I will say this is a crazier moment than usual, big surprise in the market, just like it is in the economy. You don't usually have cross currents of this violence.
Really from Bloomberg News and iHeartRadio, it's the big take. I'm Westkosova today. Is the economy getting better or worse or a little of both? Economists and Wall Street watchers have been predicting a coming recession for months now, and yet it hasn't happened. Some signals look pretty ominous. Inflation still high. The US Federal Reserve raised interest rates again on Wednesday in its ongoing efforts to cool the economy,
and we just saw another financial institution collapse. First Republic Bank has now taken Silicon Valley Bank spot as the second largest US bank failure. Ever, other parts of the economy are looking pretty good. One of the surest signs of a recession is deep, widespread layoffs, and that hasn't happened. The number of open jobs is declining, but there are still more jobs available in the US than workers willing to fill them. So what are we supposed to make
of all these contradictory signals. Two of my Bloomberg colleagues have bravely agreed to try to answer that question. Senior executive editor Chris Naji, who you heard at the very top of the show, and economics reporter Reed Pickert. They're here to help make sense of what's going on and where things go from here. Read Can you start just by painting a picture of the economy right now, because it seems pretty confusing.
So in a big picture, I think we can describe the economy as one that's still chugging along but is losing momentum, and it helps to look at some of the major building blocks of the economy. So let's start, for instance, with the labor market. Unemployment remains really low, and overall job growth is still quite solid, and we know many businesses in addition to those want to hire
but are struggling to fill open positions. A mid low unemployment, but that mismatch between labor demand and the supply of workers has eased. You know, we've seen the pace of hiring moderate, and within that, we've seen hiring become more concentrated to specific industries and pockets of the job market. While job openings still number in the millions, they've declined for three straight months now, and we've also started to see some more layoffs, though so far many have been
concentrated in sectors like tech and finance. So that out Friday we'll get the monthly jobs report, which will give us an updated picture of where things stood in April. But you know, over they're all the resilience of the labor market is really key to economic growth because having a job and an income are the most important aspects of kind of support to household spending, and consumers are really that engine of the economy.
Chris that consumer spending, despite some other economic indicators that looked a little bit wildly, also help corporate profits, which kept markets relatively high.
Really inflation itself could be said to have helped corporate
profits to a certain degree. I think that's one of the reasons is such a complicated moment in the sort of the analytical history of the economy, is that a lot of things that people are pretty sure are eventually going to wreak havoc aren't quite yet, certainly at the headline level, certainly at the level of sort of the conventional indicators that we would look at, including the stock market, But because inflation is the sort of ticking time bomb
that everyone expects to go off and that the FED has been working so hard to eradicate. It remains sort of the expectation level that eventually this is all going to end up being bad at some level.
There's really a shortage of real.
Time evidence that it is yet, and I think that's part of what's making this such a hard moment to predict. Really it's at the edges and you know, to some degree or roarsatch test that you could interpret however you wanted.
This is another problem sort of second level indicators.
Chris, What is a second level indicator?
Particularly in this environment of banking stress. There's a panoply of these things, ranging from like loan officers surveys to credit spreads, even in the corporate bond market. It's also true that the headline indicators are sort of famous for not showing anything until it's way too late. So there's good reason that people look at this stuff at the
moment it's not like resoundingly negative. But I think people are also aware that the point of these indicators is that they're rarely resoundingly anything, and they're fraying, but not in a unanimous way that everyone can be sure of making some kind of forecast based on them.
Chris. Sometimes we hear this expression that the market has priced in certain things. They priced in inflation, they priced in the risk of a recession. What is the market priced in now and what has the market grown to be concerned about?
Yeah, another complicated question.
One thing I would just say top down and almost set a psych or sank level is when the SMP falls twenty five percent, as it did last year, the main stock benchmark. It's exceptionally rare that what happened last year in the stock market isn't the precursor to a recession.
