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We’re not yet in a recession, strategist says

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J.P. Morgan Global Market Strategist Elyse Ausenbaugh joins Yahoo Finance Live to discuss U.S. GDP falling 0.9%, whether the U.S. has entered recession territory, consumer spending, Fed tightening, and portfolio strategies.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: The US GDP shrank by 0.9% between April and June, its second straight decline and a strong recession signal. The report comes after the Federal Reserve raised rates by 75 basis points yesterday, and Fed Chair Jay Powell making some market moving comments.

JAY POWELL: We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.

BRIAN SOZZI: For more, let's bring in Elyse Ausenbaugh JPMorgan Global Market Strategist. Elyse, good to see you. We'll get on Powell's comments in a second, but I'm sure you saw the GDP result this morning. So my question to you is, do you view this as we are in a technical recession?

ELYSE AUSENBAUGH: We do not. Of course, the definition of technical recession is two consecutive quarters of negative GDP growth, but the NBER, which is the institution that formally declares whether we've had a recession, looks at a lot of other factors. To us, the main things we're focusing on are ongoing strength in the labor market. So far in 2022, the US economy has added nearly a million more jobs than it did throughout the entirety of 2019. The labor market is slowing, and especially after this morning's initial unemployment claims data, that's certainly something that we should continue to watch, but elsewhere, looking into components of GDP, the fact that consumers are still spending in real terms and that things like credit card delinquencies remain at all time lows is an encouraging sign that although the window is narrowing, we're not yet in that recessionary type scenario that we're watching for that could potentially play out.

BRAD SMITH: Federal Reserve Chair, FOMC Chair Jerome Powell yesterday said as well that they don't believe all of their actions have been fully priced into or taken into the economy, as well. And so by when would we see that start to show up?

JAY POWELL: I think it's a great question, and there are signs that it is starting to show up. If you look at the housing market in particular and the pending home sales data we got, which showed that that figure dropped about 9% from May to June, you can make the argument that the Fed's policy rate is already at or perhaps even above neutral for some sectors. In a way, I think we're grateful that the Fed has a month off from decision-making because it's going to give us more time to see how this could feed through to other areas of the economy, and to what degree things might be slowing down.

JULIE HYMAN: Elyse, it's Julie here. There seems to be this sort of debate among market participants and strategists developing on how the Fed is doing, especially after the commentary from yesterday. And there seems to be, on the one hand, this idea that they've sort of caught up at this point, and that the credibility has been somewhat restored, and on the other hand, that they're still behind, and that they're not going to be able to get inflation under control. Where do you stand in that debate?

ELYSE AUSENBAUGH: So I think up to this point, it's been difficult to suss out. We knew the Fed was keen on getting to neutral as fast as possible. With the ceiling of the policy rate now at 2.5%, again, I would argue that we are about there. So in terms of how the Fed is doing its job, I think we have to acknowledge that they're fighting a really tough uphill battle, and when you've got these X factors that are stoking overall inflation higher, like the crisis in Ukraine and what's going on with commodities more broadly, it makes their job a little tougher because they no longer have to have this luxury of focusing exclusively on core inflation. But our base case scenario is that ultimately the Fed can still be successful in this mission of bringing inflation down while simultaneously avoiding recession. It's just going to be a tricky balancing act.

BRAD SMITH: And if we did enter into a real recession, at what point would the Fed adjust? Would the Fed adjust at all, I guess, is another question?

ELYSE AUSENBAUGH: Million question. The market right now is anticipating that the Fed might start cutting interest rates as soon as the first half of next year. We're not so sure. They have made it very, very clear getting inflation down is going to be priority number one, so we're reminding investors to kind of think through this from a markets perspective. We think that the same trades that would likely work in that soft landing scenario are probably going to be those that hold up best in a recessionary type scenario, like focusing on core bonds and emphasizing quality within equity allocations as we continue to ride out this uncertainty about volatility.

BRAD SMITH: Really excellent insight this morning here, and thanks so much for joining us. JPMorgan Global Market Strategist Elyse Ausenbaugh, we appreciate the time.