Worst is yet to come: Economist Stephen Roach says the U.S. needs ‘miracle’ to avoid recession

The negative economic growth in the first half of this year could be a precursor to a much deeper downturn that may last until 2024, according to Stephen Roach, former chair of Morgan Stanley Asia.

Roach predicts that the United States will require a miracle to avoid a recession. He asserts that the lagged impacts of this significant monetary tightening will lead to a recession.

Roach suggests that the Federal Reserve Chairman, Jerome Powell, has no option but to follow the Paul Volcker approach to tightening. Volcker raised interest rates aggressively in the early 1980s to control runaway inflation.

On Monday, Roach made these comments to CNBC’s “Fast Money.” The market has experienced a second straight decline, with the Dow falling by 184 points. The S&P 500 dropped 0.67%, while the Nasdaq Composite fell by 1.02%.

Recent statements by Federal Reserve officials have led to the market giving back some of its summer gains, as the central bank aims to continue its rate hikes, even if they cause economic pain. According to Rod von Lipsey, the managing director at UBS Private Wealth Management, investors are coming to grips with the idea that the Fed is serious about curbing inflation, despite the recent data indicating that inflation is beginning to decline.

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The latest data reveals that U.S. manufacturing business activity dropped to 51.3, while the services activity measure dropped sharply to 44.1 (indicating contraction) in the purchasing managers’ indexes from S&P Global, which was released on Tuesday. Business activity also fell in Europe.

A Fitch Ratings report from last Friday predicted that the recession risk in the U.S. is high due to demand erosion and the inability to pass through rising costs to customers via pricing. They indicated that this risk would become more meaningful in some sectors in 2023. Fitch also projected that median revenue growth at North American corporates would slow from 7% in 2022 to 4% for both 2023 and 2024.

Recession fears have been mounting in the United States for weeks. Powell hinted at a possible recession during his keynote speech at the Federal Reserve’s annual Jackson Hole Economic Symposium two days ago. In his remarks, he told investors that the Fed was focused on inflation and would continue its historic pace of rate hikes for the foreseeable future. Wall Street also reacted negatively to the tone of Powell’s speech, with the major indices falling on the prospect of a sustained period of higher interest rates and the associated economic pain. Powell used the word “pain” twice in his speech, referencing slower growth, higher unemployment, and financial strain that tighter policy will inevitably bring to American homes and businesses.

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