The probability of a recession is "extremely elevated," according to the chief economist, as the economy appears set to experience a surge in unemployment and a significant downturn in consumer spending.

The likelihood of the economy sliding into a recession is "very significant," as the US braces for an uptick in unemployment and a notable decline in consumer spending. Joe LaVorgna, the chief economist of SMBC Nikko Securities, remains one of the few voices on Wall Street sounding the alarm about the impending recession, amidst adjustments in forecasts spurred by a robust economy and a resilient labor market. However, LaVorgna dismissed the notion of a soft landing as "foolish," indicating that the probability of a recession falls between 49% and 51%, as per his recent discussion with Rosenberg Research.

Several recession indicators, which have accurately predicted past downturns, have already signaled a warning. The Conference Board's Leading Economic Index suggests minimal GDP growth in the second and third quarters, while the closely monitored 2-10 Treasury yield curve remains inverted, and bank lending has decreased in recent months. "All three of those metrics are still indicating a recession," LaVorgna remarked.

The labor market, particularly within the residential real estate sector, appears vulnerable to weakening. LaVorgna estimated that the construction industry is overstaffed by approximately one million workers, potentially leading to widespread job losses if housing activity fails to pick up. He projected that construction layoffs alone could elevate the overall unemployment rate by 60-70 basis points.

Furthermore, there's a likelihood of a substantial decline in strong consumer spending on goods, which could drag down economic growth. This is attributed to Americans unlikely to sustain their brisk spending pace due to elevated borrowing costs and diminished excess savings accrued during the pandemic. "This leads me to believe that the risk of recession still remains quite high," LaVorgna emphasized.

However, this risk doesn't seem as evident to investors, who generally exhibit bullish sentiment towards stocks and the economy in the coming year. According to the latest AAII Investor Sentiment Survey, 46% of investors expressed optimism about stocks for the next six months, while Gallup's Economic Confidence Index survey reported the highest economic optimism level in two years in January.