Five fears for the U.S. economy—and the one Wall Street keeps mistaking for 2008

Summary

Generals, the saying goes, are always fighting the last war. They build defenses for the threat that nearly beat them, so they miss the new threat taking shape on the horizon (or just beyond it).  

It’s a point that Joe Lavorgna, Chief Economist at SMBC and former Counselor to Treasury Secretary Scott Bessent, made when I spoke with him for a recent episode of Edge in Uncertainty. Joe spent decades reading economic data on Wall Street—across a 20-year career—before this most recent tour in Washington. He has a useful habit of refusing to let a good narrative stand in for a real argument. And he’s not shy about saying the economy isn’t working correctly right now for middle and lower classes.  

One of his main takeaways was, simply, that markets (and so many journalists that cover markets) behave in the same manner as the generals. Investors pattern-match and headlines anchor, but the truth is often hidden in the margins. To hear the financial media tell the story of the economy over the last few months, it’s almost as if subprime is hidden inside private credit or, in other words, as if 2008 simply went away for 15 years and is now back again, only it’s wearing different clothes. Joe and I disagreed with that notion when we spoke weeks ago; investor sentiment around direct lending is now catching up. 

So, if private credit isn’t one of the top-5 concerns facing the economy, what is? I asked Joe. His answer is worth taking seriously because it maps the unusually narrow path that U.S. growth has to walk from here. 

1. Long rates are too high 

Joe's primary concern is the simplest: long-term interest rates are too high. While some believe higher rates are necessary to curb inflation (see point number two below), high rates impede growth because they are quietly impeding, if not outright harming, the cyclical parts of the economy. 

Manufacturing is recovering, but tentatively. Housing is weak. Affordability for first-time homebuyers (and millions of other Americans) sits near record lows. The tax bill passed last year contains genuinely powerful supply-side incentives—including full first-year expensing for new structures, a provision designed to ignite a building boom—but those incentives only work if the cost of capital cooperates. Or the economics of AI start turning an ROI. 

There's a useful framing here in that affordability is a three-legged stool: rates, prices, and income. Each leg has to carry its share. You cannot fix housing by working only one of them. Rates are elevated. Prices are high because supply is constrained. And income growth is decelerating.  

The reason that interest rates are the No. 1 fear is that the damage they do today will only be fully revealed later. The cyclical economy—manufacturing, housing, capital projects—is the part that creates the high-paying blue-collar jobs everyone says the country needs more of. If those jobs aren’t created because capital is too expensive, the bill comes due years from now. We’ll see it in a workforce that didn't transition. 

2. Inflation is back 

The second fear flows directly from the first. Long rates aren't elevated by accident. They're elevated because inflation, which looked like it was finally on a glide path, has reaccelerated. That reacceleration is being driven by energy costs. 

Oil prices have essentially doubled in the past few months. The Middle East is the obvious culprit, but the second-order effects matter at least as much as the headline. Energy feeds into fertilizer. Fertilizer feeds into food. Food and energy combined are more than 20% of household spending. For lower-income families, the share is higher, so inflation lands hardest on the most price-sensitive consumers.  

Any benefits they might have received from a tax cut isn’t going toward discretionary spending, but to essentials like groceries and gasoline or directly toward savings. And this is happening at the same moment that nominal wage growth is decelerating. Wages slowing while prices accelerate is real-wage compression by another name. 

The Fed, which at the time of this writing has missed its 2% target for 63 straight months, cannot ease into this kind of inflation. So, rates stay where they are, the cyclical economy stays where it is, and the squeeze tightens. 

3. Geopolitics is more complicated than the market is pricing 

The problem here is that tariffs and war are not the same kinds of negotiations, but the market is treating them as such.  

Tariffs are a maximalist opening bid against trading partners who are themselves part of a shared economic system. War, particularly war involving Iran, is not. Iran is not a Western-style democracy. China isn’t either, but it’s still part of the trading system, whereas Iran is not and hasn’t been for decades. A conflict like the one we’re in now doesn't resolve as cleanly as a trade dispute.  
 
Yes, the “all signed” peace deal is making headlines, but the reality is that it’s an MOU. Ceasefires get breached. A misunderstanding can reignite conflict. Financial leaders should not be making forecasts on the Middle East in the same way that they might on trade. 

4. AI is the slow burn under a "low hire, low fire" economy 

The fourth fear is the one most companies are simultaneously over- and under-estimating. Joe's view on AI is balanced and worth quoting in spirit: It is anti-inflationary in the long run, potentially powerfully so, and could still underwrite a disinflationary boom in 2027 or beyond. But the transition from here to there is the part nobody has solved. 

The labor market is in what economists are starting to call a "low hire, low fire" environment. Taken in aggregate, most companies (outside hyperscalers) aren't laying people off, but they aren't hiring either. In that kind of environment, anything that triggers layoffs—an AI-driven productivity step-change in a white-collar function, for instance—can multiply through the system quickly, because the absorption mechanism, other firms hiring, isn't really running. 

There is a related and uncomfortable distributional point. AI tends to make people who already have deep domain expertise dramatically more productive. They work more, not less. People who don't yet have that base don’t transition as quickly into new jobs. New grads are struggling to find their first jobs. And others in the market may not transition at all. The ingredients are all there for a generational problem that the labor market is not currently pricing. 

The right response is not to chase the latest model. Sure, there is reason for optimism, and to believe that a full economic cycle will deliver positive results with everyone competent in AI and scores of meaningful new jobs created. But there will be friction and disruption along the way. This isn’t even getting into token economics, data center capex, and AI’s conspicuously missing ROI. 

5. Private credit—the amplifier, not the catalyst 

Straight into this one: Subprime in 2008 had four volatile ingredients: extreme leverage, daily mark-to-market pressure, a forced-selling mechanism, and a tight link to the most important asset on the household balance sheet—the home itself. Lehman went into the crisis at a roughly 30-to-one cash-to-assets ratio. When confidence cracked, the system seized. 

Private credit, by contrast, is gated. The capital is mostly institutional. Leverage is moderate. The assets are not tied to home prices. There is no run-on-the-bank mechanism, because there is no overnight funding to run on. Most of the assets, if held to maturity, will pay at par. 

That does not mean private credit is irrelevant, but it’s not a catalyst. If the economy contracts for the reasons listed above—high interest rates, high inflation, unstable geopolitics, and AI job-market pressures—the private credit market will pull back, the marginal borrower will lose access, and the downturn will be deeper than it otherwise would have been. 

The merry-go-round 

What now? The short answer is that there’s no point managing to the headline risk. We should be managing to the actual risks. 

Joe perhaps put it best when he said toward the end of our conversation that the economy is in an "unstable equilibrium." Not a recession. Not a boom. Think of it as a wobbly merry-go-round that's hard to get off because binary outcomes—peace or escalation, to take one example—sit just out of reach. That’s why we’re seeing market turmoil in tight bands, but not in all aspects. 

An environment such as this punishes financial leaders in two schools of thought: The ones who pick a single forecast and bet the company on it, and the ones who refuse to make any decision at all because they believe clarity is just around the corner.  

Clarity is not just around the corner. And it never has been. 

The leaders who navigate this cycle well will be the ones who keep the above five fears top of mind and who plan accordingly, hedge wisely, and pursue a long-term capital markets strategy. It’s absolutely critical neither to wait for things to resolve, nor to try and pattern-match this moment to a previous one that feels familiar. 

The market that punishes you next won't be the one you spent the last decade preparing for. It will be the one you talked yourself out of taking seriously—because it didn't fit the story you had already decided to tell yourself.