Chief Economist Eugenio Alemán’s outlook for 2024

Chief Economist, Eugenio Alemán returns to the podcast to discuss his 2024 outlook with host Chris Cooksey, including:

• Where we are in the economic cycle
• What may be in store for 2024
• What is he worried about for economy
• Inflation and rates

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Transcript

Chris Cooksey: Hello, and welcome to the Advantaged Investor, a Raymond James Limited podcast, a podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on long term success. We are recording this on February 6, 2024. I'm Chris Cooksey from the Raymond James corporate communications and marketing department. And today, chief economist Eugenio Aleman from Raymond James Financial joins the podcast to give us a sense of what's going on in the economy. Eugenio, welcome back to the podcast, I did something I shouldn't have - I looked at the weather down in St. Pete, and while it's probably not as warm as you're usually used to, it's definitely warmer than it is here in Toronto. So that being said, it's always a pleasure to connect with you and have this discussion. I hope you're doing well.

Eugenio Aleman: Yeah. It's a beautiful day. 59 degrees. It's anybody's dream weather.

Chris Cooksey: Well, I'm definitely envious up here. We have a lot to get to, as always, with the economy and related issues, I don't need to tell you that, maybe we just start with your thoughts on where we are in the economic cycle as we head towards the US election and with lots of stuff shall we say, going on in the wider world.

Eugenio Aleman: Yeah. So we basically still have a very mild recession. And the reason for that is because the Fed will stay put for several more months at 5 and a quarter, 5 and a half. So if inflation continues to go down, which is what we are expecting, the real rate of interest will continue to go up. So there is still a risk that if the Fed stays put for 3, 4, or 5 more months, there's a chance that we might go into a recession. So far, there are no signs that the US economy is heading that way. But, again, the longer the Fed waits to lower interest rates, the higher the probability to have some sort of reaction from consumers, from investment, and a slowdown will ensue. However, we are very close to no recession today. I mean, we have such a mild recession in our forecast that we are starting to think that we might not get a recession anytime soon. I mean, the political cycle is the political cycle. I won't get into that if you had Ed Mills on last episode, I'm not going to step on his toes, but the economy is doing well, thank you. I mean, so far, 353000 jobs created in January. That means that income growth is on tear, and because of inflation is coming down, real incomes are coming up. So far so good. The Fed is not ready to lower interest rates and that is the biggest risk, because they are not convinced that they can bring down the rate of inflation to their 2 percent. They fear that inflation will stagnate at 3 percent, and they want to be sure that they can bring down inflation to 2 percent and then start lowering interest rates. Our take is that the Fed will move in June for the first time, but it's anybody's guess right now, may is still open. March, they have said no already. So, March is not in the game. But depending on what happens to inflation in the next couple of months, May might enter. That's an alternative for the first rate decline, but for now, we are sticking to June of this year.

Chris Cooksey: Okay. Now so in when it comes to inflation, obviously the concern from the Fed would be rates go lower and then everyone starts, you know, upgrading their houses, buying whatever. Is it as simple as that?

Eugenio Aleman: That is a risk for the Fed. So if the economy continues to be this strong, and without any help from lending, what would happen if they lower interest rates and lending starts to happen? That is their fear. That inflation stalls at current levels, and they don't want to see that. So that is why we still have some more pain in terms of interest rates. And as inflation comes down, real rates will continue to go up. So that is still a risk, even if they don't move in the next 2 or 3 months.

Chris Cooksey: Now, as we mentioned we did have Ed Mills on recently, and he was talking about hidden fiscal stimulus and a lot of the legislation, the chips act and inflation reduction, and he was saying a lot of that stimulus is just about to enter the economy, and I just wanted to get your perspective on that.

Eugenio Aleman: That is correct. I mean, it's weird, but because about 2/3 of real Investment is non-residential investment and 1/3 is residential investment. Residential investors already took all the hits from higher interest rates - it recorded 9 consecutive quarters of negative growth. Then it started to recover in the third quarter of last year, and the fourth quarter was also positive. But non-residential investment has continued to tag along. If you look at manufacturing construction, the construction of plants, new plants for EVs, for batteries, for chips, this has been an oasis of activity going on that has the characteristic, as Ed said correctly, that no money from the federal government has been spent. So this is only private investors that are putting money upfront, in the expectations that the Chips Act, the IRA, and infrastructure act come and match their money. So, yes, I agree. It's not that hidden, the problem is that it's still not there. I think that that is another risk for the Fed. Why would you lower interest rates since the economy is growing so strongly? Why are you going to put more gasoline into the fire by lowering interest rates and push the economy even harder. That is where they stand today, and that's another reason why we think that they are going to stay put for some more time.

