A deteriorating labor market is poised to cause a rapid downturn in the US economy, according to Andrew Hollenhorst, Citigroup’s chief US economist. He anticipates an abrupt economic reckoning later this year.
“Firms are hiring at a lower rate. Firms are having workers work less hours,” Hollenhorst told CNBC on Tuesday. “So this gradual softening has already started. That tends to snowball and end up in something that looks more like a hard landing.”
Although recent labor market data doesn’t necessarily indicate such a grim scenario, Hollenhorst argued that some reports suggest a more pessimistic outlook than many might realize. A hard landing is particularly concerning, as it can lead to a full-blown recession.
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“Small businesses are telling us that their hiring intentions are at the lowest levels that we’ve seen since 2016,” he said, citing survey data from the National Federation of Independent Business. “And if I look overall at the economy, the hiring rate right now is at the lowest rate that it’s been at since 2014. So we’re at the lowest hiring rate in a decade.”
Labor market data fuels bearish sentiment
Despite recent labor market data not painting an overly dire picture, Hollenhorst contends that certain reports indicate a more pessimistic environment than many may realize. The prospect of a hard landing is particularly concerning, as it could usher in a full-fledged recession. Although NFIB data has long fueled bearish sentiment, a recent sharp decline from previous months has garnered significant attention.
From a broader perspective, there are legitimate reasons for concern. For instance, Citigroup’s chief US economist pointed out that the national unemployment rate, which has held steady around 3.9%, marks a notable increase from its previous low of 3.5%.
Hollenhorst predicted that if unemployment rises above 4%, the Federal Reserve might begin cutting interest rates as early as July. He forecasts four rate cuts by the end of 2024.
Other analysts have echoed hard-landing concerns tied to labor market deterioration. Veteran forecaster Danielle DiMartino Booth has suggested that one unemployment indicator points to a recession already being underway.
Hollenhorst further noted that the likelihood of a July rate cut is strengthened by the potential for a hard landing and weakened economic activity. He argued that the Fed’s higher-for-longer interest-rate policy is squeezing corporate earnings just as consumer savings are being depleted.
