US might be on the brink of a crisis similar to 2007 or 1998: Economist Sri Kumar

Sri Kumar, President at Sri-Kumar Global Strategies

In a recent interview on Bloomberg Radio, Sri Kumar, President of Sri-Kumar Global Strategies, analyzed the current economic landscape in the US. He identified potential risks and challenged conventional optimism, despite positive indicators such as robust labour markets and strong consumer spending.

Kumar emphasised the initially underestimated impact of stimulus measures, stating, “The extent of fiscal and Federal Reserve stimulus was initially overlooked. The system is still riding the wave created by these measures.” The interview shed light on the prolonged effects of the fiscal stimulus from the final months of the Trump administration and the initial months of the Biden administration, as well as the doubling of the Federal Reserve's balance sheet from the beginning of COVID to 2022.

Acknowledging America’s current economic strength, Kumar cautioned, “A recession has been postponed, not denied. Signs may emerge as interest rates rise and the Federal Reserve tightens its balance sheet. The first half of 2024 could be pivotal.”

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He dismissed the idea of a soft landing, drawing parallels to historical crises, stating, “Events can escalate quickly when they get out of control. The economy might be on the brink of a crisis similar to 2007 or 1998.”

Highlighting potential triggers, Kumar said, “My top candidate is a banking institution, possibly medium-sized, facing challenges from long-dated bonds. Commercial real estate, credit crunch, and bond yield fluctuations pose additional risks.” He mentioned the vulnerabilities of institutions that loaded up on long-dated bonds based on expectations that inflation would be transitory, a prediction that did not materialise.

Despite the current strength in the US labor market, Kumar expressed concern about potential unemployment surges, noting, “The robustness is fuelled by an influx of money and a gradual return of workers. However, a sudden surge in unemployment could be on the horizon.” He highlighted the role of the labor shortage due to COVID and the gradual return of certain demographics, such as wives providing childcare, to the American workforce.

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Further, addressing conflicting reports on consumer health, Kumar stated, “While aggregate delinquency numbers seem benign, disparities exist. Higher-income groups drive spending, while lower-income groups show signs of cutting back.” He explained that credit card delinquencies, often the first indicators, are starting to rise, particularly among lower-income groups.

Kumar's insights on the US economy challenge conventional optimism. His warnings of a delayed recession and identification of potential triggers underscore the need for vigilance.