What is a recession and are we headed for one? Yahoo U

Yahoo Finance Live’s Brian Cheung discusses looming recessionary risks.

Video Transcript

AKIKO FUJITA: US CEO confidence is taking a hit as some of the nation's top executives increasingly point to a recession. The latest Conference Board survey shows 60% of CEOs see economic conditions worsening this quarter. So what's behind all of those worries? Brian, of course, standing by here with a mini Yahoo U, a full Yahoo U.

BRIAN CHEUNG: Full Yahoo U. I mean, we're in the classroom. Well, there's only one student here, and it's Akiko. But class is in session.

AKIKO FUJITA: I'm here. I'm here.

BRIAN CHEUNG: Present, present. Class is in session. And it's no secret the markets have been flashing red with concern basically all year. And as Akiko mentioned, CEOs are getting less optimistic about the economic picture. So this is a chart that comes from the Conference Board. It asked corporate bigwigs about how they feel about general economic conditions. And as you can see, the print shows a huge drop in consumer sentiment in the second quarter. This is the worst since 2020.

And we really know the culprits for all of this, right? So high inflation, for example, is eroding purchasing power. That means the Fed is going to have to raise borrowing costs. That's disrupting markets. And then there's also the problems overseas, right? The war in Eastern Europe and COVID related shutdowns in the world's second largest economy, all of that makes for a nasty combination of global factors that spill over here in the United States, too.

But of course, these are just things on paper. The question is, how do they translate into an economic downturn? And for that, we have to think about corporate earnings, right? So shipping costs rise, materials getting more expensive, that cuts into margins, lower corporate earnings. It also means that companies invest less because higher borrowing costs make returns on projects a little less attractive. That makes business investment go down.

And then consumers, we all know this, buy fewer things as the basket of stuff they have to buy, like milk or eggs, gets very pricey. So these are the actual mechanisms by which the economy can slow down. And all of that is the underpinning, Akiko, of the recession concerns that are rippling through the stock market and C-suite offices and just in dinner table discussions across the country.

AKIKO FUJITA: So how does it look right now? I mean, what are the economic indicators pointing to? We have heard the technical definition of a recession. But what exactly are we seeing?

BRIAN CHEUNG: Well, you ask about the definition of a recession. I've got the textbook definition right here, at least, as most people understand it. They say it's two consecutive quarters of negative growth in US production that's measured in real GDP. And when you take a look at the chart, we already got one negative quarter of GDP in the first quarter. But what you to really look at is the pace of economic growth in the United States. And again, this is a chart of rates in US GDP over the last 10 years.

And what's interesting about this trend that I really want people to notice is that over the pre-pandemic period, really, trend of growth in the United States was not all that high. But if you notice, again, it's not a very noticeable jump here, but the trend over the pandemic period, at least, of US economic growth has been relatively higher than the trend that we saw pre-pandemic. One interpretation of that is while the US economy has been running hotter than it normally does, and that's the reason for why we see the inflationary environment.

So we're probably going to need multiple quarters of further negative growth to depress the demand. Again, think business investment. Think consumer spending that led to the post-pandemic boost that we got here in the first place. Now, the bigger concern in this hypothetical recession is therefore not necessarily GDP growth, but it's losing the jobs that we fought so hard to get back since the pandemic. So the largest labor shock that we've seen in modern history destroyed over 20 million jobs, as we all experienced and know about from 2020.

And then if we see, we actually recovered almost all of them back to this point. It's still a little bit of a shortfall, but it's pretty remarkable that we've been able to recover that much. So think about if we do go into a recession. Ignore the GDP side of things. If businesses go bust, hiring sharply reverses, do we start to lose that? That would be a big deal. And that's why these recession fears are, indeed, warranted. So in the end, we're going to have to sacrifice some economic growth to get ahead of this. But the broader question, Akiko, can we save jobs while doing it? And that is where the recession risk is.

AKIKO FUJITA: And we've already started to hear from some of those high growth companies, right, in the tech space, who have said, look, we're going to cut back on some of those jobs. Obviously, the question is, is that just an indication of how quickly those high growth companies grew? Or is that an indication of something larger that we're likely to see?

BRIAN CHEUNG: Yeah, and when we talk about the tech companies, we have to remember that these were high flying companies that had a lot of money. They were flush with more cash, had a lot more money to invest in research and development during the midst of the recovery. And that's the reason why, when I talk about business investment, people are very sympathetic, understand the consumer spending side of things.

But research and development, all the money that went into there, we saw a massive surge through the stimulus. As that reverses, how many people are going to be laid off because they were part of those projects? White collar workers who were, perhaps, part of that that are now being trimmed because the companies are deciding that those projects are no longer something they want to invest in.

Now, of course, that is a different story than, say, the blue collar jobs that have been a big part of the job losses since the pandemic. Again, leisure and hospitality, restaurant jobs-- those were all the front-facing, high-risk contact jobs that were really affected. But if the large corporate companies that are also feeling a lot of those hiring, think of the big publicly traded fast food companies, that could be a big part of this story as well.

AKIKO FUJITA: Yeah, a lot of people just kind of taking a deep breath and stepping in for the next few months as we follow the news. Thanks so much for that, Brian.