WEBVTT - Why So Many People Got This Year's Economy Wrong 0:00:09.960 --> 0:00:13.200 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.320 --> 0:00:17.520 I'm Tracy Alloway and I'm Joe Wisenthal. Joe, it's it's 0:00:17.560 --> 0:00:19.520 nearly the end of twenty twenty three. It's been a 0:00:19.520 --> 0:00:20.160 wild ride. 0:00:20.280 --> 0:00:24.040 What an incredible year. I mean, the stat that just 0:00:24.120 --> 0:00:27.840 like jumps out to me is forty one point two 0:00:28.160 --> 0:00:31.120 four percent as of right now we're recording this December fourteenth. 0:00:31.400 --> 0:00:34.840 That is the annual gain of the Nasdaq twenty three 0:00:34.880 --> 0:00:38.240 point one percent on the S and P mortgage rates 0:00:38.280 --> 0:00:42.560 below seven percent. Good times. It looks like good times 0:00:42.600 --> 0:00:42.919 when I. 0:00:42.840 --> 0:00:45.840 Look at the screen, even though you're talking about the rally, 0:00:45.920 --> 0:00:49.080 it sounds like you haven't escaped the year unscathed. Because 0:00:49.120 --> 0:00:50.760 of your voice, it sounds like you've had a rough 0:00:50.800 --> 0:00:51.600 twenty twenty three. 0:00:51.680 --> 0:00:54.160 It's been a good twenty twenty three. But my voice 0:00:54.200 --> 0:00:55.880 is not in great shape at this moment. 0:00:55.960 --> 0:00:59.600 But Joe was singing last night at his first show. 0:01:00.120 --> 0:01:02.960 Yes, that is my excuse that I was out late 0:01:03.040 --> 0:01:05.640 at a bar singing country music. But here I am, 0:01:05.760 --> 0:01:08.600 and I'm very excited to talk about the bizarre, weird, 0:01:08.840 --> 0:01:11.360 unexpected year that twenty twenty three was. 0:01:11.560 --> 0:01:14.640 Yes, so if you recall this time last year in 0:01:14.720 --> 0:01:18.800 twenty twenty two, it seemed like the consensus going into 0:01:18.800 --> 0:01:21.440 the year was we were going to have a recession. 0:01:21.480 --> 0:01:23.560 You know, people were talking about a hard landing, this 0:01:23.680 --> 0:01:25.640 idea that the FED was going to have to keep 0:01:26.000 --> 0:01:29.280 hiking rates and that that was eventually going to have 0:01:29.319 --> 0:01:31.640 to bring down employment and we were going to see 0:01:31.840 --> 0:01:34.240 a slow down in the economy. And yet here we 0:01:34.280 --> 0:01:36.040 are and it hasn't materialized. 0:01:36.280 --> 0:01:38.399 This time last year there was just like so much 0:01:38.880 --> 0:01:40.960 pessimism and the market was really like in a rough 0:01:41.040 --> 0:01:45.360 shape in November December last years this view, it's like, 0:01:45.360 --> 0:01:47.160 you know what things are going to things are in 0:01:47.240 --> 0:01:49.720 rough shape, but it doesn't matter. Inflation is still so high. 0:01:50.040 --> 0:01:52.360 The FED has to keep pressing, the Fed has to 0:01:52.440 --> 0:01:57.280 keep hiking. Yeah, it was pretty grim. And then somehow 0:01:57.400 --> 0:01:59.160 like this is the big thing that I think people 0:01:59.160 --> 0:02:01.560 are going to be talking about for years, which is, 0:02:01.600 --> 0:02:04.120 how did we have like the biggest rate hike cycle 0:02:04.200 --> 0:02:07.920 ever or one of them without more slowing in the 0:02:08.000 --> 0:02:12.839 economic activity? And how did inflation come down from where 0:02:12.840 --> 0:02:15.240 it was at its peak in the middle of twenty 0:02:15.280 --> 0:02:18.160 twenty two without more weakening in the labor market? 