Speaker 1: Calls for one of the most talked about recessions in
Speaker 1: history are starting to receive. Bank of America now sees
Speaker 1: that fed's interest rate hike ending in a soft landing
Speaker 1: out You might.
Speaker 2: Have noticed that, after many months of bracing for a
Speaker 2: sharp downturn in the US economy, some prominent economists, CEOs
Speaker 2: and market watchers have begun to sound a bit more
Speaker 2: confident that the US will avoid a recession. But you
Speaker 2: might not want to count on it. Bloomberg's chief US
Speaker 2: economist Anna Wong, along with a team here at Bloomberg,
Speaker 2: crunched all the numbers, and she's here to explain why
Speaker 2: a recession is in fact still likely on the way
Speaker 2: and possibly soon.
Speaker 3: There's always a chance this soft landing will be the reality.
Speaker 3: But I think that hinges on an assumption that this
Speaker 3: time is different.
Speaker 2: I'm Weskasova today on the big take why the landing
Speaker 2: might not be soft and a you and Bloomberg's chief
Speaker 2: economist Tom Orlick right in this new analysis that when
Speaker 2: everyone expects a soft landing, brace for impact, Why do
Speaker 2: you say that, Why do you think that a recession
Speaker 2: is still the most likely outcome?
Speaker 3: It's stumped from this observation where we look at the
Speaker 3: past recessions and found that indeed, media mentions of the
Speaker 3: word soft landing, and even corporate filings and corporate presentations
Speaker 3: research whenever the word soft lending is at a peak
Speaker 3: that actually precedes the two thousand and eight recession, that
Speaker 3: preceded the two thousand two, two thousand and one recession,
Speaker 3: the nineteen ninety recession. There seems to be something there
Speaker 3: that made us to look deeper into why people tend
Speaker 3: to call on a soft lending right before recession, and overall,
Speaker 3: our takeaway from that exercise is that there's more reason
Speaker 3: to think that a recession is more likely than a
Speaker 3: soft lending.
Speaker 2: So let's walk through the data that you compile for
Speaker 2: this article and all the things that went into this conclusion.
Speaker 2: You start the analysis with a quote from someone we're
Speaker 2: all very familiar with.
Speaker 3: Yes Jennett Yellen. In October two thousand and seven, just
Speaker 3: two months before the Great Recession, she said that the
Speaker 3: most likely outcome is a soft landing. At that time,
Speaker 3: the economics data, very similar to today now points to
Speaker 3: things looking rosier than everybody expected. Economic data we're surprising
Speaker 3: on the upside. PMI was etching back up, which means
Speaker 3: Purchaser's Manager index. That index tends to be one of
Speaker 3: the earliest data that indicate whether the economy accelerating or decelerating.
Speaker 3: So even that PMI survey shows an acceleration on the
Speaker 3: eve of the two thousand and then seven recessions. So
Speaker 3: I think that the confidence one could place on the
Speaker 3: PMI surveys is in terms of predicting the start of
Speaker 3: a recession, should be pretty low. We see a lot
Speaker 3: of similarities today. Our number one reason for why we
Speaker 3: still think of recession is most likely is because in
Speaker 3: the past recessions, the number one culprit for creating that
Speaker 3: recession is the FED, and the FED tends to murder expansions.
Speaker 3: And if you look at the legs of monetary policy,
Speaker 3: what we learned is that even within a tightening cycle,
Speaker 3: there are various length to these lags. So I think
Speaker 3: one reason why the soft lending believers think that the
Speaker 3: tightening effects of monetary policy is over ready is because
Speaker 3: you see this reacceleration in manufacturing financial conditions earlier, when
Speaker 3: the stocks keep on rising, and we also see that
Speaker 3: housing market is starting to turn up. Well, it turns
Speaker 3: out that those places are also where the legs of
Speaker 3: monetary policy are the shortest. The place where monetary policy
Speaker 3: takes the longest to work is the labor market and
Speaker 3: also in the credits market, And there are reasons to
Speaker 3: believe that these two places we have still yet to
Speaker 3: see the majority of the rate hypes effects. And once
Speaker 3: these two places labor market and credit markets start seeing
Speaker 3: those effects, that is when you have this non linear
Speaker 3: downturn that will jump start a recession.
Speaker 2: And another thing you write is that a lot of
Speaker 2: the assumptions underlying projections are that the trends we've been
Speaker 2: seeing are going to continue moving in the same way,
Speaker 2: and that that might not be the case.
