‘Consumers haven’t quite yet finished their experiential spending demand,’ economist says

RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss inflation, consumer confidence, tightening financial conditions, credit lending, and the outlook for a recession.

Video Transcript

BRAD SMITH: What do you think CEOs are so optimistic about right now, if you were to kind of put a pin on anything?

JOE BRUSUELAS: Well, right now CEOs are seeing economic data and purchase flows that really reflect what was going on prior to the financial crisis. And what I see in the economy is we're going to see a first-quarter growth around 2 to 2 and 1/2%. Inflation remains elevated, but it is easing.

And consumers haven't quite yet finished their experiential spending demand. They haven't quite spent that yet. So they're getting out. They're traveling. They're eating at restaurants. Things are moving along. However, it will-- there will be a lagged impact as tighter lending means a slower business expansion and, of course, less hiring, but that's going to be a second half of 2023 story.

JULIE HYMAN: Well, and when you talk about tighter lending standards, Joe, you're looking at financial conditions. I guess everybody has their own flavor of financial-condition indices. You have yours over at RSM, and it is showing a tightening there. So what are the implications of that in terms of as you're talking about how it's going to play out in the second half? How does the rest of this half look and then the transition?

JOE BRUSUELAS: All right, so three weeks ago, our financial-conditions index was just below neutral, right? Now it's 1.7 standard deviations below neutral. That's a significant move. Anything beyond two, you've got a severe crisis.

What that means is that when we get the next round of data, the Federal Reserve's Senior Loan Officer Survey, what you'll see is a noticeable tightening of credit beyond the corporate sector, and it will be aimed directly at the household. That means mortgages, credit cards, and auto loans and personal loans are going to be much more difficult to get. Even individuals who want to get home equity lines of credit will run into a little bit of problem. And that, overall, will just cause overall consumption to slow. You'll see it in the second quarter.

But I think by the time we get into the second half of the year-- which is where, you know, our baseline since late last year is the second-half recession. That's when we'll likely see it but not quite yet.

BRAD SMITH: And so baseline recession second half of the year, but we've heard some of the calculus around it shift from either shallow to mild or even mild to more severe. Where would you kind of put that base case at right now?

JOE BRUSUELAS: Well, right now we're still in the mild camp. You know, you asked a really good question of your previous guest, and it revolved around, hey, you know, our financial condition is tightening to the point that it's doing its job for the Fed. OK, well, a couple things on that.

We modeled that, right? We modeled that impulse shock that hit the economy via the financial channel. We think it's worth about 50 basis points of policy tightening. So right now in our estimation, the proxy federal funds rate, the top's around 5.5%. That's very restrictive, Brad, right? So that's going to show up.

Now, this isn't what you want to happen. You don't want a disorderly unwind in the banking sector result in a drop in inflation. That's not what the Fed wants, but it's the economy they're going to have to make policy around, which is why I think we're probably going to see one more rate hike if we don't see any significant issues in the community and regional banks going forward and as long as there's not a problem at Deutsche Bank or there's contagion spread into the American systemically important financial institutions.

JULIE HYMAN: So I guess to go back to the original question, as Brian Sozzi sort of laid out, is the economy resilient right now? I mean, it sounds like maybe it is, but then it's not going-- you know, eventually we're going to see more cracks here.

JOE BRUSUELAS: Well, no, Julie, you're spot on there. Before the banking crisis broke out, the R word we needed to be talking about was resilience, not recession, but unfortunately the banking crisis did erupt. Financial conditions tightened noticeably, and we'll see that later this year. But for now, the appetite to spend is still very strong in the household. They really are out there traveling. They're out experiencing the world, which they missed out on for three-- 2 and 1/2 to 3 years because of the pandemic. So we're not quite through that yet.

Now I've got to tell you, I've been traveling around the country the last couple weeks. The airplanes are full. The airports are exceptionally full, and you can tell the consumer is not quite yet done.

BRAD SMITH: And so for the consumer as well-- and you do such a great job on jobs days when we have these discussions as well. Pairing what we're seeing with employment with how people are still spending, when we think about the good spending, it seems like in the discretionary categories, there has been some continued weakness there. Are we starting to see that come back, or is it still largely just focused so much on services spending among consumers right now?

JOE BRUSUELAS: Well, I think that the switch from outlays on goods to services has been clearly noticeable. I don't quite yet think we're-- we've hit the bottom yet on where spending is going to level off on goods. But as you just get out and you venture out of your home or your apartment, you can see people are out experiencing life. That's a good thing as long as the consumer is in the game, which I think the consumer will be in the game. The slowdown will be a near miss or just a very mild recession, and that's why I'm in that camp.

JULIE HYMAN: Well, fingers crossed. Joe Brusuelas, RSM chief economist, great to see you, as always. Thank you.