Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Regan, I'm a senior editor.
Speaker 2: At Bloomberg, and I'm Aldana Hayrick, Across Acid reporter with Bloomberg.
Speaker 1: This week on the show, Well, the Federal Reserve did
Speaker 1: not raise interest rates at their meeting this week, but
Speaker 1: nonetheless the markets freaked out a little bit, probably because
Speaker 1: policymakers released projections showing that they don't expect to cut
Speaker 1: rates as aggressively as previously expected next year. Stock sold off,
Speaker 1: and so did the bond market, especially on the long
Speaker 1: end of the curve, with the ten year treasury yield
Speaker 1: reaching the highest level since two thousand and seven and
Speaker 1: the thirty year yield reaching the highest since two thousand
Speaker 1: and eleven. While the latest update from the Fed makes
Speaker 1: it look more and more like they're expecting a soft
Speaker 1: land for the economy, well, the markets are taking it
Speaker 1: pretty hard. We'll get into it with the chief US
Speaker 1: economist at a major Wall Street bank, but they'll dona first.
Speaker 1: I have to say it's been a while since we
Speaker 1: bugged our listeners to go and rate and review the
Speaker 1: show on Apple Podcasts. I think we need a new
Speaker 1: gimmick to entice them.
Speaker 2: Do you have one in mind?
Speaker 1: Funny you should ask I do?
Speaker 2: What is it? Bo?
Speaker 1: I'm thinking since you're a Buffalo Bills fan, you could
Speaker 1: do like the Bills fans do at the tailgates and
Speaker 1: like smash a card table.
Speaker 2: Yeah, you have to jump. You have to jump through
Speaker 2: the table.
Speaker 1: Jump through the table.
Speaker 3: Yeah.
Speaker 1: How about would you think you could say we get
Speaker 1: one hundred more reviews? You could how.
Speaker 2: About things one hundred more reviews and they make it
Speaker 2: to the super Bowl?
Speaker 1: Both of those?
Speaker 2: Yeah, to those I don't know to be too much.
Speaker 1: Then you'll you'll jump on a card tabe.
Speaker 2: Yeah all right, but the one hundred.
Speaker 1: Reviews being the first first order of business, it'll be
Speaker 1: a weird expense account item. Smashed the card tape? Okay,
Speaker 1: I think I.
Speaker 2: Can expense it to Bloomberg. I was just I would
Speaker 2: do it just for fun. I don't know if our
Speaker 2: guest is a football fan at all, but we have
Speaker 2: Ellen Zenner, chief US economist at Morgan Stanley, on this weekend. Ellen,
Speaker 2: I'm so happy to have you on the podcast. Thank
Speaker 2: you so much for joining us.
Speaker 3: Hi, guys, I love it. Thanks for asking me.
Speaker 2: Are you a Buffalo Bills fan. A secret Buffalo Bills
Speaker 2: fan by any chance.
Speaker 3: No, not even secret. I was quite into college ball
Speaker 3: growing up in Texas. That was really the Texas thing,
Speaker 3: high school and college ball, and never been a big
Speaker 3: fan of the NFL, although my dad was a big
Speaker 3: Saints fan, New Orleans fan.
Speaker 1: What if I remember correctly, you went to Colorado? You
Speaker 1: have coach Prime.
Speaker 3: Now, I did go to Colorado, but you know, I'm
Speaker 3: a walking paradigm. I started at University of Texas and
Speaker 3: never stopped being a Longhorns fan.
Speaker 2: Like I am loyal to the Bills. But Ellen, we
Speaker 2: had this big week, which is why I'm so thankful
Speaker 2: you were able to join us this week because, as
Speaker 2: Mike mentioned, markets sort of had a little freak out
Speaker 2: post the FED meeting. So just to start, can you
Speaker 2: give us your big takeaways from the FED meeting.
Speaker 3: Yeah. Look, I think it's undeniable that the statement was
Speaker 3: more hawkish than we expected. I think for me, you know,
Speaker 3: in the current conditions paragraph, which is how the FED
Speaker 3: describes sort of what's going on or what's happened since
Speaker 3: their last meeting, they you know, it is a fact
Speaker 3: that jobs have slowed, but remained strong, and they noted
Speaker 3: that it is also a fact that inflation has come
Speaker 3: down quite a bit but remains robust, and they did
Speaker 3: not note that. And sometimes what they leave out can
Speaker 3: be just as important as what they put in. I mean,
Speaker 3: Chairpal did note it in the press conference several times
Speaker 3: that core inflation has come down significantly. Well, why didn't
Speaker 3: they just note that fact in the statement. It's because
Speaker 3: you're far from declaring victory. God forbid that the market
Speaker 3: thinks that you're declaring victory over inflation and you get
Speaker 3: some easing and financial conditions you hadn't planned on when
Speaker 3: type financial conditions is really what they need to sustain
Speaker 3: to be sure that the economy is going to continue
Speaker 3: to slow. It's been growing much too quickly this year.
