Speaker 1: Bloomberg Audio Studios, podcasts, radio.
Speaker 2: News for our Bloomberg audiences worldwide. I'm David Weston, and
Speaker 2: I'm delighted to be joined by Larry Summer's former Sector
Speaker 2: of the Treasury and now at Harvard. Larry, thank you
Speaker 2: so much for being with us today. The talk of
Speaker 2: the town are the markets. I won't pressure on the markets,
Speaker 2: but tell us about the economic numbers underlying this, because
Speaker 2: there are indications of a slowing economy.
Speaker 3: David, I think we've seen a sea change in perception
Speaker 3: in the just almost two months since President Trump was inaugurated.
Speaker 3: At that time, the prevailing view was very strong economy,
Speaker 3: possibly inflation risk, United States exceptionalism relative to.
Speaker 1: The rest of the world, likely to.
Speaker 3: Manifest itself in continued US out performance. But the combination
Speaker 3: of substantial immigration restrictions, substantial layoffs, impossible prospect from the
Speaker 3: federal government, the damage to US competitiveness and to US
Speaker 3: production done by terrification, and above all a big increase
Speaker 3: in risk premiums have led to sharp productions in spending
Speaker 3: on the part of both consumers and on the part
Speaker 3: of businesses, and even more sharp productions in intended future spending.
Speaker 3: You saw that for example, when Delta Airlines reported a
Speaker 3: soft first quarter and a very soft set of reservation
Speaker 3: requests going forward last night. So you take all that together,
Speaker 3: you take the fact that markets were starting at a
Speaker 3: very high level in terms of valuation, and I think
Speaker 3: you have to say that there's in the range of
Speaker 3: i'd say, still slightly below a fifty percent chance of
Speaker 3: a recession starting this year. You know, I've watched economic
Speaker 3: forecast for a long time, and one thing I've observed
Speaker 3: is when they start being revised in a direction, there
Speaker 3: tends to be momentum, and all the revisions are going
Speaker 3: one way at this point, which is towards less growth.
Speaker 3: So I think we've got a real uncertainty problem. I
Speaker 3: think it's going to be hard to fix that. And
Speaker 3: we're looking at a slow down relative to what was forecast,
Speaker 3: almost for sure, and serious near fifty percent prospective recession.
Speaker 2: So taking you very literally about that close to fifty percent,
Speaker 2: chants for our audience, what numbers should they be looking
Speaker 2: at to determine what side of that fifty percent we
Speaker 2: end up on.
Speaker 3: They should be looking at what the slope of the
Speaker 3: yield curve is and what people are expecting the Federal
Speaker 3: Reserve to do. The more people are looking for sharp
Speaker 3: cuts by the Fed, the more they're judging that a
Speaker 3: recession is likely. They should be looking at what's happening
Speaker 3: to stocks, and particularly stocks in traditionally cyclical industries.
Speaker 1: They should be.
Speaker 3: Looking at data that points a little bit over the horizon,
Speaker 3: data on order books of businesses, data on consumer intentions
Speaker 3: to buy a car or to buy a house in
Speaker 3: the next several months, as an indicator for judging what
Speaker 3: is going to.
Speaker 1: Happen.
Speaker 3: All those things, taken together, I think will tell a story.
Speaker 3: There's also information in what is happening to commodity prices,
Speaker 3: and I pay a lot of attention to the various
Speaker 3: compilations that come from investment analysts who are very close
Speaker 3: to firms, who were report which way the firms are
Speaker 3: revising their own forecasts of future revenue and future earnings.
Speaker 1: All of that are the sort.
Speaker 3: Of indicators of what's happening in the economy. I think
Speaker 3: at a different level, the thing to be looking at
Speaker 3: is are we getting more policy certainty or are we
Speaker 3: getting more policy uncertainty? Every time there's a major vacillation,
Speaker 3: every time there's a question about commitment to law and
Speaker 3: to commitment.
Speaker 1: To following the law.
Speaker 3: In any sphere, you're going to be getting more uncertainty
Speaker 3: that is ultimately a prospect for chilling investment.
