It would be a 'miracle' to escape a recession and the erosion of credit is similar to 2008, top economist David Rosenberg warns

• The US looks likely to tip into a recession in about six months, according to David Rosenberg.
• The top economist warned that the deterioration of credit quality is reminiscent of 2008's mortgage crisis.

The US economy is heading toward a recession in early 2024, according to economist David Rosenberg.

In a Thursday interview on Blockworks' Forward Guidance podcast, the president of Rosenberg Research & Associates said the combination of the Federal Reserve's historic rate hikes, softer consumer spending, and a deterioration of credit all point to a coming downturn.

"We've had the biggest interest rate shock since 1981, if I'm not mistaken," he said. "1981 was followed by 1982, which was not a mild recession by the way. Part of that impact's been blunted by the lingering impact of the fiscal stimulus, which is now in the rear view mirror."

"I think that if we escape this little recession, it'll be a miracle," he added.

He also cautioned that there's still a chance of another rate hike, and how 11 of the last 14 rate-hiking cycles ended with a recession.

"I'm willing to give it about six months," he said when asked about his recession outlook.

Rosenberg's view is no longer the consensus on Wall Street, and forecasts for an imminent downturn have receded throughout 2023. Morgan Stanley economist Seth Carpenter, for example, said earlier this week falling inflation and steady growth are a recipe for a soft-landing scenario, and Bank of America has also shared a more upbeat economic outlook.

In any case, the economist said he had underestimated how much consumers would spend from their $2 trillion in pandemic stimulus checks, and that he had failed to account for "YOLO" and "FOMO" spending — that is, "you only live once" and "fear of missing out."

"What we don't know is what does the American consumer really look like when we don't have the full impact of these stimulus checks that were mailed out a couple years ago," he said. "Every penny of the stimulus checks got spent."

In the coming months, the extra cash that has been put toward fun and games will instead be siphoned into servicing debt.

And while savings dwindle, jobs are still not declining as quickly as policymakers want, and retailers like Macy's, Kohl's, and Lowe's have reported weak foot traffic, sales, and guidance.

"In the next couple months, we'll not be talking about consumer resilience anymore," he said.

Meanwhile, he sees the recent surge in credit card delinquencies as reminiscent of the 2008 mortgage crisis. Banks are tightening their lending standards, and it's weighing on consumers and credit quality.

"We just replaced credit cards with what happened with subprime mortgages 15 years ago," Rosenberg said.

"This is how a recession starts," he continued. "It starts with a significant erosion in credit quality in one particular asset class, and right now you're seeing it in credit cards and it is not insignificant, even though it's not residential mortgages [like 2008]."