Speaker 1: For I'd like to sort of just step back and
Speaker 1: talk about say the last three or four years, you know,
Speaker 1: I feel like for the art or science of economics,
Speaker 1: however you view it, it's been a really weird few years.
Speaker 2: You know.
Speaker 1: We've had this massive shutdown of the economy like nothing
Speaker 1: we've ever seen, then this massive stimulus to bring it
Speaker 1: back to life, followed on by you know, a major
Speaker 1: war in Europe, what's it been like to be a
Speaker 1: really high level, very closely watched economists during all this?
Speaker 1: You know, are there lessons to be learned? Because I
Speaker 1: feel like it was so hard to predict and forecast
Speaker 1: anything throughout all of this. What's it been like during
Speaker 1: this whole last few years.
Speaker 3: Gosh, well, it's it's been exciting, to say the least.
Speaker 3: I think, you know, the word humble comes to mind.
Speaker 3: You know, it's been a humbling experience, and it's taught
Speaker 3: me and my team to be very creative in our
Speaker 3: approach to thinking about the outlook. And frankly, I've been
Speaker 3: looking forward to, you know, sort of the period that
Speaker 3: we're going through now and next year, where you know,
Speaker 3: it's a period of normalization as we get COVID further
Speaker 3: into the rear view mirror. I think, you know, what
Speaker 3: I'm starting to realize was some of the incoming data
Speaker 3: is that it seems like we go through these big
Speaker 3: crises and there's a lot of never will we ever
Speaker 3: and this after two thousand and eight as well, never
Speaker 3: will we ever take on debt again, never will we
Speaker 3: ever buy homes again? And guess what we do? We
Speaker 3: do all those things again? But you just have to
Speaker 3: get the crisis further into the rearview mirror. Folks were saying,
Speaker 3: we'll never go see a movie again, We're never going
Speaker 3: to the theater ever again. And you know, I'm pretty sure
Speaker 3: that Barben Hibern brought in a billion dollars through the
Speaker 3: box office. So I'm looking forward to more of the
Speaker 3: datas that folds to just see a normalization of the economy.
Speaker 3: I don't think a whole lot has changed in the
Speaker 3: way we go about our business. I think we just
Speaker 3: have to get a lot of these big distortions that
Speaker 3: are now unwinding out of the way.
Speaker 2: So you say you've been very creative in your approach,
Speaker 2: what does that entail? Because I remember during the pandemic
Speaker 2: a lot of people were looking at these sort of
Speaker 2: alternative data, looking at off occupancy rates, as you mentioned,
Speaker 2: movie theater going, you know, foot different foot traffic. All
Speaker 2: kinds of different measures had come about during the pandemic.
Speaker 2: They've sort of fallen off to the wayside more recently.
Speaker 2: But so what types of things does your team look
Speaker 2: at now?
Speaker 3: Yeah, Well, I think to me, what was really lucky
Speaker 3: is that even before the pandemic hit, you know, technology
Speaker 3: was advancing in a way that we were getting more
Speaker 3: and more private data sources and high frequency data forge sources,
Speaker 3: daily data that was becoming more prevalent, so that we
Speaker 3: were starting to find new ways to track the economy.
Speaker 3: The need for that during COVID really escalated and so
Speaker 3: you know, this is where we were using Google Earth
Speaker 3: to look at ships that were parked offshore that were
Speaker 3: not able to be unloaded, and more robust use of
Speaker 3: things like Google Maps and Open table to figure out
Speaker 3: a people were starting to move and shake again and
Speaker 3: going out to dine and that sort of thing, and
Speaker 3: that kind of data. Those data sets proliferated, and hey,
Speaker 3: for a time they were free. Now those data sets
Speaker 3: have become more and more expensive. But using those data
Speaker 3: sets instead of just you know, the traditional or in
Speaker 3: addition to the traditional government and other private sources that
Speaker 3: were already prevailing before COVID really helped us stay more
Speaker 3: abreast of exactly what was going on on the ground.
Speaker 3: And I tell you what, the fact that all of
Speaker 3: that's been introduced and used more robustly now means that
Speaker 3: also we have an even more and even larger portfolio
Speaker 3: of data to rely on during government shutdowns when the
Speaker 3: government data is not available. We used to fly blind
Speaker 3: during government shutdowns. And I say this because we're facing
Speaker 3: a possible government shutdown on September thirtieth, and depending on
Speaker 3: the breadth and the length of that, we might start
Speaker 3: to miss data points. And luckily we've got private sources
Speaker 3: and other high frequency data where we can have some
Speaker 3: sort of idea of what the economy is doing even
Speaker 3: if we're not getting the official government data. And so
Speaker 3: I think even in the field of economics, we've seen
Speaker 3: a good deal of transformation of technology and how we
Speaker 3: use it.