Speaker 3: When one think about soft lending, one is implicitly assuming
Speaker 3: that the unemployment rate will continue to stay low. But
Speaker 3: when you look at the lessons of recessions over the
Speaker 3: past fifty years, one thing that jump out at us
Speaker 3: is that usually when this recession begins, you see this
Speaker 3: non leniar jump in unemployment rate. It's very hard to
Speaker 3: forecast this non lenear jump and when this jump will happen.
Speaker 3: I think the lesson is that when you look at
Speaker 3: all these mean forecasts showing a soft landing showing that
Speaker 3: unemployment rate would day between three point a to four
Speaker 3: point one percent next year. You are not taking into
Speaker 3: account the risks that skewed the distribution of forecasts on
Speaker 3: the upside. So once we put estimate on the risks
Speaker 3: based on historical episodes of recession, it just turns out
Speaker 3: that the upside risk of the unemployment forecast is way
Speaker 3: higher than low side risk to unemployment forecasts.
Speaker 2: And one reason why these trends might not continue is
Speaker 2: that there are so many things that could sort of
Speaker 2: crash into those assumptions that are unpredictable.
Speaker 3: So you're right. Recessions are usually happen not because the
Speaker 3: economy slowly drip drip dripped down to a low growth regime.
Speaker 3: It's due to a sudden confluence of shocks, and in fact,
Speaker 3: we are seeing at least five shocks in the immediate horizon.
Speaker 3: The first one is oil price shocks.
Speaker 4: Oil has resumed a rally after an industry estimate pointed
Speaker 4: to a huge drawdown in US inventries, adding to signals
Speaker 4: that the market is tightening.
Speaker 3: Aside from FED funds rate hikes, The second most popular
Speaker 3: culprit of recession is oil price increase. We have seen
Speaker 3: a twenty five dollars increase in oil price in just
Speaker 3: a matter of a couple months. That would shave off
Speaker 3: growth from consumption spending. Another second shock that we're seeing
Speaker 3: is that people are starting to repay their student loans again.
Speaker 1: Now to federal student loan payments for turning after a
Speaker 1: three year pause, tens of millions of Americans. They are
Speaker 1: back on the hook this morning making those payments again
Speaker 1: amid stubborn inflation and rising interest rates.
Speaker 3: We expect that that will pretty much take off about
Speaker 3: three hundred dollars per household in consumption and money that
Speaker 3: they could put toward consumption. Other than that, we still
Speaker 3: have a government shut down risk. The stop gap bill
Speaker 3: that was passed over the weekend only kicked the can
Speaker 3: down the world to about mid November where there would
Speaker 3: be another shut down negotiations again, So that will potentially
Speaker 3: lead to seven hundred thousand federal workers being furloughed. On
Speaker 3: top of that, you also have the United Autos Workers strike.
Speaker 4: In the United Autoworkers' Union, putting more pressure on the
Speaker 4: Big three US carmakers GM four than Silantis. It plans
Speaker 4: to expand its strikes if there is no progress in
Speaker 4: contract talks via Friday deadline.
Speaker 3: Even though right now the strikes are pretty narrow that
Speaker 3: affecting only twenty five thousand auto workers, we looked into
Speaker 3: the supply chain relationships of the auto manufacturing sector and
Speaker 3: it turns out that the auto sector has one of
Speaker 3: the longest supply chain in auto sectors. In other words,
Speaker 3: even though the strikes are concentrated in auto plants, because
Speaker 3: it sourced from so many other sectors such as steel, rubber, chemical,
Speaker 3: even service management consultant, when you have a paralysis of
Speaker 3: production in auto, you actually lead to layoff in all
Speaker 3: the other sectors. So we estimate that twenty five thousand
Speaker 3: autoworker strike could ultimately lead to one hundred and thirty
Speaker 3: thousand layoffs across all the other industries. If the UAW
Speaker 3: strikes were too broaden too, the entire membership of the
Speaker 3: United Autos Worker Union, which is about one hundred and
Speaker 3: fifty thousand workers, that could ultimately lead to about seven
Speaker 3: hundred and sixty thousand layoffs across the entire economy. So
Speaker 3: it's actually a pretty substantial threat to economic growth.
Speaker 4: There.
Speaker 3: All these shocks could easily reduce about one percentage point
Speaker 3: off GDP growth in the fourth quarter and raise unemployment
Speaker 3: rate by enough to generate a recession.
Speaker 2: And those are just the different shocks that could happen
Speaker 2: within the US. You also write that the rest of
Speaker 2: the world could wind up dragging the US economy down
Speaker 2: a bit.
