The ‘zoom economy’ is now part of corporate America: economist

RSM Chief Economist, Joe Brusuelas, joins Yahoo Finance to discuss the upcoming FOMC meeting and how the meeting will hit important topics that could affect the market like the delta variant, inflation, and the pace of reopening.

Video transcript

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MYLES UDLAND: Welcome back to Yahoo Finance Live on this Monday morning. A busy week here in markets, got all the FAANG names out with their results later this week. But it's also a busy week for economic data, GDP numbers will come out. We also have a Fed meeting set to take place on Tuesday and Wednesday.

Joining us now to talk about everything going on in the economy this week is Joe Brusuelas, he's the Chief Economist over at RSM. Joe, thanks for jumping on this morning. Let's start with the Fed and how you are thinking about this meeting? And it would seem that consensus expectations are this is the last time we'll hear from Jay Powell before he might start talking more seriously about tapering at Jackson Hole next month.

JOE BRUSUELAS: Right. So I think that what the consensus is moving towards a focus on the post statement press conference where he obviously will have to acknowledge the rising risks around the Delta variant. And we might get a little bit of talk around taper but my sense is, is that the rising risks around the Delta variant, which is going to push down growth forecast, provides the Fed with a little bit more room to delay the inevitable, which is they're going to have to begin to pull back on the pace of asset purchases. I think it's right around pulling back on the pace of mortgage-backed securities given a very hot housing market.

But you know, it looks to me like the growth is going to work out in the Fed's favor. We're probably going to grow at around 8.5% in second quarter of the year. A slower pace of reopening here in the second half will push growth into 2022, which will give some or at least help on the margin around the talk around inflation. But there are some out there who are clearly going to be talking about stagflation. I think that's erroneous but nevertheless, it's in the market.

BRIAN SOZZI: Joe, today Goldman Sachs cutting their full-year GDP growth outlook by a little over a percentage point on the heels of Deutsche Bank doing the same. How concerned are you about the COVID Delta variant being a major downside to risk in the second half?

JOE BRUSUELAS: All right, so I reduced my forecast by half a percent at the turn of the month following the payroll report in early July. We're very concerned. You know, there's an arc of instability from east Georgia all the way through west Texas. I think if you take a look at Florida, Texas, and Missouri, they're accounting for an outsized share of the new infections. I think in Florida, one in five of all Delta infections are in Florida at this point. We are going to grow slower as we don't reopen at the pace we had foreseen earlier in the year when we thought we would be to herd immunity by Labor Day. That's clearly not going to happen.

Now, I am somewhat encouraged over the past week, we're seeing the political authority, specifically on the right side of the aisle begin to say, hey, everybody, you got to get vaccinated. That's encouraging. Moreover, I live here in Austin, Texas, we're hearing people talk more openly about you know what, our friends and relatives who haven't been vaccinated, we think they are and they really need to be. That's another encouraging development here on the ground.

JULIE HYMAN: Most definitely, Joe. You know, on the flip-side, I wonder how the balance of the economy then is going to shift and find equilibrium between in-person, going out economy, travel economy, and the stay-at-home economy? And I say that as well because of course, we have earnings coming from big tech this week and we're still expecting them to be robust and put up big numbers. So even if we start to see a little bit of pulling back of reopening you know, what is that equilibrium for the economy?

JOE BRUSUELAS: Well, I think that it's not an either/or situation, Julie, and it's a great question. I think that let's just call it the Zoom economy, is now part of corporate America. We're not going back. Yes, the pace of reopening is going to slow, perhaps as many people will be returning to the office as we thought after the Labor Day holiday, that may get postponed until later in the fall or early winter. But my sense in terms of the overall equilibrium of the economy, look, we're going to grow probably at 6 to 6.5% this year, right? And that's if the Delta variant really extracts a powerful toll on the economy. That's still well above the 1.8% long-term growth.