0:02:18.320 --> 0:02:21.160 Yes, and I should note it wasn't just economists and 0:02:21.200 --> 0:02:24.760 analysts who were very pessimistic on the economy going into 0:02:24.800 --> 0:02:27.800 twenty twenty three. We had a lot of you know, 0:02:28.000 --> 0:02:31.760 real world people for lack of a better term, who 0:02:31.760 --> 0:02:33.840 also thought that things were going to slow down. Like, 0:02:33.880 --> 0:02:36.840 for instance, you had I think the Conference Board survey 0:02:36.960 --> 0:02:40.960 of CEOs like almost one hundred percent. We're predicting a 0:02:41.280 --> 0:02:44.799 recession in the US. All the sentiment surveys, as we've 0:02:44.880 --> 0:02:47.280 been discussing on the show, have been coming from totally 0:02:47.320 --> 0:02:50.120 well back until recently we're coming in very negative. So 0:02:50.400 --> 0:02:54.120 you know, this wasn't just an economist problem. But I 0:02:54.160 --> 0:02:56.560 think we should go over the year and we should review, 0:02:56.720 --> 0:03:00.280 like what exactly happened that surprised a. 0:03:00.080 --> 0:03:00.639 Lot of people. 0:03:00.800 --> 0:03:03.280 Well you said this, I think in our recent episode 0:03:03.280 --> 0:03:05.600 that we did with Ian Hatzias, and I totally agree. 0:03:05.600 --> 0:03:08.040 I mean, I feel like the last few years will 0:03:08.080 --> 0:03:10.280 be one of these periods and economics that people are 0:03:10.280 --> 0:03:14.160 going to be writing PhD papers on for fifty years, right, 0:03:14.240 --> 0:03:16.880 kind of like the Great you know, the Great Depression, 0:03:16.960 --> 0:03:19.480 or other periods that are these sort of holy grails 0:03:19.560 --> 0:03:23.400 or Rosetta stones for understanding how the economy works. There's 0:03:23.440 --> 0:03:26.720 going to be so much debate and work and academic 0:03:26.760 --> 0:03:30.640 research and relitigating debates, et cetera about like what happened 0:03:30.639 --> 0:03:31.760 over the last four years. 0:03:31.840 --> 0:03:34.360 I really hope we still have odd lots in twenty 0:03:34.400 --> 0:03:37.760 seventy three, and we'll just do episodes on like what happened. 0:03:37.840 --> 0:03:39.120 My voice will sound better. 0:03:38.960 --> 0:03:43.839 Then, So okay, all right, why don't we just get 0:03:43.840 --> 0:03:45.760 to it. We are going to be speaking with Anna Wong. 0:03:45.960 --> 0:03:49.760 She is the chief US economist for Bloomberg Economics. It's 0:03:49.760 --> 0:03:51.240 the first time we've ever had her on the show, 0:03:51.240 --> 0:03:53.720 which is kind of surprising. Anna, Thank you so much 0:03:53.760 --> 0:03:55.960 for coming on all thoughts, happy. 0:03:55.720 --> 0:03:56.560 To be here at Tracy. 0:03:57.080 --> 0:04:00.560 So, this time last year, why don't you walk us 0:04:00.560 --> 0:04:04.920 through what exactly Bloomberg Economics was expecting. How did you 0:04:04.960 --> 0:04:07.360 expect this particular year to turn out. 0:04:07.960 --> 0:04:11.720 Yeah, So, a year ago, or even more like a 0:04:11.880 --> 0:04:14.360 year and a half ago, we first put out our 0:04:14.480 --> 0:04:18.640 recession model because at the time the feed started hiking 0:04:18.720 --> 0:04:21.520 rates and there was just a lot of curiosity about 0:04:21.520 --> 0:04:25.160 how this would end, and our goal then was to 0:04:25.480 --> 0:04:29.279 have a more precise timing of the probability of recession 0:04:29.720 --> 0:04:32.240 as opposed to just giving a vague what is the 0:04:32.279 --> 0:04:36.320 twelfth month ahead recession? And there's a cottage industry of 0:04:36.360 --> 0:04:39.800 these models out there, and so our model was to 0:04:40.040 --> 0:04:42.960 put out some kind of numbers on each month of 0:04:43.040 --> 0:04:47.760 probability in July, August and over that period since. So 0:04:47.920 --> 0:04:51.560 this this model first came out in spring of twenty 0:04:51.680 --> 0:04:55.120 twenty two, and at that time the model is actually 0:04:55.200 --> 0:04:59.960 foreseeing a recession a high probability of recession only start 0:05:00.080 --> 0:05:02.840 aring towards the end of twenty twenty three and even 0:05:02.920 --> 0:05:06.400 in early twenty twenty four, and over the course of 0:05:06.520 --> 0:05:11.240 last year and this year, that model evolves in terms 0:05:11.279 --> 0:05:14.840 of the timing of when that trigger is pushed. And 0:05:15.160 --> 0:05:17.360 all of the calls of that model has been that 0:05:17.520 --> 0:05:21.279 the recession would begin in the second half of twenty 0:05:21.360 --> 0:05:25.719 twenty three, and so coming into this year, we thought 0:05:25.760 --> 0:05:29.480 that the recession that is so widely expected would be 0:05:29.520 --> 0:05:31.320 towards the end of twenty twenty three. 