Speaker 1: You read my mind, Allan, because I wanted to ask
Speaker 1: you about that looming government shutdown potential government shutdown, and
Speaker 1: reading one of your recent notes, you seem to think
Speaker 1: that it could be a sort of catalyst for the
Speaker 1: FED to pause again in November. But walk us through
Speaker 1: exactly how you're thinking about it. Is it the lack
Speaker 1: of available data for the FED that would cause that,
Speaker 1: or is it the potential damage to the economy that
Speaker 1: could be done from a shutdown? Little of both. What's
Speaker 1: sort of the implications for us for this one more
Speaker 1: curveball to be thrown at the economy at this point
Speaker 1: in the cycle.
Speaker 3: A good economist always says it's a little bit of both,
Speaker 3: and economists right to added economists, but it really is.
Speaker 3: So in monetary policy making, uncertainty tends to lead to
Speaker 3: policy paralysis. And so certainly when you have a government
Speaker 3: shut down, and the breadth of it matters, right, if
Speaker 3: it's a partial shutdown, there are some agencies that will
Speaker 3: continue to operate, and we can continue to get things
Speaker 3: like hey, roll data, even if we don't get Census
Speaker 3: Bureau data and the like. If it's a full government
Speaker 3: shut down, then you really don't get any of the
Speaker 3: government data. And so if we're lacking data that the
Speaker 3: FED can officially think its teeth into, right, then that's
Speaker 3: going to lead to an inability to make a decision
Speaker 3: about the path for rates, And so that's sort of
Speaker 3: through the lens of the FED becomes foggy. The damage
Speaker 3: to the economy comes from, say a full government shutdown
Speaker 3: where all non essential workers are furloughed. And our estimate
Speaker 3: is that for every week of shutdown, it shaves off
Speaker 3: abouto point two percentage points from GDP growth, And so
Speaker 3: that's where you're actually getting to the meat of it
Speaker 3: that you have an impact on the outlook. Now, we
Speaker 3: can go back and look at past government shutdowns and
Speaker 3: see that, Okay, in hindsight, they were sort of a
Speaker 3: blip in the economic outlook. Because the government opens back up,
Speaker 3: you do have some permanent loss of activity. Workers that
Speaker 3: weren't buying lunch around the agencies, you know, those restaurants,
Speaker 3: coffee vendors, others are not going to make up for that.
Speaker 3: But you know, workers go back to work. Congress has
Speaker 3: always approved back pay for those furled workers, and so
Speaker 3: especially for income, it ends up being a blip for
Speaker 3: the time being. It's something that stays the Fed's hand.
Speaker 3: Now in this case, right, they've got a lot of
Speaker 3: time on their hands. They've got until the end of
Speaker 3: the year to decide if they're going to hike further,
Speaker 3: and they've left the door open tike further if needed.
Speaker 3: I have a strong view that they're done here, but
Speaker 3: they have left the door open. And so this is
Speaker 3: just something that you know, the incoming data that we've
Speaker 3: got over the next several weeks, say a month, tells
Speaker 3: me that it is highly unlikely they hike in November,
Speaker 3: but they still have the December meeting to consider after that.
Speaker 2: What potentially might make them hike in November or December.
Speaker 2: And if they are done here, can you lay out
Speaker 2: your views for what you expect in twenty twenty four,
Speaker 2: because I think you are projecting cuts starting in March.
Speaker 3: Yeah, yeah, that's right. So I think for them to
Speaker 3: hike in November and December, you know, two things have
Speaker 3: to happen. One, they're pleased. Let these seem with increased
Speaker 3: slack in the labor market and the slowdown in job gains.
Speaker 3: They noted that in the statement three month moving averages
Speaker 3: around one hundred and fifty thousand for payrolls. Now, let's
Speaker 3: say that that starts to re accelerate again, and so
Speaker 3: it doesn't look like that slow down in job gains
Speaker 3: is durable. And then you pair that with, say, core services,
Speaker 3: I'm going to strip out durable goods prices because they've
Speaker 3: been in deflation, and that's only twenty five percent of
Speaker 3: the core inflation bucket. And so it's services that really
Speaker 3: matter here. And let's say that core services also reaccelerate,
Speaker 3: and for that to happen, you really need core services
Speaker 3: to pop upward to a round point six percent month
Speaker 3: over month, which would be quite a deviation from the
Speaker 3: current trend. But those things together you could see putting
Speaker 3: a November hike back on the table, putting a hike
Speaker 3: in December solidly on the table. And so you know,
Speaker 3: I've got a strong conviction from the forecast that we
Speaker 3: have for the incoming data that it's not going to
Speaker 3: meet that criteria. But there's there's always a bar, and
Speaker 3: we just think that the bar is higher for them
Speaker 3: to do something further this year in twenty twenty four.
