Economists reversing course on recession fears

[00:00:00] Speaker 1: We've been talking about recession fears for over a year now, but relief could be on the way. Some economists are now saying those financial concerns are cooling as the U.S. job market continues to show resilience. For more on this, we have Rick Newman with us. He's a senior columnist at Yahoo Finance and the author of the book Rebounders, How Winners Pivot from Setback to Success. Good to see you. Hey, guys. Hey. So not too long ago, we were talking about a [00:00:29] Rick Newman: possible recession. What's changed? We haven't had one. That's what's changed. In fact, we are actually supposed to be in a recession right now. If you go back to look at what some of the forecasts were this time a year ago, we should be in a recession. And it just keeps not happening. So now, I mean, this recession forecast just keep getting pushed out by about nine months. So what economists now seem to be saying is maybe by the end of the year, we will be in a recession. And if not then, maybe by the beginning of 2024, we will be in a recession. But if the pattern holds, we will still not be in a recession this time next year. Let's hope it's [00:01:08] Speaker 3: true. So, you know, for a while there, there was a thinking that, you know, this might mean that the Fed would maybe stop raising interest rates. But then we had all these issues with regional banks and concerns about whether or not, you know, credit would dry up. So how might this influence the Fed? Do we have a sense of where they may be going when it comes to interest rates? [00:01:29] Rick Newman: Yeah. I mean, there's a lot going on here. And it gets kind of circular because one thing causes another, which then causes another. And then it comes back to the first thing and so on. But there's a good chance the Fed is done raising interest rates. And the reason is the Fed has been raising interest rates to slow down economic activity and get inflation under control. And inflation is falling. It peaked at 9 percent last June. It's now down to 4.9 percent. 4.9 percent is still too high. But there is a lag in the effect of Federal Reserve interest rate hikes. Call it about nine months. Let's say there's a nine-month lag. So the interest rate hikes that the Fed has done this year, for example, still have probably not flown through into the real economy and into inflation. So there's reason to think that inflation is going to continue to come down. And who knows? In a year, it might be below 3 percent, which would probably be good enough for the Fed. [00:02:25] Speaker 1: So for ordinary folks who are watching this, inflation coming down, recession fears waning. And the question, of course, becomes, are businesses changing their corporate strategies? For example, you just saw something that I thought was kind of interesting. Shareholders for Netflix rejected a CEO and executive compensation, right? And in other words, you have these companies that are still paying their CEOs millions of dollars, but they are laying off thousands of workers. We see that not just across media, but in a bunch of different spaces, including tech and retail. So with recession fears waning and knowing that businesses are reactive, Rick, will they at least stem the layoffs, [00:03:05] Rick Newman: if not start hiring again? So the data is in conflict with itself because, yes, there are some large layoffs, hundreds or even thousands of employees at some big companies. But when we get those monthly job numbers, those are new jobs added on net. So those numbers include all the layoffs. And there's always churn in the economy. And there are always companies that are getting rid of workers and reducing employment. But on net, I mean, economists can't even believe how strong the labor market is. We had a 310,000 new jobs in the last month. And that was way above forecasts. And I think part of what's going on here is that the economic models are kind of broken. COVID messed things up. We've had a huge drop in the economy, followed by a huge boom in the economy. And these economic models that forecast recessions just are not really working. So, I mean, the bottom line really is, as long as you have a labor market as strong as we have right now, 3.7 percent unemployment, very, very low, and hundreds of thousands new jobs every month, you really cannot have a recession with the labor market that strong. [00:04:14] Speaker 3: So then, you know, here's my question to you. The economy goes through cycles. We expect sort of ups and downs. So are we always kind of at a slight risk of a recession? Because if we go up too high, [00:04:26] Rick Newman: we have to come down? Yes, we are always at a risk of recession. And I love this indicator that a lot of economists use. They calculate the risk of a recession. And it's not, they don't try to calculate, say, we're going to have a recession today. But they try to forecast whether we will have a recession in, let's say, six months or 12 months. And even during the best of times, the risk of recession is, in those models, is like 10 percent. So, and it is a fact. We are going to have a recession at some point in the future. So if you want to be right, just say, oh, we're going to have another recession, but don't put a time frame on it. It's that time frame that everybody keeps getting wrong. So we will have another recession. You know, there's a lot of what's called excess savings from when people were not going out during COVID and they just banked more money. There's a lot of that left. People are still using that to buy stuff. That is propping up the economy. At some point, that excess savings is going to be exhausted. Maybe that will be the thing that tips us into a downturn. But let's stop trying to talk ourselves into a recession and just enjoy a pretty good economy. I'm down with that, Rick. [00:05:36] Speaker 3: That sounds easy. Yes. Yeah, I'll take that advice. Rick Newman, thank you very much.