0:05:31.640 --> 0:05:35.040 Backing for a second, what goes into a recession model 0:05:35.080 --> 0:05:36.719 and what does that even mean? Like how do you 0:05:36.800 --> 0:05:39.720 build or construct a model and something like that. 0:05:39.960 --> 0:05:43.680 Yeah, there's a variety of models, right, So for example, 0:05:43.920 --> 0:05:49.680 our model, we took thirteen indicators, typical indicators that had 0:05:49.920 --> 0:05:53.600 some track record in identifying recessions in the past, and 0:05:53.960 --> 0:05:57.400 most many of them are overlapped with the leis from 0:05:57.480 --> 0:06:01.520 conference sports. So it's yield curve spread sentiment models. And 0:06:01.600 --> 0:06:04.800 so any models that have those two things, yield curve 0:06:04.839 --> 0:06:08.320 spreads and sentiments would tell you there's a high probability 0:06:08.760 --> 0:06:12.240 of recession. Right, Even the LI has over ninety percent 0:06:12.360 --> 0:06:15.880 probability of recession. But another type of models that one 0:06:16.000 --> 0:06:21.600 uses just thinking about the probability that NBER would date 0:06:21.640 --> 0:06:26.400 a recession, and NBR told the public that they usually 0:06:26.440 --> 0:06:30.400 look at six monthly indicators, and so one could perceivably 0:06:30.440 --> 0:06:33.119 be also building models based on that. But of course, 0:06:33.160 --> 0:06:36.480 when we make a call for a recession, that is 0:06:36.600 --> 0:06:39.960 only a very small part of all our inputs. We 0:06:40.240 --> 0:06:42.960 tend to look at things in Bloomberg Economics, in my team, 0:06:43.000 --> 0:06:46.000 we tend to look at things in three ways. We 0:06:46.080 --> 0:06:49.040 approach a question in three ways, and if those three 0:06:49.040 --> 0:06:51.960 ways all say the same thing, then we make the call. 0:06:52.120 --> 0:06:55.880 And so for a recession call last year, we also 0:06:57.120 --> 0:07:00.839 what really influenced our view is the range of other 0:07:01.279 --> 0:07:04.919 theoretical models. So the model recession probability models I just 0:07:04.960 --> 0:07:11.400 described are just empirical models, which has no theoretical frameworks, right, 0:07:11.800 --> 0:07:14.840 But economists, of course and their tools that we have 0:07:14.960 --> 0:07:18.040 generally caliber models. We have the large scales model, we 0:07:18.160 --> 0:07:22.320 have state of the art models, and so we used 0:07:22.360 --> 0:07:25.800 a model on the terminal which is called shock, which 0:07:25.920 --> 0:07:26.680 mimics I. 0:07:26.600 --> 0:07:28.640 Was looking at this earlier. It's pretty cool. Actually, what's 0:07:28.680 --> 0:07:33.239 it called shot shot shok go on the terminal, right. 0:07:33.160 --> 0:07:38.440 And that model mimics the feed's own in house general 0:07:38.480 --> 0:07:42.760 caliber model FIRMUS. And that model would suggest that the 0:07:42.840 --> 0:07:48.200 lags are monetary rate hikes at least on labor market 0:07:48.320 --> 0:07:51.160 should be about eighteen to twenty four months, which is 0:07:51.160 --> 0:07:55.360 about the standard of what has been found in economic literature. 0:07:56.240 --> 0:07:59.720 And then another state of the art model we use 0:07:59.840 --> 0:08:03.360 is a model that central bankers have been discussing a 0:08:03.360 --> 0:08:06.320 lot last year. This is based on a cutting edge 0:08:06.440 --> 0:08:11.520 economic paper, and that was the paper that tipped a 0:08:11.600 --> 0:08:15.480 lot of central bankers off into thinking about shorter legs 0:08:15.480 --> 0:08:20.240 of monetary policy. It's a paper by Bower and Swanson, 0:08:20.800 --> 0:08:23.400 and that was the paper that found that, in fact, 0:08:23.480 --> 0:08:26.200 the legs of monetary policy are much shorter. So we 0:08:26.400 --> 0:08:30.360 also looked at that model, and what those models found, 0:08:30.520 --> 0:08:34.200 especially that Bauer and Swanson, the very cutting edge model, 0:08:34.880 --> 0:08:38.439 is that yes, it's true that the legs of monetary 0:08:38.480 --> 0:08:42.400 policy are shorter for for example, for industrial production, we 0:08:42.480 --> 0:08:46.480 already have seen you know, i P declined for you know, 0:08:46.559 --> 0:08:50.160 over a year, and in fact, the decline of industrial 0:08:50.160 --> 0:08:54.120 productions almost like exactly matched the contour of that model. 