Debt ceiling: Recession fears ease as companies shift focus

BMO Senior Economist Jennifer Lee joins Yahoo Finance Live to discuss recession fears easing, the upcoming Fed meeting, and economic growth.

Video Transcript

- So as we've had this talk of recession dwindling, what does that mean for the state of the economy? Are they right? Jennifer Lee, BMO senior economist, is with us now. Jen, Josh brought up a really interesting point here that we have definitely seen corporate earnings calls that the discussion of recession has come down.

I would say, anecdotally, on people that we talked to on the show, it's not quite as clear as it was a few months ago. Where is your thinking stand on, if and when we're going to go into recession?

JENNIFER LEE: Well, good morning. Thanks for having me on the show. Just listen to Josh. It just shows how markets, and economist, analysts have been all over the map. We are still calling for that recession. Things have slowed, obviously. We've had 500 basis points of Fed rate hikes. It's having an impact. Maybe it's not having the big oomph that normally it would have. But things have started to slow.

Just look at the retail sales number last week. I was actually at a conference. And somebody had texted me the numbers right away. And I saw the headline and the core number. I thought, oh, great. Are we going to start pushing off those recession start again? But when we look at the details within the retail sales report, it wasn't exactly all positive. There are still quite a few sectors that were down to be like half and a half.

So things aren't slowing dramatically. But things are clearly slowing, especially in the factory side. So we are still looking for that negative quarter for Q2 to kick in for Q2 and Q3. But we've always been saying mild contraction. And we are still sticking by that call.

- So you are calling for a recession then later this year, and not in 2024 still.

JENNIFER LEE: Correct.

- And then one follow-up question I have for you. Because since I know you heard our conversation with Josh, what's your expectation for the June Fed meeting? Are you expecting a pause? Personally, I can't see a rate hike happening. But what are you expecting?

JENNIFER LEE: Totally outside of that. No, we are not looking for a rate hike. Our call has been that last meeting was the final rate hike. And then they would stay at these elevated levels for some time and probably until 2024 and the first Fed rate cut to kick in 2024.

If there is a risk, and there's always a risk on either side, it will be to raise rates. Right now, the data are not pushing for a rate-- I don't think it was pushing for a rate hike per se. But if things continue to remain strong, they're going to be watching things like further job gains. I'll continue to watch consumer spending. I'm dying to see what's going to happen at this Friday's April PCE report. And, of course, inflation. And if it continues to stay strong, then we could see another rate hike coming down the road. But I don't think it's going to be in June.

But, again, base case scenario, that's it until 2024. And then we start seeing rate cuts. And, of course, it depends on how all these talks play out. And if we do see things fall apart, which, again, is 50/50, and I have no idea how this is going to play out, that we could see-- it's almost a reason for the Fed to actually stay on the sidelines at least for now.

- Oh, goodness. I hope by the time the Fed meets, we know what's going to happen with the debt ceiling. Who knows. But I am curious your thoughts on that, as you said, it's 50/50. It's even tougher to game that out than it is maybe then the overall economic direction. But it does feel like the consensus is pointing to a deal, even if it's not exactly by the X-date soon thereafter. Are you guys in that camp also?

JENNIFER LEE: We are in that camp. Quite frankly, it's a lot of political theater, in my humble opinion. But I think that at the end of the day, cooler heads will hopefully prevail. If we start seeing markets reacting very badly in the event that it looks like it's not going to go anywhere, we might go a little bit past that X-date, if it is indeed June 1. And then we could probably see, hopefully, a deal soon after that. And so, hopefully, it'll be very temporary, I think, you said earlier as well.

So we'll see how that plays out. But it, obviously, will be whose word it was. It'd be catastrophic if this thing extended for a lot longer.

- Yeah. They've certainly kicked the can down the road in the past. We've been through this before. To your point, 2011, 2013, time upon time upon time. Again, some voices say we should just do away with the debt limit. That's a separate conversation altogether.

I want to ask you really quickly also about the job market. That's one of the areas of the economy where there has been continued strength and unexpected strength, particularly like in the last report. Are you expecting to continue to see that strength when we have the next report coming up in just weeks or less than a week now or about a week?

JENNIFER LEE: Yeah. Next Friday. We're still looking for something, further job gains, maybe a little bit of an uptick in the jobless rate. But it's still going to be ongoing jobs. We're not going to see obviously 500,000 jobs again. But something around the 200 level or so would be considered a decent gain. And, of course, whatever the breakdown is going to be. And, of course, what happens to earnings. But this has been the overriding feature, I think, for this entire situation. And the reason why we continue to call for a mild recession is because the job gains remain strong.

There's still talk about hoarding. Businesses are reluctant to let go of a lot of their workers because they know how hard it is to hire them back. And, of course, wages are still rising or maybe at a slower pace, but still rising. And that's helping consumer spending. And that's what's going to cushion this entire recession.

- And finally, I want to widen out and look globally for just a second here. Because earlier, we're talking about a potential COVID surge in China. And even there, growth is not what it was. And if you look around the globe, maybe other areas have been a little bit more resilient. But as it pertains to US growth, what's the dependence on the global economy at this point? And is that going to be a curb on US growth or help it at this point?

JENNIFER LEE: Having other economies continuing to grow. Europe has been beating expectations. The UK, as well, managing to circumvent a recession, which is positive news. It doesn't mean that everyone is out of the woods just yet. Because the year is still young. Inflation, especially in the UK, it's still very, very high. So that is going to weigh, I think, overall, on broader global growth.

China had a big strong start to the year thanks to a very weak year ago levels. But we still see China meeting their growth target of about 5 and 1/2%. So that would, overall, help the global growth, and, of course, help the US as well.

But the US is, obviously, going to be the big driving force. And we need to make sure the US continues to move in that direction before we start talking about things like a global recession.

- Jennifer, always good to catch up with you. Jennifer Lee, BMO senior economist. Thank you.