Blackstone’s Jon Gray is watching for signs of a slowdown in the U.S. economy

“They want the labor market to be less tight. They want to slow economic activity and drive prices down in the process, and the old line [that] you can’t fight the Fed — I think that holds true,” he said in the interview, which appears in video form below.

Gray runs the day-to-day operations of a private-equity and real-estate investing behemoth, which also has large hedge-fund and credit operations. It is arguably the top firm on Wall Street, landing Gray on the MarketWatch 50 list of the most influential people in markets.

Gray’s comments about the Federal Reserve’s battle with inflation and the likelihood of an economic slowdown as a byproduct of that showdown were made days before last week’s reading of gross domestic product, a blockbuster report that showed the U.S. economy grew at an eye-watering 4.9% annualized pace in the third quarter — the most robust GDP reading in years.

Estimates leading up to the GDP report suggested that that measure of economic output could even have been north of 5%.

Still, a 4.9% third-quarter reading — fueled by an outburst of consumer spending — seems to defy expectations of an impending slowdown.

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And expectations for any significant retrenchment have been defied time and time again in the aftermath of the pandemic and as the Federal Reserve has catapulted benchmark interest rates from levels at or near 0% to a current range of 5.25% to 5.5%.

Gray, however, warned against being fooled by signs of economic vitality, including the strength of U.S. growth as measured by GDP.

“Although the Fed is slowing things down, you know, the train had a lot of momentum,” said Gray, referring, in part, to fiscal measures such as pandemic-era stimulus payments.

“So I think they will slow this down. But I do think that momentum means that the the level of deceleration will not be nearly as bad as … we experienced back in [the 2008-09 recession],” he said.

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It wouldn’t be unprecedented for the U.S. economy to deteriorate substantially from here.

MarketWatch’s Jeff Bartash writes that the economy grew at solid 2.5% pace right before that so-called Great Recession, which ended in 2009, for example.

Bartash also notes that GDP showed the economy expanding at a frothy 4.4% in the first quarter of 1990, just months before a recession started.

What could a slowing economy look like this time around?

Gray shared thoughts on that: “Here it feels like we’re going in on firmer footing. But it does mean that the unemployment rate will likely go up, and it does mean that you’ll see less growth going forward.”

The unemployment rate currently stands at 3.8%.

More from Gray:

And when we look at our companies, interestingly, in our private-equity portfolio in the third quarter, revenue growth was still pretty good — high single digits. But when we look at the sequential path, it’s generally lower levels of growth, and when we look at their hiring plans it’s much more modest than it was 12 months ago. So I think it points to a slowdown. It’s hard to say — back to your question — just how deep this slowdown will be.

Higher bond rates are also creating stiff headwinds for financial markets and the economy more broadly because they mean the cost of capital is substantially higher that it was even 18 months ago.

That will weigh on consumers and businesses alike, and that is by design.

Speaking at the Economic Club of New York in mid-October, Fed Chairman Jerome Powell said that the whole point of raising interest rates is to “affect financial conditions, and higher bond rates are producing tighter financial conditions right now.”

And rates on everything from automobile loans to mortgages have responded in textbook fashion. A typical 30-year mortgage, frequently quoted at around 8% of late, carries its highest rate in two decades, while the benchmark 10-year Treasury note
BX:TMUBMUSD10Y
recently hit its highest yield in about 16 years, before pulling back.

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Stocks have been sputtering lower lately, too, due to competition from T-bills and other government debt perceived as low-risk.

Over the past 30 days, the Nasdaq Composite
COMP
has suffered a decline of more than 4.6%, while the S&P 500
SPX
has skidded 3.8% and the Dow Jones Industrial Average
DJIA
is looking at a fall of 2.6%, according to FactSet.

See: The Nasdaq just fell into a correction. Now what?

Equity markets, which had been mostly buoyant amid calls for a recession in 2022, may now be succumbing to the pressure.

Of course, Gray isn’t alone in anticipating the economy could experience a decline. There are others who are preparing for a more severe pullback.

“What we should not do is take this as a signal of the all-clear for 2024,” Mohamed El-Erian told CNBC after the GDP report last Thursday.

He, for one, sees the combination of higher yields and the wind-down of consumer savings as too much for the economy to bear.

Prominent money managers Bill Gross and Bill Ackman also have warned that a long-expected economic downturn has now begun. Gross goes as far as to say that a recession could still happen before the end of this year.

That may be hard to see now with markets levitating and the Fed suggesting, in its most-recent meeting policy announcement, that it might be reluctant to deliver further interest-rate increases.

Read on: Yellen says she doesn’t see signs of recession after GDP report