Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.40
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0801
    +0.0008 (+0.08%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2644
    +0.0022 (+0.17%)
     
  • USD/JPY

    151.2210
    -0.1510 (-0.10%)
     
  • Bitcoin USD

    70,447.01
    -442.88 (-0.62%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,369.44
    +201.37 (+0.50%)
     

Recession: U.S. still dealing with 'shocks unleashed by the pandemic,' economist says

RSM Chief Economist Joe Brusuelas joins Yahoo Finance Live to discuss the current economic conditions, the outlook of the economy, the recession conversation, and unemployment.

Video Transcript

- Our next guest, though, says we should be using a different word than recession to describe the current state or even the near future state of the US economy. And that word is resilient. Joe Brusuelas, RSM Chief Economist, is with us.

Now, listen. I am curious for your view on what Rick was just talking about. But let's get into this resilience versus recession discussion first, Joe. So it sounds to me like you don't think a recession is indeed around the corner.

JOE BRUSUELAS: Well, we're not in one now. And our model says the first chance that we would fall into one would be early next year. So I agree in general with what Rick said. The $5 trillion put on the table was the first time the federal government's really used fiscal firepower in a significant way to alter the dynamics and trajectory of the American economy since the mid 1960s. Yeah. We got some inflation out of that. But I would argue most inflation we got was due to the supply chain shocks followed by the Russian war in Ukraine. In addition to the demand where we had too many dollars chasing too few goods.

That half a trillion that we have sitting in excess savings right now, that's really the difference between economy that's growing right around trend at around 1.8% and an economy that would be in recession. Particularly, the corporate sector. What do you see? Significant pullback on business fixed investment. That's productivity enhancing goods. But it's the consumption that's really driving things.

- But Joe. Joe, if I--

JOE BRUSUELAS: Yeah,

- Just I'm sorry to interrupt. But what about what Rick was just saying about that new research that shows that excess savings is perhaps more quickly being spent down than is being factored in?

JOE BRUSUELAS: Without a doubt. I mean, we've gone from 2 trillion to half a trillion in a little over a year and a half. So it is being spent down. I think the real question is, when we get to the end of the year and say CPI is around 3%, and nominal wage growth's around 4%, well you know what's going to happen is we're going to see spending continue to go forward because you've got a 1% increase in real wages. At that point, you've got a very different set of dynamics and a very different discussion. Yes, those of us who work in and around financial services and financial markets will be inflation's above the target. We need to get back to target. But the best research, as you might know, is that once inflation is moving between 3% and 4%, consumers really don't care. It's more about financial markets. So this discussion will be dynamic and evolve as we go forward.

- So as of right now, it doesn't seem like the economy is in a recession. I mean, you could easily look to employment and say that it's not. But at the same time, what are the metrics that you would be looking across to determine whether or not NBR aside, to best determine if we are actively seeing signs of that?

JOE BRUSUELAS: All right. So if I'm stranded on a desert Island in the South Pacific, and let's say I'm bored and I want to think about economics, finance, and the condition of the United States, the one metric that I would go to would be the 13 week moving average of initial claims. Right now, that tells us, yes, there's a little bit of an increase in layoffs. But we know that within eight weeks, people are finding jobs. That's the median duration of unemployment. So we are nowhere near a recession right now. Despite a very sour set of sentiment inside corporate America. And of course, the social and political polarization we have in the country, which really makes me not look at a lot of soft data these days because I know they're just answering based on the preferences around the tribe.

- Let's speak a little bit more about politics though and about tribe because I am also curious to get your take Joe on something else Rick was just talking about. Which is whether especially that last piece of stimulus did more harm than good. And how the repercussions perhaps are still being felt. What do you think?

JOE BRUSUELAS: You don't get that last piece of stimulus, we're probably in recession.

- So I guess you do think it was necessary.

JOE BRUSUELAS: I do think it was necessary. Look, we're still dealing with and will for years be dealing with the shocks unleashed by the pandemic. We're 2 and 1/2 million workers short right now. Julie, in the United States, it's hard for us to even to have a discussion around why that is. Most of us have a good idea that it's the long tail of COVID. And it's knocked like a lot of people 55 and older are out of the workforce. Yet because the social and political dynamics make that conversation very difficult. Right?