It's kind of an inconvenient timeline because, certainly for journalists and macro analysts as a population, everyone's forgotten about what happened last year, and everyone is aware now that the stock market is looking relatively buoyant at the moment, it remains a lot closer to the lows it hit last year than the highs from before that, so that remains the pricing in of a recession. The other big sort of market signal of the last few months is what
happens to the bond market. Posts the initial wave of banking crisis, the SVB collapse. The lurch in bond yields that occurred in the week after that event really was almost like historically level sharp and most straightforward interpretation of that is that was the bond market stopping worrying about inflation and the FED response and becoming convinced that a recession was hence, if not already upon.
US markets are definitely pricing in a recession, and a lot of economists are expecting one this year, but it's by no means assured. And I think, you know, when we think about kind of where the economy is going, one place that folks have pointed to is the housing market. So when we think about this kind of overall picture of all of these things happening underneath the surface, the
housing market has looked to finally be bottoming. So we've started to see that while mortgage rates are still exceptionally high compared to where they were a couple of years ago, they've come off their highs and you've seen purchases kind of stabilize, and there's this hope that after being this huge drag on the economy for quarter after quarter, that housing, which has typically been a critical driver of kind of the broader business cycle, that the turnaround could actually be
helpful for growth. So as we watch other parts of the economy loose steam, whether that's consumers or business investment, that housing might offer this beacon of hope that could help carry us through this year.
And how would that happen. How does that translate into something that helps to either ward off a recession or lessen its impact.
So the housing market is one of the sectors most vulnerable to rising interest rates because of the relationship between FED policy and mortgage rates. So the ensuing spike in mortgage rates that we saw last year really drove this sharp deterioration in the housing market, where we saw sales drop, construction slump, demand for these homes really slide, and we saw folks stop listing their homes because they wanted to lock in that lower mortgage rate too. Inventory also fell sharply.
But now we're starting to see what looks like a bottoming for housing, so some stabilization in sales and in theory. The thought is that an increase in demand for homes would ultimately boost home prices, that would boost building activity and support construction jobs. And for those who already own a home, higher home prices, you know, are then bolstering
that key source of wealth for American families. All of that would then hopefully limit the pain to the rest of the economy when the full impact of the Fed's rate hikes and the tighter credit conditions that we've been talking about truly materialize.
One interesting thing that hits me when Read's talking Read, I'm interested in do you guys ever hear you occasionally get this thing in markets where they'll talk about normally
recessions kind of all occur at once. There's been a kind of new wavy theorizing this year that you're getting this sort of staggered thing going on, and these things that usually kind of line up and all combined into big forcefull slow downs, that you're getting this sort of slow motion thing that may end up not being some giant trauma for everyone, but something that goes on for a while is like each sort of shoe falls.
That's absolutely right. We've heard economists call this a rolling recession, and the idea behind it is exactly what you said is kind of each part of the economy takes its turn being the weak one, and that kind of slowly moves along one thing about that to keep in mind is that all recessions are different, and so the recessions that we have at the top of mind right now are a pandemic recession, which was sharp, unprecedented, there's nothing
quite like it. And then before that we had the Great Financial Crisis, which also has seared people's memories as one of the worst recessions the United States has ever had. The first half of last year felt terrible for people, and for most people it did feel like a recession. Not many people had lost their jobs at that point, and unemployment was pretty low, and that's because inflation was
so high. And so when people looked around, the kind of so called misery index, which is a combination of unemployment and inflation, it was so high because of that inflation component, and people felt poor even though they still had their jobs. But yet that wasn't considered a recession, even though we did see economic activity contract. Then, so when we think about, you know, a potential recession for this year, that there's kind of a several components that
you need. You need that element of the economy slowing down paired with historically an increase in unemployment and job losses that are more broad based than what we've currently seen so far, and so from the perspective of whether some kind of town turn, even if it doesn't, you know, qualify as a recession could be painful.
It will always be.
Painful for people who lose their jobs, and a lot of people have already lost their jobs. But in terms of being an actual recession, you need a ployment to move higher than the historically low level that we.
See now, and is that likely it happen. If all of those other things are happening, then there's pressure on companies to find ways to save costs, and labor is the highest cost center for a lot of businesses and that's where they look.
