1 00:00:10,680 --> 00:00:14,800 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,880 --> 00:00:17,200 Speaker 2: I'm Jill Wysenthal and I'm Tracy Alloway. 3 00:00:17,440 --> 00:00:20,200 Speaker 1: Tracy, I would say the last few weeks, in a 4 00:00:20,320 --> 00:00:23,640 Speaker 1: very real way, I would say optimism over the soft 5 00:00:23,720 --> 00:00:26,920 Speaker 1: landing scenario, or at least the end of the raid 6 00:00:26,960 --> 00:00:29,760 Speaker 1: hikes has become like deeply conventional wisdom. 7 00:00:29,800 --> 00:00:31,840 Speaker 2: I think I would agree with that, although I think 8 00:00:31,840 --> 00:00:34,839 Speaker 2: it's sort of started in the summer. We saw some 9 00:00:35,040 --> 00:00:37,720 Speaker 2: inklings of it then, but you're right, it really seems 10 00:00:37,720 --> 00:00:40,000 Speaker 2: to have crystallized in recent weeks. And of course the 11 00:00:40,040 --> 00:00:44,680 Speaker 2: irony is that going into twenty twenty three, the consensus 12 00:00:44,760 --> 00:00:47,960 Speaker 2: was really for recession. We had a number of people 13 00:00:47,960 --> 00:00:50,879 Speaker 2: who were talking about the outlook for the economy this 14 00:00:50,960 --> 00:00:55,000 Speaker 2: year and how bad it might be, and then going 15 00:00:55,040 --> 00:00:58,040 Speaker 2: into twenty twenty four, it seems like we've completely flipped around. 16 00:00:58,120 --> 00:01:01,600 Speaker 2: So the hills are alive with the sound of soft landings. 17 00:01:01,920 --> 00:01:05,039 Speaker 1: Yeah, and I think you're right. Obviously, twenty twenty three 18 00:01:05,280 --> 00:01:09,000 Speaker 1: has broken a lot of people's brains. Probably a broader theme, 19 00:01:09,080 --> 00:01:13,800 Speaker 1: which is that the entire COVID cycle, people have been 20 00:01:13,840 --> 00:01:16,200 Speaker 1: looking at it through the lens of a traditional business 21 00:01:16,200 --> 00:01:19,000 Speaker 1: cycle or macrocycle, and it feels like a lot of 22 00:01:19,040 --> 00:01:22,440 Speaker 1: that just hasn't worked, starting from probably the fast rebound 23 00:01:22,480 --> 00:01:24,040 Speaker 1: in late twenty twenty oh totally. 24 00:01:24,080 --> 00:01:26,640 Speaker 2: So I feel like the indicator that everyone was looking 25 00:01:26,680 --> 00:01:30,160 Speaker 2: at in sort of late twenty twenty two early twenty 26 00:01:30,200 --> 00:01:33,440 Speaker 2: twenty three was the yield curve, the inverted yield curve, 27 00:01:33,520 --> 00:01:35,399 Speaker 2: and there was this discussion of how you know, this 28 00:01:35,560 --> 00:01:40,119 Speaker 2: is the traditional harbinger of a recession, but maybe things 29 00:01:40,160 --> 00:01:42,920 Speaker 2: are different this time for a variety of reasons. And 30 00:01:42,959 --> 00:01:47,040 Speaker 2: then this year, you know, fast forward to November, sort 31 00:01:47,040 --> 00:01:49,720 Speaker 2: of late October of twenty twenty three, it feels like 32 00:01:49,840 --> 00:01:52,320 Speaker 2: the other indicator that everyone is starting to talk about 33 00:01:52,640 --> 00:01:54,760 Speaker 2: or was starting to talk about, is the PAM rule. 34 00:01:54,880 --> 00:01:57,520 Speaker 2: So the idea that you know, one measure of unemployment, 35 00:01:57,560 --> 00:02:01,080 Speaker 2: the moving average, has been moving up, and traditionally this 36 00:02:01,200 --> 00:02:06,800 Speaker 2: indicates an upcoming