Economist: Recession risk is ‘increasing’ — especially for 2023

Beth Ann Bovino, chief U.S. economist for S&P Global Ratings, joins Yahoo Finance Live to discuss April retail sales, inflation, recessionary risks, and Fed rate hikes.

Video transcript

BRAD SMITH: April retail sales coming in this morning, shy of estimates, though. Analysts continuing to watch for how COVID-19 is rippling through the economy and affecting consumer mobility, changing how likely consumers are to spend on everything from dining out to air travel. Let's take a deeper look at some of those newly released retail sales numbers. Joining us now, we've got Beth Ann Bovino, who's the S&P Global Chief US economist. Beth Ann, great to have you here with us today.

And particularly here, as we kind of evaluate these retail sales figures, it's also important to discuss the shift, perhaps, in spending from some goods and into services as well right now. And how would you pair that with the data that we've seen come through this morning?

BETH ANN BOVINO: Well, the numbers that came in, I mean, the retail sales numbers, it was pretty much broad-based, which was kind of nice to see. Yeah, it was a little bit under expectations, but not by much. I do want to note that we did see a nice reading for core spending, so that was also strong. In terms of the shift away from goods, basically, goods, to services, that kind of makes sense because what we're seeing is a reopening of the US economy, even though Omicron or the new variant has certainly has caused some concern.

People seem to be going about their business. When we look at our real-time data, what we've seen is that both OpenTable, tables, basically, in-room dining, people going to restaurants, is very close to where it was pre-pandemic. You're seeing people going out to hotels and going out on vacations. So in that sense, you're seeing a lot of that activity, something that's been pent-up demand for some time. And the need to purchase new products, well, we bought a lot of TVs and appliances, et cetera, so you can see that demand is also winding down.

JULIE HYMAN: Hey, Beth Ann, it's Julie here. Between these numbers, the retail sales numbers, which showed a little bit of a drop in grocery store sales, for example, and Walmart, which, of course, I know is a specific company, but I think we can take a macro read based on Walmart, given its size, what does that tell you about how folks, for example, at the lower end of the income spectrum are doing right now, particularly in response to inflation?

BETH ANN BOVINO: Well, one of the concerns that we've been talking about for some time is, yes, we did see a really nice reading in terms of retail sales in nominal terms or in current dollars. But what we have seen is if we adjust this, which we have done at S&P Global, if we adjust this for inflation, what you end up seeing is almost a wedge between real and nominal, meaning that people are spending a lot of cash, but buying much fewer items. In fact, if we measure it in real terms, people are buying about the same amount in terms of items as they bought just going back to July of last year. That's a real struggle.

When you talk about affordability issue, which people are hurt the most, lower income households. If we want to-- and that's something that we are also starting to see some signs of a squeeze. While I don't know what the Walmart numbers actually are saying, one of the concerns, of course, that is an area where lower income households-- a place where lower income households spend a good chunk of their cash. Is that slowing down as well? That would be one concern I have.

BRIAN SOZZI: Given that multitude of concerns, Beth Ann, do you think we're watching a recession starting to take form?

BETH ANN BOVINO: We think that right now, US households-- and this is also for lower income households-- right now, people are still sitting on a nice bit of savings. And the reason why is because we spent so many months in quarantine. Many people didn't spend and go out and spend. So even on-- even low income households have a little bit of a cushion. Higher income households have a much more, although that's being hit by certainly the stock market disarray at this point in time.

With that said, that gives us some cushion this year, but eventually, people are going to close their pocketbooks. That doesn't bode well for the US economy going forward. We do expect, while we don't necessarily have a recession in our forecast, we do see the risk of a recession increasing. We now have it at about 30%. We see the risk, though, much larger in 2023, when those cumulative rate hikes from the Fed to attack inflation starts to weigh on mortgage payments and monthly payments for people, going forward.

BRAD SMITH: And so amid pricing pressure, the Fed has also prioritized price stability, given some of the abnormally high prices, as they put it previously. When might we see some of that price stability come a reality? And what measures need to be implemented in order for that to be true and come to fruition?

BETH ANN BOVINO: Well, when we're looking at the most recent inflation data, CPI and producer pricing index numbers that came out, we did see a little bit of a moderation on a year over year basis. That's great to know. But it's still very close to its 40-year high, so-- both of them. So-- in particularly, CPI.

So again, that means that the Fed has their work cut out for them. The Fed responds by raising rates very aggressively. And we expect the Fed-- the 50 point basis hike that we saw most recently, that's not just-- that's not a one-off. We expect several more this year while there-- and there has been talk, although it's been pushed back by Chair Powell, of a 75 basis point hike.

There has been talk by some members that might be something that's needed later on. And we certainly wouldn't rule that out. The impact from Fed policy on inflation and also on economic activity usually works with a lag so that the rate hikes that we're seeing now, expect to see an impact on GDP, as well as inflation, probably six months down the road down the road. That's why I'd say with these cumulative rate hikes this year, the feeling will be more-- will likely be felt in 2023.

JULIE HYMAN: Beth Ann, this is something I continue to struggle with, because if the Fed is operating-- I think most economists would say the Fed should have acted earlier, but obviously, it didn't. So considering that lag that we're talking about, wouldn't it make sense if the Fed stopped earlier than most folks say they should if, indeed, the effect is going to be felt when the economy is starting to dramatically slow already?

BETH ANN BOVINO: Well, I think that the Fed is working, reading this, reading the economic indicators by Braille. It's hard to really get a sense of what Fed policy will do, how fast they go, how much it's needed. If they go too slow, as you had indicated, if they put them out-- put a few out now and wait a little bit, inflation expectations, which is a big concern for the Fed, may not really address, may not necessarily think that the Fed is moving fast enough. If inflation expectations go out of-- de-anchor, as you will, then the Fed would have to move even faster in raising rates next year.

So I think the Fed's throwing the bazooka out there for 2022 on the concern that if they don't get ahead of it right now, there's going to be more inflation down the road. So, indeed, there was a question of an overshoot. And I do expect that they will overshoot. But the concern is if they go too slow, given they were too slow last year, inflation could go-- could unwind and cause more problems next year.