Another COVID wave could depress consumer spending, labor force participation: Economist

Matthew Luzzetti, Chief US Economist at Deutsche Bank Securities, joins Yahoo Finance Live to offer an economic outlook after Black Friday's low earnings due to a virus outbreak.

Video transcript

AKIKO FUJITA: Turning our attention back to the markets, we are seeing a bounce-back here in the Dow, up about 107 points after the worst Thanksgiving sell-off since 1931. It was certainly a very ugly day on Wall Street. A bit of a reversal happening today. Let's bring in Matthew Luzzetti, Deutsche Bank Securities chief US economist. And Matthew, it feels like investors are kind of digesting the news now, initially the knee jerk reaction on Friday on what was a very limited trading day. How big of a risk do you see this new variant as when you look at the overall recovery that's happening?

MATTHEW LUZZETTI: Sure. Thanks so much for having me. And as you did note, we saw a pretty major sell-off on Friday in a liquid environment, limited trading activity. And we are seeing some recovery here. I think what we've heard from the past few guests is, there's just a lot of uncertainty at this point in terms of what the impact will be, the severity, transmissibility in terms of the vaccine effectiveness.

And so, we will need to learn that I think over the next two weeks from an economic perspective. I think if we look back, what we've seen from the past several waves, including delta, is, yes, there is a clear economic impact. It does tend to reduce consumer spending, particularly in the services sectors. And we've noted in particular that it really does keep labor force depressed, particularly for prime age individuals.

And so if we do get another wave, whether it's tied to this or not, that would be the economic impact that we expect. Some impact on consumer spending, particularly for services, and some reduction in the labor force, as we go forward over the next several months. We have a jobs report on Friday, which I think will be a key focus for the market. It'll be too early, obviously, to see the impact of that. We're still expecting a strong jobs report on Friday, 600,000 jobs created.

JARED BLIKRE: And Matthew, what do you think the Fed is thinking as it looks at this situation? All the voting members and non-voting members, we have a meeting in December. I've heard some rumblings, some people expect that the-- excuse me, the tapering timeline may be brought forward a little bit. That would open up the possibility of rate cuts-- excuse me, rate raises quicker than expected. But all of this against what you said, a very uncertain backdrop here.

MATTHEW LUZZETTI: Yeah, it's very difficult timing from the Fed's perspective. I think prior to the news on the variant, we had pretty clear signaling from Fed officials across the hawk-dove spectrum, indicating that as of the December meeting, they would think about accelerating the tapering timeline. And in fact, that's our base case. We think that they're going to double the pace of tapering ended in March of next year rather than June of next year. But very clearly, there's a lot of uncertainty on that front.

I think what market participants are looking for, what we're looking for at this point is, is from hearing from Fed officials, particularly Chair Powell over the next two days, as he has his congressional testimony, to just see if they continue with the messaging that we heard prior to Thanksgiving, which was essentially, we are more concerned on the inflation front. We want to speed up the tapering in order to open up optionality to tighten perhaps earlier than anticipated.

My base case is, you will continue to hear that from Chair Powell this week. But he has to at least give a nod to the uncertainty about the outlook that we now have from the variant. I think the one messaging we've had from Chair Powell and the Fed consistently is the pandemic has been in the driver's seat. And it tends to dictate the course of the recovery. And so, there's very clearly more uncertainty about that over the next several months.

AKIKO FUJITA: On the inflation front, to what extent have you seen some of the cost pressures ease? I mean, obviously, we saw that big sell-off in oil on Friday. We had the White House tapping into the petroleum reserves. I mean, you know, it's too early to say to what extent that's likely to have an impact. But as we talk about inflation ticking higher, you know, what's your base case on how much runway that has and when we start to see a bit of easing?

MATTHEW LUZZETTI: Sure, so over the next several months, we think you're going to get continued strong inflation prints. In particular, on the good side, we see used cars, new vehicles still adding to price pressures. At least in the next data point that we'll get next week from the CPI, we expect to see strong inflation in these services items, hotels, and airfares. I think that'll probably roll over as we get into the next several months as a potential pickup in COVID does dent demand in those categories.

But I think our base case should be the next several months are going to see very strong inflation prints. And I think the most important element of the recent inflation data and I think what we will see in the next several months is a broadening out of price pressures. And I think this has been a real concern for Fed officials. They have measures like the trimmed mean, which gets rid of the two tails or the two extremes. It really tries to get a more narrowly focused view on inflation.

And what that has shown is, it's been a broader based pickup in inflation pressures. The Fed's trimmed mean measure that we got late last week showed another acceleration. And so, I think you have a Fed that was looking at the early price pressures as being very narrowly focused on COVID impacted items. Now it's broader based. We have inflation expectations picking up, wages picking up. And that is a reason for Fed officials want to accelerate both the tapering timeline and likely when they begin to raise interest rates next year.

JARED BLIKRE: And Matthew, we've got to leave it right there. But always great to see you and hear your thoughts. Matthew Luzzetti, Deutsche Bank Securities chief US economist.