Unemployment Will Double by the End of the Year with an Economic Hard Landing Inevitable, Strategist Says

Those trying to read the tea leaves in inflation data to figure out where the US economy is headed are getting it wrong, and a hard landing is coming as unemployment rates double by the end of the year, a strategist says.

"The hard landing will be a sharp increase in unemployment," Dominic Konstam, a Mizuho strategist, told Bloomberg TV on Monday, forecasting unemployment rates at 6% or 7% by the end of the year.

The labor market is increasingly coming into focus in the soft-landing debate as hiring stalls and layoffs increase. While unemployment is sitting at a historically low 3.7%, former Federal Reserve and Goldman Sachs economists are warning about increasing risks of more job losses. Fresh jobs data is set to come out on Friday this week, giving a clearer window into the employment picture.

But investors still have their eyes glued on declining inflation, and Konstam said they shouldn't be focused on that.

In fact, he said tumbling inflation was exactly what would trigger a souring labor market. As price increases taper, that hits company earnings and profits, which begin to look smaller. In response, companies are set to stop "labor hoarding" and shed their workforce.

"The inflation decline is not a benign indicator of, 'Oh, we've done it, we've got a soft landing,'" he said. "On the contrary, the inflation decline is like, 'Oh my goodness, be careful now, what's going to happen to the labor market six months down the road.'"

While the Fed is poised to cut nominal interest rates this year, Konstam argued Jerome Powell would have to get real rates down as well because of companies' shrinking profits.

"It's a profit-margin expansion that took place in Covid that gave companies so much profit and allowed them to be a bit lazy on cost. So it's that kind of unwind, I think."