The U.S. economy shrank again in the second quarter, ushering the country into a so-called technical recession. However, many analysts, officials, and even the White House are still hesitant to use the term itself. Jose Torres, the senior economist of Interactive Brokers, joined Cheddar News to explain who gets to decide if we’re in a recession, what factors play into the designation, and why he thinks we can still be in a recession even if there is ongoing job growth. "Although there are jobs, I think that the real GDP negative is showing us that the quality of those jobs and the quality of living standards are going down, and America and the world needs to tighten our belts," he said.

Opening Bell

Is It a Recession Despite Robust Job Numbers?

here to dig into this a bit more as Jose Torres senior economist interactive brokers, Jose we know a technical recession longstanding view and definition of it is two consecutive quarters of contracting GDP But over the last 24 hours, if you're hard pressed to find someone who will actually call this a recession, why are so many people reluctant to use the R word right now? Well, I think good morning Alicia and thanks for having me. I think that folks are think aren't used to thinking about the economy in real terms because we haven't dealt with inflation for so long. We're used to thinking about data in nominal terms. So as inflation has manifested, it's made the GDP numbers negative even though nonfarm payrolls have been strong. So it looks and feels to some folks like it's not a recession, but other folks particularly in the lower and middle income um income distributions, they feel like it's more recessionary. So um that's sort of what's going on right now. And for those who don't know the National Bureau of Economic Research a committee, they're actually officially decides whether we're in a recession or not. I wonder what your insight is in terms of the metrics that the committee is going to be looking at to determine the official kind of, you know recession if we're in one or not and when we can expect that declaration. So typically probably expect that the declaration about 12 months, they look at income, they look at spending, they look at employment, they look at manufacturing and what we've seen, what we're seeing is that the monetary policy tightening by the Fed is working very fast, we're seeing manufacturing, we can significantly, we're seeing real estate weakened significantly. So the National Bureau of Economic Research, what they do is they're looking for depth and broad weakness across a wide variety of sectors. I think we meet that criteria. But other folks think that because the labor market is so tight that perhaps they won't call label this one a recession. So we get an official declaration in about a year from now, which more than likely if this is not as strong a recession as everyone, um thinks it's not, it's not going to be, we'll be out of a recession and then we'll know that we were in fact in one, it's kind of the thought process right now. I want to dig a, yep. Also, uh, third quarter is looking like it's gonna be negative as well in the Fed is tightening, that the tightening takes a lag to manifest. So investment was negative. I'm expecting that to be negative again in the third quarter, consumption slows significantly. I'm expecting that to slow again significantly in the third quarter or or go negative. Uh, exports were actually propelled GDP in the second quarter. I don't think it's gonna be that strong in the third quarter due to the stronger dollar. And I think government spending is also gonna drag. So I think the third quarter is also gonna be negative. So it should be, should be interesting if we get a third quarter negative reading, if the folks will embrace that we're in a recession or not, I think we are in one. So to that point then, if you think we're gonna be negative in the third quarter, do you think we accelerate further or we we decelerate a bit because like this quarter we had 9/10 of a percent contraction. What do you think we're looking at for for Q three, then? I'm thinking we're gonna look, we're gonna see between negative one and negative 2% um, mainly due to labor market weakness that we're starting to see the leading indicators are starting to go the other way. So initial claims are starting to rise. We're seeing, we're hearing on the conference calls, folks are high freezing hiring some companies are laying off particularly in the highly compensated tech sector. So we're seeing labor weakening. Uh, that's gonna be a big drag on third quarter GDP focusing back on this quarter. And I guess this will trickle into into Q three And your thought process there. What factors are contributing the most to the decline in economic activity right now and will continue to lead to the decline in what your thinking is gonna be third quarter contraction really. It's the cost of financing and the financial conditions tightening, um, you know, the the inflationary era made it where now the Fed has to go in reverse and when they were really uh injecting tons of liquidity into the market. Now Alicia, what they're doing is that they're reversing all of that. So that's very painful and it hurts valuations, it hurts valuations in the equity market, it hurts valuations in the real estate market and it really hurts economic activity and the incentive to invest Goes down so that we already saw in Q2 investment was negative. That's gonna continue to be a drag. I know the market is hoping for a Fed pivot next year, but I think that will be a tweak, that's not going to be. Um, you know, going from 3.5 or 3.7% down to zero like they have been doing in the past. I don't think we're gonna see that kind of monetary policy easing because we're in a inflation higher for a longer period, which also means rates higher for longer. I definitely agree that I don't think that we see that kind of drastic pivot if to everyone's point. We were potentially in a recession or maybe not in a recession, but even if we are in one, it's not a typical recession, the recession that we have been in historically, given the current labor picture, it is just fascinating though to hear your outlook and then here's some of the conversations that we've heard over the last 24 hours, Treasury Secretary Janet Yellen for example, said yesterday the economy is in a state of transition but not in a recession. The White House kind of taking obviously a similar stance and everyone trying to pretty up the picture, so to speak. What do you think? Secretary the Secretary meant there? And what do you think of the overall conversation that has been happening over the last 24 hours, a bit of a spin on what GDP was this quarter and what it looks like, you know, for the upcoming quarters? Well I do like the rule of thumb of two consecutive quarters of GDP decline. I like that definition of recession because if you have one quarter and not the next quarter, okay you're not in a recession. So it gives you a chance to give the economy a chance to sort of you know follow through. So um so I don't agree with much of what's been said in the media lately and stuff. I do think we're in a recession. I think that it's important to be honest to the math. Um I do think the N. B. R. Is going to label this recession and I think a recession is is a big psychological thing. So I think politically the politicians, they wanna sort of you know um tell us that things are gonna be all right and things are gonna be going well, unfortunately that's that's not in the cards based on my analysis. I mean you could imagine some spin, given that midterm elections are right around the corner, but to be fair, and I guess to play a little bit of Devil's advocate, the economy is still adding hundreds of thousands of jobs a month, 400,000 jobs, you know, last month. How can we truly be in a recession when we're seeing job growth be relatively strong when we're seeing even this morning personal income be elevated? I'm glad you bring that up Alicia. So sure we're adding jobs now, despite all the stimulus that we've spent and all the, the unprecedented governmental actions that we've taken on since 2020, we're still not at February 2020 levels of employment, which was the month before the pandemic started. That's 12. I would also add that an economy is growing. If workers can find jobs and their wages are increasing faster than prices, right? That's what we would, that's what I would consider a growing economy. That's broadly growing. And what we're seeing is that folks that are working minimum wage jobs or even in middle tier jobs are having a lot of trouble paying for gasoline, playing, paying for food, paying for experiences, paying for services. Uh And so, so yes, so you can go get a job, the question is five or six years ago, when you got a job, you are more better off paying your rent, more, better off paying for your bills and you were able to save more personal savings down, significa At recessionary levels consumer sentiment, same thing. So, although there are jobs, I think that the real GDP negative is showing us that the quality of those jobs and the quality of living standards are going down and America and the world needs to tighten our belts Jose. I've only got 30 seconds with you. But I want to ask this question. What happens now? Is there anything that can be done to truly get the economy back on track to avoid a contraction in the third quarter? Or is that baked in given the Fed's activity? Honestly, it's baked in Given given the Fed's activity and given um the fact that we're not gonna get that much government spending from Washington, A lot of government spending from Washington can make that third quarter positive, but we're not gonna get that. Uh And and the Fed is not going to reverse course. So even if they do 25 basis points less, that's not gonna be enough to move the needle, Jose, interesting. Inside an interesting outlook Jose Torres, senior economist of interactive brokers