- Unemployment will double to 6%-7% and a hard landing will hit by the end of 2024, a Mizuho strategist said.
- Declining inflation will shrink company profits and force layoffs.
Those trying to read the tea leaves in inflation data to figure out where the US economy is headed are getting it wrong, and a hard landing is coming as unemployment rates will double by the end of the year.
"The hard landing will be a sharp increase in unemployment," Mizuho strategist Dominic Konstam told Bloomberg TV on Monday, forecasting unemployment rates at 6% or 7% by the end of the year.
The labor market is increasingly coming into focus in the soft landing debate, as hiring stalls and layoffs increase. While unemployment is sitting ata historically low 3.7%, former Fed and Goldman Sachs economists are warning about increasing risks of more job losses. Fresh jobs data is set to come out on Friday this week, giving a clearer window into the employment picture.
But investors still have their eyes glued to declining inflation, and according to Konstam, they shouldn't be focused on that.
In fact, tumbling inflation is exactly what will trigger a souring labor market, he said. As price increases taper, that hits company earnings and profits, which begin to look smaller. In response, companies will stop "labor hoarding" and shed their workforce.
"The inflation decline is not a benign indicator of, 'oh, we've done it, we've got a soft landing,'" he said. "On the contrary, the inflation decline is like, 'oh my goodness, be careful now, what's going to happen to the labor market six months down the road.'"
While the Fed is poised to cut nominal interest rates this year, Konstam argues that Powell will have to get real rates down as well because of companies' shrinking profits.
"It's a profit margin expansion that took place in Covid that gave companies so much profit and allow them to be a bit lazy on cost. So it's really that kind of unwind, I think."