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Short Recession Would Be Better for Investors Than Soft Landing: Economist

  • A soft-landing, stagflation scenario is worse than a short recession, a Manulife economist told CNBC.
  • That’s because a recession is the only thing that will get the Fed to cut interest rates, Frances Donald said.
  • “A soft landing, stagflation type of environment where you get no growth and no Fed cuts, that’s worse for most investors.”

A soft landing would spell more woes for investors compared to a short recession, according to Manulife Investment Management Global Chief Economist and Strategist Frances Donald. 

“With the price level shock we’ve seen in the past couple years, I don’t think you get those rate cuts unless you see unemployment rates starts to rise,” she told CNBC on Friday. “This doesn’t seem to me like a Fed who would cut without a recession.”

Last week, the Labor Department’s blowout jobs report of 336,000 positions added, as opposed to the 170,000 expected, pointed to a still-strong economy. Meanwhile, American consumers continue to spend at a steady slip.

Some experts have predicted a recession is inevitable, while others say the US might just be able to avoid it. For her part, Donald sees a recession coming.

But the bigger point is that there’s a consensus the economy will have difficulty re-accelerating from this point forward, she said. 

“We really have trouble throwing out all of the standard economic relationships with rates moving this high, credit contracting at the speed and the magnitude that it is right now. The consumer is out of excess savings, defaults and delinquencies are higher, and the housing market is effectively completely frozen,” Donald added. “We can’t get growth to come above 0%.”

Still, the alternative is worse, she argued. In a soft-landing scenario, the economy doesn’t slacken enough to get the Fed to pivot. A short recession is the only thing likely to invite rate cuts. 

“Saying that a recession is necessarily the most bearish outcome — I don’t think that’s the case. A soft landing, stagflation type of environment where you get no growth and no Fed cuts, that’s worse for most investors,” Donald said.

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