0:08:54.600 --> 0:08:59.120 And so that model also says that inflation now responds 0:08:59.160 --> 0:09:02.640 faster to fetch rate hike then you know, back in 0:09:02.679 --> 0:09:06.640 the times of Milton Friedman. But the one area which 0:09:06.679 --> 0:09:10.360 the model says that two areas actually that says that 0:09:10.440 --> 0:09:13.520 the lags of frate hikes still have yet to really 0:09:13.600 --> 0:09:17.680 hit the peak is labor market and also credit market. 0:09:17.760 --> 0:09:21.720 And I think those two are precisely the area where 0:09:21.760 --> 0:09:24.440 we have not seen much adjustment, and that is why 0:09:24.480 --> 0:09:28.679 we don't have most people at least don't think we 0:09:28.800 --> 0:09:32.240 have a recession. Yeah this year. 0:09:32.440 --> 0:09:37.560 That's really interesting, especially putting my former credit market reporter 0:09:38.040 --> 0:09:40.360 on the credit side of it. And I do have 0:09:40.400 --> 0:09:42.640 a pet theory right now that I think I've we've 0:09:42.679 --> 0:09:47.560 talked about, which is that the sheer size of the 0:09:47.600 --> 0:09:51.080 private credit market might be making a difference here, like 0:09:51.120 --> 0:09:54.079 if you have this bundle of money that actually doesn't 0:09:54.080 --> 0:09:56.520 seem to be that rate sensitive in the current environment, 0:09:56.640 --> 0:10:00.319 maybe it's propping up parts of the market. But talk 0:10:00.360 --> 0:10:03.960 to us about why the credit market might not be 0:10:04.120 --> 0:10:07.240 as efficient at transmitting rate hikes as it once was. 0:10:07.679 --> 0:10:09.760 Yeah, I think that this might be the surprise the 0:10:10.400 --> 0:10:13.280 prices in the credit market might be a surprise of 0:10:13.320 --> 0:10:16.560 twenty twenty four, which is well. I think my pet 0:10:16.640 --> 0:10:19.880 theory of why credit market hasn't adjusted yet in twenty 0:10:19.920 --> 0:10:23.640 twenty three is that corporates have locked in low interest 0:10:23.679 --> 0:10:25.960 rate in the last right, everybody knows that. 0:10:26.400 --> 0:10:27.679 And also on. 0:10:27.640 --> 0:10:32.000 The household side, household also had wonderful balance sheets during 0:10:32.040 --> 0:10:36.520 the pandemic. Many households paid down the debt so deleveraged 0:10:36.600 --> 0:10:39.760 during the pandemic. But at the same time, I think 0:10:39.800 --> 0:10:42.640 this is the following areas where I don't think the 0:10:42.640 --> 0:10:49.320 market understands very well for households balance sheets, how really 0:10:49.520 --> 0:10:55.000 how accurate are the credit scores being reflected? So I 0:10:55.040 --> 0:10:57.679 think that the credit for barons, a lot of the 0:10:57.720 --> 0:11:02.720 debt for barance during the pandemic had distorted the credit scores. 0:11:03.040 --> 0:11:07.240 Inflated credit scores, and there are some studies that estimate 0:11:07.320 --> 0:11:10.240 that perhaps by as much as even fifty basis points. 0:11:10.240 --> 0:11:14.240 So a lot of the you know what currently looks 0:11:14.320 --> 0:11:19.600 like to be near prime are actually suprime, and some 0:11:19.720 --> 0:11:22.760 prime could be actually near prime. And then looking at 0:11:22.920 --> 0:11:28.559 auto delinquencies, which has risen to you know, the level 0:11:28.600 --> 0:11:31.839 of twenty ten, right, and you look at who are 0:11:31.920 --> 0:11:35.199 the ones who are defaulting. They're the ones who bought 0:11:35.280 --> 0:11:39.160 cars in twenty twenty one and twenty twenty two when 0:11:39.720 --> 0:11:42.840 car prices were extremely high, and they are also the 0:11:42.880 --> 0:11:47.360 ones who are having suprime and near prime credit ratings. 