The US will enter a mild recession as the economy deflates after its boost from unproductive stimulus cash, former Commerce Secretary says
Tyler Le/BI
- The US may face a mild recession as past stimulus is drained out of the economy.
- Stimulus checks increased demand, pushing inflation to a 23-year high in 2022.
- Key recession indicators, like the Sahm Rule and Treasury yield curve, signal economic concerns.
The US is moving toward a recession, as the economy is feeling the comedown after trillions of "unproductive" cash was pumped in during the pandemic, according to former Commerce Secretary Wilbur Ross.
The former Trump administration official gave a bearish outlook on the US economy in a recent interview with Bloomberg. His forecast is contrary to many others on Wall Street, with analysts feeling more confident that the US will avoid a recession as GDP continues to grow and unemployment remains relatively low.
"I think the US is headed toward probably a very mild recessionary period, and that shouldn't be too surprising. It was artificially propped up by all the great situations that have prevailed, and all that cash that was pumped into the economy in the aftermath of COVID. I think they overdid that," Ross said.
The US government doled around $5 trillion in stimulus during the pandemic, which revved up the economy when stay-at-home orders shuttered businesses and sent the unemployment rate soaring.
But most of the stimulus cash wasn't deployed productively, Ross said, pointing to Americans who "immediately spent" their checks in a wild shopping spree.
The burst in spending fueled demand for goods and services without increasing supply. That suggests it was the main cause of inflation, he added, with consumer price increases notching a 23-year-record high in 2022.
Strength in the labor market was also partly distorted by stimulus cash, he suggested. He estimated that around 30%-40% of the jobs created after the pandemic were government-related jobs.
"They weren't building the economy. They weren't creating supply of goods," Ross added.
The red-hot job market has cooled along with inflation over the past few years, thanks to pandemic stimulus wearing off and the Fed's rapid interest rate hikes over the past year.
But investors have been increasingly concerned that they Fed may have tightened financial conditions too far. Hiring has steadily slowed over the past year, with the unemployment rate triggering one long-running recession indicator with a perfect track record.
Most economists still agree that the economy remains on solid footing, given the rapid pace of growth and historically low unemployment rate.
Still, sentiment has soured slightly as investors keep their eye on the Fed's next rate move and continued signs of economic weakness. Americans grew more concerned about the labor market during August, according to the Conference Board's latest survey.
Meanwhile, 40% of traders said they feel bullish on stocks over the next six months, down from 52% last month, according to the AAII's latest Investor Sentiment Survey.