There's no reason for the US to fall into recession unless the Fed messes up, Mohamed El-Erian says
"Mohamed El-Erian says there's no reason for the US to tip into recession unless the Federal Reserve miscalculates what it needs to do again.
The top economist, a longtime critic of the Fed, sees hope for the US economy in data out last week. Official figures showed the labor market still moving at a brisk pace in March, even as it slowed down somewhat.
"I think we can avoid a recession. We are seeing weakening, but the most interesting sector is services. We've had conflicting data," the chief economic adviser at Allianz told CNBC on Monday.
"There's no reason why we should fall into a recession other than getting another Fed policy mistake," he said.
El-Erian has previously slammed the US central bank for mistaking inflation as transitory. That meant the Fed then had to unleash an aggressive campaign of interest-rate hikes on the US economy to try to cool price pressures.
Moody's Mark Zandi and other economists fear the central bank could "overtighten" its policy — that is, it could raise rates too far and end up undermining growth.
But according to El-Erian, the latest payrolls report from the Bureau of Labor Statistics offers room to be hopeful about the US economy.
"Solid employment growth, higher labor force participation. That's good for both the demand and supply side of this economy," he said.
The US added 236,000 jobs in March, just short of the 239,000 expected, while the unemployment rate moved down from 3.6% to 3.5%. The labor force participation rate ticked up from 62.5% to 62.6%.
Just a few days before that release, the ISM manufacturing index update for March showed a drop in US factory activity to the lowest level since July 2020, with a corresponding fall in employment.
Beyond the economic indicators, investors are watching the fallout from the failures of Silicon Valley Bank and Signature Bank
El-Erian's forecast is in stark contrast to what other top market commentators expect for the US economy, given turmoil in the banking sector following the collapse of Silicon Valley Bank.
Fears are mounting that tighter credit conditions among US lenders alongside the Fed's rapid interest rate hikes could spark an economic slump. While El-Erian notes that the SVB debacle raises the odds of a recession, it "doesn't make it a done deal."
"It's going to play out over several quarters, it's not a sudden stop, it's not 2008," El-Erian said.
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