Where's the Economy Heading in 2026? Chapman University Forecast | Fadel Lawandy

Is the economy going to face a recession in 2026 and is that going to impact the financial market significantly? Our guest today is Fidel Luandi who's an economist with Chapman University. They have been forecasting the economy for many decades now. Today they tell us what they see in the economy in 2026. The concern that I have is that by definition when you cut interest rates you tend to increase the money supply. At this point money supply is growing at a faster pace than real GDP. That tends to have inflationary pressure. People say well we're not seeing any inflation right now but if you look at our previous economic forecast and you look at some of the stuff that Jim Doty had presented on the topic it's typically it's delayed by 16 months. I'm Siamak and this is Market Insider. Fidel it's great to have you and welcome. Thank you it's a pleasure to be here and thank you for having me this morning. We want to talk to you about the economy and you guys just did your forecast for 2026 at Chapman University. You guys have been forecasting for many years and you have had a good track record. Based on our econometrics model that we've used for many many years it looks like we're we're not going to be seeing much of recessionary pressures. We'll have a kind of a steady as she goes economy. Our GDP prediction is two percent so moderate growth. That's real GDP so it's not impacted by inflation. So real GDP meaning that it's going to be above the inflation? Let's say that we end up with inflation of let's say two and a half percent. You take our two percent you put the two and a half percent and you would say that GDP would grow at a four and a half percent. So our real GDP forecast is about two percent. Mostly driven by investment in AI. Relaxed monetary policy as it relates to the Federal Reserve. Cutting interest rates. The wealth generation where people when they feel like their wealth is high tend to spend. The pressure that will drive a little bit of a of slow growth will be mostly the fact that job creation is slower. So job growth is we predict that there is a possibility that could be in the negative for next year. And also the the impact of tariffs because of the overall just uncertainty that it has on on the economy. So those will be our two negatives if you will. As it relates to slowing down the economy but overall the rest of the factors supply money, Fed policy, net wealth, investment in AI that will continue propel the economy forward. Tell us about the Fed policy. My concern as it relates to the the Fed policy as it relates to interest rates is that highlighted by the fact that you have for the first time non-unanimous decisions as it relates to what to do with interest rates. The concern that I have is that the Fed's decision to cut interest rates in most recent time has been because of job growth right. We're seeing slower job growth and that's what they're referencing as it relates to kind of the reason why they're motivated to do kind of a lower interest rate kind of environment and a more favorable environment for businesses to borrow money. The concern that I have is that by definition when you cut interest rates you tend to increase the money supply. At this point money supply is growing at a faster pace than real GDP that tends to have inflationary pressure. People say well we're not seeing any inflation right now but if you look at our previous economic forecast and you look at some of the stuff that Jim Doty had presented on the topic it's typically it's delayed by 16 months. So there's a 16 month delay from what the Fed does with interest rates and its impact on on inflation. If we're seeing the rate cuts right now September, October and November, December you count 16 months later you're going to see the impact of that cut in interest rates today sometime towards November. The early signs of those rate cuts you'll see sometime in late October early November of 2026. So that's where the concern is. Interestingly enough if you go on the Federal Reserve Education website they have a paper that reflects the fact or discusses the fact that back in the Kennedy administration in an environment where the economy was doing well but natural unemployment was higher than what the Kennedy administration would have liked and kind of persuaded the Federal Reserve to cut interest rates back then to get unemployment to a lower number. While it worked in the beginning the natural outcome later on is not only did unemployment jump up again so it's a temporary fix but also it caused inflation on the long run. So we could be experiencing a similar environment where we're cutting our nose to spite our face to a certain extent with cutting interest rates to kind of address the increase in unemployment numbers but it could impact us on the inflation side of things by the tail end of next year. Do you think they're cutting rates because so they're mentioning unemployment rates but is there a chance that some are seeing recession in the cards? We have not heard anything that would suggest a recessionary pressure. In fact the early rate cuts that we saw just a couple of months ago the concern that Jerome Powell quoted was mostly driven by concern for unemployment and the fact that it was sticking up and job creation. So as of right now they have not they haven't kind of directly indicated that there is a concern of recession and as a result they're cutting interest rates. The concern seems to be that unemployment is is just higher than what they would like. If there was a recession potential and they cut the rates would we avoid to have inflation or would would it not make a difference in you? If inflation was at two percent right you say well you know cutting interest rates and and having a little bit of inflation going up to two and a half percent is a well well measured trade-off to not have a recession. The concern is is that inflation is still at 2.7. It's still higher than where we would like it or where would the Fed like it to be. When