Former Treasury Secretary Larry Summers recently offered a not-so-rare insight into his thoughts on the possibility of an impending recession (and stock market crash).
So, what exactly is Summers’ crystal ball showing lately?
Well, in the midst of rampant discourse over the country’s eventual confrontation with the effects of the Federal Reserve’s historically aggressive rate-hike campaign, Summers essentially sees three paths forward for the U.S. economy.
According to Summers, the U.S. economy will face one of three potential outcomes.
The first is a “soft landing” — a scenario where inflation lowers to Fed-acceptable levels (about 2%). In this outcome, the economy manages to dodge wider economic deterioration in the forms of elevated unemployment and reduced consumer spending. This is a sort of mythical best-case scenario. Many economists scoffed at this early in the Fed’s rate-hike cycle but has been seen as a legitimate possibility in recent months amid easing inflation and surprisingly resilient spending and unemployment.
Another outcome Summers described is the possibility of a “no landing.” This is where inflation never quite gets to where the Fed wants and potentially even reverses course. The economy would face some headwinds, with the possibility of a minor recession, but wouldn’t face the doomsday case others have peddled. There is some evidence mounting for this scenario, given yesterday’s 3.7% consumer price index (CPI) inflation reading.
Finally, there is the “hard landing” scenario. This is the worst case where, even if inflation does ease to 2%, it’s not without a steep cost to the U.S. economy. Think plummeting spending, unemployment at more than 6%, and even the potential of an accompanying stock market crash as earnings begin to fall short of expectations. It’s a dreaded scenario and one that Summers himself has previously given credence to.
Stock Market Crash Fears Swirl as Summers Shares Bleak Outlook
“We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” Summers said back in June 2022.
Today, Summers has taken a similarly cautious view of the Fed’s path forward. In a pointed X post towards the analysts, investors, and economists who have taken an overly optimistic view of the economy, even as the war on inflation rages on, Summers believes there may be trouble ahead.
“People need to be very careful about declaring victory — to be very careful about some assets, particularly in the stock market. It may be priced a bit for perfection, with more room for negative surprise than positive.” Summers wrote.
It seems Summers believes the sunny state of the stock market belies a general misconstruction of the state of the economy on the part of traders and analysts. Perhaps reasonably so.
Most traders are pricing in at least one more rate hike before year-end. With many of the Fed’s monetary changes still having yet coursed through the economy (it takes about nine months for the economy to completely digest a rate hike), the notion of a lagged effect where the U.S. feels the brunt of the Fed’s many rate-hikes late in the game, becomes a scary, and realistic possibility.
People need to be very careful about declaring victory — to be very careful about some assets, particularly in the stock market. It may be priced a bit for perfection, with more room for negative surprise than positive. https://t.co/ROjxcxW1QT
— Lawrence H. Summers (@LHSummers) September 13, 2023
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