That's absolutely right. So we've heard a lot of talk about labor hoarding. So because these businesses have fought so hard to attract and retain these employees, now they've raised their wages quite substantially to try to hold on to them and attract them. The last thing that any of these companies want to do is just cut them loose,
because they'll be in the exact same situation. But when your bottom line is threatened and the choice is whether you let go of workers or your company goes under, especially a small business, you make the decisions that you have to make, and that often comes with laying.
Folks off after the break. Why so many people are on the lookout for layer Chris. We saw the failure of Silicon Valley Bank earlier in the year, and just this week we had the collapse of First Republic Bank. Exactly how does that fit into this bigger picture of the economy. We thought of Silicon Valley as this kind of one off, an unusual way the bank was operating, But now it's starting to look like it's more than that.
I mean, the main fear and the big thing in market and sort of economic forecasting over the last few months is to what degree do these failures pretend a big freezing up in credit? That's the main channel that everyone's worried about that other banks will, you know, look at what went down at the ones who went under and couldn't make it and decide one of the ways they'll prevent themselves from becoming one of them is to
cut off the spigot. And that sort of split second and local decision really is the reason that Bonn Yields fell so much in March that everyone just decided at once that there would be a big credit crunch in the US and all of you know, it's not like the economy was doing screamingly well before any of that stuff happened, but the bank failures really convinced a lot of people that the economy was doomed. More ors you
said sphoeb was a one off. I mean, I think there's a category of people, including JP Morgan's CEO, Jamie Diamond, who this week is saying he sees the end the of the banking crisis coming. So that's not a baseless claim. The banks that have gone under have been particularly leveraged for the circumstances that have evolved.
I think that history is littered.
With examples of people deciding that something was idiosyncratic.
Though.
I think that's the big sort of psychological thing in people's minds right now, is that even though there aren't like obvious, blatant other problem children banks to look at, it's still early. That really is an issue with this
kind of forecasting. At this point, it's only about a month and a half since the banking stress unleashed, and I think it's kind of crazy to have expected it to found its full implication and the economy at so again, everyone just sort of stares at their favorite tea leaves and tries to decide if the trend is moving towards something sort of all encompassing.
In the end, well, when you look at those indicators, the headline indicators, you say, the really big ones that everyone looks at, and then these secondary indicators, do you think that the banking stress is over?
So I'm a market's guy. My big indicators for better or worse would be markets.
To a large degree, I feel like the sort of collective unconscious of millions of people synthesizing this stuff on their own tends to cough up a pretty pretty reliable signal. At the moment, you have to say, you look at corporate bond spreads, which is basically the level of credit risk built into yields on corporate bonds. They're hanging tight for whatever is in the stock market. Definitely price the recession in last year, but now it's you know, it
basically doesn't move. It takes a great deal to get it to go anywhere. The government bond sort of the risk free lending rate that really caused people to freak out in March has stopped behaving volidly. I look at it all and I find the case that maybe it's believable.
Would I kitch my whole wag into it.
I think it'd be crazy just to announce that the crisis is over, although I mean, again, Jamie Diamond came very close to doing that.
So they are definitely people who who can be led to believe.
That the idiosyncraticness of the ones that have gone under will kind of wall the economy off from further shocks. I guess it remains to be seen, but I mean, it's not a crazy argument.
Just to add a little bit to what Chris said in terms of thinking about why we care about credit conditions. In order for the economy to expand, businesses really need loans in order to expand their businesses, to open new businesses. New businesses means new hiring, more jobs, and more people employed, and those more people employed have more money to spend in the economy. So that is kind of the chain when we think about what this pullback and credit conditions really means for people.
And do you think that there's now pressure on loans as a result of this, that there's greater scrutiny by banks on where that money is being lent.
We saw that there was.
Some tightening credit conditions prior to svb's failure, but it does appear to be going that direction. I mean, economists certainly think it's going that direction, and tightening credit conditions are an expected. Tightening credit conditions is one of the key elements of most economists who are expecting a forecast expectations. But it'll be interesting when we get the Senior Loan Officer Survey to see kind of what the latest update is there.
