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Debt ceiling: Recession talks and its impact on investors

Yahoo Finance's Vera Gibbons joins the Live show to discuss recession talks as the debt ceiling deadline looms, as well as the impact on investors and the U.S. economy.

Video transcript

RACHELLE AKUFFO: Well, high inflation, the threat of a debt default, and volatility on Wall Street adding to growing concerns about a potential recession in the US. But are talks of an economic slowdown being overhyped? Yahoo Finance contributor Vera Gibbons is here to weigh in. So Vera, why does it feel like we've been talking about a recession forever at this point?

VERA GIBBONS: It feels like we've been talking about a recession forever at this point because we have been talking about a recession forever at this point. Going back a couple of years, right around when the pandemic hit, we were talking about a recession.

And there's a couple of reasons for this. First of all, we are in a world of high inflation and high interest rates. And that does typically end with recession. So that has people thinking we're headed down the economic rabbit hole.

And another reason we're hearing so much about a possible recession now is if you look at the yield curve which tracks US Securities, it is inverted. And that's one of the top signs that economists look to see whether or not a recession is coming or not coming. And that does indicate that it is coming or a bear market is coming. So that's one of the top indicators that tells them, you know, be on the lookout.

Now in terms of when, nobody really knows. I mean, some economists have said, you know, guess what, we've already had a couple of recessions, one in the first quarter-- first two quarters of 2020 because of the COVID induced shutdown. We had another one, albeit a milder one in the first two quarters of 2022.

Other economists are saying, you know what, we did not have a one and two recession, but we are in fact, expecting a recession, whether it's a third one or a first one because of the boatload of inflation that the Fed is continuing to fight, also because there have been a slew of layoffs, especially in the tech sector and in the media world. Granted the job market overall is extremely strong. But there has been a sign of more layoffs coming.

And then if you look at the stock market overall, which is a forward indicator, it is showing that it's declined for the year. So that does suggest bad things are coming. Now again, it's like the crystal ball will tell you, oh, is it going to happen this month, is it going to happen next month, some economists are saying the end of the year. Nobody really knows. Nobody really knows.

RACHELLE AKUFFO: And it almost feels like we're speaking it into existence as well. And keeping in mind, so technically a recession is defined by two consecutive quarters of negative growth. So have we already been through this several times over the past few years, and is this any different?

VERA GIBBONS: Yes. That's what some economists are saying. We've already gone through this twice. So why aren't all economists saying, yes, we've already been through two recessions over the past couple of years. They're in denial over that to some extent. I think this-- things just seem really uncertain, really kind of wonky right now.

Recessions in general are pretty hard to say start date, finish date. But if you think back to the Great Recession in hindsight, anyway-- it's what started in 2007-- it was obvious. I mean, people were buying homes they couldn't really afford. Interest rates went up. They couldn't afford the homes. They lost them. There were foreclosure signs all over the place.

Now I feel like the warning signs are so, so different and so cloudy and so murky that our judgment is kind of off too. We're in uncharted territory altogether. But the one thing that does look certain at the moment anyway is that the job market is in fact strong and the labor market is strong. So there's no sign of any kind of recession activity there.

In fact, if you look at the job market, it is booming. And when you have a booming job market, you have consumers who are pretty happy. They're out there spending. You have some who have cut back on discretionary costs a little bit. But if you look at service spending, restaurants, hotels, bars, all the travel that's going on, people are really dead set on actually spending and having fun. So that's kind of keeping us afloat.

All eyes are really on the consumer in general going forward because there's a little bit of bubbling going on there. We have seen higher delinquencies in the auto market and in the credit card arena, as well among subprime borrowers. So we're watching that. But I think overall, the consumer is holding pretty strong under these kind of very strange circumstances we're under.

RACHELLE AKUFFO: It's true. Because when you think of how a recession typically goes down and what makes things different this time, you mentioned the tight labor market you have that. Is there anything you think people should be bracing themselves for, especially when you look at the consumer and you see this strong labor force as well?

VERA GIBBONS: Well, you know, I was talking to a bunch of economists, and they did say that some consumers have in fact, made the necessary preparations in case a recession is coming. They've got the emergency fund set up. They're trying to pare down the credit card debt. But you have the subprime borrowers which aren't really paying particular attention to because we're seeing those guys, as I mentioned, default on the auto loans, credit card defaults or delinquencies are rising a little bit as well.

You try to get ahead of it as much as possible. The one thing that's holding us together right now is that very strong labor market. But there are some people who are saying more layoffs are coming. Just because we've had them in the tech sector in the media sector that they've been limited to a few sectors, doesn't mean that we're not going to see widespread layoffs down in the future.

I think the market behavior is very indicative of what's going on. It's pretty wonky. It's very volatile. And again, that is a forward indicator. So to be determined.

RACHELLE AKUFFO: Indeed. Well, thank you for that breakdown. Yahoo Finance contributor Vera Gibbons, always good to have you on.

VERA GIBBONS: Thank you.