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Wall Street economists are starting to accept U.S. recession odds

In this article:
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Yahoo Finance's Myles Udland joins the Live show to discuss Goldman Sachs's recessionary risk warning and the outlook for the economy.

Video Transcript

BRIAN CHEUNG: But of course, the big focus is on still the market action following last week's abrupt pivot from the Fed towards a more aggressive rate hike path. And Goldman Sachs last night raising its recession probability from 15% to 30%. And then we heard from former US Treasury Secretary, Larry Summers, saying the US will need to have unemployment rates above 5% for five years to take inflation down.

Yahoo Finance's Myles Udland at the desk here to talk about this. And Myles, you know, first of all, great to have you on this side of the desk.

MYLES UDLAND: I was going to say, I'm not allowed to read prompter, though. Tough.

BRIAN CHEUNG: No. You're not.

MYLES UDLAND: Tough scene for me.

BRIAN CHEUNG: Yeah, you're going to have to just actually talk off the dome right now here.

MYLES UDLAND: Oh no.

BRIAN CHEUNG: Try to get through it. Hey, any recession call is a recession call, right? I mean, I guess, on one hand, why should we put any more water into Larry Summers' thoughts than anyone else's? But look--

MYLES UDLAND: Right.

BRIAN CHEUNG: --this is becoming a prevailing talking point, which is that the Fed might not be able to keep unemployment rate down if it wants to try to get ahead of inflation.

MYLES UDLAND: Yeah. Well, there's like two parts to this conversation. So we'll start with the Larry Summers part, which is like a classic Larry Summers, unemployment could be this or that or the other. That's his argument. Could be one of three things is how we need to proceed here to sort of get inflation under control. But really what it sounds like to me is Wall Street economists in their own way all accepting what higher interest rates are likely to do.

BRIAN CHEUNG: Capitulation is how you describe it, yeah.

MYLES UDLAND: Yeah. I mean, in general, higher interest rates are going to be-- in general, rising interest rates will be negative for growth. And they will be negative for corporate earnings, negative for profit margins, and negative for the economy. But it takes some time for these things to both be seen in the data, see the Fed do it, for these recession calls to start ratcheting up. But what's a 30% recession call anyway? Cathie Wood math actually says that's a 100% increase in the recession probability from Goldman Sachs.

BRIAN CHEUNG: Which I-- yeah, OK, that's a very mathematical approach to that.

MYLES UDLAND: Math.

BRIAN CHEUNG: That is one view of it. OK, so here's the thing, a lot of dunking that was attempted by some sides of FinTwit over the weekend over Larry Summers' kind of take here. And this may be because of the fact that he had already had some attention for that third, third, third call you remember?

MYLES UDLAND: Yeah.

BRIAN CHEUNG: The third chance of a recession, third chance of no recession, third chance of something else in the middle. I mean, how important do you think the economists' view is right now? Because you brought up earlier in the morning that the markets have already come around to the view that a recession was going to happen months ago. And it's only now that you're starting to see these Wall Street notes start to say that. Why the difference?

MYLES UDLAND: Well, again, we'll do the two parts, Larry Summers matters because he had a call with President Biden about the economy.

BRIAN CHEUNG: Yeah.

MYLES UDLAND: So the president called Larry Summers and said, hey, Larry, what do you think about the economy? So it matters for that reason, regardless of what we think of his construction of maybe, maybe, maybe. On the Wall Street economists' side, I think what you are starting to see is an acceptance and ultimately-- we talked about this last week with the SEP, the SEP, if you kind of finely tune that, finally read that, is saying the economy is going to slow down if not tip into recession. And Wall Street economists are now saying, OK, we believe the Fed to an extent.

BRIAN CHEUNG: So I guess here's the question, is the recession is a recession but the severity of the recession is not something that you can necessarily see when Goldman Sachs says, well, we're raising our odds from 15% to 30%, right? You can have a recession that looks something more like 2000, which is going to be a very different story than '08 versus 2020.

MYLES UDLAND: Yeah.

BRIAN CHEUNG: So is that the conversation, is that the next evolution of this conversation?

MYLES UDLAND: I think it is but that's the evolution that I do not care for. I talked about this with Julie last week because Julie Hyman was sort of being like, well, you know, it could be a shallow recession, right? That's not so bad. The reason in my view, that all recessions are bad is because you don't know what happens when the economy starts to slow when people begin to lose their jobs. Negative externalities to use a Brian Cheung framework on that one.

So I think that we can now start having the conversation, Deutsche Bank, more severe but sooner, shallower but longer from other banks. If the economy is going to slow down, we don't know exactly what shape it will take but it does seem that there is now more acceptance let's say, of the-- with the idea that there will be people losing their jobs, there will be fewer people employed. And as a result of that, you know, we're going to get a recession.

BRIAN CHEUNG: No recession is good. That's a Myles Udland quote. Kind of like what Jay--

MYLES UDLAND: That's my controversial take--

BRIAN CHEUNG: That's what Jay--

MYLES UDLAND: --all recessions are bad.

BRIAN CHEUNG: --Powell basically told me when I asked him, you know, why the difference between the Main Street view and the Fed view? And he was like no one likes inflation.

MYLES UDLAND: No one likes inflation.

BRIAN CHEUNG: Everyone knows that.

MYLES UDLAND: No one likes recessions.

BRIAN CHEUNG: Yeah.

MYLES UDLAND: No one likes multiple dinners.

BRIAN CHEUNG: Morning Brief perhaps.

MYLES UDLAND: We have moved so far away from can't eat twice per night.

BRIAN CHEUNG: Which I think we should do a whole other column on that actually.

MYLES UDLAND: That's kind of like the--

BRIAN CHEUNG: You can eat dinner-- you can eat multiple-- I can eat three to four dinners in one night.

MYLES UDLAND: God, there's so much there.

BRIAN CHEUNG: That's what Jay Powell would say.

MYLES UDLAND: Like, what a different world, Jay Powell talk about two dinners a night, you know?

BRIAN CHEUNG: All right--

MYLES UDLAND: How far we've come.

BRIAN CHEUNG: --Junior, Senior Market Editor Myles Udland.

MYLES UDLAND: Thank you.

BRIAN CHEUNG: Thanks so much for stopping by. Appreciate it.