Speaker 3: The cuts that we have there, you know, you mentioned
Speaker 3: that we're expecting them to start in March. We have
Speaker 3: a quarterly paced twenty five basis points a quarter. You know,
Speaker 3: the FED is now expecting two cuts next year, and
Speaker 3: it may be a little tongue in cheek to say,
Speaker 3: but the difference between the Fed's expectation and our own
Speaker 3: is a difference of opinion around the outlook. So we
Speaker 3: have a forecast that this deceller and inflation continues. That
Speaker 3: means that even as the FED holds rates steady at
Speaker 3: between five and a quarter and five and a half percent,
Speaker 3: if inflation is falling, then real rates continue to remain
Speaker 3: very restrictive around that two percent level. In our forecast,
Speaker 3: which is historically quite high. The fed's forecast has real
Speaker 3: rates rising further from around one point nine percent at
Speaker 3: the end of this year to two and a half
Speaker 3: percent next year. You plug that into any macro model,
Speaker 3: and that doesn't look like a FED that's really wanting
Speaker 3: to achieve a soft landing. And I think therein lies
Speaker 3: that the issues that can come about with internal consistency
Speaker 3: when you're forecasting by committee. It's not quite consistent that
Speaker 3: the median forecasts of the FED suggests that real rates
Speaker 3: are going to need to rise six tenths further next year,
Speaker 3: yet they're wanting to achieve a soft lane. There's something
Speaker 3: off there.
Speaker 2: Can you talk about real rates a bit more? Why
Speaker 2: do real rates matter? And can you talk about the
Speaker 2: sort of through line to the real economy.
Speaker 3: Yeah, so real rates matter both from a company perspective
Speaker 3: in terms of profitability, from how restrictive credit is in
Speaker 3: the economy, banking's ability and willingness to lend. And you know,
Speaker 3: if you think about the where the FED thinks the
Speaker 3: neutral rate of interest should be, they think the neutral
Speaker 3: rate of interest is half a percent for the real rate.
Speaker 3: So two percent real rate is really restrictive, really far
Speaker 3: into restrictive territory, and you know, feeding that through into
Speaker 3: macro models would tell you that that's going to have
Speaker 3: a pretty big downward impact on the economy, and I
Speaker 3: think much larger than what the FED thinks is necessary
Speaker 3: in order to flow inflation. I don't think individual policy
Speaker 3: makers are really thinking that we need to have two
Speaker 3: and a half percent real interest rates next year, that
Speaker 3: they need to be two percentage points higher than neutral.
Speaker 3: But that's what it looks like if you were to
Speaker 3: just take their forecasts at face value. The impact to
Speaker 3: the real economy is essentially what we've been seeing, right.
Speaker 3: It's not that the Fed's interest rates have not had
Speaker 3: an impact. You know, we've already gone through a recession
Speaker 3: in housing. We saw the impact on housing first and foremost.
Speaker 3: It's the very interst rate sensitive area of the economy.
Speaker 3: We've seen higher interest rates have the effect of flowing
Speaker 3: demand for credit and credit availability, making credit more expensive.
Speaker 3: We are of the camp that monetary policy works with
Speaker 3: long lags, and that is the biggest disagreement, the outstanding
Speaker 3: disagreement on the FMC. Those that believe monetary policy works
Speaker 3: pretty quickly through the economy and those that believe it
Speaker 3: works with a lag. So while it may look like
Speaker 3: we've escaped unscathed after such a rapid pace of tightening
Speaker 3: and monetary policy, we think that all of the impacts
Speaker 3: have not yet been felt, and that uncertainty alone means
Speaker 3: that there's a good deal of downside risk to the
Speaker 3: economy that we think is out there.
Speaker 1: Obviously, the other big elephant in the room these days
Speaker 1: is the price of oil. West Texas Intermediate is back
Speaker 1: in the ninety dollars a barrel range, mostly a supply
Speaker 1: issue with Russia and some of the OPAC nation in
Speaker 1: Saudi Arabia really limiting production. You do seem out an
Speaker 1: interesting note out on this about a week ago, and
Speaker 1: you know, to summarize and correct me if I'm getting
Speaker 1: this wrong, But basically it seems like you think a
Speaker 1: lot of people are worried about the inflation are aspects
Speaker 1: of oil rising like this, But you point out it
Speaker 1: should take a while for it to feed into the
Speaker 1: core measures of inflation that exclude energy and food, but
Speaker 1: that perhaps that sort of tax on the consumer element
Speaker 1: of oil is a bigger story here. So how big
Speaker 1: of a risk is this oil price shock to both
Speaker 1: sides of the equation, growth and inflation, because I think
Speaker 1: one thing I would point out I think is different
Speaker 1: about this than a lot of oil price shocks. A
Speaker 1: lot of times you get this spike in oil prices
Speaker 1: because of say a hurricane in the Gulf for some
Speaker 1: geopolitical tension that really ratches up the speculation in the market,
Speaker 1: that boosts the price, and all that turns out to
Speaker 1: be ephemeral and short lived. Personally, I'm not sure if
Speaker 1: that's the case this time, with the OPEC producers really
Speaker 1: seeming very happy to keep the price higher for the
Speaker 1: near future. But I'm wondering, how you thinking about it.