0:11:47.520 --> 0:11:50.480 So the question, I think in twenty twenty four is 0:11:51.120 --> 0:11:54.600 how many of these borrowers who have leveraged up in 0:11:54.640 --> 0:11:59.480 the past two years are in fact the credit rating 0:11:59.679 --> 0:12:03.920 that the good credit quality that they looked to be like. 0:12:04.400 --> 0:12:08.960 And when the moment that more defaults happen, As you know, 0:12:09.080 --> 0:12:13.280 prices slow when inflation slows, what else happens is income slows, 0:12:13.400 --> 0:12:17.079 wage grows slow, and that that is if interest rate 0:12:17.120 --> 0:12:20.920 doesn't fall as fast. So suppose that the Fed do 0:12:21.040 --> 0:12:25.959 ultimately do hold higher for longer whereas income and prices. 0:12:25.559 --> 0:12:26.400 Are coming down. 0:12:26.520 --> 0:12:29.720 That would means that there would be more delinquencies. So 0:12:30.120 --> 0:12:34.000 when that moment happened, whether there will be a credit 0:12:34.040 --> 0:12:39.400 crunch versus just a normal gradual credit slowed down depends 0:12:39.400 --> 0:12:42.280 on how the lenders is seeing the information. Right, This 0:12:42.400 --> 0:12:46.880 is the famous at first selection issue is like, if 0:12:46.920 --> 0:12:51.400 there's a portion of people whose credit scores don't appappropriately 0:12:51.520 --> 0:12:57.160 reflect their true behavior, do lenders can lender sees who 0:12:57.200 --> 0:12:59.320 are the bad seats who are not? And this is 0:12:59.360 --> 0:13:02.360 like a famous a symmetry in the used car market, right, 0:13:02.400 --> 0:13:04.160 This is why it's very hard. 0:13:04.120 --> 0:13:25.720 Market for lemons, right, right, What is the takeaway from 0:13:25.880 --> 0:13:28.280 the realized disinflation. 0:13:27.720 --> 0:13:29.360 That we've seen? You know, I think at one point, 0:13:29.400 --> 0:13:32.920 CPI is around nine percent now where basically you can 0:13:33.080 --> 0:13:36.640 argue that in recent months we are by some measures 0:13:36.679 --> 0:13:39.680 at the Fed's target, and yet unemployment is at three 0:13:39.720 --> 0:13:42.439 point seven percent. And that was a set of conditions 0:13:42.480 --> 0:13:46.280 that very few people would have anticipated was even possible, 0:13:46.360 --> 0:13:48.920 in part because the standard story as well, you need 0:13:48.960 --> 0:13:52.000 to reduce demand to use prices, and the way you 0:13:52.080 --> 0:13:56.520 use demand is by people unfortunately having to lose their jobs. 0:13:57.120 --> 0:13:59.880 What have we learned about, at least what we've seen 0:14:00.120 --> 0:14:00.760 so far in. 0:14:00.760 --> 0:14:04.840 This cycle, Yeah, Joe, So I would say one will 0:14:04.880 --> 0:14:08.080 have to acknowledge that it's going better than what everybody 0:14:08.120 --> 0:14:13.079 thought at first, that it will have to be extremely painless. 0:14:13.400 --> 0:14:16.400 But at the same time, I think, as as Powell 0:14:16.440 --> 0:14:19.720 said yesterday, it is too soon to declare victory on 0:14:20.480 --> 0:14:26.040 flamee inflation. And and here's why. So so, based on 0:14:26.160 --> 0:14:29.880 various model decomposition of the drivers of inflation over the 0:14:29.960 --> 0:14:33.240 last two years, our assessment is that half of it 0:14:33.280 --> 0:14:35.800 is driven by supply and about half of it is 0:14:35.880 --> 0:14:39.800 driven by demand. But of course it's the mixture of 0:14:39.840 --> 0:14:43.760 those two high demand while supply is heard which led 0:14:43.760 --> 0:14:48.000 to this explosive inflation. Right. And in terms of inflation, 0:14:48.120 --> 0:14:52.000 we saw this year earlier this year when SVB collapsed. 