Speaker 2: So President Trump has addressed this and said we're going
Speaker 2: through what he called a transition period on the way
Speaker 2: to what he called something very big. Here to try
Speaker 2: to argue his side of it, is this a necessary
Speaker 2: sort of transition to rebalance the economy, get the government
Speaker 2: out of the economy to the extent that it was,
Speaker 2: and really go forward to a better future for the economy.
Speaker 3: No, look, David, transition period, doesn't it sound like a
Speaker 3: lot like the word transitory. The idea of transittory inflation
Speaker 3: when it was put forward by the Biden administration and
Speaker 3: the FED when things weren't going well didn't work out
Speaker 3: very well. And I don't think the idea that this
Speaker 3: is some kind of transition period is going to.
Speaker 1: Work out very well at all.
Speaker 3: And why do we think that it is going to
Speaker 3: help the US economy to not be able to use
Speaker 3: Mexico in Canada as a production partner, given that we
Speaker 3: are competing with Asia and Europe.
Speaker 1: I don't see what that logic is.
Speaker 3: Why is scaring people about whether they're going to get
Speaker 3: their social Security benefits, scaring people about whether the United
Speaker 3: States is going to continue to develop new medicines at
Speaker 3: the NIH. Why are those things fought likely to increase confidence.
Speaker 3: If this was going to increase confidence and people saw it,
Speaker 3: you'd expect to see surveys of consumer confidence showing and
Speaker 3: improvement in conditions, and you don't see that at all.
Speaker 3: If this was going to increase it was just a
Speaker 3: temporary dip that was going to increase the prospects of businesses.
Speaker 3: You see their stock market use going upwards, knock downwards.
Speaker 1: I think, by.
Speaker 3: Far the more likely saying is that we are in
Speaker 3: the shallow end and we're walking towards the deep end,
Speaker 3: and the problems are only going to increase with the
Speaker 3: passage of time. You know, this is not the first
Speaker 3: time that a country got a new leader who gave
Speaker 3: a lot of orders and imposed a lot of tariffs.
Speaker 3: That populist policy mix is a standard around the world,
Speaker 3: particularly common in Latin America, and what the studies show
Speaker 3: is that it can go either way in terms of
Speaker 3: its impacts in the short run, but it's almost always
Speaker 3: bad over the medium to long run. So i'd expect,
Speaker 3: unless there's a reversal in policy, I would expect this
Speaker 3: situation to get more serious. And every time the President
Speaker 3: uses rhetoric that conveys steadfastness on this policy course of
Speaker 3: clarification of economic nationalism, of greatly expanded concept of government action,
Speaker 3: and vast wide interpretation of government power, every time he recommits,
Speaker 3: pessimism increases. And so I think those explanations of downturn
Speaker 3: being temporary are actually quite counterproductive.
Speaker 2: Larry to play devil's advocate. I think that if somebody
Speaker 2: were here from the Trump administration, they say, the transition
Speaker 2: is to a world where we have a bigger manufacturing base.
Speaker 2: We had Sean Fain from the UAW just recently say
Speaker 2: he thinks what you're doing, he's exactly right, because we've
Speaker 2: lost so many jobs. Is there an argument that, in fact,
Speaker 2: we could be rebuilding the manufacturing base that could help
Speaker 2: the economy in the long term.
Speaker 3: Manufacturing has trended downwards for sixty years. It has trended
Speaker 3: downwards in Germany as a share of the economy. It
Speaker 3: is even trended downwards in China as a share of
Speaker 3: the economy. There's a reason, which is that there's just
Speaker 3: lots that used to be done by people on assembly
Speaker 3: lines that can now be done by machines.
Speaker 1: And there may be blips from.
Speaker 3: One year to the next, but the idea that we
Speaker 3: were going to have some kind of durable manufacturing renaissance
Speaker 3: was a schimero when Joe Biden said it, and it's
Speaker 3: an illusion when Donald Trump says it. And the much
Speaker 3: more likely thing is that the particular kinds of protection
Speaker 3: that the Trump administration is stressing are actually going to
Speaker 3: hurt manufacturing. Think, for example, of those promised aluminium steel tariffs.
