- Elon Musk predicts the US economy will have a tough year, before rebounding next spring or summer.
- The Tesla CEO warns higher interest rates, layoff fears, and tighter bank lending may hit demand.
- Musk has been warning of a recession and urging the Fed to cut rates for several months.
Elon Musk expects the US economy to struggle for the next year — and a toxic cocktail of higher interest rates, rising unemployment fears, and banks pulling back on lending to dent demand for Tesla vehicles.
“Stormy weather for about 12 months and then, provided there are no major geopolitical wildcards that show up, things start getting sunny around spring next year,” Musk said on Tesla’s first-quarter earnings call on Wednesday, according to a transcript provided by AlphaSense/Sentieo.
In response to historic inflation, the Federal Reserve has hiked interest rates from nearly zero to about 5% over the past 13 months. Higher rates make borrowing more expensive and encourage saving over spending, which can slow the pace of price increases. But they can also sap demand, erode asset prices, and increase the risk of a recession.
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The central bank’s hikes are making Tesla vehicles less affordable, and thus reducing demand for them, Musk said on the call. That’s been a key driver of Tesla’s recent price cuts, which ate into its profit margins last quarter.
“Every time the Fed raises the interest rates, that’s equivalent to increasing the price of a car,” Musk said.
“For most people, their ability to buy a car is a function of can they make monthly payment or not,” he continued. “If interest rates are really high, like they are right now, in some cases, people can’t get a loan at all.”
The world’s second-richest man and the CEO of Tesla, Twitter, and SpaceX also noted that if people are reading about mass layoffs in the news, they may hold off on big purchases until they’re confident their job is safe.
“They’ll be, naturally, a little more hesitant than they would otherwise be to buy a new car,” he said.
The technology billionaire also nodded to growing fears of a credit crunch, given the massive outflow of deposits from smaller banks into larger ones and money-market funds, and lenders taking fewer risks after bank runs toppled Silicon Valley Bank and Signature Bank in March.
Banks are probably “not leaning forward in providing loans, I expect, these days,” he said, adding that a bank is “maybe not as secure as it used to be.”
Musk has been ringing the recession alarm and urging the Fed to cut rates for a while. In December, he predicted a recession would strike this year and might last until the second quarter of 2024.
At the height of the recent banking turmoil, Musk argued lower rates were needed to prevent more bank runs. He also warned that if the Fed failed to contain the regional-banking fiasco, it could spark another Great Depression.