recession because unemployment increases non linearly in 37 00:02:07,000 --> 00:02:10,160 Speaker 2: every business cycle. And supposedly this was a hard and 38 00:02:10,200 --> 00:02:13,240 Speaker 2: fast rule. But as we discussed with Claudia on one 39 00:02:13,280 --> 00:02:16,480 Speaker 2: of our episodes of Lots More again, maybe things are 40 00:02:16,520 --> 00:02:17,320 Speaker 2: different this time. 41 00:02:17,720 --> 00:02:19,400 Speaker 1: I do think it's important that you bring that up, 42 00:02:19,400 --> 00:02:22,280 Speaker 1: because it does feel like the labor market situation is 43 00:02:22,400 --> 00:02:24,640 Speaker 1: kind of the fly and the ointment of the soft 44 00:02:24,720 --> 00:02:29,480 Speaker 1: landing scenario, which is that there's clearly some kind of softening. 45 00:02:29,680 --> 00:02:31,960 Speaker 1: I guess I would say in the labor market, it's 46 00:02:32,080 --> 00:02:34,920 Speaker 1: the question how far does that go? When will the 47 00:02:34,960 --> 00:02:36,960 Speaker 1: FED have to cut? Should the FED be taking out 48 00:02:36,960 --> 00:02:39,720 Speaker 1: some sort of insurance cut sooner rather than later to 49 00:02:39,720 --> 00:02:43,000 Speaker 1: forestall a downturn? All big macro questions. We are nowhere 50 00:02:43,040 --> 00:02:46,480 Speaker 1: near the end of understanding this macrocycle, and I think 51 00:02:46,480 --> 00:02:47,679 Speaker 1: we got to get a better handle. 52 00:02:47,480 --> 00:02:49,600 Speaker 2: On the good news about this macro cycle is I 53 00:02:49,600 --> 00:02:52,639 Speaker 2: feel like twenty years from now, fifty years from now, 54 00:02:52,680 --> 00:02:56,120 Speaker 2: there will still be studies coming about exactly what. 55 00:02:56,160 --> 00:02:59,480 Speaker 1: Just happened unambiguously. I am confident on that. All Right, Well, 56 00:02:59,480 --> 00:03:02,680 Speaker 1: we do literally have the perfect guests to help us 57 00:03:02,880 --> 00:03:06,520 Speaker 1: understand this moment in macro, what happened in twenty twenty three, 58 00:03:06,639 --> 00:03:08,919 Speaker 1: what we should be looking forward to in twenty twenty four. 59 00:03:09,240 --> 00:03:13,240 Speaker 1: I'm thrilled to welcome back on to the show, Jan Hatzias. 60 00:03:13,240 --> 00:03:15,680 Speaker 1: We've had them on a few times. Jan Hatzias, chief 61 00:03:15,680 --> 00:03:19,440 Speaker 1: economist at Goldman Sachs. Joan, thank you so much for 62 00:03:19,520 --> 00:03:21,560 Speaker 1: coming into the studio and coming on odlots. 63 00:03:21,680 --> 00:03:23,800 Speaker 3: It's great to be back with you, Joe and Tracy. 64 00:03:24,120 --> 00:03:25,200 Speaker 3: Always wonderful to be here. 65 00:03:25,280 --> 00:03:27,600 Speaker 1: Thank you so much. You put out a recent note, 66 00:03:28,040 --> 00:03:30,480 Speaker 1: and what I really loved about it is that, you know, 67 00:03:30,480 --> 00:03:34,960 Speaker 1: there's this cliche that many markets journalists, maybe even tracing 68 00:03:35,040 --> 00:03:37,480 Speaker 1: myself at times, have used, where it's like, blah blah blah, 69 00:03:37,560 --> 00:03:40,000 Speaker 1: happens now here comes the hard part. It's just one 70 00:03:40,000 --> 00:03:42,400 Speaker 1: of those things that people love to say. It's this trope. 