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Why Mark Zandi says the US economy will narrowly avoid a recession

<i>Julia Nikhinson/AP</i><br/>People shop for shoes in a Nike store on Black Friday on November 25 in New York.
AP
Julia Nikhinson/AP
People shop for shoes in a Nike store on Black Friday on November 25 in New York.

By Matt Egan, CNN Business

Inflation is cooling. Consumers are still spending. And hiring is slowing — but not collapsing. That’s why Moody’s Analytics chief economist Mark Zandi is increasingly confident that the American economy will — narrowly — escape a recession.

“It’s going to be a struggle. It’s going to feel uncomfortable. But I think we are going to thread the needle,” Zandi told CNN Business in a phone interview earlier this week.

Zandi, whose forecasts are often cited by the White House, pointed to recent economic and market indicators that suggest the economy is not falling off a cliff despite widespread fears of a recession.

“The data over the last couple of months have been better than I would have thought. None of the financial market indicators suggest we have a recession dead ahead,” Zandi said.

New numbers released on Thursday show inflation, as measured by the Federal Reserve’s favorite metric, eased in October. That is raising hopes the US central bank can slow the pace of its massive interest rate hikes as soon as this month.

The US economy also grew faster in the third quarter than initially estimated, bouncing back from two quarters of contraction.

And in a big positive for inflation-weary consumers, gas prices have plunged. The national average for regular gas is now below where it was when Russia invaded Ukraine and down sharply from the record high in June.

“My baseline is still no recession. That has not changed. But I do feel more confident than I did a few months ago,” said Zandi. “Inflation is moderating. Oil prices are stable to down. Employment growth is slowing. Layoffs are normalizing.”

Manufacturing stumbles, layoffs increase

Of course, there remains a great deal of uncertainty about what lies ahead and there are many reasons to be concerned about a potential downturn — including the most aggressive interest rate hikes from the Federal Reserve in decades.

Zandi said he wouldn’t argue with those who forecast a recession, conceding it’s going to be a “close” call.

A slew of major companies have announced layoffs of more than 1,000 jobs apiece in recent days, including AMC Networks, DoorDash and crypto exchange Kraken. That’s on top of mass layoffs that have wiped out tens of thousands of jobs in the tech sector, including major cuts at Amazon, Twitter and Facebook owner Meta.

Factories are also coming under significant pressure. A survey released Thursday by the Institute for Supply Management found that manufacturing activity contracted in November for the first time since May 2020.

“Overall, things are worsening,” one executive from a maker of electrical equipment, appliances and components said in the ISM survey. “Housing starts are down. We’re doing well against our competitors, but the industry overall is down. We’re sitting on cash (that is) tied up in inventory.”

‘Mild’ recession still a risk

Some business leaders are warning a downturn is likely still in the cards.

Bank of America CEO Brian Moynihan told CNN’s Poppy Harlow on Tuesday that the economy will probably slip into a recession next year — though he’s hopeful it will be a “mild” one.

In a report on Monday, S&P Global Ratings said just one of the nine leading economic indicators it tracks was in positive territory through October. S&P reiterated it expects the US economy to fall into recession next year, though it expects a “mild” recession in line with the 1969-1970 downturn. S&P forecasts peak-to-trough US GDP will decline by just 0.8%.

Zandi said he thinks all of these recession fears could end up working to the economy’s advantage by discouraging risky behavior, forcing businesses to keep cash on hand and persuading officials in Washington to make prudent decisions.

For instance, he pointed to President Joe Biden’s decision this week to call on Congress to act to prevent a crippling freight rail strike.

“I bet if we weren’t worried about a recession, the president wouldn’t have been so quick to go to Congress,” Zandi said. “Everyone is on high alert and very cautious. The fact we are so nervous about a recession makes it less likely something will go wrong.”

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