Okay, Senior Loan Officers Survey tell us about that.
It is essentially a survey of all of these different banks across the country, and they talk about their lending practices, whether that relates to commercial loans or consumer loans, residential loans. And it was already starting to show that banks were pulling back a little bit prior to kind of everything that happened in March. But what really matters is if we continue to see that trend moving forward, So see that tightening titan even further, and then the next one titan even further.
One thing we saw at First Republic was the kind of lending for the housing market, which you were talking about, usually a good thing, turned out to be a really bad thing because they were lending enormous amounts of money to very, very rich people and that wound up getting them upside down.
That's another argument that these are isolated cases. You can make a case for all of the ones that have gone under it. I would say First Republic probably looked more like a normal bank than all of the rest of them. But you're right, it did have a particularly aggress of sort of franchise with people that ironically they felt their credit worthiness was so great that it could skip some of the steps ordinarily prudent banks would undertake.
I mean, so again, it becomes if you want to frame an argument that says these are not representative banks and that they're isolated shocks. All of that stuff matters, and that has tended to become a big, you know, part of the bowl case such as it is at the moment.
Chris and Reid tell us where they see the economy headed when we come back. So we painted this very broad picture of the economy all looking forward to the question that we keep asking again and again, will there won't there be a recession? What are you looking for now as you look at the economy, as you look at all of these indicators we've been talking.
The world that we're living in right now appears to be one where growth is slowing but inflation remains really high, which is, you know, really problematic from a perspective of the economy. And when we think about the Fed's mandate to bring inflation under control, they will get it under control. The question is whether it takes a recession to get there or not. So in terms of what we're looking at right now, it's some of these indicators we've still
been talking about. It's consumer spending, it's the jobs market, whether we're starting to see any layoffs there, It's the housing market. It's these inflation numbers to see whether they're you know, really on a downward path. And we've seen some kind of inspirational readings there, but we've also seen some kind of pockets of concern within the inflation data that makes us know that it's not going away anytime soon.
And what are those so kind of.
Underneath the surface of the inflation problem. So besides the fact that we're basically roughly double where the FED would hope for inflation to be right now.
They have a t target of two percent.
Two and it's around four percent now. So when you look at the details, it kind of matters in terms of what consumers are spending on, and we've seen consumers have this almost pent up demand for services. And services is also where we're seeing some of the worst labor shortages, and so when we talk to businesses and hear about places that are still struggling to kind of beef up
their payrolls. A lot of the areas that you're seeing in in are the service sectors like restaurants and bars or hotels.
And those are places that tend to pay less, and in a tight labor market where workers have a choice, they don't want to take those jobs anymore.
Absolutely, and FED chair Jerome Powell has said that he's particularly worried about this service sector inflation as a kind of persistent upward pressure on inflation. That these kind of sticky prices, because service prices are largely influenced by the wages that you're paying for workers, because it's a very work intensive industry, that that could help keep inflation for longer. We've seen a little bit of abatement in terms of service prices, services inflation in a report that was out
last week. But overall, we're still working with price pressures in that category that are way too high compared to where the FED wants them.
And Chris, when you look at markets, I guess the same question. We've started to see a lot of turmoil in the tech industry. Where are other areas that you're looking at as a sign of what's to come.
It's interesting because, yes, tech industry has been one of the only places doing any wayoffs the only place that hired enough that it can afford to cut some of its excess. But as far as the stock market's concerned, tech companies have done amazingly well this year. It's one of these sort of massive planet uncertainty situations where these companies are gigantic operators.
In the US economy.
They really like macro significant things companies like Apple and Microsoft, which they insinuate their themselves into the economy.
Is crazy.
Their stocks doing well is not like an unadulterated vote of confidence in the economy either, though. I mean, on a basic level, yes, they're growth stocks and high valuations, et cetera. But people also know that they're probably the least likely to be affected.
By normal economic gyrations.
For lack of a better phrase, how well the nasdac's doing right now and kind of shudder a little bit.
