Where is the Recession?
Danielle DiMartino Booth's Updated Views Since the Fed Rate Cut - Article #86
In this 14-minute article, The X Project will answer these questions:
I. Who is Danielle DiMartino Booth, and Why this article now?
II. What does she say about monetary policy and Fed strategy?
III. What about recession risks and economic weakness?
IV. What is her take on the labor market?
V. What about the consumer and consumption?
VI. What are her views on corporate debt markets?
VII. What does she think about inflation and deflation?
VIII. What about her global views?
IX. What does The X Project Guy have to say?
X. Why should you care?
Reminder for readers and listeners: nothing The X Project writes or says should be considered investment advice or recommendations to buy or sell securities or investment products. Everything written and said is for informational purposes only, and you should do your own research and due diligence. It would be best to discuss with an investment advisor before making any investments or changes to your investments based on any information provided by The X Project.
I. Who is Danielle DiMartino Booth, and Why this article now?
When The X Project was initially launched, 20 of the first 38 articles summarized the top 20 most influential books on The X Project topics. One of those books was: “FED UP: An Insider's Take on Why the Federal Reserve is Bad for America - A summary of the book written by Danielle DiMartino Booth (2017).”
Almost four months ago, I wrote “About That Recession Call… Danielle DiMartino Booth’s Bold Prediction.” Her bold call in April and May was that the U.S. was already in a recession. This article is worth a re-read, and you can get her bio there or in the article on her excellent and best-selling book, “FED UP.”
So, why this article now? With the recent Fed rate cut, there has been much talk and debate about the state of the economy and whether we are in or headed for a recession. So it is an excellent time to check with Danielle on her current thinking. And I did so by watching the following recent interviews with her:
The market is in for a 'rude awakening' about the U.S. GDP print: Danielle DiMartino Booth, CNBC on September 24 (32,662 views)
DiMartino Booth of QI Research, live with Street Signs, CNBC Asia on September 23 (18,786 views)
What's Ahead for the Fed w Danielle DiMartino Booth, Truflation on September 23 (131 views)
Danielle DiMartino Booth of QI Research with Jack Farley of Monetary Matters on September 18 (63,421 views)
Fed Cuts Rates by 50 bps — Danielle DiMartino Booth of QI Research, Fox Business on September 18 (33,886 views)
This article summarizes her thoughts and views on a range of topics related to the economy.
II. What does she say about monetary policy and Fed strategy?
In her interviews, Danielle emphasizes a significant shift in the Federal Reserve's approach, likening Powell's decisions to the more aggressive, inflation-fighting stance of Paul Volcker in the early 1980s. This shift is evident in Powell’s decision to cut interest rates by 50 basis points, defying market expectations and prioritizing long-term economic stability over appeasing short-term market desires. Danielle highlights how Powell’s move broke a longstanding precedent where the Fed typically followed market pricing, indicating a return to a data-driven, public good-focused approach.
Danielle explains that Powell's decision reflects an acknowledgment of deeper structural issues in the U.S. economy that require preemptive action rather than reactive policy measures. This approach differs sharply from Powell's predecessors, who were more inclined to move with market expectations to avoid surprises. By cutting rates unexpectedly, Powell sent a clear message that the Fed is not beholden to market pressures and will instead act as needed to preserve economic stability, even at the risk of short-term market volatility.
She further elaborates that this bold move signals Powell's willingness to step away from the “financial market-centric” approach that Alan Greenspan and others followed, where market signals often dictated policy decisions. Powell’s break from this tradition highlights a more proactive stance to address potential economic downturns before they spiral out of control. Danielle's view reflects a return to focusing on the Fed's core mandate of managing inflation and ensuring long-term economic health rather than prioritizing market sentiment.
III. What about recession risks and economic weakness?
Danielle expresses strong concern about the underlying economic weaknesses in the U.S., which she believes are being overlooked by many experts who continue to predict a "soft landing." She points to several key indicators that suggest the U.S. is on the brink of a recession, if not already in one. One of the most critical factors is the weakening in consumer spending, historically a strong pillar of U.S. economic activity. Danielle notes that while consumers have continued spending, much of it has been fueled by credit and refinancing, which is unsustainable in the long term.
In her analysis, Danielle argues that these factors, combined with slowing industrial production and growing debt burdens, clearly signal that the economy is already deteriorating. She parallels the early 2000s and 2008 recessions, where similar delayed reactions from official reports masked the actual depth of the economic downturn. According to her, policymakers and market participants are underestimating the severity of the situation, potentially leading to a more significant recession than anticipated.
IV. What is her take on the labor market?
A recurring theme in Danielle’s interviews is her detailed critique of the labor market. While headline employment numbers have remained relatively stable, she highlights that much of this stability is illusory, as the quality of jobs has deteriorated significantly. She points out that there has been a significant shift from full-time to part-time work, primarily driven by the gig economy. She argues that this shift is masking deeper structural problems in the labor market, where individuals increasingly take on gig work like Uber or DoorDash deliveries to make ends meet rather than finding stable, full-time employment.
