‘I Hate to Say This’: CNBC Guest Calls for More Unemployment Because ‘Very Strong’ Consumers Are Overheating the Economy
A CNBC guest warned that consumer spending remains so robust that the Federal Reserve is nowhere close to easing off its tightening of monetary policy.
That typically means bad news for markets because the cost of borrowing increases, which tends to dampen demand.
On Thursday morning, the U.S. Bureau of Economic Analysis released revised data for the third quarter showing that GDP grew more than expected:
Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2022 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.6 percent.
Normally, solid GDP numbers have a positive effect on markets, but stocks tumbled during Thursday’s session, potentially over fears the Fed will accelerate its tightening. The Fed has already raised rates seven times this year to rein in 40-year high inflation, brought on in part by llow unemployment.
“I do think it will be a slog for the first half, certainly of ’23,” said Jackie Cavanaugh, a portfolio manager at Putnam Investments. “We think it’s going to be a slog for the markets…. The consumer is just really still very strong. They have cash balances at the banks that are 30% above where they were pre-pandemic. Even when you look at the lower income cohorts, they’re still 12% to 15% above where they were pre-pandemic. So they have cash to spend.”
She pointed to the strong jobs market and stated consumers have “confidence” in this atmosphere.
“And they have confidence to spend because the jobs market is about as good as we’ve seen have seen in the last 40 or 50 years,” Cavanaugh continued. “So they have a job and they have confidence that they can get another job if they need to. So that’s a really tough nut for the Fed to crack when the consumer is 70% of the economy.”
She said the Fed “isn’t close to cutting” rates.
CNBC host Joe Kernen asked whether she thinks the current consumer data is “good or bad.”
“You talk about how strong the consumer is across the country, not just in New York. Is that good or bad, Jackie?” Kernen asked.
“It is good,” she answered. “Listen, the Fed is trying desperately to thread this needle of you know, slow the economy but not engineer a major recession. We are likely going to have a modest recession it’s going to be a garden variety recession.”
Cavanaugh then called for “some slack in the labor market.” In this case, “slack” means more idle individuals who could be working but aren’t, i.e., unemployed people.
“And so the consumer is strong now and the Fed’s trying to slow that,” she said. “And so, the way they have to get after this – and I hate to say this to be the Grinch two days before Christmas – but they have to get some slack in the labor market. And that is what I really think we need to be watching because you know, the 6%+ wage inflation that we’ve been seeing is just inconsistent with the 2% Fed [inflation] target. And so they have to start to create slack in the labor market, but that takes time.”
Watch above via CNBC.