0:14:52.880 --> 0:14:56.840 At that time the CPI recall, it was actually falling 0:14:56.960 --> 0:15:00.000 and everybody thought, uh, inflation is not a problem. But 0:15:00.480 --> 0:15:06.480 infect the supercore, which is Powell's preferred measure, which captures 0:15:06.520 --> 0:15:12.440 the labor intensive part of inflation, was not slowing at all. 0:15:12.680 --> 0:15:15.280 But then moving into the second half of this year, 0:15:15.400 --> 0:15:19.680 we start to see a lot of disinflation and it 0:15:19.760 --> 0:15:22.840 actually start in June this year. And this is where 0:15:22.880 --> 0:15:26.760 I said that you know, the lacks of monetary policy 0:15:26.760 --> 0:15:30.280 on labor market is about eighteen to twenty four months, 0:15:30.760 --> 0:15:35.080 so that slowed down in wage growth actually hit right 0:15:35.160 --> 0:15:38.880 about the time that all these models would suggest, and 0:15:39.320 --> 0:15:42.480 so we started seeing movement in that, but still core 0:15:42.600 --> 0:15:47.960 inflation is still around four percent during the summer. On 0:15:48.000 --> 0:15:52.120 the second day of the December FOMC meeting, the FOMC 0:15:52.360 --> 0:15:55.920 received a very critical data point. It is the November's 0:15:56.160 --> 0:16:02.240 c PPI sorry, and so feed staff usually can pull 0:16:02.320 --> 0:16:05.960 together a PCE inflation number very quickly the moment they 0:16:06.000 --> 0:16:10.240 have both CPI and PPI numbers in their hand. So 0:16:10.360 --> 0:16:14.960 on the second day of December FOMC meeting, that PPI 0:16:15.160 --> 0:16:20.080 number came in to suggest that actually core PCE for 0:16:20.200 --> 0:16:24.040 November is going to be very low, as we estimate 0:16:24.080 --> 0:16:29.040 that it's only zero point zero four percent, possibly so 0:16:29.440 --> 0:16:35.160 round to zero in November, and this would mean that 0:16:35.240 --> 0:16:38.880 the six month annualized core PCE, this is the measure 0:16:39.000 --> 0:16:42.040 that Chris Waller and a lot of FED officials are 0:16:42.080 --> 0:16:45.400 looking and engaging, the momentum of inflation would come in 0:16:45.440 --> 0:16:51.520 at two point zero likely in November, right at the 0:16:51.560 --> 0:16:56.120 FET's target. So the FOMC has that data point on 0:16:56.160 --> 0:16:59.960 the second day, in the morning of the December FOMC meeting, 0:17:00.520 --> 0:17:06.120 and that explained why the Summary of Economic Projection see 0:17:06.720 --> 0:17:09.640 downward revision of core PCE to only three point two 0:17:09.640 --> 0:17:13.399 percent for end of twenty twenty three. Now, how do 0:17:13.440 --> 0:17:17.520 you make of this significant drop in core PCE, right, 0:17:18.000 --> 0:17:21.520 And so I would say that when this number ultimately 0:17:21.600 --> 0:17:25.800 is publicly released late in December, I think it would 0:17:25.800 --> 0:17:29.040 spark a big debate. On one side, a lot of 0:17:29.080 --> 0:17:31.840 people would say the FED is already at target, they 0:17:31.840 --> 0:17:35.440 should be cutting rates in January even But the second 0:17:36.600 --> 0:17:38.800 second group of people, and I would be in that 0:17:38.840 --> 0:17:42.000 second group of people, would be saying that, but a 0:17:42.000 --> 0:17:46.399 lot of the disinflation in November is actually in categories 0:17:46.520 --> 0:17:51.000 that's exhaustions to the feds R effect. It's due to China. 0:17:51.080 --> 0:17:54.960 If you look at the downside surprises, it's actually all 0:17:55.040 --> 0:18:03.480 in categories that with high China import contents there in apparels, clothing, furnishings, 0:18:03.880 --> 0:18:07.720 and those actually drove almost all of the downward surprises. 0:18:08.119 --> 0:18:11.080 So what I'm I think is happening, and this give 0:18:11.160 --> 0:18:13.879 me some memory of what happened in twenty fourteen and 0:18:14.000 --> 0:18:19.479 twenty fifteen was you have global growth slowed down and 0:18:19.560 --> 0:18:24.359 start by China, and then that led to commodity prices decline. 