you're doing quantitative easing and you're expanding the monetary supply in an environment where inflation is at 2.7 what you're looking at is is in the threes if you will if you end up not having a recession. In terms of the bond market what do you see in the bond market? Well it's interesting because in the bond market we're seeing a lot of debt that is coming coming to market in in the world of AI and it's not all created equal so you're seeing the the bonds that are coming in from you know that are being issued by the Microsofts and and Google and and Amazon, Apple and those are quality bonds right they're backed by well-established corporations you're going to have you know you have the cash flow to support it whether the investment in AI is successful or not. Now with Meta and Oracle for instance who are also bringing bonds to the market they're having to pay much higher coupons to to have successful bond offerings and then you have things like for data centers and so you have bonds that are coming to the market by data centers and and more kind of the real estate and infrastructure side of the business and those are in the high yield market so there there's a lot of fixed income that is coming to the market it's coming in multiple flavors for across the board but it's going to be very interesting to to kind of see how they unfold because we're seeing a much higher level of bonds that are coming to the market from the AI trade. The stock market is it almost at all times high what are your thoughts what's your assessment of what the stock market is The stock market is definitely expensive and and it continues to become more and more expensive driven by the AI the AI trade the fear of missing out if you will so everybody's investing because that's the next thing and we're seeing a lot of money go into it from from investors now what's interesting is that unlike the dot-com bubble you're you're seeing well-established corporations are backing the the AI expansion when you have companies like Apple and Amazon and Microsoft that are investing and backing the new technology or that new application that's a little bit more reassuring than having a no-name company with no cash flow whatsoever trying to expand as you saw with the dot-com bubble right pet.com demand.com furniture.com just to name a few those were my favorites to kind of monitor because they became public and then they went out of business in a handful of years and took all their investors monies to investment to zero. Today you're you haven't well well-established companies backing these these initiatives AI is monetized already right you could get on Google Gemini and for $19.99 or $19.95 you could have a monthly subscription that allows you to proactively have an AI assistant you have chat GPT you have multiple platforms and and we already know how it's being monetized we're already seeing the revenue numbers so there's a true application there so that's that's how it's different than what you see in a dot-com bubble but that does not change the fact that for every successful company you're going to have three or four companies that are not successful in leading the forefront of of AI so selectivity would be the the key word here because not everybody's going to be a winner you're going to be selective you're going to back as it relates to the winning horses and this is not investment advice by any mean at the imagination but my perspective is moderate investment selective investment is the key word when it comes to AI you can't put all your money in one basket this is advice that I give my son this is advice that I follow is that moderate investment in AI and being very selective in in that realm for me when I'm advising our students that invest in our student managed fund and it's what right now it's about 5.4 million the money that they manage what we're looking at is we're not looking at direct AI companies but what we call AI adjacent so look at the industries that are benefiting the most from AI find the quality companies there and then let's see which ones are worthwhile investing because yes you're still seeing higher valuations there but it's not as significant as you would with direct AI investments nor companies that are directly investing in and putting a lot of capital expenditure in into AI. You mentioned in your forecast that AI spending is a big reason why you guys are forecasting this growth in GDP next year and you're also saying there's a lot of bonds getting issued to raise the capital what if this capital doesn't get raised is there a chance that some of this capital doesn't get raised next year? I doubt it because everybody as of right now wants a piece of of AI 2024 I think it was 100 billion dollars in venture capital invested in in AI and AI related industries or companies 2025 you're looking at 200 billion invested in from the VC side alone our prediction during our economic forecast was 400 billion so you already have 200 billion of that coming from venture capital you're seeing a lot of bond offering as I mentioned earlier from publicly traded companies that capital is is is already being raised and and successfully being banked if you will to support that growth that we're predicting for 2026. We're already there as it relates to that so the possibility of the capital not being raised is very minimal but you never know if we end up with much higher inflation than we expect because of the rate cuts and the federal reserve has to do a turnaround just like they did in the last cycle where they said hey inflation is transitory transitory transitory oh my god it's not transitory oh my god we got to raise interest rates very quickly there's also the possibility that that happens next year as a result of the rate cuts that we're seeing right now and if that's the case and the push interest rates up very fast that might dry up the bond market so of course there's the possibility of of capital especially in the form of debt not being there to support the the AI growth that we're predicting next year so it's a very small probability. Right