■Experts predict the U.S. economy will have a saucer-shaped recovery.
■First interest rate cut expected in June, followed by one or two more.
■Growers will need to find new overseas growth markets.
The future of the U.S. economy was the topic of conversation at Fort Washington Country Club Wednesday morning as Wells Fargo brought two of the bank’s leading economists to discuss food prices, housing, wages, and interest rates.
When plotted out on a graph, Gary Schlossberg, global strategist for Wells Fargo, predicted a U-shaped or saucer recovery, with a soft decline in production, employment, and wage growth. By the end of the year, he sees a return as consumer spending revives those economic indicators.
For consumers, Michael Swanson, chief economist for Wells Fargo Agri-Food Institute, said food prices would remain stable and flat, a good thing for consumers —but not so good for farmers.
“We’re not going to get that kind of slow down this time, we don’t think,” Schlossberg said. “It’s going to be a fairly even, what we call, ‘saucer-shaped’ economic cycle, very gradual on the way down, very gradual on the way up. Gradual on the way up because we don’t see the kind of cleansing that we normally see.”
June for Interest Rate Cut: Schlossberg
A true recession would have a sharp return following sharp declines, but neither Swanson nor Schlossberg see that happening. When businesses fear a recession, they empty inventories and lay off employees in anticipation of lowered consumer spending.
“Although if you really squint hard, we think the economy will be slowing a little bit over the next couple of months,” Schlossberg said.
Investors, business owners, and would-be home buyers have been waiting for the Federal Reserve to drop interest rates and by extension, borrowing costs.
The Fed moved to the “sidelines” after record interest rate increases to temper inflation, Schlossberg said. Now that the effects of those actions are coming to bear, Fed bankers will take a more active role in playing with the interest rate dial.
Federal Reserve Chairman Jerome Powell in an interview with CBS’ “60 Minutes” on Sunday said the central bank was on track for three rate cuts this year.
While some think the first drop will come in March, Schlossberg predicts June to be the date of the Fed’s announcement.
“We’re guessing two or three cuts before the Federal Reserve moves to the sidelines, that’s a pretty short cycle,” Schlossberg said. “We could see it more extended than that, and we’re making these guesses because they dovetail with investment strategy.”
US Growth Rate Stronger Than China’s, Schlossberg Says
That saucer-shaped recovery model is leading Schlossberg to take a more defensive investment strategy. That defensive strategy begins in the U.S.
“We’ve done far better than most other economies around the world for a developed economy, the strongest,” Schlossberg said. “Our growth rate is even stronger than China.”
Schlossberg has been looking for stability and liquidity in investments. That means large-cap stocks with little leverage.
“Healthcare is one of the favorite sectors at the moment,” Schlossberg said.
Because of the slowed response to the economy, by the time the economy recovers, industrials such as capital equipment manufacturers, defense companies, and transportation companies will bear strong returns on equity given how undervalued they have historically been, something Schlossberg calls a “supercycle.”
“The supercycle simply means that it was under-invested years ago,” Schlossberg said. “We didn’t build up to capacity, so as the economy recovers, demand bumps up against that capacity pretty quickly.”
Housing Recovery Limited, Nothing Like 2020’s Boom
Housing stands to gain first from the rate drop. After a historic jump in interest rates, housing had a difficult 2023. Home buyers could swallow high home prices when interest rates were at 3.5%, Swanson said. When they peaked at 8%, many buyers couldn’t justify that monthly payment.
What’s more, would-be home sellers opted against selling a home with a low interest rate for one with a higher rate, further limiting supply.
But even a recent surge in supply and lower mortgage rates will have difficulty competing with rents, Swanson said.
Construction surges in rental properties have dampened rental inflation, making them more attractive in contrast to high monthly mortgages.
Swanson expects a drop in current mortgage rates of no more than 100 basis points.
“Right now with the price of housing where it is and the interest rate where it is, they’re like ‘that’s a huge monthly payment,'” Swanson said. “So I’m better off renting something as an alternative.”
Labor Will Have Long-Term Leverage, Demanding Higher Wages
The short-term softening of wage growth Schlossberg predicts is only a product of the coming economic slowdown. Beyond this coming economic cycle, Schlossberg sees labor continuing to be able to negotiate better wages and benefits.
In the past six or seven years, the influence of unions waned. But following the pandemic, unions have become more present and able to secure more from employers. Train workers, nurses, auto workers, and teachers have all either threatened work stoppages or gone through with strikes, securing terms favorable to labor.
Schlossberg sees this trend continuing.
“As more people reach that 55 and older age, it’s going to slow labor force growth, which means that demand is going to be bumping up against supply,” Schlossberg said. “We think that will keep more pressure on wages independent of where we are in the economic cycle.”
Did You Miss the Forecast? Watch It Here Start to Finish
National Debt Could Spook Investors Away from Buying Government Debt
On Sunday, Powell in his morning issued a warning about the “unsustainable” level of U.S. debt. He said lawmakers need to wrangle in spending. A full 17% of U.S. revenue is being spent on interest, Schlossberg said. In 2022, the Congressional Budget Office said the U.S. was spending 8% of revenue on interest.
That increase could have a direct impact on the economy should investors move away from buying Treasury bonds.
“One way it could play out is long-term rates initially,” Schlossberg said. “Investors don’t invest in intermediate and longer-term government securities. So demand weakens, prices decline, yields move up. If yields move up, that could squeeze the economy. It squeezes housing, mortgage rates go up, squeezes other capital-intensive areas of the economy, the economy slows.”
Flat Food Prices, Flat Commodity Prices
Stubbornly low commodity prices may be a good thing for consumers, but for Central Valley farmers, below-modest returns on produce made compensating for higher input costs difficult. Pistachios and almonds have had dismal returns. And Swanson doesn’t see prices swinging upward any time soon.
Global competition can earn faster when prices do rise.
In the case of lemons, a major crop in California’s Inland Empire, when prices go up, Argentina can simply put in another 100,000 acres, Swanson said.
When prices are low, farmers have typically turned to foreign markets, especially China, whose growing middle class has an appetite for premium California-grown nuts and fruit.
But China isn’t the market it was 20 years ago, Swanson said.
“The last two years, China has said that they’ve had population declines, very minimal on a percentage basis, but that’s the start of a new trend,” Swanson said. “So China’s gone from being that growth market to simply being a very big market that we can sell to.
Commodity trade groups will have to begin marketing in other parts of the Pacific.
“They’re going to need to find a new growth market,” Swanson said. “You know, it’s not going to be a new China, it’s going to be a new coalition. You know, Indonesia, Philippines, Malaysia — countries in those parts of the world do have strong population growth and do have rising incomes.”