0:18:24.720 --> 0:18:29.000 And also that also sometimes when global growth slowed down 0:18:29.240 --> 0:18:33.280 occasionally that could also lead to OPEK having trouble keeping 0:18:33.359 --> 0:18:35.440 a discipline with an OPAC and that leads to a 0:18:35.520 --> 0:18:37.159 race to the bottom. On top of that, you have 0:18:37.280 --> 0:18:40.000 US shale who's pumping suddenly a lot more of that 0:18:40.040 --> 0:18:44.520 actually was the dynamics in twenty fifteen and twenty fourteen 0:18:44.560 --> 0:18:46.880 that led to that collapse in oil prices. So when 0:18:46.920 --> 0:18:50.400 you have this trying to slow down and what's going 0:18:50.440 --> 0:18:54.879 on with oil prices, you actually could lead to this 0:18:55.359 --> 0:18:58.359 dissiplation that we're seeing right now. But the implication is 0:18:58.400 --> 0:19:03.080 also that for the part that the FED has been 0:19:03.840 --> 0:19:08.720 focusing on supercore services that actually doesn't look as great. 0:19:08.800 --> 0:19:12.840 So services inflation actually picked up a little bit in 0:19:12.920 --> 0:19:16.560 November in the core PCE, So I think for the 0:19:16.600 --> 0:19:20.600 FED to declare victory too soon would be a mistake. 0:19:20.720 --> 0:19:25.000 And just looking an outlook our outlook out to twenty 0:19:25.040 --> 0:19:28.960 twenty four, we do see the six month annualized core 0:19:29.040 --> 0:19:33.120 PCE dipping in the first half of twenty twenty four 0:19:33.240 --> 0:19:36.399 and dropping to even two point two percent in March 0:19:37.040 --> 0:19:40.119 and then stabilizing it about two point seven percent in 0:19:40.160 --> 0:19:42.679 the second half of the year, and that would be 0:19:42.760 --> 0:19:46.800 that last mile of inflation, because the FED should not 0:19:46.880 --> 0:19:49.600 be happy about two point seven or two point eight 0:19:49.600 --> 0:19:50.480 percent inflation. 0:19:51.320 --> 0:19:54.480 I definitely want to discuss the outlook a little bit more, 0:19:54.600 --> 0:19:59.760 but before we do, I'm glad you mentioned these exogenous factors, 0:20:00.200 --> 0:20:04.000 these exogenous price declines, because there is you know, twenty 0:20:04.040 --> 0:20:06.560 twenty three has turned out to be better than a 0:20:06.560 --> 0:20:09.560 lot of people expected, but there is now this vibrant 0:20:09.640 --> 0:20:12.520 debate about how much of that can be attributed to 0:20:12.760 --> 0:20:17.040 the rate hikes and by extension, the FED. So I 0:20:17.040 --> 0:20:20.959 guess my question is how do you think FED tightening 0:20:21.040 --> 0:20:25.080 has actually worked through this economy and how much of 0:20:25.320 --> 0:20:28.320 what we've seen so far is due to monetary policy 0:20:28.440 --> 0:20:32.600 versus perhaps normalization of things like supply chains. 0:20:32.960 --> 0:20:36.359 Yeah, good, good question, Tracy. You know, I think the 0:20:36.359 --> 0:20:40.640 way that monetary policy has worked this year is largely 0:20:40.760 --> 0:20:44.000 as the models expected. As I was saying, if you 0:20:44.160 --> 0:20:47.200 use the state of the art models, you would see 0:20:47.560 --> 0:20:52.520 industrial production has declined exactly according to that contour that 0:20:52.520 --> 0:20:59.160 the model would describe inflation as well, and the places 0:20:59.240 --> 0:21:04.640 where which has not been behaving as models would describe 0:21:04.680 --> 0:21:07.639 would be the credit market and labor market. But even so, 0:21:08.320 --> 0:21:11.080 the labor market in fact is moving in the direction 0:21:11.160 --> 0:21:15.680 that the model would describe. So you know, with eighteen 0:21:15.720 --> 0:21:19.200 to twenty four month lag of monetary policy on labor market, 0:21:19.440 --> 0:21:23.280 we should be seeing a more clear slow down in 0:21:23.880 --> 0:21:27.760 job job growth in the second half of this year, 0:21:27.760 --> 0:21:29.480 and I think we did see that. And I will 0:21:29.480 --> 0:21:32.600 also have to add that the strong non farm payroll 0:21:32.720 --> 