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FedEx warning ‘as good a bellwether as one could obtain,’ economist says

RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss FedEx's economic warnings, the U.S. economy compared to foreign markets, mortgage rates in housing, and the market outlook amid inflation.

Video Transcript

- For more on FedEx and the state of the consumer, let's bring in Brusuelas, RSM chief economist. Good to see you, Sir, although good on some very bleak news, let's talk more about the FedEx news and what it means. A global recession. Would you agree with the assessment from the FedEx CEO?

JOE BRUSUELAS: Absolutely in complete agreement. The global economy will be in recession in 2023. When you take a step back and you look at FedEx, it's about as good a bellwether as one could obtain for the relationship between multinational active enterprises, the American real economy, and their linkage to the international economy.

That's really the big takeaway here. That's why you're seeing the sell-off in transportation, rails, and other industry industrial sectors that have exposure into how we do things, how we buy things, how we move things. Just thinking about online commerce and its relationship to FedEx, it's everything. So I'm not surprised at what we're seeing.

Moreover, I do remember in years past When Alan Greenspan did use this as really the bellwether for globalization. We actually used to map out the quarterly average of the FedEx price against US GDP, pretty darn good indicator. So I think we know what's ahead of us here, Dave. And unfortunately, we're seeing it in price valuations today.

SEANA SMITH: Joe, how deep of a global recession do you think we could potentially see?

JOE BRUSUELAS: OK, so at this point, I'm not expecting an extremely deep one like we saw in 2008 or during the pandemic. It's going to be more of a garden variety. However, there are a lot of risks out here in front of us.

The first being on December 5 when the US/UK/E, when its allies impose a price cap on Russian oil exports, the Russians retaliate, cut off all exports of oil and natural gas to the west. We'll be talking about a very different set of economic conditions going into 2023. And that's just scratches the surface of the risks we see out there right now.

- Joe--

- As you look at some of these multinational companies looking at what's happening with the strong dollar then, what's some of the concerns that you're watching there?

JOE BRUSUELAS: OK, so when we talk about a strong dollar, what we're really talking about is everything that has to do with oil gets more expensive because you're having to pay in American dollars. You're seeing the dollar Sterling story today. Clearly what's permeating markets this week is a potential intervention by the Bank of Japan to prop up the yen.

When we have those currency interventions, the only way that they work is if the central banks act in a semi-coordinated fashion. So companies are beginning to really feel the impact of $1 appreciation. And you can expect a macro response in return I think likely any time after the Fed's big interest rate decision next week.

- Which looks like 75. I'm really curious about a tweet you had, Joe. When it comes to the housing sector and the mortgage rates now tipping above 6% first time since 2008, you basically say that's going to break our economy, if you will. In two different groups, haves and have nots, tell me about that theory. And what do you see coming in the housing market?

JOE BRUSUELAS: All right, so we're now resetting much higher in terms of what it's going to cost to purchase a house because we now really require 20% down, except for a small number of people who are first-time buyers and can qualify for Fan or Fred with 3% or 5% down.

What's occurring here is I think over time, we'll take a look back at this period. And the big socioeconomic divide will be who had the wherewithal or ability to get into a house during the pandemic or refinance their house? During the worst portion of the pandemic, you could refinance out just under 2%. Many people have 2%, 2 and 1/2%, 3% mortgages on their house.

I think that, you know, Dave, we really are in what I think we can charitably called a regime change. We're moving from a period of insufficient aggregate demand to a period of insufficient aggregate supply characterized by negative supply shock, intense geopolitical tensions, all of which will likely contribute to a much higher level of inflation and much higher interest rates compared to where we've been since 2008.

You know, my specialty is monetary policy. I really think the terminal rates moving to 4 and 1/2%. I wouldn't be surprised if Fed really has to push much higher above that. And we'll be talking about much higher mortgage rates. And it's going to limit the pool of people who can get into a home.

At that point, we're going to have to sit down, have a deep, somewhat troubling national conversation about we need to build more home. And those of you who have the not in my backyard problem, well, you're going to have to get over that because we're going to need to build more homes to deal with the demographic surge that's now in train as the millennials are in their 40s. Gen Z is on the way. And we haven't built enough homes in this country really since before the great financial crisis.

Let me give you a number on that, OK? Over the next five years, we need to build about 1.7 million homes at an annualized basis on an annualized basis over the next five years because we're 3 million homes short when we adjust for the demographic changes that are happening in our economy. And that's happening during the time when inflation has gotten out of the box.

That's why when we spoke about this last, I said, look, it's not energy that's going to be the long-term problem. It's the fact that inflation has become persistent and now bled into the housing industry. That's sticky inflation, and that's very difficult to bring back down.

SEANA SMITH: So Joe, we have high inflation. One of the big challenges here in the US. FedEx specifically calling out weakness in Asia, also challenges in Europe. How does the US stack up against what we're seeing overseas in Europe and in Asia?

JOE BRUSUELAS: OK, so the United States for all its economic problems, for all of the political polarization and social divisions, we're the cleanest shirt in a very dirty laundry. We're likely to outperform our trade partners in the UK, in Europe, and in Asia for the remainder of this year and probably almost all of next year if not beyond that simply because the energy emergency that's going to generate a bleak winter of discontent across Europe is now upon us.

United States is going to ship as much liquefied natural gas as it can spare to the European Union to get through. It's going to be a very difficult winter. So yeah, I mean, we will look better despite all of the challenges we have, whether it be inflation, shortage of housing supply, and the unfortunate situation, which is the Federal Reserve is going to have to generate higher unemployment and job losses to bring down inflation to tolerable levels.

Our estimate-- we need to see inflation go to 4.7%, which likely generates about 1.7 million job losses in order to bring inflation just down to 3%, not 2%, but 3%. And that of course, is going to cause some issues here in the United State.

- So Joe, just very quickly, obviously, FedEx, a real bellwether of what happens in the economy. If you had the ear of Jay Powell, what would you-- what would you say?

JOE BRUSUELAS: I'd say hike by 75 basis points next week, continue to hike until you think you've got inflation or what you've actually moved into restrictive territory. Then you can take a pause, ascertain the damage done by the rate hikes. And then you can make a decision on whether you need to push on and push higher.

I agree with Jay Powell. Price stability is a precondition of maximum sustainable employment. Stability is a precondition for the economy to grow at or above its long-term trend of 1.8%. And it's what you need to create a stable set of financial conditions that are reasonable.

That's why they have to demonstrate that they show of resolve when they meet next week, make their policy decision. But they also want to let markets know that there will be a time when the magnitude of rate increases will ease. You're not going to see super size, jumbo rate hikes indefinitely. Markets will find that very good mesh.

- They certainly could do that glimmer of hope. A big thank you there. Joe Brusuelas there, RSM chief economist. Thank you for joining us this afternoon. Have a great weekend.