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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: It's that time of December. We're taking stock of the

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Speaker 2: year that was and looking forward to the upcoming year.

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Speaker 2: Problem is, trying to describe the state of the US

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Speaker 2: economy in twenty twenty five isn't exactly a straightforward task.

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Speaker 2: Still we try.

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Speaker 3: We're journalists, we're storytellers. We're always looking for a story

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Speaker 3: in the data.

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Speaker 2: Stacy Vanismith is a financial journalist and the host of

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Speaker 2: Bloomberg Businessweeks Everybody's Business podcast. She says, when she tried

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Speaker 2: to reflect on the year that was, the data just

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Speaker 2: didn't translate into neat narratives.

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Speaker 3: I just couldn't find one that held together.

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Speaker 2: From jobs numbers and consumer sentiment polls to stock valuations

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Speaker 2: and inflation indicators. Everything has been topsy turvy.

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Speaker 3: Right now in the economy. There are parts that are

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Speaker 3: so strong and so good. I mean, obviously the markets

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Speaker 3: setting records all the time, there's all this really exciting

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Speaker 3: growth and expansion with AI. At the same time, the

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Speaker 3: job market is so stagnant. It feels like it's in

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Speaker 3: a deep freeze. It's just a hard economy to get

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Speaker 3: your head around. Every time I sort of identify a

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Speaker 3: narrative thread, it goes away. What I ended up landing

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Speaker 3: on was Alice in Wonderland. No, I'm because that is

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Speaker 3: a place where nothing makes sense. When Alice goes into Wonderland,

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Speaker 3: she follows the rabbit and like is in this strange world,

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Speaker 3: her perspective is always getting thrown off.

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Speaker 4: How very curious.

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Speaker 3: She's big, she's little.

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Speaker 4: Much of the gains wiped out as investors sold off

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Speaker 4: after the rally.

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Speaker 2: People speaking gibberish North Korea has used cryptocurrency to evade sanctions.

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Speaker 3: She thinks she's getting a handle on what's going on.

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Speaker 3: She doesn't have a handle on what's going on.

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Speaker 2: There is growing uncertain over the economy again as President

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Speaker 2: Trump renews a possible hike in Chinese goods.

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Speaker 3: And that's how I feel what I look at the

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Speaker 3: economy like none of these numbers are lining up. We

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Speaker 3: are in a through the looking glass economy.

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Speaker 2: To me, I'm Sarah Holder, and this is the big

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Speaker 2: tick from Bloomberg News Today. On the show Bloomberg, Stacey

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Speaker 2: Vano Smiths and Moody's analytics Mark Zandy help us understand

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Speaker 2: what this year's wonky economy can tell us. As we

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Speaker 2: head for twenty twenty six, Good things stabilize or are

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Speaker 2: we still seeing recession risks down the rabbit hole? For

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Speaker 2: several years in a row, economists, market watchers, and everyday

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Speaker 2: people have looked at the US economy and saw warning

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Speaker 2: signs of a recession. Remember when yield curve inverted in

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Speaker 2: twenty twenty two, and when the unemployment rate triggered something

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Speaker 2: called the Psalm rule in twenty twenty four. These have

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Speaker 2: historically been reliable recession predictors.

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Speaker 3: A few years ago, all of these economic indicators were

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Speaker 3: saying one hundred percent chance of a recession, ninety percent

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Speaker 3: chance of a recession. All of these really respected, venerated

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Speaker 3: institutions that study the economy very seriously. We're all saying

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Speaker 3: a recession's coming, and then here we are. It just

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Speaker 3: never came.

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Speaker 2: And there were also recession fears this year, right what

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Speaker 2: what do you think was kind of the peak of

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Speaker 2: our recession fears in twenty twenty five.

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Speaker 3: Oh, Liberation Day in April Liberation Day, when President Trump

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Speaker 3: unveiled the chart, you remember the chart on the White

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Speaker 3: House lawn with all of those double digit tariffs on

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Speaker 3: dozens of countries all over the world. It was shocking.

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Speaker 3: I mean, here at Bloomberg, I think our economists recession

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Speaker 3: predictions went up from twenty percent to forty percent, I believe,

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Speaker 3: and everybody just thought, this is going to throw such

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Speaker 3: a huge wrench into our economy, into economies around the world.