0:21:38.239 data over the year is likely to be overestimating the 0:21:38.280 --> 0:21:42.240 strength of the labor market. That in fact, about forty 0:21:42.280 --> 0:21:46.199 percent of the three million non farm payroll gains is 0:21:46.280 --> 0:21:49.439 due to a biel as birth and death models. So 0:21:50.080 --> 0:21:53.679 if you think about whether this makes sense, so you know, 0:21:53.720 --> 0:21:57.000 this is a year where bankruptcy has risen to the 0:21:57.119 --> 0:22:00.600 level of twenty ten. Right at the same time, business 0:22:00.680 --> 0:22:03.679 are complaining that it's been very hard for them to hire. 0:22:04.000 --> 0:22:06.280 So if that's the case, how could it be that 0:22:06.400 --> 0:22:10.920 new firms could contribute to forty percent of the three 0:22:11.040 --> 0:22:14.120 million job gains this year? So I think I think 0:22:14.160 --> 0:22:17.760 that in fact, after all the revisions are done, which 0:22:17.800 --> 0:22:20.640 will take a year or two more then it will 0:22:20.640 --> 0:22:23.359 be it will be clear that, in fact in twenty 0:22:23.400 --> 0:22:27.720 twenty three, the job market did slow down significantly in 0:22:27.760 --> 0:22:29.160 the second half of this year. 0:22:30.400 --> 0:22:33.159 What do you see in the data that makes you 0:22:33.480 --> 0:22:38.280 thinking that the strength of the labor market is overstated, 0:22:38.320 --> 0:22:40.639 because I mean, if small businesses are still to this 0:22:40.800 --> 0:22:44.040 day and on, we like I said, you know, recording 0:22:44.040 --> 0:22:46.720 this December fourteenth. Earlier in the week we got the 0:22:46.840 --> 0:22:50.240 NFIB survey which said that labor, finding labor is still 0:22:50.280 --> 0:22:53.240 a challenge for many companies. It's like in the first 0:22:53.520 --> 0:22:56.520 one or two paragraphs of the report that sounds like 0:22:56.560 --> 0:22:59.840 a robust type labor market. So what do you see 0:23:00.119 --> 0:23:03.960 the data that makes you think that it's there is 0:23:04.000 --> 0:23:05.159 this acceleration going on. 0:23:05.840 --> 0:23:11.720 Yeah, several things. So I think the difference between our views, 0:23:11.760 --> 0:23:14.760 our assessment of the labor market and other soft landing 0:23:14.920 --> 0:23:18.760 really staunch soft Landers view of the labor market really 0:23:18.920 --> 0:23:24.000 differs only in how much weight we place in different 0:23:24.119 --> 0:23:30.640 labor market indicators. For example, job openings, so that has 0:23:30.720 --> 0:23:33.720 been very high throughout this year, and in fact, for 0:23:33.800 --> 0:23:36.120 most of most of this year it was still over 0:23:36.200 --> 0:23:40.720 one point eight vacancies for every unemployed. But we put 0:23:40.920 --> 0:23:44.480 very little weight in that data because, first of all, 0:23:44.800 --> 0:23:48.679 a lot of HR recruiters have been fired over the 0:23:48.760 --> 0:23:52.200 turn of last year, and so logically you would ask 0:23:52.240 --> 0:23:55.840 yourself if so, if most of the layoffs late in 0:23:55.880 --> 0:23:58.399 twenty twenty two in early twenty twenty two is in 0:23:58.440 --> 0:24:01.720 the recruitment industry, than who are the people you know 0:24:02.480 --> 0:24:07.200 looking for jobs and recruiting people? And second, we do 0:24:07.440 --> 0:24:11.679 rely on anecdotes, and in turning points of and economy, 0:24:11.880 --> 0:24:17.240 anecdotes are extremely useful because they don't get revised, and 0:24:17.240 --> 0:24:19.960 and the FED also relies a lot on Facebook and 0:24:20.040 --> 0:24:24.160 anecdotes during turning points as well. But so we thought 0:24:24.200 --> 0:24:28.119 that the JULTS was just overstating and and but what 0:24:28.240 --> 0:24:32.000 gives us more confidence are the price measures, so wage growth, 0:24:33.080 --> 0:24:36.320 And throughout the year we have seen wage growth measures 0:24:36.359 --> 0:24:40.359 coming down softer and softer, even as you see these 0:24:40.720 --> 0:24:45.119