Recession worries: Economist explains why he still sees a hard landing ahead

The May ISM services data was slightly lower than economists were expecting. Economic Cycle Research Institute Co-Founder Lakshman Achuthan joins Yahoo Finance Live to discuss what the data is telling us about the state of the economy and why he still sees a hard landing for the U.S. economy ahead.

Video Transcript

JULIE HYMAN: Let's get some reaction to all of this. We're joined by Lakshman Achuthan. He is Economic Cycle Research Institute Co-Founder. So services were supposed to be the part of the economy that still is really strong.

LAKSHMAN ACHUTHAN: Yep.

JULIE HYMAN: So what does this tell us?

LAKSHMAN ACHUTHAN: And they're slowing, right? So yes and yes. They are-- they typically are a stronger part of the economy, particularly in this post-COVID period where you have this, like, YOLO, you only live once, and I want experiences, I want leisure, I want hospitality, I want all that stuff in lieu of goods. And that's been kind of keeping people on the, hey, we're fine, you know, what me worry kind of attitude. And now you're seeing I think, at least this is one data point-- a couple data points, but you're seeing this deceleration in services consumption.

One thing-- stepping back from today's number, right? One thing I don't think people really realize, and this is just from studying recessions for decades my whole professional life and looking back, services and consumer spending typically are OK as a recession starts.

BRAD SMITH: Interesting.

LAKSHMAN ACHUTHAN: That is-- I think the received wisdom is that, oh, yeah, that has to fall apart and then there's a recession.

BRAD SMITH: Right.

LAKSHMAN ACHUTHAN: Totally not the case. What happens is you can walk into a recession with a couple of percent growth in services or consumption and it only kind of slows down and goes to around 0 inside a recession.

BRAD SMITH: So is the setup this time drastically different than what we've seen in the past?

LAKSHMAN ACHUTHAN: Probably not. You know, those are-- I think it's Sir John Templeton. Isn't it the Templeton guy who said the four most expensive words in the English language are-- this time it's different. And I don't think it's that different. We're pretty much the same. We want to keep it going as long as we can. And I don't think anything's particularly different this time. It certainly doesn't look so on the services numbers.

JULIE HYMAN: So to zoom out again a little bit, there seems to be now a narrative taking shape that we keep talking about the recession, we keep talking about the recession, we keep talking about the recession--

LAKSHMAN ACHUTHAN: Yeah, where is it?

JULIE HYMAN: And we're OK. Like, maybe the recession isn't coming this year, maybe it's not coming at all.

LAKSHMAN ACHUTHAN: Ever.

JULIE HYMAN: I don't know. I mean, what are you-- how are you thinking about it?

LAKSHMAN ACHUTHAN: Again, that's totally normal. And we have recession.

JULIE HYMAN: It's sort of normal for us to talk about it and talk about it, and then for it--

LAKSHMAN ACHUTHAN: Yeah.

JULIE HYMAN: --to not happen as quickly.

LAKSHMAN ACHUTHAN: Yeah, I was looking--

JULIE HYMAN: Well, but is it still coming? That's the--

LAKSHMAN ACHUTHAN: Yes, it is. Yes.

JULIE HYMAN: OK.

LAKSHMAN ACHUTHAN: So the punch line is-- our expectation is that we're still looking at a hard landing recession. And I think it is still coming. The real wrinkle this time is to a degree some consumer spending on services and jobs in general, right? They're positive. And I'll remind everyone that nobody ever realizes we're in recession when it's starting. I think it was July of 08, three-quarters inside of the Great Recession before there was a negative GDP print, right? So that's the reality, but we remember it differently. We're like, oh, yeah, it was obvious, but it totally wasn't obvious.

Now, here we have I think a combination of labor hoarding, because there's not a lot of people in the labor force. A lot of people left. And so it's super tight. So managers, businesses don't want to let people go unless they have to. So what you see and you even see this in last week's jobs data is that the hours worked is coming down. So instead of letting people go, you have work on aggregate for the whole economy a bit less. And that's a way they're reacting to the slower demand even on the services side. And you can kind of get away with it.

I know you're doing a lot of earnings stuff, top line earnings, the revenues look pretty good, it's because they're jamming through those price increases as much as they can. And we all are feeling that.

JULIE HYMAN: One more thing I want to ask you about, and then we're going to talk a little bit about the data coming out this week. Just quickly, we've had sort of a debate here about what data we should be paying attention to. And I know that you told our producers you're looking at something called GDI--

LAKSHMAN ACHUTHAN: Oh, yeah. That's a fun one.

JULIE HYMAN: --vs GDP. Just as briefly as you can--

LAKSHMAN ACHUTHAN: Sure.

JULIE HYMAN: What's GDI? How do we track it? What does it tell us?

LAKSHMAN ACHUTHAN: It comes out. It's just a month later than GDP. It's conceptually equal to GDP.

JULIE HYMAN: And it stands for Gross Domestic--

LAKSHMAN ACHUTHAN: Domestic Income. So I produce something and give it to you, that's gross domestic product. You pay me some money, that's the income side of it. Other side of the coin totally conceptually as important. It comes out a month later, so nobody cares about it. And when you look at GDI, it's been sharply negative for the last two quarters. The Philly Fed does some really good work optimizing the two data sources, GDP and GDP. They're both negative for two quarters. You've never seen that away from a recession.

So if nothing radically changes there, and I don't really think it's going to, we might have slipped into recession at the end of last year or the beginning of this year. That's what that data says. We just have to see the jobs now start to go. And first we're seeing work week going weaker. Let's see what happens with jobs.

BRAD SMITH: All right.