71 00:03:42,640 --> 00:03:44,400 Speaker 1: All the easy money has been made, now here's the 72 00:03:44,440 --> 00:03:47,000 Speaker 1: hard part. Inflation's gone down. Here, here's the hard part. 73 00:03:47,240 --> 00:03:50,160 Speaker 1: You and she said the opposite. You said, actually coming 74 00:03:50,240 --> 00:03:52,840 Speaker 1: up next, there's quite a bit of disinflation in store, 75 00:03:52,920 --> 00:03:56,640 Speaker 1: and that this stage of further declines and inflation should 76 00:03:56,680 --> 00:03:58,640 Speaker 1: be the fairly easy part. That we've passed the hard 77 00:03:58,640 --> 00:04:01,600 Speaker 1: part of fighting inflation. What do you let's start there? 78 00:04:01,960 --> 00:04:05,400 Speaker 1: What gives you confidence that actually, regardless of what happened, 79 00:04:05,480 --> 00:04:07,400 Speaker 1: there's more disinflation in the pipe. 80 00:04:07,600 --> 00:04:10,480 Speaker 3: You're right. The title of our annual Outlook Report, which 81 00:04:10,480 --> 00:04:12,560 Speaker 3: we published a couple of weeks ago, is the hard 82 00:04:12,560 --> 00:04:15,920 Speaker 3: part is over. And think the reason why I think 83 00:04:15,960 --> 00:04:18,600 Speaker 3: the hard part is over is that we have a 84 00:04:18,600 --> 00:04:22,760 Speaker 3: proof of concept that we can bring down inflation and 85 00:04:23,000 --> 00:04:28,920 Speaker 3: rebalance the labor market without having to crush the economy 86 00:04:28,960 --> 00:04:31,320 Speaker 3: and put the economy into recession. And I think we've 87 00:04:31,360 --> 00:04:35,200 Speaker 3: seen that very clearly in twenty twenty three. We've seen 88 00:04:35,240 --> 00:04:37,800 Speaker 3: it in the US, but we've seen it much more 89 00:04:37,839 --> 00:04:44,080 Speaker 3: broadly across G ten economies and EM economies that saw 90 00:04:44,200 --> 00:04:49,320 Speaker 3: a big surge in inflation in twenty twenty one, Inflation 91 00:04:49,440 --> 00:04:52,880 Speaker 3: has come down. If you take an average of all 92 00:04:52,920 --> 00:04:56,520 Speaker 3: of these economies that saw a large and unwanted inflation 93 00:04:56,640 --> 00:05:00,240 Speaker 3: surge across DM and EM went to six percent core 94 00:05:00,279 --> 00:05:03,240 Speaker 3: inflation in twenty twenty two or six percents come back 95 00:05:03,279 --> 00:05:09,080 Speaker 3: down to about three percent on a sequential, annualized basis 96 00:05:09,400 --> 00:05:14,440 Speaker 3: without any deterioration in the labor market across these economies. Yeah, 97 00:05:14,520 --> 00:05:17,480 Speaker 3: in some places you've seen some increases in the unemployment rate. 98 00:05:17,520 --> 00:05:20,560 Speaker 3: We have seen some increase in the US. In others 99 00:05:20,560 --> 00:05:23,640 Speaker 3: you've seen some decline, but the average actually has been 100 00:05:23,920 --> 00:05:27,400 Speaker 3: basically flat. And to me, that's very very telling. 101 00:05:27,960 --> 00:05:31,080 Speaker 2: Well, can I ask you something specifically about the US 102 00:05:31,200 --> 00:05:35,280 Speaker 2: economy because I was reading another Goldman publication. You know 103 00:05:35,360 --> 00:05:38,400 Speaker 2: this one. In addition to the outlook that Joe just mentioned. 104 00:05:38,400 --> 00:05:40,400 Speaker 2: This was sort of a Q and A between you 105 00:05:40,480 --> 00:05:45,039 Speaker 2: and someone internal at Goldman and they asked you about 106 00:05:45,120 --> 00:05:48,719 Speaker 2: long and variable lags in monetary policy, and you sort 107 00:05:48,720 --> 00:05:52,720 Speaker 2: of suggested that you don't really think that's a thing. 