What Broke U.S. Recession Indicators — Mark Zandi

[00:00:00] Speaker 1: 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? [00:00:29] Mark Zandi: 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 economy, most important indicator, signals 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. [00:01:14] Speaker 1: 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? [00:01:27] Mark Zandi: Yeah, I mean, it's pretty hard to interpret all the data just because 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 have hit the economy at roughly the same time and 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's it going to come down? You know, a gazillion open-ended questions, and that goes just back to the fact that this is a very unique period when two massive supply shocks have come together and disrupt things globally. [00:02:27] Speaker 1: 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? [00:02:42] Mark Zandi: Yeah, I expect layoffs to rise. I mean, they're at record lows, we're close, too, 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. And 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, given what's going on, in realtors, given what's going on in the housing market. Pretty limited, but I would expect, you know, 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. [00:03:28] Speaker 1: Yeah. I guess just at this point, are we staring down a recession? [00:03:33] Mark Zandi: 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 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 wage growth, the job growth, job market slows and wage growth moderates back to something that would be more consistent with the Fed's target. And that may be that may be more stubborn. That may be maybe more persistent. 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 a 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 the 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 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 that 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, you know, just to be safe and sound. [00:05:26] Speaker ?: That doesn't make a lot of sense to me.