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Speaker 3: This is going to do it. A recession is going

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Speaker 3: to come. It didn't come. Here we are end of

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Speaker 3: twenty twenty five, no recession. In fact, the economy has

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Speaker 3: been growing at a pretty strong pace, like over three percent.

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Speaker 2: That doesn't mean there aren't still fears of an economic

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Speaker 2: contraction as we head into twenty twenty six. Analysts surveyed

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Speaker 2: by Bloomberg put the odds of recession next year around

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Speaker 2: thirty percent. Mark Zandy, the chief economist at Moody's Analytics,

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Speaker 2: said his team has it even higher.

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Speaker 1: Well, to be precise, forty two percent probability recession over

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Speaker 1: the next twelve months. It's based on a model that

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Speaker 1: we've created that looks a lot of different data. I mean,

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Speaker 1: and that's very consistent with my intuition. So if you said, hey, Mark,

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Speaker 1: you know, what do you think the probability recession is

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Speaker 1: over the next year, I'd say forty to forty five percent.

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Speaker 1: So at this point in time, both the model and

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Speaker 1: Zandy say they're roughly the same thing.

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Speaker 2: It's not quite a coin flip, but it's close. And

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Speaker 2: Mark things these odds are uncomfortably high in a healthy economy.

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Speaker 2: He says that number should be closer to fifteen percent.

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Speaker 1: We're growing, but it's a very fragile growth. You know,

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Speaker 1: everything's got to kind of stick to script here. The

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Speaker 1: way I think about what's going on in the economy

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Speaker 1: and where it's going to be over the next year

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Speaker 1: is it's being buffeted by these very two powerful crosswinds.

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Speaker 1: One is deglobalization, Tariff's immigration policy or part of that.

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Speaker 4: There's other aspects of that as well.

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Speaker 1: And the tailwind is AI And these two forces are

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Speaker 1: really buffeting each other to a draw. But if anything

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Speaker 1: changes to alter that balance between those headwinds and tailwinds,

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Speaker 1: then we got a problem.

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Speaker 2: And those headwinds are strong. Mark says tariffs and immigration

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Speaker 2: crackdowns are already impacting sectors like manufacturing.

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Speaker 1: That's a very trade sensitive part of the economy that's

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Speaker 1: in recession. It's you know, we're losing jobs and industrial

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Speaker 1: productions going nowhere fast and c manager surveys are indicating

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Speaker 1: contraction transportation distribution, also trade sensitive that's contracting that's in recession.

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Speaker 2: Transportation distribution, meaning like the trucking industry.

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Speaker 1: Yeah, like trucking because there's just a lot less trade,

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Speaker 1: you know, going through the ports and through the rail

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Speaker 1: system and through the trucking systems. Also housing construction broadly

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Speaker 1: outside of data centers, you know, AI, it's in deeper session,

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Speaker 1: you know, contracting. But at the end of the day,

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Speaker 1: you know, the key to whether we go into recession

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Speaker 1: or not is whether businesses begin to lay off workers

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Speaker 1: or not.

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Speaker 2: Stacy Vennixsmith says it's the labor market that worries heard

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Speaker 2: the most too.

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Speaker 3: The job market is in a really strange place. Fewer

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Speaker 3: and fewer people are quitting, and fewer and fewer people

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Speaker 3: are hiring.

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Speaker 2: This deep freeze that you're talking about.

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Speaker 3: Deep freeze, yes, And I think the problem with that

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Speaker 3: is what it's showing is a job market where everybody's

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Speaker 3: kind of clinging onto the job they have, and that

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Speaker 3: puts people in weird positions. If you don't feel like

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Speaker 3: you've got options as a worker, that means are you

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Speaker 3: going to ask for a promotion? Are you going to

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Speaker 3: ask for a raise, Are you gonna, you know, take

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Speaker 3: a chance. Probably not. You're just kind of waiting it out,

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Speaker 3: waiting to until things get better.

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Speaker 2: And in the meantime you are still having to buy things,

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Speaker 2: still having to get groceries, still having to pay rent. Yes,

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Speaker 2: so I want to talk about inflation this past year

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Speaker 2: before we talk about what we're expecting next year. What

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Speaker 2: we anticipated this year was that after the Liberation Day

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Speaker 2: tariffs prices with skyrocket. That hasn't quite happened, but inflation

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Speaker 2: is still weighing on people.

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Speaker 1: Right.

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Speaker 3: This is so interesting because, yes, this is exactly why

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Speaker 3: all the recession fears really took off after Liberation Day.