Now, if you're a trader out there and you're trying to estimate the second derivative equation, right, which is the rate of change of the rate of change. Yes, the rate of change is going to be a bit slower than we anticipated. But look we're still pushing growth out into next year. That will on the margin help mitigate things.

Moreover, I do think that we will get an assist from the global reopening later next year. That will put us more as sort of a better composition of growth. Right now across the United States is really about the household and business fixed investment, we really don't have a global component. And of course, the fiscal aid which has been so generous over the past two years is going to fade going forward. And that's separate and distinct from the infrastructure bill which we can talk about if you want but that's really a decade-long spending package if it passes.

BRIAN SOZZI: Joe, do you think stocks should be trading where they are, record valuations, last week powering to record highs? As we're all calling for, and now you've called, you've marked down your GDP estimates, the other investment banks have as well, should stocks pullback here?

JOE BRUSUELAS: Well, I think that this is an opportunity for equity markets to take a bit of a breather and assess where things are going. My sense here is that we're still better off if you're looking at investments thinking about consumer cyclicals, utilities, that sort of thing, to be in a bit of a defensive posture until we get a better sense of what's going to happen both in terms of growth, Fed policy, and of course, the big debates going on in Washington over a fiscal aid package. That would be the hard infrastructure package, and then the broader piece, which could be as high as $3.5 trillion, as opposed to the $1.2 trillion infrastructure package.

MYLES UDLAND: And then, Joe, just coming back to the Fed, we've seen a few reports over the last couple of weeks, questions about who the next Fed Chair will be, will it indeed be Jay Powell. I don't-- I mean, I'm pretty confident no one really knows at this point where that is headed but this conversation is certainly starting and is not going to get quieter over the coming months. As you think about Powell's tenure, do you think it's best for him to remain? Is continuity best at this point and how do you think as a risk to markets any change at the top of the central bank and how might that play into the equation?

JOE BRUSUELAS: All right, so I think that financial markets would broadly and warmly welcome continuity with Jay Powell at the head of the Fed. I don't really care who you are, if you take a look back what's gone on the past 18 months, Jay Powell has performed magnificently, as has the Federal Reserve. I think most of what we're hearing has to do with an itch that has to be scratched out on the progressive left. I think that has more to do with Randal Quarles than Jay Powell.

There are going to be three seats up for grabs here going forward at the Federal Reserve, the White House is going to get a chance to leave its imprint on the Fed. And I think most importantly, Janet Yellen thinks quite highly of Jay Powell as I think does the president. And I expect him to be reappointed.

JULIE HYMAN: Joe, the fact that you described his performance as magnificent leads me to believe that you don't agree with some economists out there who think that there is a risk of a Fed misstep here, mishandling of whether it's tapering or inflation as a-- tapering as it relates to inflation. I take it you don't think that that risk is high?

JOE BRUSUELAS: No, I think that's still relatively low. I'm not one of those who thinks that they need to abandon the flexible average inflation targeting regime that was put in place last year. In fact, I think that's the appropriate policy stance given the broad demographic changes that are going on in the economy, as well as the profound structural changes that have occurred and are occurring in the US economy.

Look, if inflation ends up being a bit more sticky, should owners' equivalent rent really begin to firm and then take off, the Fed's in a good position to act. This is not the 1960s or 1970s where they're going to sit there and they're going to do nothing. They can pull back on the pace of asset purchases, they can utilize forward guidance. And if necessary, sometime in 2022 or 2023 create the conditions to begin normalizing policy at the front end of the curve.

It's not like they don't know what to do. It's not like the market doesn't know what to do. I think right now these are more talking points around some very interesting but rather unproductive trades that are going on right now. By that, I mean, look at what's happened to those who shorted the Treasury market since April. It's not gone so well for them.

MYLES UDLAND: All right, we'll leave it there. Joe Brusuelas, Chief Economist at RSM. Joe, always great to get some time with you. Thanks for jumping on and I know we'll talk soon.