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Economist: ‘You can’t ignore’ the possibility that we’re going into a recession

JPMorgan Chase & Co. Chief Economist Bruce Kasman joins Yahoo Finance Live to discuss the state of the economy, recessionary risks, job growth, consumer spending, inflation, and the outlook for Fed policy.

Video Transcript

JULIE HYMAN: Let's talk more about the economic outlook now. As we've talked about this morning, as Alexandra just mentioned, are we going into a recession? If so, when is it happening? What's the probability? We've got lots of opinions on this. Let's get another one. Bruce Kasman is with us. He's JPMorgan Chase chief economist.

Bruce, it's good to see you. We've been talking all about Goldman Sachs, your peers over there raising their probability for a recession the next year to 30%. We got some comments on this from Elon Musk. We talked to an investor earlier in the show who said signs point to us already being in a recession. I believe you are not in that camp. Talk us through why we're not there quite yet and maybe not-- it's not as imminent as some are saying.

BRUCE KASMAN: Well, let's just make sure we know what we're talking about. Recessions are basically breaks in economic activity, which depress household income sharply, really have a major impact on labor markets. And we haven't had a recession in the US in post-World War II history without the unemployment rate rising more than 2 percentage points. If you ask me are we there now, I think the answer is definitely not. We're still seeing strong job growth. We're still seeing consumer spending increase, despite the fact that there's a fairly big drag here from purchasing power from inflation. And basically, all the indicators are suggesting we're still growing.

What it is suggesting is we're slowing. And I don't have any difficulty with the idea that recession risks are rising. There's a combination of higher inflation with commodity price pressures intense, tightening financial conditions, and more recently, of course, and importantly, what the Fed told us last week, which is that they're definitely moving policy into a restrictive stance, and that they ultimately do want the unemployment rate to rise. You put those things together, you can't ignore the idea that we could be in a recession sometime in the next 6 to 12 months.

BRAD SMITH: Previously, on the employment front, we were talking about the great resignation. But are recessionary fears, at least right now, pushing more people back to looking for jobs or being in the workforce right now?

BRUCE KASMAN: I think people are moving back. And we're seeing the participation rate rise. I don't think it's primarily about recession fears. I think it's partly about activity picking up in the world of service sector industries, which were hurt and dislocated. I think it's partly about the pandemic concerns fading. And I do think it's partly also about the fact that income has been squeezed by higher inflation, which is also pushing people back into the workforce. So that negative, I think, is a factor, but I don't think it's recession fear specifically that's driving labor supply to pick up here.

JULIE HYMAN: So, Bruce, as we look at recession risks, how should we frame this potential recession? In other words, you think about the financial crisis and its feeders and what triggered a recession there. The pandemic, one, was quite obvious. How should we think about this one? Is it going to be a slowdown or a recession, however you slice it? Is it consumer spending led because of inflation? We've got some slowing in housing. Where are you looking for those sort of pain points the most?

BRUCE KASMAN: So I'd like to emphasize two very different dynamics around recession. They're not unrelated, but they are different. The first is that we're just putting too many straws on the camel's back here. And the back is the consumer. And that is the high inflation. It is the tightening in financial conditions. It is combining with what the Fed is doing here to put a lot of pressure. And if you kind of hit that hard enough, even in what we think is a pretty healthy underpinning for the economy, you can throw us over.

That's the short-term recession risk. And I would put the risk of that in the next six to nine months, it's somewhere in the 35%, 40% probably, which means I don't think it's the likely scenario. But it's uncomfortably high in terms of risk. I think the second scenario-- and it does interact with this-- is the fact that inflation is not likely to come back down to where the Fed wants. It's likely to need to put policy in place to raise unemployment rates. And over time, that's not an easy path to follow without doing enough damage to throw the economy into recession.

I think those risks are quite high. But I think they're elongated over a two or three-year period because I don't think the Fed is, right now, moving completely insensitive to what they see in the data. And I don't think the Fed is going to get policy rates up high enough in the next six to nine months to do the job by itself.

BRAD SMITH: We've gone from talking about a soft landing to a hard landing. I think we're just trying to make sure that everybody who was on the flight makes it safely here at this point. But if there are those major kind of risk factors that we have to think about within certain parts of the population, you know, who is going to feel this the deepest right now?

BRUCE KASMAN: Well, I think it's, unfortunately, the case that any time you have a mix of high inflation and labor markets that are easing, which isn't the case now, but would be the case in a recession, it does hit low income households by far the most. And I think that is the concern. And that is the problem that we're going to face here. Of course, a recession is broad-based. It hits sectors across the economy quite widely.

But I do think right now, the biggest concern are consumer interest sensitives, autos, housing. I do think if it is, as we would think, a recession that reflects drags that are hitting the world broadly, global manufacturing gets hit. I think the interesting thing is that if we're right and the pandemic dynamic is shifting to an endemic, service sector activity should, in a relative sense, do better here, even if economic conditions worsen.

JULIE HYMAN: Bruce, finally, your purview is global, so I do want to ask you about the global economy. It doesn't feel like we're necessarily going to get a coordinated global recession. You have China coming out of its shutdown and seeing some growth there. So what does that do, if anything, to mitigate the effects of a slowdown and recession where it is happening?

BRUCE KASMAN: So, first, and I think most importantly, that's one of the reasons we think we might be able to avoid things. I think in the rest of the world, what we think we're seeing, as we're moving into the middle of the year, is China begin to lift from its recent lockdowns. We think Europe has some benefits from the dynamics of COVID as well, Asia, more broadly. Those are the things which we think can help cushion the blow in the US.

Unfortunately, though, the other parts of the global environment with the Russian war, with the pressure on energy prices, those are things which will hit the US and hit everybody else as well. But in our baseline forecast, we do have the rest of the world doing somewhat better, mitigating some of the effects, not by any means creating a complete buffer. And it's one of the things that helps keep the economy from avoiding recession if we're broadly right here.

I would not want to argue if oil went to $200 a barrel and we had another intense geopolitical shock that I'd want to ignore the sense that that could push us over the edge. But I still think the risks of a recession right now, while elevated, is still below 50% for the next six to nine months.