Speaker 1: How long do we need to see prices elevated for
Speaker 1: the risk to really become acute, both from an inflationary
Speaker 1: and economic perspective.
Speaker 3: Yeah, so it's great points we like to point to
Speaker 3: weather forecasters and commodity strategist to make us feel better
Speaker 3: as economists when we're trying to get things right in
Speaker 3: the economy. It's a really tough job because there are
Speaker 3: a lot of people that will tell you only geopolitics
Speaker 3: matters for oil prices, and so I have no idea
Speaker 3: where oil prices will go, But I will tell you
Speaker 3: that our commodity stratus do believe, as you noted, that
Speaker 3: this may be more durable, but it is a mixed
Speaker 3: bag for the US economy. When it is a supply
Speaker 3: shock and not a demand shock. Demand shock would be
Speaker 3: that just the strength of the US economy and global
Speaker 3: economy is so great that demand is outstripping supply. That
Speaker 3: tends to have a more muted impact on the economy
Speaker 3: than if it's a supply stock where the amount of
Speaker 3: barrels that were producing globally just drops, And so in
Speaker 3: that case you do get an impact on demand on
Speaker 3: top of the impact on inflation. So we've modeled these changes,
Speaker 3: and a ten percent increase in oil prices does raise
Speaker 3: headline inflation in the US by about thirty five basis
Speaker 3: points on headline over a three month period if you
Speaker 3: just modeled as a one offstock. But the transfer to
Speaker 3: core prices in the US, because really you're only immediately
Speaker 3: impacting transportation prices in core inflation, it's only about two
Speaker 3: to three BIPs, right, two to three basis points on
Speaker 3: core inflation, So a really really small effect. What outweighs that?
Speaker 3: And I think you were getting at this and what
Speaker 3: we addressed in the note is that it acts as
Speaker 3: a tax on households. If you are paying more to
Speaker 3: gas up at the pump, then you are having to
Speaker 3: pull spending from elsewhere, and so it tends to reduce
Speaker 3: consumer buying power and weighs on not just real income growth,
Speaker 3: but real consumer spending, and that is the predominant concern
Speaker 3: of the FED today. So it's really a blessing in disguise.
Speaker 3: If you're the FED and you have been trying to
Speaker 3: slow the economy and the consumer has just been frustratingly resilient.
Speaker 3: If you can get some additional help from higher gas prices,
Speaker 3: then you might welcome that. It becomes problematic only if
Speaker 3: it is sustained over longer periods of time, and then,
Speaker 3: as chair Pal noted at the FED meeting, it then
Speaker 3: becomes something that could pose a risk to inflation expectations,
Speaker 3: raising inflation expectations, but it does have to be sustained
Speaker 3: for some time.
Speaker 2: So, Mike, rising oil prices were another elephant in the room.
Speaker 2: But I can actually name like a bunch more, including
Speaker 2: that consumer loan repayments are restarting. We also had a
Speaker 2: survey that we had done at Bloomberg, where the majority
Speaker 2: of respondents we had asked about consumer spending said that
Speaker 2: personal consumption. They see personal consumption going down in the
Speaker 2: first quarter of twenty twenty four. So how do you
Speaker 2: see all of these factors impacting the consumer?
Speaker 3: Yeah, so I think the student loan, the resumption of
Speaker 3: the student loan debt payments is a great point to note.