Speaker 3: Let's talk about China. China is the second largest economy
Speaker 3: in the world. Especially within China, the property market usually
Speaker 3: is a big factor in generating growth within China. Our
Speaker 3: team members from China are telling us that there is
Speaker 3: a structural weakness in the Chinese economy, some scarring effect
Speaker 3: within households after the pandemic that lead them to revise
Speaker 3: down China's growth through the medium horizon. If China does
Speaker 3: slow more visibly, that would affect commodity prices, that would
Speaker 3: affect the motivation to invest in equipment spending. Usually when
Speaker 3: you see global growth slow down, the first place you
Speaker 3: see in the US economic data is in equipment's investment.
Speaker 3: So that could further drag down GDP growth.
Speaker 2: When we come back, can consumer spending word offer recession
Speaker 2: and on one of the bright spots in the US
Speaker 2: economy even with the recession fears has been consumer spending
Speaker 2: has remained really strong, and now you're finding that maybe
Speaker 2: that might not last either.
Speaker 3: One of the most popular cited reasons for the soft
Speaker 3: lend is the resiliency of consumption, right, and I would
Speaker 3: say that there are two reasons to doubt why consumption
Speaker 3: should not be a key predictor. Number One. In past recessions,
Speaker 3: services consumption remain resilient even in a recession. I think
Speaker 3: the median American household consumer is not a forelooking person.
Speaker 3: As long as you can borrow, you spend, So this
Speaker 3: is why even in a downturm, people still spend in services. Second,
Speaker 3: if consumption does slow down, that as additional bad news
Speaker 3: on economic growth. And we do see some good reasons
Speaker 3: why it would slow down ultimately, and one of them
Speaker 3: is that I mentioned the resumption of student loan payments.
Speaker 3: We think that that would altogether add up to about
Speaker 3: seventy billion dollars per year spent on paying back student
Speaker 3: loans instead of spending on things and services. Another reason
Speaker 3: is because all these pandemic savings that people had from
Speaker 3: either a paycheck from the government or from forced saving
Speaker 3: because they were not able to spend during the shutdown years,
Speaker 3: those savings are running down for about eighty percent of
Speaker 3: the American households. And finally, this summer, we actually saw
Speaker 3: a once in a blue moon kind of consumption spending splurreed.
Speaker 3: That's due to three cultural phenomena in the US. Number one,
Speaker 3: you have the Barbenheimer movie release that led a lot
Speaker 3: of people to go back to movie theaters. And number two,
Speaker 3: you have Taylor Swift concert tours in the US. On
Speaker 3: top of that, you have Beyonces concert tour in the
Speaker 3: US as well. Imagine this, Each person on average who
Speaker 3: go to a Taylor Swift concert pay fifteen hundred dollars
Speaker 3: for altogether at the concert tickets, hotel fans, memorabilia, airline tickets,
Speaker 3: and for Beyonce, the average concert goer spend even more
Speaker 3: because the typical fan of Beyonce is older than a
Speaker 3: typical person who goes to Taylor Swift concert. So what
Speaker 3: you see is then a Q three Barbenheimer Taylor Swift
Speaker 3: beyond explosion of things that cause people to spend irrationally
Speaker 3: because they just want to go for it. And then
Speaker 3: in Q four you have this nuclear winter of entertainment
Speaker 3: because of Hollywood writer strikes no more Taylor Swift, no
Speaker 3: more Beyonce. So you have this cliff of services spending.
Speaker 3: So what we're expecting is this big drop off in
Speaker 3: consumption spending will start to become evident in consumption data
Speaker 3: in the coming months.
Speaker 2: And Enna, you actually were able to put a figure
Speaker 2: on just how much all of these cultural events added
Speaker 2: to the US economy.
Speaker 3: Yes, we estimate that those three things together added about
Speaker 3: eight point five billion to the third quarter growth in
Speaker 3: annualized growth domestic product growth terms, that is about zero
Speaker 3: point five percentage point. You added point five percentage point
Speaker 3: to Q three, then you must have point five percentage
Speaker 3: point subtracted off Q four if you'd no longer have
Speaker 3: those growth drivers.
Speaker 2: That's an astonishing figure that those things could have such
Speaker 2: an effect on an economy as large as the US is.
Speaker 3: It's like an Olympic event basically.
Speaker 2: And you said that people will spend as long as
Speaker 2: they're able to borrow. And that's another thing that you
Speaker 2: found in your analysis that banks are starting to become
Speaker 2: a little stingier when it comes to lending out money.
Speaker 3: We were searching for the one indicator which has a
Speaker 3: good track worker of predicting recession, and when I was
Speaker 3: reading the October two thousand and seven, FOMC transcript. I
Speaker 3: note that their staff was talking about all these positive
Speaker 3: economics surprises. Then the one indicator that showed that something
Speaker 3: bad is happening is the FED Senior Loan Officer's Survey
Speaker 3: or short for SLUS. That survey tells you what are
Speaker 3: the plans of banks in lending. And typically when banks
Speaker 3: indicate that they're planning to reduce lending to consumers reduce
Speaker 3: lendings to firms, that has been a very good indicator
Speaker 3: of credit tightening. And when you don't have credit flowing
Speaker 3: freely in the economy, that's when you start to see
Speaker 3: more clearer signs of slow down in growth.