now the national debt has grown significantly and the interest is becoming a big component of the budget do you think it's sustainable for rates to stay that high if the fed keep the rates at the levels that we are even the interest payments has become significantly higher? There are arguments that hey as long as the country has the the printing machine they could always print the money there are arguments that argue that that's one of the reasons why the federal reserve is not too worried about higher inflation because you're paying a debt with an inflated dollar and then there's the argument that hey as long as the economy is growing at a at a fast pace to allow us to service the debt then it's not a big issue. Now if you look at the big picture the interest on the debt is becoming a bigger and bigger piece of the federal government's budget pie so the question is is where do you cut to accommodate the the interest expense and that's a policy question that I think we'll we'll see the impact of in in the next few years as it relates to do you cut social security do you cut medicare do you cut federal government assistant department of education do you cut your defense budget where do you cut to accommodate that piece of the pie expanding and that's the more interesting question from a policy perspective right where do you cut in order for you to service that debt. You mentioned certain sectors would benefit from the AI trade what are those sectors that you're looking at? I think you're you're going to see the benefit of AI across the across the board there is a publicly traded company that collects actually health care data so charts hospital data so patient data and aggregate huge health care data sets to identify potential diseases causes for cancer whatever it may be and they use AI models to reach these conclusions they collaborate with other companies and those companies do DNA sequencing we'll take the blood samples from some of these patients that we have data about we're able to do DNA sequencing and with the advent of AI we're able to sequence the DNA in a much much higher level of accuracy and as you identify markers you identify mutations you identify whatever it may be then with the advent of AI you're able to edit this DNA sequencing and come up with ways that well okay how do I create a edit to a particular DNA that will allow us to resolve for this cancer marker or resolve for the particular illness or DNA mutation or whatever it may be AI is improving that whole world by dealing with a huge amount of data being able to improve the sequencing being able to improve the editing so that the editing is much more accurate so that would be one example of an area of an area that would benefit other areas that will benefit is just simply productivity in any white-collar environment or white-collar jobs a good example of that that I used in during the economic forecast it used to take me two to three days to put the slides together for my economic forecast once I put my thoughts together put my bullet points together come up with the ideas and what I'm going to discuss what I want to highlight or whatnot then it would take me two to three days of just putting the powerpoint together the graphics making sure that the fonts look right and all of that and then it would go to the person to actually aggregate all of our slides together into a single economic forecast and she would edit everything match colors make sure that there is no typos make sure that the data makes sense that there is no errors in the graphs or whatnot just for the purposes of the going through the exercise for this most recent economic forecast I took the same document that I would use to generate the powerpoint put it in Gemini Google Gemini and said hey create a powerpoint deck that would cover and highlight all these points and it spat out my 13 or 14 slides that I used in the economic forecast I did a couple of edits to and I didn't do the edits I just said hey Gemini on slide you know three change this bullet point or correct this number whatever but within a 10 minute period I finished my entire powerpoint that used to take me two to three days to finish that frees up my time for more productive work that I'm able to do so you're going to see that type of efficiency and that type of improvement in productivity as a result of it across the board do you think it's going to replace a lot of jobs we didn't discuss the employment numbers can you tell us more about employment and then the employment numbers are our prediction is that we're going to we're going to see a much slowdown in employment growth going into and through 2026 then we kind of agree with the federal reserve's perspective that we're you know the number is going to be a little bit worse than what is being reported right now as it relates to the job losses where we are going to see and we already started to see if you look at the the layoffs that amazon announced that target announced and other companies announced those are white collar jobs that they're they're eliminating they're not it's not the guy and gal that is in the in the warehouse it's the guy or gal that is sitting in a cubicle what's interestingly enough the acceleration in that side to a certain extent has been driven by people not wanting to go back to work and want to continue to work from home because as employers started looking at okay how do we improve productivity while our employees continuing to work from home instead of coming into the office they started looking at okay how do we implement ai to become more productive and as that implementation got accelerated as a result of employees want to continue to work from home employers started realizing that hey i might not need this job because i could replace it with ai i might not need that job because i could replace it with ai and that's effectively what you're seeing today is that that acceleration is a result of the fact that people just wanted to continue to work from home and productivity dropped as a result of that do you think there's going to be