Speaker 3: We have tried to use surveys to get at the
Speaker 3: percentage of student loan borrowers that say they are going
Speaker 3: to start paying that back right away because there is
Speaker 3: an option to be able to delay that into the
Speaker 3: second court, sorry, the first quarter of twenty twenty four,
Speaker 3: and I like to think that, you know, as good
Speaker 3: debt holding Americans, we will delay the payment as long
Speaker 3: as we can. Probably does create a drag in the
Speaker 3: fourth quarter and the first quarter. I will note that
Speaker 3: it has been surprising the amount of payments that have
Speaker 3: been resumed already in anticipation of that. But you can
Speaker 3: imagine that that folks that have decided to start repayments
Speaker 3: already are those that want the balance to be lower
Speaker 3: when the interest rate is again applied, and of course
Speaker 3: those that have paid it down already or already restarted
Speaker 3: that are obviously not the lower income student borrowers. Really
Speaker 3: those are going to be the ones that are delaying
Speaker 3: the payments the most. But we have taken into account
Speaker 3: not just sort of the payback from as I mentioned,
Speaker 3: you know, Barbenheimer hitting in the third quarter, Taylor Swift
Speaker 3: and Beyonce Tours peaking in the third quarter. You're going
Speaker 3: to have some payback in the fourth quarter from that
Speaker 3: plus the start of the student loan repayments. And so
Speaker 3: we already have forecast that consumer spending is in decline
Speaker 3: in the fourth quarter. Now, some of that are just
Speaker 3: those one off impacts fading, but I think further weight
Speaker 3: on consumer spending in the first quarter is likely as well. Now,
Speaker 3: is the consumer falling off a cliff? No, we think
Speaker 3: that in the grand scheme of things, when you smooth
Speaker 3: through these impacts, it really shows that consumer spending is
Speaker 3: just continuing to slow. And there is sort of a
Speaker 3: little spoken about silver lining here, and that is in
Speaker 3: the second quarter, wage growth among lower income households started
Speaker 3: to turn positive on an inflation adjusted basis because inflation
Speaker 3: has come down. Now higher gas prices can throw a
Speaker 3: monkey wrench in that temporarily, but that means that we
Speaker 3: have started to get some modicum of buying power back
Speaker 3: for lower income household So I think there's plenty here
Speaker 3: that tells me that the consumer should not fall off
Speaker 3: a cliff, but the consumer spending will be slowing, and
Speaker 3: I think that will You know, seventy percent of the
Speaker 3: economy is consumer spending, and so that's critical to the
Speaker 3: said who's looking to further depressed inflation going forward.
Speaker 1: Now, Ellen, one more final elephant in the room for
Speaker 1: this economy. Maybe it's not an elephant, I don't know,
Speaker 1: Maybe it's a baby elephant or something smaller. I don't know,
Speaker 1: a donkey or something. But the United Auto Workers strike.
Speaker 1: And I'm not sure if your team have done any
Speaker 1: work on this, but it's again one of those things
Speaker 1: where I think there's a little bit of a risk
Speaker 1: to inflation and a little bit of a risk to growth.
Speaker 1: You know. Obviously, however this has resolved, it's going to
Speaker 1: be a significant wage increase for a very influential union
Speaker 1: that may inspire other unions, other workers, or other labor
Speaker 1: groups to see khier wages. Also could cause the price
Speaker 1: of cars to go up again. That was a pretty
Speaker 1: big part of the CPI numbers for certain months used cars,
Speaker 1: and obviously if there's a lot of lost production, there's
Speaker 1: going to be a drag on growth. But how big
Speaker 1: of a deal is it if it lingers on if
Speaker 1: the strike expands to other plants. You know, is it
Speaker 1: a risk to the headline numbers in either CPI and
Speaker 1: GDP or is it Does it not rise to that level?
Speaker 3: Yeah, I think that. You know, autos are a major
Speaker 3: sector in the US, and right now the strike has
Speaker 3: started off small. It's not impacting a good deal of workers,
Speaker 3: right so it's not been as big of a drag
Speaker 3: as we initially on say the employment report. But let's
Speaker 3: say it extends for some time more and broadens out
Speaker 3: to capture more workers. So, first and foremost, if it
Speaker 3: extends through mid October and starts to capture the survey
Speaker 3: week in which we survey employers for their level of payrolls,
Speaker 3: when you could get something like a negative payroll print
Speaker 3: in the month of October, which would be reported in
Speaker 3: early November. So again go back to the additional fog
Speaker 3: this creates on the data front for the said in
Speaker 3: terms of GDP, you know, it's interesting there there seemed
Speaker 3: to be some evidence that automakers were ramping up production
Speaker 3: ahead of the planned strike, But it does interrupt production
Speaker 3: for the time being during the strike, and then that resume,
Speaker 3: so you would have further weight on fourth quarter industrial
Speaker 3: production and GDP if the strike goes on for a while.
Speaker 3: Average our earnings is interesting because it's not just the
Speaker 3: fact that you know, if you count the UAW strike alone,
Speaker 3: it's not that big of an aggregate wage bill to
Speaker 3: really move the needle nationwide. But as you say, what
Speaker 3: if there are spillovers, what if other unions take the
Speaker 3: example of UPS and UAW and start to follow suit,
Speaker 3: you start to get a notable impact. If say, you're
Speaker 3: pulling in the majority of all union workers in the US.
