Steve Hanke: economy 'treading water'

The basic story here is not “recession now.” It is almost the opposite — an economy that keeps moving, but without much lift. That is what Steve Hanke means by “treading water.” In a May 1 David Lin interview, he argued that growth is soft, inflation pressure is not fully gone, and investors should think in terms of selective winners rather than a big, broad risk-on boom. (limpidmarkets.co.uk) ### What does “treading water” actually mean? It means the economy is still above the surface, but barely. Hanke is not describing a collapse. He is describing an expansion with weak momentum — enough activity to avoid an outright downturn, but not enough to create the kind of broad earnings (limpidmarkets.co.uk) first quarter of 2026, up from 0.5% in the fourth quarter of 2025, so growth exists. But it does not look like a clean acceleration into a new cycle. (limpidmarkets.co.uk) ### Why is inflation still the problem? Because the economy is not weak enough to kill price pressure, and price pressure is not cool enough to give the Fed much room. March core PCE — the inflation gauge the Fed watches most closely — rose 3.2% from a year earlier. Headline PCE hit 3.5%. Mar(limpidmarkets.co.uk)sticky enough to keep policy tight and sentiment uneasy. (bea.gov) ### Why does Hanke focus so much on money and credit? Because his whole framework starts there. Hanke argues that inflation does not mainly come from one-off price shocks like oil. He thinks the deeper driver is money creation through bank lending. In his April 23 Kitco interview, he said commercial banks create about 80% of broa(bea.gov)ith 2% inflation. You do not have to buy every part of that model to see the point: if credit keeps expanding, inflation can stay stubborn even when headline growth feels mediocre. (kitco.com) ### But if growth is mediocre, why not expect rate cuts anyway? Because the Fed has two problems at once. The labor market is still generating jobs — payrolls rose 178,000 in March and unemployment was 4.3%. That is softer than a red-hot labor market, but not weak enough to scream emergency easing. At t(kitco.com)too warm for aggressive cuts. That is the annoying middle ground Hanke is talking about. (bls.gov) ### What does this mean for markets? It usually means narrow leadership. When the macro backdrop is uneven, markets stop rewarding “everything” and start rewarding pockets — sectors with real earnings momentum, hard-asset exposure, pricing power, or insulation from the broad cycle. Hanke has been especially vocal on gold, arguing markets are too relaxed about infl(bls.gov)on or lower oil. Even if you do not follow him all the way to his most bullish commodity calls, the bigger idea is clear: this is a stock-picker and theme-picker environment. (kitco.com) ### Is this basically stagflation? Not full-blown stagflation — more like stagflation-lite. Growth is positive. Jobs are still being added. But inflation is sticky enough, and growth is soft enough, that the old playbook of “buy the whole market because the cycle is turning up” looks less reliable. That is why Hanke’s message resonates right now. It explains why the economy can feel dull while certain assets still rip. (bea.gov) ### So what is the bottom line? Hanke’s “treading water” line lands because it matches the data better than either extreme. The U.S. economy is not sinking. But it is not swimming fast either. In that kind of market, broad optimism is a trap — and selective outperformance is the whole game. (limpidmarkets.co.uk)