Speaker 2: When we come back, what would it take to avoid
Speaker 2: a recession? This is all painting a pretty bracing picture
Speaker 2: of what may be ahead of us. And yet you
Speaker 2: also lay out what you call the arguments for the defense,
Speaker 2: the reason why maybe this won't come to pass and
Speaker 2: we will have a bit of a soft landing. Can
Speaker 2: you tell us what they are?
Speaker 3: The best argument for a defense is if you believe
Speaker 3: that there's a productivity boom underway, possibly from AI. If
Speaker 3: you look at the past fifty years of history, of
Speaker 3: FED hiking cycles and soft landing. There had only been
Speaker 3: one successful case of soft landing, which happened in the
Speaker 3: mid nineteen nineties, and that was because Alan Greenspan decided
Speaker 3: not to further hike interest rates because he'd strongly believed
Speaker 3: that productivity growth is rising. Therefore wage growth could continue
Speaker 3: to increase with that gen inflationary pressure. In this case, lately,
Speaker 3: we have been seeing a lot of labor strikes, right,
Speaker 3: and the settlement of these labor strikes shows that people
Speaker 3: are asking for four or five percent wage growth per year,
Speaker 3: and not only for this year but in the next
Speaker 3: couple of years. In order for that to be consistent
Speaker 3: with the FEDS two percent inflation target, it means that
Speaker 3: productivity growth got to pick up to around two percent
Speaker 3: or even three percent from about one point five percent.
Speaker 3: I believe that the FED believes that trend productivity has
Speaker 3: been running at about one point five percent over the
Speaker 3: last couple of years. So if you do believe in
Speaker 3: that AI boom, the FED would allow this wage growth
Speaker 3: increase to happen and sit back and let productivity do
Speaker 3: its work. But I would say that to have confidence
Speaker 3: about this judgment that productivity is rising is as hard
Speaker 3: as having confidence over what the neutral rate that our
Speaker 3: star is, and I think that Chair Powell will not
Speaker 3: have that kind of conviction, strong enough of a conviction
Speaker 3: of a productivity boom underway before he paused the rate hike.
Speaker 2: And then some of the things that you're watching, which
Speaker 2: could spell bad news you say, could turn around and
Speaker 2: wind up actually being good for the economy.
Speaker 3: Yeah. I mean, it could easily be that the UAW
Speaker 3: strike could end tomorrow and then government shut down could
Speaker 3: be completely averted if Republicans and Democrats decide to work together,
Speaker 3: and all that disruption would just be a rounding error
Speaker 3: for Q four. It could also be that Bidenomics could
Speaker 3: be successful in reversing decades of economist's understanding of industrial policies,
Speaker 3: which is that while government subsidization actually helps spur private
Speaker 3: investment in these selected sectors and as a result, lead
Speaker 3: to an investment boom in the US, if that happens,
Speaker 3: we can totally avert a recession.
Speaker 2: But I think we can all hear the skepticism in
Speaker 2: your voice. You don't really think that that's likely.
Speaker 3: I think it really stems from our exercise in this
Speaker 3: piece of article, which is we go back to history
Speaker 3: and look at the probability of what is the most
Speaker 3: likely outcome, and yes, there's always a chance this soft
Speaker 3: landing will be the reality. But I think that hinges
Speaker 3: on an assumption that this time is different, and I
Speaker 3: just feel like it's such a hard argument to make
Speaker 3: that this time is different that I would still say
Speaker 3: our base case is a recession.
Speaker 2: Enna if a recession does come to pass, is there
Speaker 2: any way of telling from all of these numbers that
Speaker 2: you're looking at how deep it will be and how
Speaker 2: long it might last.
Speaker 3: Our base case is for a short and shallow recession.
Speaker 3: But it is a very low conviction call because you
Speaker 3: when a recession happens, it's because all shocks hit the
Speaker 3: economy at the same time and some kind of non
Speaker 3: linearity effect is happening. It's kind of like somebody in
Speaker 3: the movie theater is shouting fire and everybody rushes out
Speaker 3: of exit. It's usually a kind of like a freak
Speaker 3: out moment. It's hard to tell how severe it would
Speaker 3: be once those dynamics kick off.
Speaker 2: Anna, thanks so much for giving us a look at
Speaker 2: what's to come. Thanks thanks for listening to us here
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