The US economy may be inching closer to the cliff edge given these 4 troubling signs, Larry Summers says

  • Ex-Treasury chief Larry Summers thinks the economy is edging closer to a “Wile E. Coyote” fall off a cliff. 
  • Rising inventories and dwindling savings are among key factors threatening the US economy’s current robustness, he said. 
  • “People may be reading a bit too much into the moment in terms of economic strength,” he warned. 

Former Treasury Secretary Larry Summers highlighted four troubling signs of potential risks to the US economy’s current robustness. 

Speaking in a Bloomberg interview on Thursday, Summers suggested investors may be too upbeat about recent economic data, including a strong labor-market figures and a surge in retail sales in January. 

“We’ve got an extremely difficult economy to read,” Summers said. “People may be reading a bit too much into the moment in terms of economic strength — relative to the way things could look very differently in a quarter or two,” he added.

While those indicators “look very strong,” the former Harvard University professor said, there’s still worrying signs that the US could experience a Wile E. Coyote moment, referring to the Looney Tunes character who runs off cliffs, realizes he’s standing in midair, then drops like a stone.

“There are a variety of leading indicators that are more troubling,” he said. These include rising inventories relative to sales, companies’ growing concerns over their order books, businesses employing too much staff compared to their output, and dwindling consumer savings. 

“On one hand, we have this current robustness and concern about inflation. On the other, there is stuff when you look down the road a bit that has to be substantially concerning about a Wile E. Coyote kind of moment,” Summers said. As a result, he warned the Federal Reserve needs to stay nimble and flexible given the continued uncertainty about the US economy.

Summers’ pessimism about the economy builds on warnings he’s made in the past. He’s noted that the central banks’ efforts to bring down inflation aren’t working as well as hoped – and that could mean the US economy is headed for a “collision.” 

Though inflation has moderated from the 40-year highs hit last summer, it was still far above the Fed’s 2% target in January – coming in at 6.4%. It was just slight drop from December’s reading, suggesting price pressures remain stubbornly high.

Such high price pressures have not been helped by a robust labor market and resilient consumer spending, with Summers warning the Fed should refrain from slamming on the brakes too hard on the economy with rising interest rates.