Economy going at the speed of light – what could go wrong?

What does the future hold for this rapidly paced market?

About this episode
In this episode, Chief U.S. Economist Lara Rhame and Kara O’Halloran, Director, Investment Research, discuss 5 things that could go wrong, from labor markets to policy error, as the current economy travels at the speed of light. What does the future hold for this rapidly paced market?

Transcript excerpt:

Kara O’Halloran (00:00):
Welcome back to FireSide, a podcast from FS Investments. I’m Kara O’Halloran. I’m a Director on our Investment Research team here, and I think I’m going to start calling this “The Kara and Lara Show” because we are, once again, joined by Lara Rhame, our Chief U.S. Economist. Lara, how are you?

Lara Rhame (00:20):
I’m great. Oh my God, we have so many amazing people to bring into our podcast, but I have to say, I’ve been enjoying our one-on-one conversations. These have been so much fun.

Kara O’Halloran (00:29):
I know. We’ll spread the wealth a little bit soon, but it’s been great. So given what we’re talking about today, it does make sense that we’ve had you on for the last few episodes. The economy is moving so quickly, it’s changing really rapidly, so we have needed a lot of updates from you recently to really help us sift through all of the noise and all of the data. But today we want to take a step back and look at the fact that we are moving so quickly and really what that speed means, and then more specifically, the risks that come with an economy that is moving this quickly.

Lara Rhame (01:00):
Yeah. Something that I try to put across so clearly to people is the consensus forecast of 2021 growth of over 6%, and then 2022 growing at 4%, these are growth rates that are three times higher than where our economy is sort of built to grow. I compare it to my 12-year-old Volvo, it’s a workhorse, it’s a great car, but no matter what kind of gas you put in it, no matter what kind of road you lay before, it does not like to go above 95 miles an hour, full stop. I mean, if you’re on a slanted racetrack with high premium fuel, it can maybe get up to a little bit more speed, but it’s not going to be able to sustain that.

Lara Rhame (01:56):
When I think of our economy right now, I just am writing a chartbook that’s going to go out at the end of the week, and I’m really talking about the fact that our economy is traveling at light speed. Our economic cycle is moving at light speed. Our financial cycle has already moved at light speed. Not only are things getting faster, but the fact that our economy is growing so fast, I think you’re going to start to see some structural constraints, and just to really remind people that for our economy, this is such a terrific speed of growth.

Kara O’Halloran (02:35):
Right. So I’m looking at this list that you sent over and as you said, you’ll be publishing it. So maybe first you can not quite at light speed, but rapid fire, list the five things that you see that could go wrong with the economy moving this quickly, and then we will dig into them for the rest of the episode.

Lara Rhame (02:52):
Totally. I mean, the first thing that we really look out for closely is labor markets, and sort of that job gap closing. The second thing that can really happen when the economy is moving so fast, at possible risk of overheating, are frothy markets, and that can come in a couple of different places. And I think alongside of that, the third thing is keeping a close eye on leverage. And I think today, I’m focusing on corporate leverage. And the fourth thing obviously, I mean, is inflation. It’s a tremendous issue right now, and it is sort of the target of where all of the attention goes when the economy is racing at such a strong level above our potential growth.

Lara Rhame (03:40):
And finally, of course, policy error. It’s way too early to start talking about a recession but when you look historically at prior recessions, what has preceded them? Rate hikes that have gone too far, some kind of other policy misstep that has caused our economy to really sort of break and contract a little bit. So those are, I think the five things that we need to start thinking about now, even though our economic growth right now is very solid and very strong.

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Kara O’Halloran, CFA

Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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