Nuveen CIO Saira Malik joins Catalysts to give an overview of the current state of the economy and discuss whether the US is headed toward a recession.

Malik points to two areas where she's the most concerned: the consumer and the jobs market. She points to weak retail sales data alongside mixed employment numbers and emphasizes that unemployment claims are almost at cycle highs.

"I think consumer and employment goes together. When you feel secure in your job, you tend to spend more. We're seeing both of those start to break down. My view is that a recession is a when, not an if," she explains.

She believes that the US is "slowly approaching" a recession, most likely between the fourth quarter of this year and the first quarter of 2025. She explains, "the resilience of this economy in the face of higher interest rates and inflation has been surprising... I think consumers are showing more signs of slowing than the employment market, and that slow decline will be eventually what takes us into that recession." She notes that even if the Federal Reserve cuts interest rates, it won't be enough to "stave off any form of a recession."

Malik states that the Fed is in a "tough spot" as it balances the right time to cut without reaccelerating inflation. She does not believe that the US will reach the Fed's 2% inflation target in 2024, but there is a chance it will in 2025. She adds: "I think the consensus view that somehow we get through this period of high rates, high inflation, and we just have this beautiful soft landing is kind of a tough one. The markets (^DJI, ^IXIC, ^GSPC) are pricing that in. That's where I think the challenge is..."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

Going back to what you just said a moment ago when you talked about some of the cracks that are starting to form within the economy.

Talk to us just about what exactly signal or what signals that sends to investors right now or maybe what investors need to keep in mind given some of the risk associated with that, the two areas we're starting to become concerned about.

That's the consumer and the jobs market.

So first with the consumer, we've seen it in weaker retail sales data, fast food discounting, even retailer foot traffic starting to slow employment, numbers have been mixed of payrolls have been very strong.

But if you look at unemployment claims, they're almost at cycle highs.

I think consumer unemployment goes together.

When you feel secure in your job, you tend to spend more.

We're seeing both of those start to break down.

My view is that a recession is a when not an if at this point, are we at a recession today?

Are we slowly?

No, but we're slowly approaching one and maybe fourth quarter of this year, first quarter of 2025 we will probably be in that recession.

I was going to say.

So what exactly is going to be the catalyst?

Because I think so many people have been a little bit surprised or very surprised, quite frankly, just about the resilience here of the consumer.

And even though we are starting to see some weakening, it doesn't seem to be drastic, I guess up until this point.

So what is going to change some of that, the resilience of this economy in the face of higher interest rates and inflation has been surprising.

Many investors thought 2023 it would be the year of the recession.

But now we're starting to see what needs to break down.

The employment markets are the main catalyst that need to break down.

And if they're still reasonably healthy and then the consumers need to slow.

I think consumers showing more signs of slowing than the employment market and that slow decline will be eventually what takes us into that recession?

Now, of course, many hope that the Fed will cut rates in time to save us.

I think the Fed will eventually start cutting rates, but I don't think it will be enough for us to just stave off any form of a recession.

Does that indicate to you that the fed is already too late?

I think it's tough for the Fed because they're in a tough spot.

They want to maintain their credibility by not cutting too early.

They've been clear they will not cut interest rates.

Until inflation shows signs of moderating and approaching their target just last month.

Inflation numbers were the first ones that were coming in under consensus.

We need multiple data points before they can cut.

Inflation was just re accelerating earlier this year.

So if the fed cuts too early and causes the acceleration of inflation, we have another problem.

So that's a balance for them.

They need to cut in time to save off, try to minimize the impact of a recession but also make sure they don't cause inflation to pick up again.

You know, I'm curious what you make of the inflation trend that we have seen because uh Treasury Secretary Jenny Yellen was on with Jennifer SCG on Yahoo Finance yesterday saying that she remains confident that we're going to get to that 2% target next year.

Is that realistic?

Or I guess how much, how does the fed then balance what you about the tough spot that they've been put and they don't want to cut too early and, and, and risk reigniting that inflation versus seeing enough progress but not waiting too late.

Sure.

And I don't think we hit 2% inflation in 2024.

We do have a chance of getting there next year.

It's going to depend on some of these areas like autos which have been inflationary health care insurance.

Also in the PC number this week will see financial services which will likely remain strong and with an inflation because of the market rally, which tends to inflate that number.

So that, that has to balance that.

But also what's the economy doing?

So you could see them start to cut before we hit 2% if the economy weakens enough and that's going to be their balance.

You know, how, what is the economy doing versus what is inflation doing?

What are the risks of cutting and re accelerating inflation versus the risk of not cutting and causing a deep recession is a recession or requirement for 2%.

I don't think it has to be a requirement, but I think it's most likely.

I think the consensus view that somehow we get through this period of high rates, high inflation and we just have this beautiful soft landing is kind of a tough one.

The markets are pricing that in, that's where I think the challenge is you're going in the second half of this year while key to earnings should be strong.

We do have to worry about volatility around the elections and the slowing in the economy, it's going to be a tougher second half in the first half.