Speaker 3: So it does take a significant wave capturing almost all
Speaker 3: union workers to really show up on average hourly earnings
Speaker 3: in a meaningful way. But I think that I would
Speaker 3: just take it at the at its least, it adds
Speaker 3: to all of that data fog we've been talking about
Speaker 3: that it will make it very difficult for the FED
Speaker 3: to hike rates further this year.
Speaker 2: Ellen, I have them millien more questions for you, So
Speaker 2: I'll just I'm going to combine two of them very quickly,
Speaker 2: because I think this is important to bring up. One
Speaker 2: is about your track record, which you've been spot on
Speaker 2: about the soft landing narrative. I think you've been calling
Speaker 2: for a soft landing for quite a while, so I
Speaker 2: wanted to ask you about that. But I also want
Speaker 2: to ask you about I don't know if ironic is
Speaker 2: the right word or word we can use, but is
Speaker 2: it around ironic that recession odds have gone up just
Speaker 2: as people have priced out a recession.
Speaker 1: Yes.
Speaker 3: I think those are great questions, and it gives me
Speaker 3: a chance to pat myself on the back, which economists
Speaker 3: to have a rare opportunity to do. And we have
Speaker 3: been calling for a soft landing since February of last year,
Speaker 3: and we could do a whole other podcast on just
Speaker 3: why that is. But you know, I think what I
Speaker 3: would like to impart is that even as I've had
Speaker 3: that long soft landing narrative and others have finally grabbed
Speaker 3: onto that, I have not reduced my recession probability. First
Speaker 3: of all, let me just say any economist that says
Speaker 3: they're accurate more than two quarters out is just lying.
Speaker 3: You can get the narrative right. You almost always get
Speaker 3: the numbers wrong. And so with that being said, I'm
Speaker 3: very confident that we have enough momentum in the economy
Speaker 3: to get us through the next six months, and so
Speaker 3: I think for the next six months the odds of
Speaker 3: recession should be lower. I think when you go out
Speaker 3: of full twelve months, which when we talk about recession probabilities,
Speaker 3: it's always over a twelve month horizon. The six months
Speaker 3: beyond that I am not so certain about. I think
Speaker 3: there's been so much monetary policy tightening that I do
Speaker 3: believe has not all come through. I think a lot
Speaker 3: can go wrong with the economy the further you go
Speaker 3: out on the horizon, and so I have not reduced
Speaker 3: my recession probability that within the next twelve months there's
Speaker 3: a forty percent chance we have a downturn. I'm confident
Speaker 3: it will be mild, but I do think that we
Speaker 3: have to be realistic and not reduce the probability of
Speaker 3: recession too much, just because today growth remains very resilient.
Speaker 1: Well Ellen Zendner, chief US economist at Morgan Stanley, thank
Speaker 1: you so much for joining us today and sharing your thoughts.
Speaker 1: A lot to think about. Can't let you go quite
Speaker 1: yet though, however, we do have attrition on the show,
Speaker 1: where we must share the craziest things we saw in
Speaker 1: markets this week. I'm going to go first. Mine's a
Speaker 1: little stale. It's almost two weeks old, so forgive me
Speaker 1: wil Donna. All Right, Wall Street Journal story about California
Speaker 1: real estate, particularly the Brady Bunch House. Did you watch
Speaker 1: The Brady Bunch as a kid, fil Dona, I did not.
Speaker 3: You know, she might be a little bit younger than us.
Speaker 1: I'm dating myself here, Ellen to some degree. But the
Speaker 1: famous house you see the picture of it at the
Speaker 1: beginning of every show and every commercial break. It recently
Speaker 1: went on sale, and so it's time to play the
Speaker 1: prices precise and you guys have to guess what the
Speaker 1: sale price was for the Brady Bunch House. I'll give
Speaker 1: you a little more details. It was previously bought by
Speaker 1: HGTV and they did a whole show about remodeling the
Speaker 1: inside of it to make it look like the house
Speaker 1: on the show, which I'm not sure boosted its value
Speaker 1: because it's all dated seventies appliances and furniture, and I'm
Speaker 1: not sure that's what your average La house hunter is
Speaker 1: looking for. But it did sell. So the question is
Speaker 1: what do you think the Brady Bunch House just sold for?
Speaker 2: So it's in LA, it's in Los Angeles. How many rooms?
Speaker 1: It's huge? Actually five bedrooms. Total square footage approximately five
Speaker 1: thousand wow. With they added bedrooms and a second floor
Speaker 1: when they did this whole remodel to I guess recreate
Speaker 1: the kids rooms and everything. So five bedroom, five thousand
Speaker 1: square foot house in LA not cheap. They don't tell
Speaker 1: you this straight doesn't tell you what neighborhood in LA, which.
Speaker 2: Might Oh, that was gonna be my next question. Okay,
Speaker 2: I'm gonna go with three point five million dollars.
