The US economy is headed for a hard landing this year, and deep rate cuts are the only solution, Citi chief economist says

• Citigroup’s chief US economist told CNBC a deteriorating labor market was setting up a hard landing.
• Andrew Hollenhorst said a gradual softening in the job market is happening and “tends to snowball.”
• He’s calling for four interest-rate cuts this year; other forecasters are being more conservative.

A deteriorating labor market will be what causes the US economy to quickly turn sour, according to Andrew Hollenhorst, Citigroup’s chief US economist. In fact, he sees an abrupt economic comeuppance later this year.

“Firms are hiring at a lower rate. Firms are having workers work less hours,” he told CNBC on Tuesday. “So this gradual softening has already started. That tends to snowball and end up in something that looks more like a hard landing.”

While recent labor-market data doesn’t necessarily point to such a dire situation, Hollenhorst argued that certain reports revealed a more pessimistic environment than many may realize. A hard landing is a troublesome prospect, since a full-fledged recession can follow.

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“Small businesses are telling us that their hiring intentions are at the lowest levels that we’ve seen since 2016,” he said, citing survey data from the National Federation of Independent Business. “And if I look overall at the economy, the hiring rate right now is at the lowest rate that it’s been at since 2014. So we’re at the lowest hiring rate in a decade.”

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Though NFIB data has fueled bearish sentiment for a while, Hollenhorst said a recent sharp drop from previous months made it worth paying attention to.

Even when taking a holistic perspective, there are reasons to worry. For instance, Hollenhorst argued that while the national unemployment rate has remained at about 3.9%, that’s a big shift from its previous low of 3.5%.

Hollenhorst predicted that unemployment ticking up above 4% could trigger the Federal Reserve to start lowering interest rates as soon as July. Overall, he thinks four cuts will come before the end of 2024.

Other analysts have also voiced hard-landing calls pegged to labor-market deterioration. The veteran forecaster Danielle DiMartino Booth has said one unemployment indicator suggests a recession has already arrived.

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Meanwhile, Hollenhorst said the likelihood of a July cut was bolstered by the prospect of a hard landing and weaker economic activity — specifically, he argued that the Fed’s higher-for-longer interest-rate policy was grinding down on corporate earnings at a time when consumer savings have been run through.