Chris Cooksey: Right. And I guess in terms of jobs, like you mentioned the rate is very low, and you would know this far better as a student of this than I would, but I would find it hard to believe that when jobs are strong, recession is imminent if we're still adding jobs and looking for people for these jobs.

Eugenio Aleman: I agree. I mean, even though an economy can turn on a dime, it normally turns on a dime if there's a crisis. And there is always a potential of a crisis, and firms get spooked, and firms think that things are going to get worse, and they start getting rid of workers. But I agree, there are no signs from the employment side that there's any risk of the economy going into recession. So that's why we are saying, look, yes, we still have a recession because the risks of higher real rates are still there and will remain there for some months, but there is still tailwinds from the federal government because of these 3 acts. So, you know, at this time, It's very unlikely that we see a slowdown in the economy, but we still have the recession just because rates are very high. At some point in time, it will impact economic activity.

Chris Cooksey: Now are we at the stage where supply chain the issues we had during COVID, have we largely come away that from that situation, or are we still seeing remnants of that out there?

Eugenio Aleman: No. No. There are no signs so that that there are any issues with supply chains. There are some issues with the geopolitical issues around the world, the Russia/Ukraine, the Israel/Hamas conflict and then the Houthi issues are reshaping the shipping industry and cost of shipping is going up. The biggest difference between today and what happened during the pandemic Is that there was no production during the pandemic. Nothing has happened to production today. Yes, the cost of shipping might go up but it's a blip in the whole picture. It will not stop this inflationary process in the US. And remember, the US gets almost 60 percent of imports from Mexico, and Canada and they are normally not using these routes, so its mot affecting the trade between the US, Canada, and Mexico.

Chris Cooksey: Alrighty. Now just say things map out and the rates go down in June. How do you see the second half of the year playing out then?

Eugenio Aleman: I think that If the Fed starts lowering interest rates in June as we expect, we will have a second half that is very, very strong and then all bets are off. I mean, the markets, normally, typically go ahead of everything that happens. So maybe that is what they are already integrating into their behaviour, and that's why markets are so strong today. But, you know, markets are markets. I don't trust them going up, and I don't trust them going down.

Chris Cooksey A they are ust a voting machine as they say. Right?

Eugenio Aleman: Yeah. You know, I say that markets take the elevators. The economy takes ther stairs. Much slower things happening in in the economy compared to the markets.

Chris Cooksey: Alright. Well, let's just finish off with some things you're worried about that maybe aren't visible right now, but things you're watching just to make sure things stay on track.

Eugenio Aleman: Yeah. I mean, we always are concerned with what could this political environment in the US bring us this time. It is really unsettling because of everything that is happening, and it's the first time that these types of things happen in the US. So nobody knows how this is going to end but hopefully it's not going to be bad. I mean, there's always a possibility, the commercial real estate sector is still in trouble, but everybody knows that it's in trouble. It has been in trouble since the great recession. So hopefully, the regulators are on top of it and nothing will happen. So, we could have a scenario where there's a surprise. We don't see a surprise coming, but that's why it’s called a surprise. For now, we are thinking that we might have a slowdown in economic activity that could become a very, very mild recession. But if the Fed starts lower interest rates, then I think that they we could avoid even a mild recession this year, and things will get better after that.

Chris Cooksey: Well, as they say, we'll be watching intently here north of the border because when the US sneezes, we get a cold, I'm told. We'll make sure we keep following you and I just really want to thank you for your time today Eugenio. It’s always very interesting when we get the chance to speak with you. So thank you very much.

Eugenio Aleman: Thank you for the invitation, Chris.

Chris Cooksey: Reach out to us at advantagedinvestorpod@RaymondJames.ca. Subscribe to The Advantaged Investor on Apple, Spotify, or wherever you get your podcasts. Please contact your advisor with any questions you have. On behalf of Raymond James and The Advantage Investor, thank you for taking the time to listen today. Until next time, stay well.

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