Proactive Investors - After a slew of disappointing economic data last week, some analysts increasingly believe that another interest rate hike from the Federal Reserve could tip the US economy into a recession.
Last week, the ADP (NASDAQ:ADP) National Employment report showed that private employers in the US hired far fewer workers than expected in March and Labor Department data revealed that February’s 9.93 million job openings were fewer than the Street expected.
Meanwhile, the Institute for Supply Management's survey showed the services sector slowed more than expected last month on cooling demand, while a measure of prices paid by services businesses fell close to a three-year low.
The next domino to fall will be the March CPI data, scheduled for Wednesday. James Knightley, chief international economist at ING, isn’t holding his breath.
“With next week's core inflation number likely to come in at 0.4% month-on-month the odds must favor a final 25bp Fed rate hike in May,” Knightley wrote. “However, economic challenges are mounting with higher borrowing costs and reduced credit flow heightening the chances of a hard landing.”
That 0.4% figure is more than double the 0.17% rate necessary to bring the US back to 2% year-over-year inflation. If it comes to pass, “it is difficult to see the Fed pausing in May,” Knightley added.
In March, the Fed lifted the interest rate by another quarter point to a 4.75%-5% range. A hard landing refers to when high interest rates push the economy into a recession.
On the other hand, St. Louis Federal Reserve president James Bullard believes fears of a credit crunch have become exaggerated. The central bank should remain focused on bringing inflation back towards 2%, Bullard said in a speech given to the Arkansas Bankers Association on Thursday.
"Financial stress seems to be abated, at least for now," Bullard told reporters after the speech. "And so it's a good moment to continue to fight inflation and try to get on that disinflationary path."
Bullard also cited an 85% probability that banking stresses will keep easing in his remarks and said that the conditions are not strong enough to draw the US into a recession. He noted that recent lending facilities extended to banks have been proven effective.
"It's not clear to me that there will be much of a pullback on lending by these types of banks," Bullard said. "As long as they have enough liquidity and enough capital they will just as likely go ahead and make those loans."
Layoffs and lagging indicators
There were fewer job openings than expected in February, but an increase in layoffs means that may not remain the case.
US employers announced nearly 90,000 job cuts in March, up 15% from February, according to a report from Challenger, Grey & Christmas.
“There is always a delay between [the] announcement of lay-offs and the actual job losses happening that results in an unemployment benefit claim,” Knightley said. Rising layoffs “suggests a big rise in initial jobless claims is coming imminently and this will translate into a rising unemployment rate.”
What’s more, the recent banking crisis could hinder the flow of credit to the economy, and business confidence (by both the Conference Board measure of CEO confidence and the National Federation of Independent Business' small business optimism index) is at recessionary levels.
This, in Knightley’s view, sets the stage for the dreaded hard landing, in which case the Fed would rapidly reverse course on rates.
“The combination of higher borrowing costs, disrupted credit flow, weak business confidence and a crumbling housing market increase the chances of a hard landing for the economy, which will mean inflation pressures moderate more quickly,” Knightley said. “We see the potential for 50bp rate cuts at both the November and December FOMC meetings in such an environment.”