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Speaker 3: There was this idea of, oh, no, if we're taxing

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Speaker 3: imports from China at fifty percent, like that is going

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Speaker 3: to immediately trickle down to store shelves. That has not happened.

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Speaker 3: I mean, inflation is still a little bit higher than

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Speaker 3: we want. It's just over three percent, but not anywhere

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Speaker 3: near I think what we feared it would be. I

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Speaker 3: think there are a few reasons for that. Harvard has

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Speaker 3: a great it's called the Pricing.

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Speaker 2: Lab, led by Alberta Cavallo.

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Speaker 3: Yeah, Cavallo has studied this a lot, and what he

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Speaker 3: found was there's often a lag between when tariffs are imposed,

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Speaker 3: companies will often hesitate to raise prices. They don't want

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Speaker 3: to lose customers. They don't want to raise prices before

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Speaker 3: the competition. But Cavallo did say he thought price rises

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Speaker 3: were coming. Also, though the tariffs have changed a lot

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Speaker 3: since Liberation Day, they're here, they're gone, So a lot

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Speaker 3: of the tariffs didn't end up happening or are still

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Speaker 3: kind of in debate or in a gray area.

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Speaker 2: Well, let's talk about how consumers are behaving in today's economy.

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Speaker 2: Consumer sentiment is low, but spending hasn't really slowed. The

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Speaker 2: top ten percent of earners are driving nearly fifty percent

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Speaker 2: of the spending. There's this bifurcation going on. How are

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Speaker 2: consumers feeling and how are they acting? And why does

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Speaker 2: that matter to me?

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Speaker 3: That's maybe the most important economic story of the year.

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Speaker 3: People will often refer to this as the K shaped economy,

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Speaker 3: just meaning that one part of the economy, the upper

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Speaker 3: leg of the K, is like kind of getting wealthier

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Speaker 3: and wealthier and wealthier. These are people who have money

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Speaker 3: in the markets. Then there's a part of the economy

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Speaker 3: that isn't necessarily super invested in the markets that is

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Speaker 3: not invested in AI. Just look the regular working person.

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Speaker 3: That is the leg of the k that's going down,

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Speaker 3: and for those workers things are pretty rough. I mean, yes,

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Speaker 3: inflation isn't so bad, but if you look across to

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Speaker 3: when the pandemic started, food is more than thirty percent

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Speaker 3: more expensive than it was. Rent is hugely more expensive.

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Speaker 3: Electricity costs are forty percent more expensive. So we're in

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Speaker 3: a situation where a lot of people in the economy

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Speaker 3: are just feeling really squeezed. This is not a healthy,

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Speaker 3: stable situation. You want everyone in an economy doing better

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Speaker 3: and better. You don't want just one part of the

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Speaker 3: economy doing better. That's really unstable. It's a bad recipe.

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Speaker 2: Well, so, I mean, what is the outlook for the

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Speaker 2: consumer heading into twenty twenty six? You painted a pretty

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Speaker 2: grim picture, But what is the data telling us about

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Speaker 2: how this might evolve next year or deepen?

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Speaker 3: Well, this is the thing about the Alice in Wonderland economy.

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Speaker 3: Consumer sentiment is terrible. It's like near the lowest levels

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Speaker 3: it's been in decades. People are feeling horrible about the economy.

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Speaker 3: I think a lot of that's the job market. So

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Speaker 3: when the holidays spending season happened, especially Black Friday, which

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Speaker 3: is this big measure, I thought it was going to

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Speaker 3: be a real disaster for retailers. A lot of them

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Speaker 3: make a third of their money around this time. This

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Speaker 3: is a big, big deal. Retail sales did great, they

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Speaker 3: looked great. Somehow we feel terrible. We're spending more than ever.

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Speaker 2: Yeah, this is just like it's confounding.

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Speaker 3: It's confounding, it's through the looking glass. Yes, it is

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Speaker 3: the cognitive dissonance that is the twenty twenty five economy.

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Speaker 2: After the break, the tailwind that's been keeping the US

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Speaker 2: economy growing, and what could happen next year if the

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Speaker 2: winds shift.

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Speaker 3: I think AI has saved our bacon.

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Speaker 2: Artificial intelligence. Stacey Vnixsmith, the host of Bloomberg Businessweeks Everybody's

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Speaker 2: Business podcast, says, the companies developing AI, the chips they're buying,

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Speaker 2: the data centers they use for power, it's all driven

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Speaker 2: the stock market. In twenty twenty five.

