Inflation: Consumers will ‘finally buckle’ under higher prices, economist says

S&P Global Ratings U.S. Chief Economist Beth Ann Bovino joins Yahoo Finance Live to discuss the probability of a recession, inflation, consumer sentiment data, and the outlook for the labor market.

Video Transcript

BRIAN SOZZI: S&P 500 and NASDAQ are still in bear market territory. Meanwhile, several economic indicators, such as consumer sentiment and manufacturing, continue to paint a gloomy picture for the US's economic outlook. But will a hawkish Fed pull the US into recession? And how is the business cycle playing out, compared to previous recessions?

S&P Global Ratings chief economist Beth Ann Bovino joins us now. Beth Ann, always nice to get some time with you. This morning, we are waiting for a lot of earnings. You have Coca-Cola out here raising prices by 12%. We just talked to UPS's CFO, saying they don't really-- they don't see any signs of, per se, a recession in their business, looking for a good holiday season. Do you think we just avoid a recession?

BETH ANN BOVINO: We basically have a baseline in our forecast for a recession. We think it's going to be a very shallow one, but a recession nonetheless. It's largely because of affordability issues, both because of still incredibly high prices, as you just noted, by the increase in final prices for US households, as well as affordability tied to interest rate hikes. So in both cases, we think the consumers will slow down dramatically, leading into a very shallow recession for early next year.

BRAD SMITH: Interesting. And so with that in mind, where do you believe the mindset of the consumer would be by that point?

BETH ANN BOVINO: Well, we're looking at-- we think-- we-- looking at the numbers from a consumer confidence, a bit weaker than what we, in markets, had expected. The idea is there that even that we expected a little bit-- not as extreme, largely because we saw a bit of a pickup in the stock market, as well as cooling of gasoline prices, well, that's not enough for consumers. They're still disappointed because it's not just about gasoline.

It's about affordability and pretty much all aspects of society, particularly for shelter, not just home-- purchasing a home, but also renting a home. And that means less money to spend elsewhere. People are squeezed. And we do think they'll finally buckle.

BRIAN SOZZI: Beth Ann, I've really been surprised by how many or how much price increases a lot of these big companies have been reporting in recent weeks, as they've come out with earnings. I mean, continued double digit increases for products and services, really, for the second quarter in a row. When does it stop? When are we beyond these double digit increases?

BETH ANN BOVINO: Well, we're expecting to see-- eventually, one of the reasons-- the good news about a recession is it also brings lower prices. And the big question of, is, if consumers do slow down, as we expect, that means there's going to be more inventory on businesses's books. So if we do see a slowdown for consumers, then we end up seeing is a lot of inventory needs to be unloaded. And unfortunately, that inventory is unloaded at lower prices. So indeed, the Fed gets its wish in the end. But of course, there's a cost to both businesses and consumers as well.

BRAD SMITH: We've got a lot of companies that have started reporting earnings fast and furious in this most recent quarter, but the forward guidance here is going to be the big question. What are your expectations for where companies will continue to either reiterate their guidance? Or for some of them, we've already seen, at least in the case of Snap-- I know a specific name, but where they might start to say, you know what? We have to either pull back our guidance or just pull it in entirety. And what net impact would that have?

BETH ANN BOVINO: Well, speaking from an economic position-- again, I don't cover particular industries or companies, but I can say that given this environment, this is a classic overheating situation for the United States, where the Fed has to come in and be incredibly aggressive-- understandably. We have core inflation still at a 40-year high on a year over year basis. So they have to move.

And with that said, what I suspect we could see for those businesses that switched from just-in-time inventory accumulation to just-in-case inventory accumulation, that means that they're going to be squeezed. And so I suspect the forward guidance would be basically what happens to profits when we have to unload all those inventories. That's where I suspect we would see some activity, particularly for retail, the retail sector, who have been holding on to things, but I suppose other areas will be squeezed as well.

BRIAN SOZZI: Within your outlook, Beth Ann, for a mild recession, is the economy shedding jobs? Are we talking about non-farm payroll reports where maybe there's 50,000 jobs shed?

BETH ANN BOVINO: In our business cycle barometer, the one indicator that is still showing positive-- everything else is neutral or negative, and extremely negative. But the one area that we're seeing still positive territory is in that jobs market that you pointed to. One of the-- we're looking at job openings coming down, slowing down, but still rather high. So the question is, are businesses canceling that job opening and still-- but still want to hold on to those workers? I suspect in certain areas, that we're going to see the crunch.

Retail I mentioned, housing also. I suspect we're going to see some kind of a cutting of jobs. But overall, we suspect a mild impact on jobs. And we do expect to see the unemployment rate rise. But we're looking at something that's going to be by 2024 about 5 and 1/2%. In normal times, that's what we used to get to. So indeed, we'll see a pickup, but nothing dramatically so.

BRIAN SOZZI: Beth Ann Bovino, S&P Global Ratings US chief economist, always good to see you. We'll talk to you soon.