What investors need to know as debt ceiling votes loom

Comerica Bank Chief Economist Bill Adams joins Yahoo Finance Live to discuss what to watch this week, including economic data and earnings reports, the upcoming Fed meeting, and the debt ceiling.

Video transcript

BRAD SMITH: We're joined by Bill Adams, Comerica Bank chief economist. Bill, great to have you here. This morning, you know, we've got an abbreviated trading week, however, still, as Josh was laying out, a bevy of economic data plus some earnings reports that are coming forward that will really give us a signal of where consumers, both kind of the end consumer sitting at home or the business consumption as well, where that's continuing to stand right now. What most notably would you be paying attention to over the course of this week?

BILL ADAMS: I think the big releases this week are obviously that jobs report on Friday. But the other one is going to be the survey of manufacturing purchasing managers. That's the people who are buying the inputs to manufacturing businesses coming out this week. And that is a really great survey for measuring price pressures in the business to business part of the economy.

We have seen inflation moderating there from where it was in 2022. But in the last couple of months, it's sort of treaded water at relatively high levels, so I'm going to be watching that report to see whether the prices component of that survey points to further moderation in inflation.

JULIE HYMAN: It doesn't-- I mean, the PCE was not terribly encouraging was it, Bill, that we got last Friday. One of our earlier guests pointed out that the market kind of shrugged it off here. Is there just this belief that we are going to see deceleration in inflation gains? And you know, it seems like the data is not necessarily supporting that.

BILL ADAMS: Yeah, there's a conflict between the data in hand from the PCE or the CPI out earlier in the month versus what you get from business surveys or from consumer surveys where you do see a little more progress on inflation coming down. And the catalysts of high inflation in 2021 and 2022 also seem like they should not be as much of a problem going forward. You do see a little bit more softness in the labor market in some of those business and consumer surveys.

Like in the Conference Board survey out this morning, if you look at the balance of consumers who say that jobs are plentiful versus consumers saying that jobs are hard to get, the labor market still looks solid but it does not look as strong as it did earlier this year, and it looks considerably less tight than it did six or 12 months ago. And that is going to feed into less wage growth over time, which not as good for wage earners but good for inflation and services prices where the cost of labor is a big input to what businesses have to pay to provide those services to consumers.

BRAD SMITH: If we did see more than 200,000 jobs get added, does that automatically-- as Citi was pointing out or at least expects, does that automatically mean that we see potentially two more rate hikes?

BILL ADAMS: I think the Fed is more concerned about inflation than the labor market right now. And I think the data they're watching more closely are those inflation data. We're going to get another CPI report out immediately before the Fed's June decision. And I think an upside surprise in that report will probably nudge the Fed toward another quarter percentage point rate hike. But I think, more likely than not, they're probably still on hold in June.

With that said, it's a close call, but I think the decision is really going to be more determined by the inflation reports again than by the jobs report. The Fed knows that the labor market's tight. I think the June-- the release of the May jobs report at the end of the week is likely to still show that even with job growth a little faster, a little slower, the unemployment rate around a half century low points to a tight labor market.

JULIE HYMAN: Bill, we haven't talked about the debt ceiling yet I think in part because we're all too happy to put the thing behind us. But I mean, when all is said and done, was it a non-event?

BILL ADAMS: It looks like the debt ceiling is getting closer to resolution where not everything's done yet. Chair Yellen said that she thinks the Treasury has about five or 10 days before they run out of cash. Now, historically, the Treasury has a couple of other tricks up their sleeves that-- where they can extend that deadline.

But it does look like we're set to get a deal. I think that's going to result in federal government expenditures growing a little slower than inflation in 2024 which should contribute to a softer economy overall, slower growth, and helping to bring inflation down. So I think it's resolving. Basically, if you'd asked me 12 months ago to guess what the 2023 debt ceiling deal would look like, I'd say something like this. It does seem to be resolving close to expectations.

BRAD SMITH: OK. And so yeah, as that is finally perhaps coming to a close here, the attention of course shifts back to and really has always been on the Fed over the course of this year but the debt ceiling at least giving Fed Chair Jay Powell a second to go sit by the pool for a moment at least. But now if we go into the tenor of what these talks continue to hold within the Fed, is there anything that we should be watching for to, say, on the other side of this that they could see reason to cut?

BILL ADAMS: I think the Fed definitely is monitoring downside risk to the economy from, you know, increased tensions in the financial system. For example, credit spreads have widened over the last-- last two months, three months. I think they are monitoring the effect of high interest rates on the economy and on the real estate market. But right now, the Fed-- you know, it's important to remember the Fed doesn't have a GDP growth mandate. They don't have an economic growth mandate. They have a maximum employment mandate. And so with the unemployment rate so low, the Fed really is just still focused on inflation. And inflation is too high. And I think their decision about when to stop with rate hikes is really going to be determined by inflation slowing or maybe continuing to surprise to the upside. I don't think that's likely, but it's still possible. And I think, with that the case, the Fed's rate cut is at least a quarter or two away. And if the economy kind of ekes out a soft landing this year and the labor market stays very tight, I think we could be looking at interest rates above 5% on the Fed funds rate into 2024.

JULIE HYMAN: Well, we'll be watching to see if that's the case. But luckily we have some inflation data heading our way before the Fed's next meeting. To your point, interesting on the manufacturers purchasing survey this week. We'll keep an eye on that and then CPI. Bill Adams, Comerica Bank chief economist, Thank you.