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Speaker 3: I saw this great chart. It was basically the SNP

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Speaker 3: four ninety three, meaning the S and B five hundred

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Speaker 3: minus what they call the Magnificent seven stocks. Those are

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Speaker 3: the stocks really driving the economy right now. All of

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Speaker 3: them are very interwoven with AI. It's Google, Amazon, Apple, Meta, Microsoft, Nvidia,

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Speaker 3: and Tesla. And if you take them out and you

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Speaker 3: look at what happened, the S and P five hundred

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Speaker 3: subtracting the Magnificent seven is essentially flat Wow, basically single

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Speaker 3: handedly responsible for all of the market growth we saw

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Speaker 3: this year. But AI's a little tricky because right now

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Speaker 3: it's creating a lot of jobs because of data center construction.

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Speaker 3: Because AI is notoriously like really thirsty, it needs a

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Speaker 3: lot of juice, so data centers are going up, and

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Speaker 3: also companies are kind of expanding. What Mark Xandy said

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Speaker 3: to me was he was like, we're walking a really

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Speaker 3: fine line. He's like, if AI replaces as many jobs

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Speaker 3: as quickly as people are sort of dreaming it will,

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Speaker 3: then that's going to cause the crisis in the job market.

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Speaker 3: And if it doesn't grow fast enough or it doesn't

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Speaker 3: live up to those promises, the markets are going to panic.

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Speaker 3: So there is a fine line, a soft landing of

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Speaker 3: AI that needs to happen.

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Speaker 4: There's a kind of a narrow needle to thread.

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Speaker 2: Moody's Analytics Chief economist Mark Zandy.

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Speaker 4: Again, I think we're going to be able to do it.

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Speaker 1: But that's why recession risks start so high, because it

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Speaker 1: is a narrow path that we have to make our

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Speaker 1: way through without a downturn.

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Speaker 2: I mean, what might happen to tip the scale either

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Speaker 2: way to bring the economy closer to a potential recession

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Speaker 2: or to really stabilize it and bring it closer to

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Speaker 2: that fifteen percent number.

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Speaker 1: Well, the kind of the risk that's kind of top

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Speaker 1: of mind is the runaway stock market. The surge and

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Speaker 1: AI stock prices and particular valuations are very high.

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Speaker 4: Now.

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Speaker 1: I'm on board with the idea that AI is a

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Speaker 1: big deal. It's going to raise productivity growth, and we

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Speaker 1: are going to see gains and profitability that will support

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Speaker 1: higher stock prices, but it just feels like stock investors

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Speaker 1: are kind of over their skis, and it feels like

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Speaker 1: speculation starting to creep into the market.

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Speaker 4: What I mean by that is that.

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Speaker 1: Investors are starting to purchase these stocks simply because they've

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Speaker 1: risen in price in the recent past and have concluded

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Speaker 1: therefore a rise consistently going forward, and that generally when

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Speaker 1: you get into that kind of a market.

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Speaker 4: It's at risk of correcting.

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Speaker 1: That's not my baseline, but I think think if you

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Speaker 1: had you said, you know, what would be the most

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Speaker 1: likely downside scenario where we could go into recession that

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Speaker 1: you know. The other thing to point out is, you know,

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Speaker 1: the run up in stock prices has been critical to

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Speaker 1: growth because it drives up wealth, and through wealth effects,

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Speaker 1: the consumers that are very well to do and own

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Speaker 1: the stocks are outspending. So if you construct a scenario

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Speaker 1: where price is correct, then that wealth effect goes from

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Speaker 1: positive and negative, and that knocks one of the legs

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Speaker 1: out from the economy's growth and thus the higher risks

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Speaker 1: of recession. So that's the downside risk.

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Speaker 2: But Mark also laid out the potential upside things that

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Speaker 2: could push the recession risks lower.

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Speaker 1: We've got a lot of stimulus coming, deficit finants, tax cuts,

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Speaker 1: you know, that's one the one big beautiful bill Act,

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Speaker 1: you know, cuts taxes for businesses through accelerated depreciation, and

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Speaker 1: we're going to get some individual tax cuts, lower taxes

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Speaker 1: on tips, over time, salt deduction, that kind of thing,

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Speaker 1: and it's all deficit finants just so that it provides

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Speaker 1: you know, near trom stimulus so obviously raises our deficits

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Speaker 1: in debt, but it does support growth and that could

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Speaker 1: be more of a tailwind in twenty twenty six that

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Speaker 1: I'm anticipating, and we get a better year than I expect.

