here to dig into this a bit more as Jose
Torres senior economist interactive brokers, Jose we know a
technical recession longstanding view and definition of it is two
consecutive quarters of contracting GDP But over the last 24
hours, if you're hard pressed to find someone who
will actually call this a recession, why are so
many people reluctant to use the R word right now
? Well, I think good morning Alicia and thanks
for having me. I think that folks are think
aren't used to thinking about the economy in real terms
because we haven't dealt with inflation for so long.
We're used to thinking about data in nominal terms.
So as inflation has manifested, it's made the GDP
numbers negative even though nonfarm payrolls have been strong.
So it looks and feels to some folks like it's
not a recession, but other folks particularly in the
lower and middle income um income distributions, they feel
like it's more recessionary. So um that's sort of
what's going on right now. And for those who
don't know the National Bureau of Economic Research a committee
, they're actually officially decides whether we're in a recession
or not. I wonder what your insight is in
terms of the metrics that the committee is going to
be looking at to determine the official kind of,
you know recession if we're in one or not and
when we can expect that declaration. So typically probably
expect that the declaration about 12 months, they look
at income, they look at spending, they look
at employment, they look at manufacturing and what we've
seen, what we're seeing is that the monetary policy
tightening by the Fed is working very fast, we're
seeing manufacturing, we can significantly, we're seeing real
estate weakened significantly. So the National Bureau of Economic
Research, what they do is they're looking for depth
and broad weakness across a wide variety of sectors.
I think we meet that criteria. But other folks
think that because the labor market is so tight that
perhaps they won't call label this one a recession.
So we get an official declaration in about a year
from now, which more than likely if this is
not as strong a recession as everyone, um thinks
it's not, it's not going to be, we'll
be out of a recession and then we'll know that
we were in fact in one, it's kind of
the thought process right now. I want to dig
a, yep. Also, uh, third quarter
is looking like it's gonna be negative as well in
the Fed is tightening, that the tightening takes a
lag to manifest. So investment was negative. I'm
expecting that to be negative again in the third quarter
, consumption slows significantly. I'm expecting that to slow
again significantly in the third quarter or or go negative
. Uh, exports were actually propelled GDP in the
second quarter. I don't think it's gonna be that
strong in the third quarter due to the stronger dollar
. And I think government spending is also gonna drag
. So I think the third quarter is also gonna
be negative. So it should be, should be
interesting if we get a third quarter negative reading,
if the folks will embrace that we're in a recession
or not, I think we are in one.
So to that point then, if you think we're
gonna be negative in the third quarter, do you
think we accelerate further or we we decelerate a bit
because like this quarter we had 9/10 of a percent
contraction. What do you think we're looking at for
for Q three, then? I'm thinking we're gonna
look, we're gonna see between negative one and negative
2% um, mainly due to labor market weakness that
we're starting to see the leading indicators are starting to
go the other way. So initial claims are starting
to rise. We're seeing, we're hearing on the
conference calls, folks are high freezing hiring some companies
are laying off particularly in the highly compensated tech sector
. So we're seeing labor weakening. Uh, that's
gonna be a big drag on third quarter GDP focusing
back on this quarter. And I guess this will
trickle into into Q three And your thought process there
. What factors are contributing the most to the decline
in economic activity right now and will continue to lead
to the decline in what your thinking is gonna be
third quarter contraction really. It's the cost of financing
and the financial conditions tightening, um, you know
, the the inflationary era made it where now the
Fed has to go in reverse and when they were
really uh injecting tons of liquidity into the market.
Now Alicia, what they're doing is that they're reversing
all of that. So that's very painful and it
hurts valuations, it hurts valuations in the equity market
, it hurts valuations in the real estate market and
it really hurts economic activity and the incentive to invest
Goes down so that we already saw in Q2 investment
was negative. That's gonna continue to be a drag
. I know the market is hoping for a Fed
pivot next year, but I think that will be
a tweak, that's not going to be. Um
, you know, going from 3.5 or 3.7% down
to zero like they have been doing in the past
. I don't think we're gonna see that kind of
monetary policy easing because we're in a inflation higher for
a longer period, which also means rates higher for
longer. I definitely agree that I don't think that
we see that kind of drastic pivot if to everyone's
point. We were potentially in a recession or maybe
not in a recession, but even if we are
in one, it's not a typical recession, the
recession that we have been in historically, given the
current labor picture, it is just fascinating though to
hear your outlook and then here's some of the conversations
that we've heard over the last 24 hours, Treasury
Secretary Janet Yellen for example, said yesterday the economy
is in a state of transition but not in a
recession. The White House kind of taking obviously a
similar stance and everyone trying to pretty up the picture
, so to speak. What do you think?
Secretary the Secretary meant there? And what do you
think of the overall conversation that has been happening over
the last 24 hours, a bit of a spin
on what GDP was this quarter and what it looks
like, you know, for the upcoming quarters?
Well I do like the rule of thumb of two
consecutive quarters of GDP decline. I like that definition
of recession because if you have one quarter and not
the next quarter, okay you're not in a recession
. So it gives you a chance to give the
economy a chance to sort of you know follow through
. So um so I don't agree with much of
what's been said in the media lately and stuff.
I do think we're in a recession. I think
that it's important to be honest to the math.
Um I do think the N. B. R
. Is going to label this a recession and I
think a recession is is a big psychological thing.
So I think politically the politicians, they want to
sort of you know, um tell us that things
are gonna be all right and things are gonna be
going well, unfortunately that's that's not in the cards
based on my analysis. I mean you could imagine
some spin, given that midterm elections are right around
the corner, but to be fair, and I
guess to play a little bit of Devil's advocate,
the economy is still adding hundreds of thousands of jobs
a month, 400,000 jobs, you know, last
month. How can we truly be in a recession
when we're seeing job growth, be relatively strong when
we're seeing even this morning personal income be elevated?
I'm glad you bring that up Alicia. So sure
we're adding jobs now despite all the stimulus that we've
spent and all the the unprecedented governmental actions that we've
taken on since 2020, we're still not at February
2020 levels of employment, which was the month before
the pandemic started. That's 12. I would also
add that an economy is growing. If workers can
find jobs and their wages are increasing faster than prices
, right? That's what we would, that's what
I would consider a growing economy that's broadly growing.
And what we're seeing is that folks that are working
minimum wage jobs or even in middle tier jobs are
having a lot of trouble paying for gasoline, playing
, paying for food, paying for experiences, paying
for services. Uh And so, so yes,
so you can go get a job, the question
is five or six years ago, when you got
a job, you are more better off paying your
rent, more, better off paying for your bills
and you were able to save more personal savings down
, Significa At recessionary levels consumer sentiment, same thing
. So, although there are jobs, I think
that the real GDP negative is showing us that the
quality of those jobs and the quality of living standards
are going down and America and the world needs to
tighten our belts Jose. I've only got 30 seconds
with you. But I want to ask this question
. What happens now? Is there anything that can
be done to truly get the economy back on track
to avoid a contraction in the third quarter? Or
is that baked in given the Fed's activity? Honestly
, it's baked and given given the Fed's activity and
given um the fact that we're not gonna get that
much government spending from Washington, A lot of government
spending from Washington can make that third quarter positive,
but we're not gonna get that. Uh And and
the Fed is not going to reverse course. So
even if they do 25 basis points less, that's
not gonna be enough to move the needle Jose interesting
. Inside an interesting outlook Jose Torres. Senior economist
of interactive brokers