A chilling forecast from a legendary economist who accurately predicted the 2008 financial meltdown now casts a dark shadow over the future of the U.S. economy.
David Rosenberg, a respected voice in the world of finance and the former chief economist at Merrill Lynch, is ringing alarm bells once again, warning that the recent downward revision in job growth is a clear sign that the nation is teetering on the brink of a recession.
Rosenberg’s analysis is rooted in the revelation that the U.S. economy created a staggering 818,000 fewer jobs over the last year than initially reported. This adjustment, described as the most significant downward revision since the Great Recession, has sent shockwaves through the financial world. The Bureau of Labor Statistics (BLS) now admits that job growth from March 2023 to March 2024 was overstated by 30 percent, a dramatic reduction from the original figure of 2.9 million jobs. For Rosenberg, this data is not just a blip on the radar but a flashing red warning sign of impending economic trouble.
In a client note obtained by Business Insider, Rosenberg didn’t mince words in his criticism of the Federal Reserve’s handling of the economy. He blasted the Fed for its stubborn refusal to ease interest rates since July 2023, arguing that its policy has been “too tight, and for too long,” making an economic slowdown all but inevitable. The Fed’s decision to raise interest rates for 11 consecutive meetings from March 2022 to July 2023 has left the federal funds rate at a staggering 5.5 percent, a level not seen in 23 years.
This steep increase in interest rates has had a ripple effect on consumer lending, driving up mortgage rates and credit card APRs, squeezing American households already grappling with the rising cost of living. The Fed’s justification for these hikes has been to curb consumer spending and bring inflation under control, which they have managed to reduce to 2.9 percent in July. However, the Fed remains fixated on its 2 percent inflation target, a goal that Rosenberg believes is misguided given the current economic realities.
“Incredibly, the Fed raised rates 500 basis points under a false presumption – by over one million – of just how robust the jobs market was,” Rosenberg wrote, highlighting the disconnect between the Fed’s policies and the actual state of the economy.
Rosenberg has been sounding the alarm about a potential recession for years, but his warnings have grown more urgent in 2024. Despite a seemingly positive report of 206,000 jobs added to the economy in June, Rosenberg pointed out that full-time employment has actually declined by 1.2 percent since the start of the year. This troubling trend, coupled with the massive downward revision in job numbers, suggests that the U.S. economy is far from the rosy picture painted by some.
Back in May, when it was revealed that 63,000 fewer jobs were added in April than initially reported, Rosenberg cautioned that this was just the beginning of a series of downward revisions that would “come as a shock to the Fed – and to the markets as well.” His prediction proved accurate, as the recent news of the 818,000-job revision briefly sent major indexes like the S&P 500 and Dow Jones into a tailspin before they managed to recover by the close of trading on Friday.
Rosenberg’s dire outlook is bolstered by two economic models that he believes paint a grim picture of the future. The first is an enhanced version of the yield curve, traditionally used to gauge the risk appetite of bond investors, which Rosenberg has adapted into a recession indicator. This model incorporates U.S. businesses’ ability to repay debt through corporate bonds and the Fed’s National Financial Condition Index, which evaluates the overall tightness of the economy. Currently, this combined measure indicates a 57 percent chance of a recession, a sobering statistic that should not be ignored.
The second model, developed by economists Pascal Michaillat and Emmanuel Saez, focuses on the number of job openings and shows that the U.S. is already in “possible recession” territory, with the trend pointing ominously toward a “sure recession.”
However, not everyone shares Rosenberg’s bleak perspective. Ian Shepherdson, the chief economist at Pantheon Macroeconomics, argues that the downward job revision may not be as catastrophic as it seems. He points out that average monthly job gains remain strong despite the revisions, and the unemployment rate, measured by a separate household survey, has not been impacted. Shepherdson maintains that payrolls grew at a respectable average pace of about 175,000 in the twelve months leading up to March, down from 232,000 previously.
Despite these more optimistic views, Rosenberg remains convinced that the Fed’s delayed response to the economic slowdown could lead to severe consequences. Fed Chair Jerome Powell, in a speech at the Fed’s annual retreat in Jackson Hole, Wyoming, hinted that a policy shift might be on the horizon. Powell acknowledged that “the time has come for policy to adjust,” and that the timing and pace of rate cuts would depend on incoming data and the evolving economic outlook.
The next Federal Open Market Committee meeting, set for September 17 and 18, will be a critical moment for the U.S. economy. While the Fed is expected to cut rates by at least 25 basis points, the consensus on Wall Street remains cautiously optimistic that the economy will achieve a “soft landing,” narrowly avoiding a recession. However, as Rosenberg warns, the fate of the economy hinges on the strength of the labor market in the coming months. If job data continues to weaken, the road ahead could be much rougher than anticipated.
