A forecast of a ‘long and ugly’ inflation-driven recession is wrong
Nouriel Roubini is sounding the alarm that an inflation-driven recession is about to hit the US economy in a big way, according to an interview with Bloomberg.
“It’s not going to be a short and shallow recession, it’s going to be severe, long and ugly,” the so-called Dr. Doom economist said, adding that the stock market could crash 40% in the event of a hard economic landing.
Roubini ultimately expects the Federal Reserve will be forced to continue with its aggressive interest rate hikes and lift the fed funds rate to at least 5% due to persistently high inflation.
But Cathie Wood, ARK Invest CEO said in a Tuesday tweet, disagrees with Roubini on at least one part of his assessment, as she continues to stick with the thesis that deflation is about to take hold in the US.
“In our view, Roubini forecasting intractable 1970’s-style inflation will be blindsided by outright deflation.”
She argued that headline inflation is already unwinding on a sequential basis thanks to tightening monetary and fiscal policies, and that some commodity prices have fallen considerably from recent highs.
Some deflation would be welcomed by stock investors, as it would mark an end to the recent period of high inflation and give the Fed more flexibility in its interest rate trajectory. But too much deflation could be a bad thing, as it can signal demand destruction.
To that point, Wood noted recent data on gasoline demand as reason to believe deflation is imminent.
“Gasoline demand in the US has dropped below the level hit during the depths of the coronavirus in 2020 to levels last seen 25 years ago in 1997, even though the number of cars on the road – most of them gas-powered – is much higher than it was 25 years ago,” she said.
In fact, the total number of miles traveled by vehicles in the US fell 3% in July relative to the prior year.
The drop in gasoline demand came after the average price for a gallon of gas soared to above $5 in the US. Wood chalks it up to the fact that consumers do have the ability to balk at high prices and reduce their spending habits in response. Since hitting highs in June, gas prices have fallen sharply.
But whether it’s inflation or deflation, one thing both Roubini and Wood can agree on is that the US will enter an economic recession, if it hasn’t already.
“What we do see in these earnings results is that we are in a recession… We think this is an inventory-led recession, and I think that’s coming through loud and clear. We’re seeing advertisers cut back dramatically,” Wood said in August.
In the beginning of September, Cathie said that Fed Chairman Jerome Powell is making a mistake as he continues on a path of outsized interest rate hikes to tame inflation, and Fed is overly focused on lagging indicators like employment and core inflation, rather than leading indicators which show signs of deflation.
This article was first reported by Business Insider.