new opportunities open up with that will employ these people or do you think it would become challenging the employment going forward it would be harder and harder the way i explain it to my students is that the person that used to use an excel model if you will to populate data in it in order for them to see what the outcome is right what the graph would look like or whatnot that job is going to be lost but the person that sits and think of what i need to do to create a model that resolves so strategic thinking thoughts and jobs that require realizing the nuances the jobs that will say hey i am willing to lose this much in order for me to attract this client jobs that are heavily dependent on relationships and human interactions those are the ones that are going to be available long term speaking for those that are losing their jobs or their jobs might be eliminated as a result of ai in next 5 10 15 years being able to pivot and develop those those kind of skill sets like strategic thinking interpersonal skills improving the their eq if you will because last few years yeah eq has been kind of like oh it's a cool thing to have it's a new thing to discuss but it is going to be pivotal moving forward because it's it's it's that nuance it's being emotionally mature to to be able to develop the relationships to be able to interact with people to understand the nuances of individuals in order for you to get work done and business done are the jobs that are going to be preserved for a longer period of time than jobs that are just heavily dependent upon just data if you will so you don't need an analyst if you will or a junior task oriented repetitive tasks are gone complicated repetitive tasks because repetitive tasks that are intellectually driven were eliminated by computers and big data analysis and whatnot it's sophisticated repetitive tasks are the ones that are being eliminated by ai because those are kind of ai is able to logic its way and i use the word logic its way in a much broader sense in this situation logic its way through an appropriate answer but it's the nuances is is where the human touch is still going to be there it's the relationship it's understanding the trade-offs it's the one unique situation that is very hard to replicate in a data set for an ai to learn that's where the the human the human yeah it's going to be there and it's going to continue to be neat housing costs have gone up significantly part of the reason the interest rates there are thoughts that it might help the housing but they're short-term interest rates when the federal reserve is lowering the rate so can you tell us what you see in the housing market people talk about the fit cutting rates it helps mortgages and whatnot but even with the cut in interest rates let's assume the mortgage rates retreat and they have retreated the biggest problem is 40 percent of the population like 40 percent of the people that have mortgages have mortgages that are under four percent they're reluctant to refinance their mortgage they're reluctant to sell their homes and upgrade or downgrade despite the fact that rates are coming down they're not improving the market from an existing home sales or whatnot what they offer is they offer an opportunity for people that are buying brand new homes the challenge is is that homes are very expensive and some of that is regulatory in nature like in california the cash buyers that are that are continuing to be a dominant force in the marketplace just the migration right if you look at prices in a lot of the places that you've seen in the last few years net migration out of california to throughout the u.s you're seeing home valuations now have gone up so much like austin texas and san antonio those areas yeah like now affordability is becoming an issue in those places because as californians sold their homes here in the u in california they were able to be cash buyers in those areas and because of the increased demand they were willing to pay premiums and push the values up the affordability issues migrated from just being a california issue i shouldn't say just a california issue but migrated with those that migrated from california and it's becoming a more broader issue but of course it's most pronounced here in california and especially in southern california you're seeing more and more people living in in the inland empire and commuting to a lay in orange county because of affordability but affordability is starting to become an issue even in the inland empire do you think housing costs will go down from here or do you think with the inflation pressure you mentioned it may not come down you're starting to see some retreat in values so again it's not across the board but you're seeing some values start to retreat a good example of that is in north county north orange county in some of those cities that saw a big jump in valuations in the past few years we saw that the values have retreated now thankfully hasn't retreated significantly to where people are concerned about losing their homes yeah like the wealth that they have in their home but they're definitely have seen a valuation drop of somewhere in neighborhood of five to six percent but affordability is just becoming a big issue and don't get me wrong i don't think that the solution is to build affordable housing i think that there there isn't going to be a one solution fit all some places affordable housing might fix the problem some places it's going to be a supply kind of solution where we just need added supply so it's going to be a diverse basket of solutions there isn't going to be a one one answer fits all as it relates to will only takes the fed to drop interest rates in order for us to solve the the affordability issue fidel luandy economist with chapman university it was great to have you thank you so much um it's it's been a pleasure and um i i look forward to our next visit let us know what you think of this interview do you agree with the chapman university's you can always comment we read all of your comments i'm siamak and this is market insider