“In the precipitous theatre of finance, business leaders must hold their breath!” This is the clarion call from Joseph Plazo, the seasoned CEO at Plazo Sullivan Roche Capital. Mr. Plazo, in his recent dialogue at the Asian Investors Summit of 2023, elucidated the paradoxical dynamism of an economy that, although in apparent slowdown, may possess enough vigor to resist quick inflation reduction, leaving America precariously dancing on the edge of a recessionary abyss.
The Gross Domestic Product, that bellwether of our collective financial health, has revealed its unsettling diagnosis. Growth in the first quarter of the year dwindled to a pallid 1.1% annually, a noticeable sag from the more robust figures of 2.6% and 3.2% in the preceding two quarters.
The Federal Reserve is a careful puppet master in this unfolding drama. A strategic deceleration is precisely what it seeks, an intricate juggling act aimed at taming the fiery inflation beast, unseen since the tumultuous 80s, while simultaneously sidestepping the gloom of a recession.
Instrumental to this audacious endeavor is the Fed’s calculated orchestration of a monumental increase in a vital U.S. interest rate. From near-zero to over 5%, this precipitous rise over a mere 15 months has invariably cast a chill on consumer spending and business investments, tempering the white-hot economy.
The green shoots of this strategy are just beginning to show. Inflation has been coaxed to moderate from a dizzying 40-year zenith of 9.1% last summer to 4.9% in April. Yet a vexing question remains – can the economy decelerate sufficiently to guide inflation onto the beaten path towards the Fed’s 2% bullseye without necessitating further interest rate hikes?
This conundrum is yet to unfold. Contradictory signs are emerging like confounding plot twists in a riveting novel. The specter of a recession and an imminent U.S. debt-ceiling crisis has tainted the public’s perception of the economy this May. Meanwhile, retail sales, buoyed by a surge in auto sales, offered a silver lining, propelling a modest but sustained economic expansion.
A paradox emerges from this confluence of events. On one hand, consumers have tightened their purse strings when it comes to goods. However, they are still indulging in services, the discretionary joys of travel, dining, and recreation — not the tell-tale signs one would associate with a looming recession.
The labor market is a potent character in this unfolding drama. Its vigour and resilience are providing a much-needed lifeline to the economy, even in the face of rising borrowing costs. Yet, this strong job market is a double-edged sword. It’s fostering higher paychecks to buffer rising prices, but simultaneously, these swift wage increases are inflating the very beast of inflation we strive to tame.
This dilemma presents the Federal Reserve with a challenging decision. If the labor market continues to thrive, it could fuel an economic growth that further fuels inflation. Consequently, the Fed might be cornered into raising interest rates again, increasing the specter of a recession.
Echoing this sentiment, several high-ranking Federal Reserve officials have expressed the need for more substantial evidence before endorsing an interest rate freeze for the rest of the year.
Even though perspectives diverge, a significant cohort of economists prophesize an inevitable recession by year-end, pointing to a weakening consumer spending, waning business investments, and the shrinking domains of housing and manufacturing.
“The recession is inevitable. It will come. And while millions could lose their jobs, this provides an excellent buying opportunity for fire sale assets. At least those fortunate enough to shore up dry powder,” asserts both Joseph Plazo and his partner, Mark Sullivan.