Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Dread is seeping into the economic outlook, and for good reason. Banking turmoil will force lenders to withhold credit, and it remains to be seen whether a more severe financial crisis is in the cards. The commercial real estate market — a driver of construction and growth — appears to be under pressure. And it’s all landing as the Federal Reserve continues its attack on inflation with rate hikes designed to slow the economy. It has the Fed signaling that the bottom could fall out after the first quarter. But some economists see a path in which the surprisingly resilient post-Covid economy might defy the odds once again. One obvious wildcard is the labor market, which added 815,000 jobs in January and February. “At the end of the day most of what the economy comes down to are jobs, jobs, jobs,” said RSM US chief economist Joe Brusuelas. “If unemployment doesn’t rise and wages continue to increase at the recent pace, there's a small chance that the economy could avoid a recession.” Another factor: the U.S. economy is less dependent than others on bank lending, according to an analysis from Institute of International Finance chief economist Robin Brooks, surfaced by former MM host Kate Davidson. That could also lower the odds of a recession. There’s another scenario that the markets might not appreciate: The banking turmoil, counterintuitively, could trigger actions that stimulate the economy. Unlimited Funds CEO Bob Elliott, who previously led research at hedge fund giant Bridgewater Associates, said mortgage rates are falling, easier monetary policy is being priced in and asset prices are flat to up, modestly. “If you add that all up, you look at it and say, it’s not obvious this is a negative for the economy,” he said. They’re factors that matter more than small bank lending, according to Elliott, which he said had already been slowing. Elliott describes the economy as a tanker ship that takes a lot to slow down. He’s skeptical that “a couple banks that frankly no one had ever heard of before the last two weeks” are enough to throw off macroeconomic momentum. “In the same way the Fed’s tightening has incrementally moderated economic growth, some of these credit problems are an incremental drag on growth, but you have to compare that to the underlying momentum in the economy, and that still looks pretty good.” “And so will this be enough to bring the economy down? When you pencil through all the numbers it seems like that's a low probability.” It’s Friday — Thanks for all the great feedback this week. Sam will be back Monday. So please keep us in the loop at ssutton@politico.com and zwarmbrodt@politico.com.
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