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Economist Hugh Johnson discusses high inflation, recession probability and volatile markets

Hugh Johnson
Jim Levulis

Record inflation, a tight labor market and high gas prices are just a few of the headwinds facing the U.S. economy. Along with a volatile stock market, the Federal Reserve and policy makers are looking to stave off a potential recession while easing pressures on consumers. To help digest all of this, WAMC’s Jim Levulis checked back in with economist Hugh Johnson.

Johnson: I wish I could say there's not much chance of a recession happening in the next couple of months. And there's certainly plenty of policymakers that would make that statement. I don't think you can make that statement. I think the best way to sort of set it, is to simply say it's going to be a very close call. There are some that believe we are in a recession now and an equal number that think that we'll have a recession, starting in the third quarter, although I think most that think there's going to be either a recession now or a recession in the third quarter, that they don't think it's going to be deep or very severe, but nevertheless, a contraction in the economy. So right now, I think if you look carefully at the numbers, and I think you really have to look carefully at the numbers, you'd have to say that it's a very, very close call. It may be a recession, it may not be a recession.

Levulis: And what about the likelihood of what's called stagflation, a combination of slow economic growth and high inflation?

Johnson: I think the bet for slow economic growth, or let's just say, growth that slows – second, third and fourth quarters of 2022 and through 2023, the likelihood of that is extremely strong. And so we may not have a recession, it might be what we call a soft landing, not a hard landing, but a soft landing. But even if the economy slows into what we might call a soft landing, there seems to be a very, very strong case that it is in the process slowing and will do so through 2023. And that really gets me up to the edge of yes, the economy is going to be in the process of slowing, but whether it has a contraction, or a negative quarter or two is really up in the air a little bit. It’s going to be a close call. So slowdown. Yes, I think there's a really strong case for that. Contraction or recession, well, let's call it a close call. I've got my fingers crossed. And I don't think it's going to be a recession or a contraction. But believe me, I don't have a level of confidence that I would really feel comfortable with.

Levulis: Now, inflation is at a four-decade high of 8.6%. The Feds target is 2%. When do you expect that target might be hit or we might be close to that?

Johnson: That's really a good question. And I would answer that question by saying the Fed is unconditionally trying to get the number down to 2%. And they say unconditional, which leads me to believe that they might be a little bit hawkish, or maybe too aggressive, because I think they're going to have a lot of trouble, difficulty in hitting that 2% target in 2023 or 2024. And of course, that implies they're going to stay with their game plan of making sure that the economy slows during this process and brings the inflation rate down. But that's, as I say, it's going to be a really close call. I think inflation is going to be in the process of coming down. But hitting a 2% target, that's very ambitious.

Levulis: Now a major pocketbook issue. Where do you fall on the idea of eliminating the federal gas tax?

Johnson: You know whatever can be done on a short-term basis to help consumers is going to be important. Keep in mind that consumer spending was bolstered very much in 2021 by programs from the federal government. You remember the American Rescue Plan, where essentially, the federal government put money in the pockets of consumers. You're not going to have that in 2022. And you're not going to have that in 2023. In other words, there's not going to be the kind of help we got in 2021 for consumer spending. Now that consumers have spent down a great deal of their savings, their savings rate being 4.4%, which is a very low number, you ask yourself the question, where are they going to get the wherewithal or the money in order to support consumer spending to keep the economy going? And the answer is, it's not going to be easy. It's going to have to probably come from job growth. And with job growth, we'll have a little bit of upward pressure on wages and therefore, personal income will be hopefully strong enough to support consumer spending. But believe me, there again we have a really tough call. We're not going to get the help we had in 2021. We hope to get help in 2022. And if you can give a little bit of help in the form of a decline or a reduction in the gasoline tax, that'll be good news. But we're not going to be able to stay with that forever. Eventually, that's going to be eliminated or rolled back. But for the time being, in order to try to help consumer spending, it might be very important.

Levulis: And shifting to the stock market here, I think it's fair to say overall, you remain relatively optimistic as it comes to the markets. And the S&P 500 has dropped about 20% since its January high, that's the indicator of a bear market. What's driving you to conclude that the upside for the S&P 500 through 2022 and into 2023 remains positive?

Johnson: Well, there again Jim, I wish I was much more confident than I am. But I am somewhat confident. And I am somewhat confident largely because I see a configuration right now of events. And this might not make a whole lot of sense to some of our listeners. But number one, I think that the stock market and especially looking at individual stocks as undervalued. In other words, it's cheap. And the second thing I see is very, very widespread and intense pessimism. When you see in financial market history, when you have seen a combination of undervaluation, which I do think we see and widespread pessimism, that's usually a combination that leads to a turn in the market and better stock prices. So quite frankly, we're seeing something historically that ordinarily is associated with a turn in the stock market towards the better. And the second thing is I think we're seeing some news more recently, news on the economy, which is slowing, and also news on inflation, which we see commodity prices down 11.3% in two weeks, which suggests, look, the Federal Reserve, if they pay attention to these numbers, may not keep their foot on the brake quite as hard as they did. And if you get that combination, you get widespread pessimism, you get undervaluation, and you get the Federal Reserve trying to help some by not leaning as hard towards restraint, that's a pretty good combination for a stock market to do better. You can't guarantee it, I wish I could guarantee it. But, the only thing I can do is tell you, I've got financial history on my side and my fingers tightly crossed.

Levulis: And given what we've talked about, given the fact that markets have been relatively volatile over the past several weeks. And that, you know, we've been talking about inflation and safer investments really don't seem to be keeping up with the high inflation. What's your advice to investors right now?

Johnson: We have the one thing you know, it's first of all, it's hard to time the markets that markets are gonna go up, the markets are gonna go down, they're gonna remain very volatile for a long period of time. The one thing that some of us that have been at this for a while have learned that, as we like to say it's time not timing. That's the secret to being successful as an investor. So don't try to time the markets. The basic thing is to have a meaningful exposure to equities, keep on having that meaningful exposure to equities. And that over time, you're likely to do quite well. It may be a tough road ahead. It certainly has been a tough road since the beginning of 2022. I'm not saying it's behind us, but it could very well be behind us. But in time, the one thing that's common to all the corrections and all the bear markets is the end, and stock prices eventually go higher and that's the one thing I would bet on. So maintain a meaningful exposure to equities. Don't try to time the markets and in time you'll be just fine.

Jim is WAMC’s Assistant News Director and hosts WAMC's flagship news programs: Midday Magazine, Northeast Report and Northeast Report Late Edition. Email: jlevulis@wamc.org
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