Additionally, she discusses the substantial downward revisions in payroll numbers, particularly full-time jobs, as a sign that the labor market is far weaker than it appears. These revisions are particularly troubling, as they suggest that previous reports had been overly optimistic about the job market's health. She explains that this revision process mirrors previous recessions, where initial data painted a rosier picture of the economy than what was revealed once more accurate data became available.
Furthermore, she addresses the issue of unemployment benefits, noting that many Americans have exhausted their unemployment insurance, particularly in states with shorter benefit periods. As a result, these individuals are not counted in the official unemployment figures, which skews the data to make the labor market appear healthier than it is.
Danielle stresses that these developments suggest a more precarious labor market than is commonly understood. She warns that without significant improvements in job quality and stability, the labor market could further deteriorate, leading to higher unemployment rates and greater economic instability.
V. What about the consumer and consumption?
Consumer spending, long considered the backbone of the U.S. economy, is another area where Danielle sees significant risk. While consumer spending has remained relatively strong in recent years, she believes this strength is increasingly built on shaky foundations. She notes that many consumers have relied on credit and home refinancing to maintain their spending. This is an unsustainable strategy, especially as interest rates remain elevated and borrowing costs rise. She views this reliance on debt as a critical vulnerability that could lead to a sharp decline in consumption.
The Federal Reserve's Beige Book, which Danielle frequently references, indicates that consumer spending is already beginning to slow across multiple regions. She emphasizes that the Beige Book's findings show falling consumption in all 12 Federal Reserve districts and are a warning sign of a potential consumer recession. This is particularly alarming, as consumer spending typically accounts for a significant portion of U.S. GDP. If consumers pull back, it could lead to a sharp contraction in economic growth.
In her view, the current consumption slowdown is not just a temporary blip but rather the beginning of a broader trend. She warns that as more consumers run out of credit and face rising costs for essential goods and services, spending could contract further, exacerbating the economic downturn. She argues that the U.S. economy will unlikely avoid a deeper recession without solid consumer activity, particularly given the other structural weaknesses in the labor market and corporate sectors.
VI. What are her views on corporate debt markets?
Danielle paints a grim picture of corporate America, where falling revenues and high debt levels lead to growing insolvency risks. She explains that many companies struggle to meet revenue projections, especially in the real estate and automobile sectors. As a result, they are cutting costs by laying off workers or reducing investment, which only further weakens economic growth. Danielle argues that these cuts are not just a short-term reaction to falling demand but a sign of deeper structural problems within the corporate sector.
Additionally, she highlights the growing risks in the corporate debt markets, particularly in the high-yield and private credit sectors. Many companies, she notes, are heavily leveraged and face significant refinancing challenges as interest rates remain high. While the Fed's recent rate cuts may provide some relief, Danielle believes they cannot solve the underlying problems. She points out that many firms will still struggle to refinance their debt without resorting to drastic cost-cutting measures, which could lead to more layoffs and further economic contraction.
Danielle also draws attention to the growing divide between large corporations with more access to capital markets and smaller firms relying more on private credit. She warns that the latter group is particularly vulnerable to rising interest rates and declining demand. As these smaller firms face increasing financial pressure, she expects to see a wave of corporate bankruptcies and consolidations, particularly in industries already struggling with high debt levels and weak consumer demand.
VII. What does she think about inflation and deflation?
While inflation has dominated economic discussions over the past few years, Danielle believes that deflationary risks are beginning to emerge. She explains that many companies are losing their pricing power as demand weakens, leading them to cut prices and reduce costs. This, in turn, drives layoffs and further reduces demand, creating a deflationary spiral that could push inflation below the Federal Reserve’s 2% target. Danielle argues that this shift is already underway, with several key indicators pointing to slowing price growth across various sectors.
Danielle's concerns about deflation are mainly tied to the labor market and consumer dynamics. As companies face falling revenues, they increasingly turn to layoffs to protect their profit margins, reducing overall demand. At the same time, consumers are cutting back on discretionary spending as their purchasing power declines, further exacerbating the deflationary trend. Danielle warns that if these dynamics continue, the U.S. could enter a prolonged period of low inflation or deflation, creating new policy challenges.
She also notes that the Federal Reserve may struggle to respond effectively to deflationary pressures, particularly if caught off-guard by a rapid shift from inflation to deflation. While the Fed has recently focused heavily on controlling inflation, Danielle argues that policymakers may need to pivot quickly to address the emerging deflationary risks. However, she cautions that the Fed's response ability could be limited, especially if the economy is already in a recession and interest rates are low.
In the next Section, I will discuss Danielle’s global views. Then, in Section IX, what I think, and in Section X, why should you care and, more importantly, what more can you do about it? However, I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last three sections. The X Project’s articles always have ten sections. Soon, after a few more articles, the paywall will move up again within the article so that only paid subscribers will see the last four sections, or rather, free subscribers will only see the first six sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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