It's very much shades of early twenty twenty.
And if you're looking for kind of a fat problematic signal for the likelihood of a recession, you kind of have to view that as.
One of them.
And is that because I guess sometimes we talk about the animal spirits in the market, the idea that a market stays high because people want it to stay high, and it crashes when people just all of a sudden say, wait a minute, this thing is priced too high. We no longer believe it. And some of it is really just what people believe about the direction of a market.
Yeah, absolutely, that's what makes it a decent tool, sometimes in spite of itself, to tease out its macro message. And right now that's kind of a grim one. I would say generally, again, if I wanted to go look for positive signs in the US doock market, I could find them. I could find them in credit spreads as discussed. I could find them in home builders doing quite.
Well right now.
Cruise lines are doing amazingly well in Europe, Luxury goods makers are doing well. All of those things are pretty straightforward proxies on consumer spending. And if you wanted to hit your wagons that message, you could just easily do that. I'm acting like a typical markets journalist here and giving nine different accounts of what might happen, but it is
sort of what's going on. I will say, this is a crazier moment than usual, big surprise in the market, just like it is in the economy, Like you don't usually have cross currents of this violence really to assess. And I mean that alone is kind of a message, maybe somewhat of a bad portent.
So we started this conversation talking about all the different mixed messages the economy is sending us, and looks like we're ending this conversation on the same thing. As you say, Chris, you can find hopeful signs and you can find some pretty pessimistic signs. So let me ask you the unfair question, and I'll start with you read will we have a recession? And when? How bad?
In short, we don't know. We simply don't know. And there are a host of economists who certainly think that we will have a recession this year as you kind of pair together the high inflation, high interest rates, pullback in business investment, tightening credit conditions, and kind of all of that works together to lead to some job losses and this contraction and activity. But you also have the other argument where we may not be having any gangbusters growth,
that things may just keep trucking along. I mean, if we think back to last year, economists have been expecting a recession for a long while now, and at a certain point, it's kind of like, you know, if you keep on pushing your timeline back and back, business cycles do have to end at some point, So we'll get one eventually. But will it be this year? It's hard to know.
Chris, you said that everybody looks at their favorite tea leaves to try to figure out what's going to happen. When you look at yours, what do you use at.
The end of the day of twenty five percent decline in the S and P Sorry to be a broken record, but that never happens without a recession. One thing that might be useful to do is just what's the bull case here? What could possibly happens avoid a recession?
Happening.
One something needs to cause the FED to decide that inflation has been subdued.
It's a long way from happening.
Yet while it's come down, it remains pesqually high in sort of a seventies ESQ way, and that the FED is going to have to continue its aggressiveness. The argument now would be that the banking crisis does enough, sort of symbolically to cause just enough credit withdraw in the economy, that financial conditions tighten and inflation it's taken care of without a ton more FED interaction, and that that credit withdraw isn't so great that it causes some massive recession.
An argument for that would be the companies are not hugely in need of financing right now, big companies. They took out a lot of loans, they sold bonds while the sun shone in twenty twenty and twenty one, so they're not hugely sensitive to a credit cycle. But still that's a lot that needs to go right at the moment to avoid a recession. Could it happen? Yeah, this is a weird time. The economy is weird. The economy,
never mind the pandemic and everything else. The economy is now dominated by a bunch of intellectual property begemis.
Think about what you need to get through the day.
It's all of the products of basically Microsoft, Apple, Amazon, It's a weird economy, possible recessions don't look like they used to do. But leaving that somewhat fuzzy headed view aside, it just seems like you have to peer so carefully to see the conditions, seeing the whole that Neil can thread at this point that I have to say, you know, sort of odds on in my head. For whatever it's worth, it just seems like a long shot.
Chris Read, thanks so much for coming on the show, Thanks for having us, Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take is Vicky Vergalina. Our senior producer is Katherine Fink.
Rebecca Shasson is our producer. Our associate producer is Sam Gabauer Bilde Garcia is our engineer. Our original music was composed by Leo Sidrin. I'm West Kasova. We'll be back tomorrow with another big take.