U.S. economic indicators are sending mixed signals.
And on top of that, red hot inflation that the Federal Reserve is trying to
get under control by hiking interest rates.
All of this is prompting fears of a recession.
And with that, if there will be layoffs down the road.
To break all of this down, we're talking with Mark Zandi, chief economist at
Moody's Analytics.
So how would you define a recession, especially given the strong labor market
right now?
Well, a recession is defined as a broad-based, persistent decline in
economic activity.
And the arbiter of recessions is the Business Cycle Dating Committee, which
is a group of academic economists that are at the National Bureau of Economic
Research. And they look at a plethora of economic data.
GDP is one of the indicators, and that by itself would be signaling, yes, a
recession has occurred in the first half of this year, but all the other
data that the committee looks at, including employment and jobs, which is
their most important indicator, signal the economy is still growing and not in
recession. So my sense is that the Business Cycle Dating Committee will not
consider what happened in the first half of this year as a recession.
And what's the historical significance of all of these mixed messages and sort
of how we define a recessionary period moving forward since the pandemic sort
of messed everything up?
Yeah, I mean, it's pretty hard to interpret all the data just because of
all of the cross currents and it goes to just the circumstances.
I mean, the reason why the economy is struggling is because of the pandemic
and the fallout. It's disrupted global supply chains in the labor market.
And of course then there's the Russian invasion of Ukraine, which happened at
the start of the year. And that scrambled things, sent oil prices
skyward, natural gas prices, agricultural prices, prices for
different types of metals.
And so these two massive supply shocks hit the economy at roughly the same
time, and it makes interpreting what's going on in the economy and the data
particularly difficult and why there's so much confusion as to, is this a
recession, not a recession?
Are we going into a recession?
Inflation? Is that going to come down?
When is it going to come down?
You know, a gazillion open-ended questions.
And it goes just back to the fact that this is a very unique period when two
massive supply shocks have come together and disrupted things globally.
What do you think will happen with layoffs?
I guess if it goes broader than the tech sector or if it's going to hit
other industries?
Are you expecting more layoffs?
Yeah, I expect layoffs to rise.
I mean, they're at record lows or close to, so we can't stay there
forever. And in fact, it's not sustainable because with these kind of
layoffs, with this kind of hiring, with this kind of job growth, with this kind
of low unemployment, inflation is going to remain a problem.
The Federal Reserve is raising interest rates at this point in an effort to slow
down the job market and that's going to mean more layoffs.
And so we will see layoffs pick up going forward.
So far, as you mentioned, a lot of that's been isolated to the tech sector.
We've seen some layoffs in the mortgage finance industry, in realtors, given
what's going on in the housing market.
Pretty limited, but I would expect kind of a broadening out of the layoffs that
we see just to be consistent with what the Federal Reserve is trying to
accomplish here. And that's a slowdown in the job market.
Yeah.
I guess just at this point, are we staring down a recession?
The most likely recession scenario is that what happens here is that over the
next few months, inflation continues to moderate because oil prices are down and
food prices roll over, vehicle prices will probably decline because we're
getting more chips as supply chain disruptions abate and we're getting more
vehicle production that rely on the chips, obviously.
But once that's over, then we still may not be back, probably won't be back, to
the Fed's inflation target.
That will only happen if the job market slows and wage growth moderates
back to something that would be more consistent with the Fed's target.
And that may be more stubborn, that inflation might be more persistent.
And the only way to get rid of that persistent stubborn inflation would be
to push the economy into recession.
And that means the Fed just jacks up interest rates much more significantly.
But if that's the scenario, and I think that's the most likely recession
scenario, not the most likely scenario, but the most likely recession scenario,
that probably won't happen until second half of 2023.
That would be the most likely period when the economy would go into another
downturn. I think Americans should do what they typically do.
Spend, save, invest in the same way that they typically do.
Having said that, it's probably a time to be cautious, prudent, not take on a
big loan. Of course, it's going to be very costly because of higher interest
rates and, you know, the job market is going to weaken.
There are going to be more layoffs. So you need to be wary of that.
So I guess the way I would put it is Americans don't need to run for the
bunkers. That doesn't make a lot of sense to me, but maybe keep one hand on
the bunker door just to be safe and sound.