The United States needs a miracle to avoid recession, warns economist Stephen Roach

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Negative economic growth in the first half of the year could be a prelude to a much deeper downturn that could last until 2024.

Stephen Roach, who served as chairman of Morgan Stanley Asia, warns that the United States needs a “miracle” to avoid a recession.

“We will definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach told CNBC’s “Fast Money” on Monday. “They haven’t acted at all yet.”

Roach, a senior fellow at Yale University and a former Federal Reserve economist, suggests that Fed Chairman Jerome Powell has no choice but to adopt a Paul Volcker approach to tightening. In the early 1980s, Volcker aggressively raised interest rates to tame runaway inflation.

“Let’s go back to the kind of pain that Paul Volcker had to inflict on the American economy to make inflation ring out. He had to push the unemployment rate above 10%,” Roach said. “The only way not to get there is for the Fed under Jerome Powell to keep its word, stay focused on discipline, and get that real fed funds rate into the tight zone. And the tight zone is a long way from where we are right now.”

Despite the Fed’s strong interest rate hike trajectory, the unemployment rate is at 3.5%. It corresponds to the lowest level since 1969. That could change on Friday when the Bureau of Labor Statistics releases its August report. Roach predicts that the rate will start to climb.

“The fact that this hasn’t happened and that the Fed has done significant monetary tightening to date shows you how much work they need to do,” he noted. “The unemployment rate is probably going to be over 5%, hopefully not much more than that. But it could go up to 6%.”

The ultimate tipping point may be consumers. Roach speculates that they will soon capitulate due to persistent inflation. Once they do, he predicts that the spending cuts will ripple through the broader economy and create challenges in the labor market.

“We are going to have to have a cumulative decline in the economy [GDP] somewhere around 1.5% to 2%. And, the unemployment rate is going to have to go up 1 to 2 percentage points at a minimum,” Roach said. “That would be a backyard recession.”

“Cold War” with China

The prognosis abroad is not much better.

He expects the global economy to slide into a recession as well. He doubts China’s economic activity will cushion the impact, citing the country’s zero Covid policy, serious supply chain backlogs and tensions with the West.

Roach is particularly concerned about the relationship between the United States and China, which he discusses in his new book “Accidental Conflict: America, China and the Clash of False Narratives” due out in November.

“Over the past five years, we’ve gone from a trade war to a technology war to now a cold war,” Roach said. “When you’re on this trajectory of escalating conflict like we’ve been, it doesn’t take a lot of spark to turn it into something much more serious.”

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