A MARTÍNEZ, HOST:
The stock market sell-off has prompted broader concerns about the strength of the economy. Market gains since November's election have been lost. And the S&P 500 - that's an index of top-performing companies - dropped 9% below last month's all-time high. As consumer sentiment is down and some banks cut growth forecasts, some wonder if the U.S. might be headed for a recession. U.S. Commerce Secretary Howard Lutnick on "Meet The Press" this weekend said this.
(SOUNDBITE OF TV SHOW, "MEET THE PRESS")
HOWARD LUTNICK: Absolutely not. Donald Trump is a winner. He's going to win for the American people. That's just the way it's going to be. There's going to be no recession in America.
MARTÍNEZ: For more, I'm joined now by Michael Gapen. He is the chief U.S. economist for Morgan Stanley. So Michael, there is that saying that I've been hearing the last few days is that the market is not the economy. But with the tariffs on and off, the stock market fluctuating, and then that drop in consumer spending, what's the likelihood of a recession right now?
MICHAEL GAPEN: Hello. Good morning. I do think the likelihood of a recession has risen. You know, pegging it to a particular probability is hard. Maybe 20%, 25%, so maybe twice as high as you might have in any normal given year. So the probability has risen, given the combination of policies, tariffs, spending cuts, immigration controls, which all tend to soften activity in the near term. So if you put all of those in place, I think you do have to conclude recession odds have risen. Whether we get one or not is, I think, still open for debate.
MARTÍNEZ: Now, your bank, Morgan Stanley, has lowered growth expectations while raising inflation expectations. What does that mean for people?
GAPEN: Well - so the latter, in terms of raising inflation - that comes from the tariff story, right?
MARTÍNEZ: OK.
GAPEN: Tariffs are essentially a tax on consumption - you pay more to import that good, so the cost to the consumer ends up rising. So this is not necessarily about services, but mainly about goods and products that we import. So one of the simple tenets of economics is if you make something more expensive, you get less of it. So less...
MARTÍNEZ: Ah, OK.
GAPEN: ...Trade activity tends to mean growth is a little softer. But you impose tariffs, it tends to push inflation higher in the short run. So that's the balance we're considering.
MARTÍNEZ: Now, President Trump has said this is a period of transition, and it could lead to a stronger position down the line. Could he be right?
GAPEN: Yes, I think that's the - that's essentially the argument the administration is making. The configuration of the global economy, in their opinion, has not been beneficial for America. There's obviously disagreement about that statement. But if you're trying to - in economics, we would say transition to a new equilibrium, it tends to mean there's a disruptive period of transition. And so you would hope the costs you pay in the short run are outweighed by the gains in the long run, but those short-run costs tend to be more obvious. The gains over time, we're never quite sure if they materialize. So that - but that is, I think, the argument they're making and why we might see some softness in the near term.
MARTÍNEZ: Now, according to the National Bureau of Economic Research, the definition of a recession - of a U.S. recession is, quote, "a significant decline in economic activity that is spread across the economy and that lasts more than a few months." Now, Michael, I bring this up only because I remember in the last few years, and especially in the Biden administration, there was always this debate - are we in a recession? Are we not in a recession? So what specific thing could someone point to to say, yes, that fits the definition of a recession?
GAPEN: Yeah, so you make a very good point, that there's a lot of things that are happening in the economy at any one time. And so I think the two most important ones that rise to the top of the scale that say, are we in a recession or not? How long did it last? - is employment growth and personal consumption from households. Employment growth - we added 150,000 jobs last month. Certainly, that's lower than prior years, but I would say you need successive months of negative job growth, so outright job declines. Now, we're getting losses at the federal level. But most of our job gains come at the private sector level, so we're still adding jobs. So I would say if the job market turns negative and we're laying off private and public sector workers, that's the key No. 1 criterion. After that, I'd say it's more about spending by households. Personal consumption...
MARTÍNEZ: OK.
GAPEN: ...From households is about 70% of total economic activity in the U.S. And obviously, the labor market and what households spend are closely tied together.
MARTÍNEZ: OK.
GAPEN: So I would look at those two items - unemployment and spending by households.
MARTÍNEZ: That's Michael Gapen, chief U.S. economist with Morgan Stanley. Thanks a lot. Transcript provided by NPR, Copyright NPR.
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