108 00:05:53,279 --> 00:05:56,120 Speaker 2: So my question is, how do you square the idea 109 00:05:56,160 --> 00:05:59,680 Speaker 2: that the hard part is over, that there's more disinflation 110 00:06:01,000 --> 00:06:03,680 Speaker 2: with the idea that monetary policy, you know, maybe the 111 00:06:03,760 --> 00:06:07,160 Speaker 2: long and variable lags aspect of it is over egged. 112 00:06:07,279 --> 00:06:09,279 Speaker 2: Is it just a matter of degree? It's like the 113 00:06:09,320 --> 00:06:11,720 Speaker 2: majority of disinflation has happened, and now we're going to 114 00:06:11,760 --> 00:06:13,200 Speaker 2: see little bits and pieces. 115 00:06:13,640 --> 00:06:13,839 Speaker 1: Well. 116 00:06:13,880 --> 00:06:18,680 Speaker 3: On inflation, I think we will see additional declines in 117 00:06:18,760 --> 00:06:23,640 Speaker 3: a few areas. One that's I think very clear is 118 00:06:24,080 --> 00:06:29,400 Speaker 3: housing rent inflation and Honer's equivalent rent inflation is very 119 00:06:29,600 --> 00:06:32,880 Speaker 3: likely to come down further. It's still running at about 120 00:06:32,920 --> 00:06:39,520 Speaker 3: six percent on a again sequential annualized basis, and just looking 121 00:06:39,560 --> 00:06:43,520 Speaker 3: at alternative rent indicators and where they've been running and 122 00:06:43,600 --> 00:06:46,640 Speaker 3: continue to run, we would expect that to get back 123 00:06:46,680 --> 00:06:49,240 Speaker 3: down to the three to four percent range by the 124 00:06:49,839 --> 00:06:52,880 Speaker 3: end of next year. In the core CPI rent and 125 00:06:52,960 --> 00:06:56,159 Speaker 3: owner's equivalent rent has a forty percent weight in the 126 00:06:56,200 --> 00:06:59,360 Speaker 3: core PCE index, it still has a seventeen percent weight, 127 00:06:59,440 --> 00:07:05,040 Speaker 3: So these are are pretty significant reasons for expecting further deceleration. 128 00:07:05,720 --> 00:07:09,640 Speaker 3: We've also seen a lot of labor market rebalancing. Job 129 00:07:09,680 --> 00:07:13,320 Speaker 3: openings have come down substantially. The quid rate has gone 130 00:07:13,360 --> 00:07:17,400 Speaker 3: back to where it was in February twenty twenty. That 131 00:07:17,640 --> 00:07:21,480 Speaker 3: is still feeding through to the wage numbers, and I 132 00:07:21,480 --> 00:07:24,440 Speaker 3: think that's another source of disinflation, and then there's still 133 00:07:24,480 --> 00:07:28,040 Speaker 3: some disinflation to come on the core goods side. So 134 00:07:28,800 --> 00:07:31,680 Speaker 3: in that sense, I think the lagged effects of what's 135 00:07:31,720 --> 00:07:36,040 Speaker 3: already happened are indeed important. Where I don't agree with 136 00:07:36,160 --> 00:07:39,239 Speaker 3: the sort of maybe cliche of long and variable lags 137 00:07:39,840 --> 00:07:43,800 Speaker 3: is if I think about the gap between a monetary 138 00:07:43,840 --> 00:07:47,160 Speaker 3: policy shock and the maximum impact on the growth rate 139 00:07:47,200 --> 00:07:50,040 Speaker 3: of GDP, which for me on the growth side is 140 00:07:50,040 --> 00:07:52,400 Speaker 3: really the most important question. How long does it take 141 00:07:52,480 --> 00:07:55,680 Speaker 3: until I see the maximum impact on growth? We think 142 00:07:55,720 --> 00:07:59,920 Speaker 3: that's