Professor Son Sung-won: "With Fed tightening, excess inventory, and strong dollar... a 'mild recession' is coming next year"

[Asia Economy New York=Special Correspondent Joselgina] "A mild recession is coming." Amid the Federal Reserve (Fed), the U.S. central bank, implementing a third consecutive giant step (0.75 percentage point interest rate hike), renowned economist Sungwon Son, Chair Professor at Loyola Marymount University, predicted a mild recession for the U.S. economy next year.

On the 21st (local time), Professor Son met with correspondents in Manhattan, New York, stating, "A recession is approaching," citing the following reasons: ▲base interest rate hikes ▲quantitative tightening (QT) ▲supply chain bottlenecks ▲strong dollar ▲excess inventory ▲wealth effect ▲financial tightening environment. He forecasted that the U.S. annual economic growth rate would record 1.8% this year and turn to minus 0.6% next year. Professor Son, who served as the chief economist of the White House Council of Economic Advisers during the Nixon administration in the 1970s, is a prominent financial and economic expert who has also held positions such as senior vice president at Wells Fargo and president of LA Hanmi Bank.

Having predicted the Fed’s three consecutive giant steps, Professor Son said, "Interest rates will rise further," expecting the monetary tightening trend to continue through next year. Despite consecutive tightening, since the real interest rate is still negative, it must first turn positive to gauge the Fed’s future moves. He suggested a terminal rate of 4.25?4.5%, predicting that "this level will be maintained for about a year (without rate cuts)."

This high-intensity tightening will inevitably impact the overall economy. Additionally, Professor Son expects that during the QT process, which reduces assets from a total of $9 trillion to $6 trillion, the base interest rate will effectively increase by 0.5 percentage points. He also noted that the strong dollar "does not seem likely to ease quickly," estimating it has an effect equivalent to raising rates by 0.25 percentage points, and up to 0.5 percentage points if prolonged.

However, Professor Son pointed out that historically, only 60% of tightening episodes have led to recessions. He explained that the biggest problem in the current situation lies in excess inventory.

Professor Son warned, "While the Fed’s tightening effects are concerning, the biggest factor causing this recession is actually excess inventory," adding, "Companies that increased inventory after the pandemic are now unloading it, which could cause shocks." He further noted, "As companies like Target have recently warned, inventory issues are the biggest problem," and "Historically, recessions caused by inventory adjustments are the most frequently confirmed cases."

However, Professor Son’s diagnosis is that the recession will not be as severe as the global financial crisis, which can be seen as a representative consumer-driven recession. He explained, "During the pandemic, government spending expansion and rising housing prices significantly increased the net assets of the bottom 50% in the U.S. These groups continue to spend heavily, supporting consumption, which accounts for 70% of the U.S. economy," adding, "Due to strong employment, increased net assets, and wage hikes, a consumer-driven recession will not occur." He predicted the recession period will last about one year.

On this day, Professor Son also reiterated concerns about inflation. He said, "Currently, two issues are problematic regarding inflation," citing wages and housing costs. In particular, housing costs, which account for 42% of the Consumer Price Index (CPI), have about a six-month lag before being reflected in the index. He stated, "Housing costs are still rising now, so they will have a negative impact for at least six months," adding, "Looking at the University of Michigan Consumer Sentiment Index, which reflects U.S. consumer sentiment, it is clear that people’s inflation concerns remain high."

This content was produced with the assistance of AI translation services.