So when I see half a trillion on the table that's going to get us through the last vestiges of the inflation shock and the interest rate shock, I think when we get to the other side of this we're going have a very different discussion. Because right now, it's difficult to talk about. Inflation is sitting at 4.9% if you use the CPI metric. It's going to be down to 3% by the end of the year. Then we're going to have some discussions around what's the what's the appropriate federal and Federal Reserve inflation target. Do we want to shoot for a different level of growth? And do we need that churn? Because we have all those baby boomers retiring, we're going have to finance their Social Security and their Medicare. It's a very different discussion from the one we're having now. But one would think in 2024 and 2025, that's going to be one of the primary narratives around our economy.

- Considering that we've been talking about recession for the better part of a year now, and we've continued to try not to fight the Fed at least in the equity markets, but to best anticipate what they're going to do, what do you believe of the Fed credibility once we get through? Or I guess we have to get to the next recession that has been impending and that we've been discussing for this length of time.

JOE BRUSUELAS: Well, there's going to be a period of time where the Fed's going to need to rebuild eroded credibility. What that means is they're going to have to move back to risk management and a focus on price stability. Look, price stability is a precondition of maximum sustainable employment. The Fed needs to not throw in the towel on that while I think it appropriate that they pause at the June meeting and give it two or three months to assess lagging impact of past rate hikes. And notice the risk matrix around us. Tightening lending by local and regional banks. And of course, the debt ceiling.

It's a good time to stop. But it doesn't mean that it's permanent. Now this is where a lot of the noise is going to be in financial markets. I think this summer will the Fed restart after that June pause. Look, if inflation's sticky, if we don't get the relief we're expecting inside the housing sector on rent, owners equivalent rent, shelter, the Fed is going to need to restart those rate hikes. And I would expect one or two more if that's the case. If we do get those big year ago base effects, and it looks like we're getting down to three or even below 3 on CPI, and we're sitting at 3 and 1/2 to 4 on core PCE, well then I think maybe if the conditions are right, the Fed will stop. That'll be the peak. And then watch. You'll see equity markets take off.

- What do you think that places the real then at the end of this terminal rate at?

JOE BRUSUELAS: Well, I'm thinking that the geopolitical tensions around the world that are resulting in reshoring of work back to more friendly countries, back to North America, It will entail higher costs and require a higher interest rate. And instead of being half on the real rate, we're probably talking about 1 to 1 and 1/2%. So we're going through some structural changes. It's very hard to identify in real time while you're in the foxhole. But I think that that's what's happening. That's one of the reasons why I'm in that camp that when we get to 3% on the core PCE, we need to have an in-depth, full throated, robust discussion on the appropriate interest rate target. And I think 3% makes a lot of sense because in order to get to 2%, we'd have to put just too many people out of work. To be honest with you, we can cause real problems because right now we don't have enough people to fill the jobs.

Female labor force participation rate 25 to 54 hit an all time high at 77.5%. And that's well below the near 90% of the male cohorts. But I think that's the last bastion of people we can tap to pull back in the workforce, which entails another discussion around incentives, structural flexibility among private sector firms, and perhaps childcare finance in a international way. And these are big, big topics. But the conditions are changing rapidly. And we're going to have to evolve with them.

- Joe, one more really quick point to go back to the idea that we might get a skip instead of a pause in the rate increases. How disruptive would that be for the markets? How much has it been historically when the Fed seems like it's stopping and then does another one on a delay?

JOE BRUSUELAS: Well, we're in Shakespeare's undiscovered country here. Aren't we, Julie? This is a very different type of inflation. So I don't think there's any real precedent. We will all draw on the lessons of the stop start monetary policy of the 1970s into the 1980s and say, that was a bad idea. But is that the best analogy for where we're at now? And I don't think so.

Again, I think it's appropriate that the Fed pause. You're going to hear from Jay Powell in a few minutes. He's going to sound a lot like he did in his presser following the last FOMC meeting. But my sense is we're going to get some good news on June 14 when the Fed releases its forecast. I guess my sense is they're going to upgrade the forecast for this year. So it won't look like an inflation is imminent. Then we can have a much more nuanced discussion around the evolution of the path of monetary policy. And indeed the Fed may need to pull back on its quantitative tightening program because after we get through the debt ceiling, the Treasury is going to have to flood the market with money. And you're going to want to watch the repo market as the canary in the coal mine around some near-term disruptions once we get through the artificial political crisis that's been induced.

- Joe, thank you so much. Really interesting stuff. A lot to keep a watch on. Including-- thank you for the reminder. We are going to be hearing from Jay Powell, as well as former Fed Chair Ben Bernanke in the next hour. Joe Brusuelas, RSM Chief Economist, thank you. Appreciate it.

Advertisement