only about two quarters, which means that since the 143 00:08:00,120 --> 00:08:04,440 Speaker 3: FED was most aggressive in tightening policy starting at the 144 00:08:04,480 --> 00:08:09,480 Speaker 3: June twenty twenty two FORMC meeting, the biggest impact occurred 145 00:08:09,960 --> 00:08:13,600 Speaker 3: really in late twenty and twenty two, early tw and 146 00:08:13,640 --> 00:08:18,080 Speaker 3: twenty three, So it's quite important to think about what 147 00:08:18,280 --> 00:08:21,960 Speaker 3: question you're asking. There are long lags in terms of 148 00:08:22,040 --> 00:08:24,560 Speaker 3: the impact on inflation. There are even some pretty long 149 00:08:24,680 --> 00:08:27,040 Speaker 3: lags in terms of the impact of monetary policy on 150 00:08:27,080 --> 00:08:29,960 Speaker 3: the level of GDP. But as a forecaster, what I 151 00:08:30,040 --> 00:08:33,319 Speaker 3: care most about is the maximum impact on the growth rate. 152 00:08:33,400 --> 00:08:36,840 Speaker 3: Because if I have a non recession forecast and we've 153 00:08:36,840 --> 00:08:42,200 Speaker 3: already gotten through the biggest hit from the tightening without 154 00:08:42,360 --> 00:08:45,360 Speaker 3: the economy having entered recession. Now we're still seeing some 155 00:08:45,440 --> 00:08:48,600 Speaker 3: negative impulses, that's it's not going to worry me that 156 00:08:48,760 --> 00:08:50,920 Speaker 3: much because we've already survived the biggest hit. 157 00:08:51,440 --> 00:08:54,800 Speaker 2: Yeah, and since you mentioned the non recession call, I 158 00:08:54,880 --> 00:08:57,600 Speaker 2: feel that we have to mention Joe that the last 159 00:08:57,600 --> 00:08:59,679 Speaker 2: time we had yan on was in August I think 160 00:08:59,720 --> 00:09:02,760 Speaker 2: of two, twenty twenty two, in an episode titled The 161 00:09:02,880 --> 00:09:07,640 Speaker 2: Narrow Path to Avoid Hard Landing, basically laying out a 162 00:09:07,679 --> 00:09:10,600 Speaker 2: lot of the soft landing scenario that seems to be 163 00:09:10,600 --> 00:09:11,600 Speaker 2: coming to fruition. 164 00:09:11,960 --> 00:09:15,000 Speaker 1: So, yeah, if we've been able to see all of 165 00:09:15,040 --> 00:09:18,120 Speaker 1: this realized disinflation, prime more to come without too much 166 00:09:18,200 --> 00:09:21,440 Speaker 1: damage to the labor market. You know, the story goes, 167 00:09:21,760 --> 00:09:25,840 Speaker 1: the FED hikes rates, it slows demand, people lose their jobs, 168 00:09:26,400 --> 00:09:29,319 Speaker 1: prices compressed, but we didn't get the massive job losses. 169 00:09:29,440 --> 00:09:31,840 Speaker 1: How do you even think about the link between the 170 00:09:31,920 --> 00:09:34,360 Speaker 1: rate hikes that we've seen and the disinflation we've seen. 171 00:09:34,600 --> 00:09:36,920 Speaker 1: Are they connected? Is it the kind of thing where 172 00:09:36,960 --> 00:09:40,040 Speaker 1: it's not entirely clear what has been the Fed's role 173 00:09:40,120 --> 00:09:41,240 Speaker 1: in slowing down inflation. 174 00:09:42,080 --> 00:09:45,000 Speaker 3: I think they're connected in the sense that the economy 175 00:09:45,120 --> 00:09:48,560 Speaker 3: grew more slowly than it otherwise would have done. If 176 00:09:48,600 --> 00:09:51,559 Speaker 3: the FED had not tightened policy, we would have seen, 177 00:09:52,440 --> 00:09:56,760 Speaker 3: you know, stronger growth and higher inflation. But I think 178 00:09:56,800 --> 00:10:01,360 Speaker 3: the primary reason for why this cycle looks so different. Yeah, which, 179 00:10:01,400 --> 00:10:04,200 Speaker 3: by the way, was the title of our Outlook report 180 00:10:04,200 --> 00:10:06,000 Speaker 3: a year ago, this cycle is different. 