Speaker 3: Sixty times as many people useuminum of businesses use aluminum
Speaker 3: and steel in their production as are in the aluminum
Speaker 3: and steel industries.
Speaker 1: So we're raising costs.
Speaker 3: What this administration can't understand, or seems.
Speaker 1: Not to be able to understand, is.
Speaker 3: That today we live in a world of supply change,
Speaker 3: and in that world of supply change, when you tariff things,
Speaker 3: you're increasing the price of inputs that would have gone
Speaker 3: into exports or would have gone into competition with totally
Speaker 3: imported goods from further abroad. So I think the idea
Speaker 3: that we're going to have some manufacturing renaissance of employment
Speaker 3: is misguided, and I think in terms of strategy for
Speaker 3: getting there, it would be if you wanted to have
Speaker 3: that as an objective, your chances would be much better
Speaker 3: subsidizing their outputs than raising the price of manufacturers inputs.
Speaker 3: So I think this is protectionist policy, which as an
Speaker 3: economist I don't like, but entirely separate from that, it's
Speaker 3: misguided and confused protectionist policy, even if one accepted the
Speaker 3: protectionist philosophy.
Speaker 2: Larry one last one. Here we are going into fom
Speaker 2: see Federal Open Marketing Committee meetings. We're supposed to have
Speaker 2: statement of economic projections coming on. How on earth does
Speaker 2: the Federal Reserve issue a statement of economic projections?
Speaker 3: Given the uncertainties, I think they should follow the consensus,
Speaker 3: and the consensus is moving downwards. I hope they don't
Speaker 3: set them in stone too far in advance of the meeting,
Speaker 3: because I think we've got a rapidly evolving situation, and
Speaker 3: I think the Fed's in a delicate situation. On the
Speaker 3: one hand, from people, no doubt we'll think that as
Speaker 3: the economy weakens, you should be moving more towards signaling
Speaker 3: strong interest rate cuts. On the other hand, for the Fed,
Speaker 3: to send that kind of signal would be alarming to people,
Speaker 3: would have a material effect on sentiments, and I'm not
Speaker 3: sure search just how much it matters. If a car
Speaker 3: is a lemon, or you're worried that a car might
Speaker 3: be a lemon, You're not going to buy it because
Speaker 3: somebody gives you a discount or cuts the loan rate.
Speaker 3: In the same way, when there's so much swirling uncertainty
Speaker 3: and the props from under your investment might be removed
Speaker 3: by some new policy coming out of some decree, you're
Speaker 3: going to wait before you invest in. The exact level
Speaker 3: of the interest rate isn't going to matter very much.
Speaker 3: So I think the FED needs to express its concerns
Speaker 3: about the economy in the context of the current moment.
Speaker 3: It wouldn't be the first time central banks have expressed
Speaker 3: concern about rigidities. They've expressed concern about budget deficits before.
Speaker 3: I think they need to highlight just the very substantial
Speaker 3: toll that uncertainty is taking on the economy, and note
Speaker 3: that they've only got very limited capacity to respond to
Speaker 3: that uncertainty. And I think they need to remind us
Speaker 3: all of something. They need to remind us that the
Speaker 3: test of policy is economic performance. Sometimes this administration seems
Speaker 3: to be saying that as long as the ten year
Speaker 3: interest rate is coming down, things are going well well.
Speaker 1: The ten year interest rate.
Speaker 3: Fell the fastest during the financial crisis, it fell the
Speaker 3: fastest after as the two thousand and one recession was starting,
Speaker 3: so fell the fastest at the beginning of COVID. So
Speaker 3: the idea that somehow trying to get the ten year
Speaker 3: rate down fast is some measure of how well you're
Speaker 3: doing policy, which is another thing we've heard from the administration.
Speaker 3: I think he isn't right, and I hope as he
Speaker 3: answers questions and talks about things, Chairman Powell can emphasize
Speaker 3: the centrality of simply trying to have stable economic performance.
Speaker 2: Larry, thank you so much for joining us today. It
Speaker 2: was really important to hear from you. That's Larry Summer's
Speaker 2: former Secretary of the Treasury, now a special contributor for
Speaker 2: Wall Street Week