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Investor explains 'high likelihood' for business recession

Both the global and domestic economies have been smacked with a variety of economic headwinds, from increased geopolitical conflicts to elevated inflation and prolonged labor disputes. The Federal Reserve has signaled that interest rates will stay higher for longer, leaving some analysts to believe that a recession is inevitable. With rates being so high, the impact is felt on the consumer which translates to less buying power that can impact businesses even more.

Thomas H Lee Partners Co-CEO Scott Sperling joins Yahoo Finance to discuss what he believes will be a very likely scenario of a recession for business going forward.

"You're seeing a massive increase in consumer debt, particularly credit card debt. That obviously has a depressing impact on future purchases, especially with the high ratings of consumer loans," Sperling explains.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

- First and foremost, when you say high likelihood of a business recession here, you've got CEOs, especially from some of the largest banks, giving their kind of weather forecasts about the economy right now. And the latest coming from Morgan Stanley's CEO this morning saying that he does think the Fed is going to do one more rate increase by the end of the year. He doesn't expect them to cut in 2024. What does that signal to you if were not to see a cut in 2024 about the likelihood of that recession and ultimately if this higher for longer has a larger impact on the depth of a recession?

SCOTT SPERLING: Well, higher for longer is going to-- should theoretically have an impact on what the value of any given asset is clearly. And we saw that with a collapse in mostly technology stocks but stocks of all sort about 18 months ago as people were coming to grips with the fact that inflation was not going to get defeated easily, that the Fed's job was very difficult.

And I think now you're looking at a situation where not only is the Fed probably going to have to retain these higher rates longer because of the nature of inflation that we're dealing with, but the fiscal deficits are so large that the supply and demand equation, particularly as you look at the 2 to 10 year tranches of Treasury debt, we're just going to have an enormous amount of supply being put into the market. And it's not clear the demand will meet that unless you see higher long-term rates be sustained even past the point that the Fed may start to bring down the near term rates.

- So Scott, it sounds like you see a reasonable possibility here that rates are going to stay in this elevated range, is that correct?

SCOTT SPERLING: Yes. I would agree with a number of the I think both banking leaders but also business leaders who are seeing the same thing, which is we're not fully defeating the forces of inflation. The wage push inflation that we see coming from maybe appropriate demands, particularly from the Union side for double digit wage increases over the course of the next three to four years is not abating. There are still a number of areas where there are labor shortages. And again, I think while technology can help solve some of that, it's going to take some time.

- And then Scott, to that point then, when we talk about the consumer right now, obviously, the consumer has been extremely resilient. Pointed to in many instances as one of the reasons or one of the main reasons why the US economy has been able to avoid this recession. If we are in this higher for longer elevated rate period here going forward, what is then the impact on the consumer? And just what that would mean in terms of weakness that we could see more broadly speaking.

SCOTT SPERLING: Well, I think you're starting to see two facts emerge. One is that the massive amount of fiscal stimulus, putting money in the pockets of consumers is starting to run out. And that's going to have an impact. The second fact is that you're seeing a massive increase in consumer debt, particularly credit card debt. And that obviously has a depressing impact on future purchases, particularly given the high rates for lots of different types of consumer loans, even putting aside the extraordinarily high rate of credit card debt.

So I think those things will tend to dampen at least the growth of consumer demand going forward and in many cases may actually bring it down.

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