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Recession risk: GDP ‘not the most important indicator,’ economist says

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Economic Innovation Group Chief Economist Adam Ozimek joins Yahoo Finance Live to discuss the state of the economy, recession territory, inflation, the Fed raising rates by 0.75% bps, and the outlook for the economy.

Video Transcript

- Let's bring in the first guest for the hour. We've got Adam Ozimek. He is Economic Innovation Group chief economist.

Adam, let's kind of build on this conversation here. We got the data out this morning. A lot being made about what exactly this means about the state of the economy.

How do you read the data? And does this point to whether, in fact, we're in a recession?

ADAM OZIMEK: Well, I think you really have to read the data with a large grain of salt, understanding that GDP is a relatively volatile, poorly measured, highly revised, indicator.

You can't dismiss it entirely, of course. It does say something about where we think the economy is at. And it does provide suggestion that growth is slowing. I don't think that's a very controversial statement.

But it's entirely possible that the first quarter, maybe even the second quarter will revise to show positive growth in the long run. So I certainly keep my eye on GDP. I certainly watch GDP.

But in terms of understanding the economy in real time, it's just not the most important indicator out there. And it's very easy to put too much reliance on it because of the sort of folk wisdom that says that a recession is two consecutive quarters of declining GDP, which is obviously not the real definition of a recession.

So I would emphasize, don't overreact to these numbers. At the same time, there are a lot of problems in the economy. We don't need it to be a technical recession in order to recognize that the economy has really big problem right now.

- And Adam, I'm glad you bring that point up because there are a lot of other measures that are important too. We're not going to get into the nuances of the NBER. But it's important to look at other things, like real personal income, how manufacturers and industrial production are doing in the United States.

So when you look at the dashboard of other indicators, where are you seeing the signs of concern that you just mentioned?

ADAM OZIMEK: Yes, I mean, job growth is really going quickly still. And that's probably the most optimistic indicator that we have. But even there, we've seen a slowdown.

And we know that the Fed raising rates is going to reduce demand. And I think the housing market is starting to feel that.

You can certainly see homebuyers bidding up prices less. Home sellers are more likely to be taking price cuts. Inventory is building up there.

So you can certainly see the housing market is starting to feel the effects of rapidly rising mortgage rates. So no disagreement there with the GDP report.

To me, the biggest concern remains inflation. And while we may not be in a recession now-- I don't think we are in a recession now-- if inflation remains high and is difficult to pull down with a few rate hikes, the Fed's going to have to hike rates more and will eventually have to push us into a recession.

So that remains my biggest concern, not the direction of real economic activity right now, but inflation.

- Adam, let's talk about what we heard from the Fed yesterday. We saw the equity space rally on the back of that decision to hike rates another 75 basis points on the Fed chair's comments.

I mean, it certainly felt like investors read it as more of a dovish tone. But what did you hear?

ADAM OZIMEK: I think the Fed is trying to be as open minded as possible right now. They are looking at the data, and they're concerned about inflection points. I think that what happens next is going to be very data dependent on what happens in the next few months.

If it looks to them like the labor market isn't cooling down, they may continue to hike faster. If there are diverging signals of wage growth, and if they start to think that wage growth is really still strong and the labor market hasn't cooled notably, then I think they may hike more.

But I think what they're really trying to say is, we'll see. They are very data dependent and very open minded right now. And they don't want to provide too much guidance about where they expect rates to go next because it's highly contingent.

- I mean, Adam, it seems like that's going to be an interesting challenge for the Fed because of the fact that monetary policy operates on a lag. Right?

So if the Fed were to see signs of job losses, the unemployment rate ticking up, they might react a little bit too late to that, if they don't start preemptively cutting rates, perhaps.

So I guess when you take a look at what the Fed's measure is of where they need to stop, where the terminal rate might be, how confident are you that the Fed can pull that off?

ADAM OZIMEK: That's a really great point. You know, it's one of the problems with having underestimated inflation so drastically over the last year. I think the Fed would rather play wait and see right now, frankly.

But I think that the inflation, having gotten it so wrong, they don't have a lot of credibility to continue to say, just wait, inflation is going to come down. Just wait, the energy price spike is really driving inflation up.

So you're right. There is a lag in inflation. And I think that they would rather wait and see. But high inflation is pressuring them to move. And so, that makes it tough.

With the lag effect, as you note, I don't think they have a great idea where the terminal rate is. I don't think anyone has a great idea of where the terminal rate is.

Part of that, also, is what does full employment really look like? And unfortunately, we're stuck with a pretty poor indicator, that's the unemployment rate, right now.

I think the Fed takes wider labor market slack seriously. But they don't really have a strong position on what is wider labor market slack? What does full employment look like? And that's a fight in the discussion that should have happened before we hit this pandemic, to be frank.

- Certainly, still a lot of questions to be answered there. Adam Ozimek. He's Economic Innovation Group chief economist. Good to have you on today.