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Deutsche Bank economist maintains 2023 recession call

Deutsche Bank Chief US Economist Matthew Luzzetti joins Yahoo Finance Live to discuss recessionary risks, inflation, the April JOLTS report, stock market futures, and the outlook for Fed policy.

Video Transcript

BRIAN SOZZI: All right, let's get over to Matthew Luzzetti over at Deutsche Bank. Matthew, always good to see you here.

So we've just been talking about the JOLTS report. Now, you were one of the first people on Wall Street to call recession amongst the biggest banks. Where are you at right now with that call?

MATTHEW LUZZETTI: Sure. First, thanks so much for having me.

We've maintained that call. I think it's important to note that it was not very near term or imminent recession. The basis of our call was that we expected a recession towards the end of next year in the second half of next year, and it was driven by a view that the labor market would remain remarkably tight, something that we're seeing with this morning's job-openings data, quits-rate data, and that inflationary pressures would be more persistent and ultimately force the Fed to be more aggressive in terms of the rate hikes.

So we still maintain that call. I think a lot of the data that we're seeing is suggestive of an economy that remains resilient, a labor market that remains tight, and a Fed that will need to tighten more aggressively than what the market currently anticipates.

- But if we stay in this kind of recessionary period-- because that's what it feels like if you ask consumers. If you listen to businesses on their earnings calls, even if they are bullish about their business prospects, they are still very much monitoring the reality of a recession. And so with that in mind, if some of these elements remain intact through your target, which is second half of next year, that places us in a much different conversation by that point.

MATTHEW LUZZETTI: Yeah, certainly from a market perspective there's been a lot of focus recently on recessionary risk, and that has been driven by the sharp tightening of financial conditions that we've seen, the sell off in risk assets, most notably in equities. We've seen some alleviation of those pressures recently.

What I would focus on from a real-economy perspective is what is the labor market telling us? And I think from that perspective, the best real-time indicator is jobless claims. And there we've seen continuing claims remaining near record low levels, initial jobless claims remaining very low. It's suggestive of a labor market that we're not shedding labor because there is still substantial tightness there. And I think as long as that story holds in, you have consumer spending that will remain resilient, as we saw with last week's consumer spending data.

BRIAN SOZZI: How long do you think it will stay intact, Matthew? Because you had President Biden come out in op-ed this week in the "Wall Street Journal," I think really reset expectations on job growth. Are we talking about later this year we're getting, what, 50,000 jobs added each month?

MATTHEW LUZZETTI: Yeah, I think the context is really important. So over the past three months, we've added more than 500,000 jobs on average, and that's with an economy where the unemployment rate is already 3.6%, where you have 5.5 million more job openings than unemployed. So you have a really tight labor market at a time where we're seeing really, really strong job gains.

Inevitably that will slow. We think that you see 325,000 jobs later this week and that that will likely slow further as we go forward, but that is kind of the natural course of things as you get to a very tight labor market. The question will be does labor demand hang in? do job openings remain elevated? and does wage growth continue to pick up? And at least from that perspective, the data we saw this morning I think is still saying that it is a tight labor market, the quits rate remains elevated, and that wage growth should remain elevated, at least over the next several quarters.

- In the event that things reverse course and perhaps because businesses are seeing more tightness in their balance sheet or their ability to actually maintain a profit over an extended period of time, whether that's because they are having more difficulty on the supply-chain front or whether they're paying employees more and thus need to cut back on the number or the headcount that they have, those discharges, that comes even more into the conversation at that point. And so ultimately where do you see those businesses netting out in-- and, at the end of the day also, some of the workers-- in how they're going to be able to find those job opportunities if there aren't as many postings that are out there.

MATTHEW LUZZETTI: Yeah, that's currently the big macro debate at the moment, and we saw Governor Waller from the Fed devote a speech to this on Monday. What will happen as job openings come down-- and given the huge buffer that we have of 5.5 million more job openings than unemployed-- will unemployment ultimately begin to rise?

Our view is that it will, that there's a lot of variation in these job openings relative to unemployed across different geographies and across different sectors. And so as the Fed tightens monetary policy as financial conditions tighten, I think ultimately it will mean that the unemployment rate rises.

And then historically we know simply that once the unemployment rate rises by 0.5% or more, that has always coincided with a recession. And so that is essentially the basis of our call that in order for inflation pressures to come down, the labor market has to loosen materially and that the labor market loosening will likely mean the unemployment rate moving higher, and that has always been associated with a recession historically.