Economy Is at Risk of a ‘Sudden Stop’ Despite January Job Report, Larry Summers

• Larry Summers warned that there could be a “sudden stop” in the economy this year.
• Summers made the comments after a strong January jobs report sent the unemployment rate to 3.4%.
• “It’s as difficult as an economy to read as I can remember,” Summers told Bloomberg.

The US economy could see a “sudden stop” and even fall off a cliff later this year, according to former Treasury Secretary Larry Summers.

That view stands in stark contrast to the strong January jobs report that was released on Friday, which showed job gains of 517,000, more than double the average economist estimate of 188,000.The unemployment rate fell to 3.4%, its lowest level in 54 years.

“It’s as difficult an economy to read as I can remember,” Summers told Bloomberg on Friday. 

The big question, according to Summers, is whether the income generated by employees is going to be spent and help lift up the economy, or are companies about to conclude that they have too many employees and need to enact widespread layoffs.

Layoffs have already hit the tech sector hard over the past few months, though they have been typically been a single digit percentage of a company’s overall workforce. If the layoffs accelerate to other sectors of the economy, Summers expects the economy to see a “fairly sudden stop.”

Another question on top of Summers’ mind is whether wage inflation continues to slow, or does it reaccelerate? Such a tight labor market would suggest that wage inflation could see a pick-up from here, especially after the January jobs report. And given that wage inflation is integral to overall inflation, it will help inform the Federal Reserve as to whether they need to continue with their interest rate hikes.

“The question now is whether that inflation is going to continue to decline rapidly,” Summers told Bloomberg. If inflation sees a rebound, it would make a soft-landing in the economy much more harder to achieve.

All of this means that the Fed doesn’t have an easy job ahead of it, according to Summers.

Policymakers are “recognizing that it’s going to be very hard, and they’re going to have to try to interpret the data month by month, and that there are a lot of surprises,” Summers said. 

The Fed is now expected to hike interest rates by 25 basis points at both its March and April FOMC meetings, according to the CME FedWatch Tool.