Michael Gapen, Barclays Chief U.S. Economist, joined Yahoo Finance's Jen Rogers, Myles Udland, Andy Serwer, and Dan Roberts to discuss his outlook for the US economy and what the shape of recovery may look like.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance, Myles Udland with you in New York. We're joined now by Michael Gapen, and he is the chief US economist over at Barclays. So Michael, let's just start with where we stand, I think, in the troughing process or trying to get through this initial shock. I think a lot of folks have said, well, the absolute worst of the economic data might be behind us. The data coming up isn't going to be good. I guess where do you see things standing, as we head into the summer months?

MICHAEL GAPEN: Yeah, I think that accurately describes it. The April data, of course, was awful because of the statewide stay-at-home orders. So all of the April data, very unprecedented, very weak. The May data, on an absolute level, of course, is still extremely poor, but it seems better than the April data.

We saw that from the PMIs this morning. Both services and manufacturing still very much in contractionary territory but better than we saw in April. Initial jobless claims, the good news there is they're coming down. Of course, they're about a third of where they were in the early to mid-March or even late March period. But obviously, they're still at unprecedented levels.

So the trajectory seems to be that April would be the trough, in terms of the sharpest contraction in activity. Some better performance in May, as states begin to reopen, and we would expect June to show that further improvement. So if you look at the months within the quarter, April would be the weakest, although the quarter as a whole is still going to be, you know, as bad as we've ever seen, in terms of GDP growth.

MYLES UDLAND: So I want to ask a little bit more about the labor market because we've had, you know, 38 million claims filed in the last seven weeks. And you know, a number of people pointed out that there was the-- that temporary layoff number in the jobs report a couple of weeks ago suggested maybe, you know, there would be kind of mass rehiring of folks. As you look at the labor market right now, we have an unemployment rate that's likely going to head north of-- or to around 20%--

MICHAEL GAPEN: Right.

MYLES UDLAND: --in a couple of weeks. Where do you-- like, do you think that there is the potential for a big wave of rehiring, as we head into the summer, or have we maybe over-estimated, perhaps, the stickiness of some of these furloughs and temporary layoffs and things like that?

MICHAEL GAPEN: Well, I would-- I just remind people, that temporary number came from sampling households, right? What do you think? Do you think this is a temporary layoff, or do you expect to be laid off for longer? And I think the answer from the worker side of the view is I kind of expect this to be temporary.

And I think you're right that there's probably a fraction of this employment that will come back-- or this unemployment that will come back relatively quickly. And by that, I mean over the three to five month kind of horizon. But we still expect the unemployment rate to be around 10.5% in Q4, so still double digits. So we might re-employ half of those who were unemployed by the end of the year, and we think it'll be a tougher slog for the remaining because we don't believe all these service sector jobs are coming back and we're going to have to operate with less.

So as I'm sure it's been well discussed on your show, restaurants won't be back to full capacity, neither will travel, leisure, and hospitality. So yes, there will be, I think, a significant amount of re-employment, but it's going to be a long slog to get back to full employment.

ANDY SERWER: Hey, Michael. When it comes to calling this a recession, you know, we rely on the-- either the two quarters in a row or the NBER. But what about Michael? Does Michael just say this is a recession? You tell your bosses, your boss ask, you officially-- can we officially characterize this as a recession or even maybe something worse?

MICHAEL GAPEN: Yeah, absolutely. I think we started calling that in March when we saw the surge in unemployment claims. Because then it was clear to us that we were-- we would get negative growth in the first quarter and likely a substantial contraction in the second. So based on the labor market and the amount of firing, I think it's very difficult to characterize it as anything else other than a recession. So what you want to call it, the COVID recession or the COVID pandemic, I think we're definitely in that, and we've been using that type of terminology since March.

JEN ROGERS: So Michael, we head on Yahoo Finance today the CEO of Coke, and Brian Sozzi, one of our anchors, was on breaking it down for us just a little bit ago. And he talked about how we might be seeing Coke prices be cheaper in the future. And it got me thinking about deflation again. And I want to know if you think that that's a risk. Like, if Coke is going to be cheaper here, is that a sign that we could be seeing deflationary pressures for other companies, and is that a concern?

MICHAEL GAPEN: Yes, we actually think risks are still to the downside. We think core inflation will fall to about 0.5% year on year in Q1 of next year. We think all of this is really based around a drop in demand, a still strong dollar, a lot of discounting that's likely to go on. So we have a lot of disinflation in front of us.

And I'd like to add one additional thing that we're keeping track of very closely. Normally, we would say the US exhibits nominal wage rigidity. We're very reluctant to cut wages in downturns. But this time around, we're reading a lot of stories, seeing a lot of corporate earnings reports that suggest there are outright cuts in wages and salaries, which could mean downward-- even more downward pressure on inflation in the near term, meaning over the next three to four quarters.

So it's not unrealistic to think that core inflation could dip into deflation temporarily. To get a-- you know, a debt deflationary spiral, you'd need a resetting of inflation expectations, maybe a W-shaped scenario. But we clearly believe that this is disinflationary, and we wouldn't be surprised if some nominal wage flexibility gives you outright deflation for a couple of months, if not a couple quarters. I think that's very much within the realm of possibility.

MYLES UDLAND: And then Michael, last before we let you go, I don't know if you guys are thinking about this in terms of any of these letters, but I'm sure that you have many clients asking you, is this a V, a U, a W, so on. How are you responding, I guess, to that line of inquiry?

MICHAEL GAPEN: So I'm calling it a reverse J.

ANDY SERWER: Seriously?

MICHAEL GAPEN: I'm trying to come up with something new. And the idea being, you are likely to see a pop in activity in the third quarter, the change in growth rates-- a strong growth rate in the third quarter, but we don't make it all the way back. So you drop down, it comes back, and then you get the slow, gradual recovery. So a reverse J is what I call it.

ANDY SERWER: It makes sense. I like it. We're all drawing it right now.

MYLES UDLAND: I was--

MICHAEL GAPEN: --drawing it.

ANDY SERWER: Yeah, right.

MYLES UDLAND: I was just going to say, that is the first time we have heard that on our air. That's the first time I've seen that really kind of mentioned anywhere, so innovation in the letter space. Michael Gapen with Barclays, always great to get your thoughts. Thanks so much, and we'll talk to you soon.

MICHAEL GAPEN: Thank you.