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Speaker 2: So, you know, say we dodge another bullet, we don't

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Speaker 2: have a recession next year, But what are the concerns

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Speaker 2: about an economy that continues in the trajectory that it's

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Speaker 2: been going.

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Speaker 1: Right now, I've been at professional commis for thirty five

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Speaker 1: years and I've been following the fiscal situation for that

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Speaker 1: period of time, and I look at three indicators to

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Speaker 1: gauge the fiscal aalth of the nation, debt to GDP,

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Speaker 1: deficit to GDP, and interest payments at a percentag GP.

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Speaker 1: In that thirty five years, I've never had a time

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Speaker 1: when all three of those indicators at the same time

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Speaker 1: are screaming we got a big problem. You know, our

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Speaker 1: fiscal situation is really problematic and the direction of travel

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Speaker 1: is very disconcerting. If we don't change policy and stay

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Speaker 1: on the same path, then are all these these indicators

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Speaker 1: are going to keep moving in the wrong digression. At

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Speaker 1: some point it's going to lead to much higher interest

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Speaker 1: rates and be already corrosive on the economies. So that's

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Speaker 1: one key thing that we need to address. And at

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Speaker 1: some point there will be a cliff event. It will

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Speaker 1: boil over and be a serious problem inst racial spike.

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Speaker 1: It could be a year from now, it could be

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Speaker 1: twenty five years from now, but it feels like if

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Speaker 1: we don't change something, that's going to be the case.

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Speaker 1: It doesn't mean we're going to recession next year, but

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Speaker 1: it does mean at some point there's going to be

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Speaker 1: some form of day reckoning. In fact, that go far

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Speaker 1: as to say, Sarah, I'm not sure we'll ever generate

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Speaker 1: the political will necessary to make these hard choices unless

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Speaker 1: we actually do have a cliff event, we have a

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Speaker 1: spike in interest rates and have a crisis to catalyze

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Speaker 1: the political will necessary to make these changes. So that's

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Speaker 1: something you know, I think we're going to grapple with.

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Speaker 1: I don't know that that's a twenty twenty six event,

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Speaker 1: but that's an event in our future if we don't

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Speaker 1: change something.

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Speaker 2: On a lighter note, to wrap up here, if you

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Speaker 2: were the US economy, what would your new year's resolution be?

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Speaker 4: My New year's resolution?

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Speaker 1: I mean my New Year's wish, it would be, you know, hey, guys,

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Speaker 1: could we just you know, come together and solve this

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Speaker 1: immigration problem, because there's no better thing than we can

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Speaker 1: do to address our both near and long term economic

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Speaker 1: problems and coming up with a rational immigration plan to

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Speaker 1: allow for more immigrants into the country. Goodness knows, we

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Speaker 1: need immigrants of all skill levels, low skilled, medium skilled,

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Speaker 1: high skilled. We need immigration form, we need a rational

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Speaker 1: immigration policy. Let's just come together. That would be my

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Speaker 1: new Year's wish for twenty twenty six. And I think

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Speaker 1: if that happened, then I think, you know, we'd be

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Speaker 1: in a much better place in twenty twenty six. And

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Speaker 1: in twenty thirty six.

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Speaker 2: I asked my colleague Stacy the same question, any economic resolutions.

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Speaker 3: So if I were the US economy, my new Year's

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Speaker 3: resolution would be everything in moderation. I would just be like,

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Speaker 3: you know, just don't overdo it. Slow and steady, just

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Speaker 3: like toe the line, toe the line. Yes, go back

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Speaker 3: through the looking glass back where like jobs numbers makes sense,

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Speaker 3: with the markets, makes sense, with consumer spending, where it

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Speaker 3: all looks like, yeah, go back to normal.

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Speaker 2: We're hoping for clarity and stability in twenty twenty six.

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Speaker 3: Yes, Yes, clarity instability sound amazing. Let's do that.

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Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.

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Speaker 2: To get more from the Big Take and unlimited access

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Speaker 2: to all of bloomberg dot com, subscribe today at Bloomberg

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Speaker 2: dot com slash podcast offer. Thanks for listening. We'll be

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Speaker 2: back tomorrow.