Speaker 1: Three point five million dollars, Ellen, what's your bid for
Speaker 1: the Brady Bunch House, completely remodeled to match interior and experts?
Speaker 3: Can I prices right?
Speaker 1: Say?
Speaker 3: Three three and a half and one dollar? No, I'll
Speaker 3: say I don't know. If I think about the square footage,
Speaker 3: the cost for square footage in LA, even though we
Speaker 3: don't know the neighborhood, I think I would say closer
Speaker 3: to nine million.
Speaker 2: Wow.
Speaker 1: I would have guessed somewhere in that vicinity. I'll be honest.
Speaker 1: A five thousand square foot house in LA five bedrooms,
Speaker 1: but as the buyer points out, it actually sold for
Speaker 1: less than what HDTV bought it for because the buyer
Speaker 1: thinks no one wants to live in a house with
Speaker 1: these seventies of liots is a shy carpet, and so
Speaker 1: three point two million.
Speaker 3: Dollars, Oh my gosh, wow, we all overget.
Speaker 1: Even if you told me a five thousand square foot
Speaker 1: house in LA with five bedrooms, I would have gone
Speaker 1: over three point two.
Speaker 3: I mean buy it and got it, although that might
Speaker 3: not be allowed now if there's a historical landmark designation
Speaker 3: on it, as you know, that's going to reduce the value.
Speaker 1: That's right, that's right.
Speaker 3: Yeah.
Speaker 1: I don't know if a recreation of the historical interior accounts,
Speaker 1: but maybe I don't know.
Speaker 2: That's all I got. I have a good one. It's
Speaker 2: also a Wall Street Journal story. The headline is A
Speaker 2: Mother's Love a bargain at four hundred and fifty dollars
Speaker 2: a year plus applicable fees. It's about parents hiring concierge
Speaker 2: services for their college students. So you send your you
Speaker 2: send your kid off to college, then you hire somebody
Speaker 2: to be their mom. The mom can hug bring you
Speaker 2: soup when you're sick, pick up your medicines. Furniture assembly
Speaker 2: is one of the things for some reason they give you.
Speaker 2: They give students rides to and from the airport.
Speaker 1: Just a furniture assembly.
Speaker 2: I know. They go to doctor's appointments with people. It's just, yeah, you.
Speaker 1: Can I hire one of these for myself.
Speaker 2: Surely is a stressor?
Speaker 3: Yes it is. It really is a real stressor.
Speaker 1: That alone is worth the four hundred and fifty bucks.
Speaker 1: That's pretty good. Don't let my daughter at the University
Speaker 1: of Maryland find out about this. I've got enough expenses
Speaker 1: for lated education. That's pretty good. How about you, Ellen,
Speaker 1: Have you seen anything crazy lately?
Speaker 3: I'm going to still go back to, you know, sort
Speaker 3: of all the wrap up reports after the said meeting,
Speaker 3: where it just seemed, you know, why, why does the
Speaker 3: market take the FED at face value and suddenly all
Speaker 3: of a sudden decide that the Fed are perfect forecasters
Speaker 3: and know exactly what's going to happen even out to
Speaker 3: twenty twenty six. Why and so that always astounds me.
Speaker 1: Yeah, yeah, that dot plot was a blessing and a curse.
Speaker 1: I guess I wonder I sometimes wonder if they regret
Speaker 1: introducing that, that maybe it causes more confusion than it
Speaker 1: than clarity that they hope it would cause.
Speaker 3: Yeah, there are definitely those on the SAED that regret it.
Speaker 3: But you know, once the Fed introduces something, it's near
Speaker 3: impossible to take it away. So so chair pal, even
Speaker 3: with chair Pal saying basically ignore the dot plot, it's
Speaker 3: just sort of a fun exercise for nineteen participants to
Speaker 3: air their dirty laundry about what they think about the outlook. Nevertheless,
Speaker 3: markets take it at face value as though that is
Speaker 3: exactly the path that the Fed will follows.
Speaker 1: That's etched in stone, not in you know, light colored pensil.
Speaker 1: That could be a raise at the next meeting, right,
Speaker 1: Alan Zendner, Chief US Economists at Morgan Stanley, thank you
Speaker 1: so much for joining us.
Speaker 3: Good bet, Thank you Ellen.
Speaker 1: What goes up. We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal website and
Speaker 1: app or wherever you get your podcast. We'd love it
Speaker 1: if you took the time to rate and review the
Speaker 1: show on Apple Podcasts so more listeners can find us.
Speaker 1: And you can find us on Twitter. Follow me at
Speaker 1: freak Anonymous Wildna Hirich is at Goildona hira. You can
Speaker 1: also follow Bloomberg Podcasts at Podcasts. What Goes Up is
Speaker 1: produced by Stacy Wong. Thanks for listening, See you next time.