Professor: Economic slowdown will continue

The housing and car markets will slow down in the coming months, an Ohio State University finance professor said. Whether that will mean full-blown recession still remains to be seen. The Federal Reserve, in its war to reduce inflation, increased its benchmark interest rate last week for the fifth time this year. "The Fed's latest rate hike will slow down the housing market and car sales," said Finance Professor Itzhak (Zahi) Ben-David, the Neil Klatskin Chair in Finance and Real Estate at OSU. "Both market segments depend heavily on the affordability of financing. Once financing becomes more expensive, it rations out households that cannot afford the high mortgage or loan payments." While those steps are necessary to curb inflation, the interest rate hikes are a blunt instrument that could sink the economy into recession. Federal Reserve Board Chairman Jerome Powell has said the Fed hopes to bring a "soft landing" and avoid a recession. However, the Fed also has signaled that more large rate increases are possible and it is willing to tolerate a period of higher unemployment in order to get inflation under control. "It is difficult to predict whether the Fed will succeed in leading the economy in a 'soft landing' fashion. An area of concern is the high asset prices relative to fundamentals, especially stocks and real estate," Ben-David said. "Slowing inflation and cooling down the economy means lowering consumption, slowing down sales and profits of corporations, and possibly increasing unemployment and causing stock prices to drop further. "Of course, how big and how fast the impact will be is hard to predict." For those watching with dismay as their 401(k)s, IRAs and other investments shrink in value, Ben-David advises caution. "The stock market is difficult to predict. Stock prices still appear expensive, but so they did in 2016 — just before the stock market took off," he said. "So, a reasonable strategy is to keep a conservative and diversified portfolio and hope for the best."