181 00:10:06,840 --> 00:10:10,280 Speaker 2: Is that a lot of how did you feel publishing that? 182 00:10:10,400 --> 00:10:12,959 Speaker 2: Because I feel every time I say this time might 183 00:10:13,000 --> 00:10:16,160 Speaker 2: be different, I get really nervous because like, there's going 184 00:10:16,200 --> 00:10:19,319 Speaker 2: to be dozens, probably hundreds of people online who are like, eh, 185 00:10:19,400 --> 00:10:20,640 Speaker 2: it's never different this time. 186 00:10:20,800 --> 00:10:23,600 Speaker 3: But if you're not a little nervous, then you're probably 187 00:10:23,679 --> 00:10:27,400 Speaker 3: not taking enough risky as a forecaster, because you're never 188 00:10:27,480 --> 00:10:31,000 Speaker 3: going to be certain. So I felt that that was 189 00:10:31,720 --> 00:10:33,920 Speaker 3: our core of you, and so I put it out 190 00:10:33,960 --> 00:10:37,240 Speaker 3: there as the you know, as the title of the report. 191 00:10:37,440 --> 00:10:40,240 Speaker 3: But of course there's always a risk that you're wrong 192 00:10:40,240 --> 00:10:43,120 Speaker 3: about these things and end up with egg on your face. 193 00:10:43,640 --> 00:10:45,880 Speaker 3: But what I was going to say is that I 194 00:10:45,920 --> 00:10:49,080 Speaker 3: think the cycle is very different because, as you said 195 00:10:49,160 --> 00:10:53,600 Speaker 3: in the opening part, the core dynamic of this cycle, 196 00:10:53,640 --> 00:10:56,480 Speaker 3: really going back to the spring of twenty and twenty 197 00:10:56,559 --> 00:10:59,920 Speaker 3: has been COVID and its aftermath and all the imbalance 198 00:11:00,960 --> 00:11:05,600 Speaker 3: that emerged either directly because of the pandemic or because 199 00:11:05,640 --> 00:11:11,320 Speaker 3: of policy responses. Then of course we've also had geopolitical shocks, 200 00:11:12,160 --> 00:11:14,719 Speaker 3: the Russia Ukraine War in particular, But for me, it's 201 00:11:14,800 --> 00:11:19,679 Speaker 3: really COVID and the recovery from COVID that makes this 202 00:11:19,920 --> 00:11:20,960 Speaker 3: cycle soul different. 203 00:11:36,600 --> 00:11:39,440 Speaker 2: So I mentioned the PSALM rule in the intro, and 204 00:11:39,480 --> 00:11:41,920 Speaker 2: I think that's been getting a lot of attention recently 205 00:11:42,000 --> 00:11:45,400 Speaker 2: because it's been getting closer to triggering. I think the 206 00:11:45,480 --> 00:11:49,160 Speaker 2: rule itself is something like if the three month average 207 00:11:49,200 --> 00:11:52,760 Speaker 2: of the unemployment rate this is U three is half 208 00:11:52,800 --> 00:11:55,400 Speaker 2: a percentage point more or above it's low in the 209 00:11:55,440 --> 00:11:58,280 Speaker 2: prior twelve months, then the economy is in the early 210 00:11:58,320 --> 00:12:00,840 Speaker 2: stages of her session, and the current values something like 211 00:12:00,880 --> 00:12:05,280 Speaker 2: point three to three something like that. I didn't realize 212 00:12:05,679 --> 00:12:10,560 Speaker 2: that Goldman has a similar rule. Apparently it's a point 213 00:12:10,679 --> 00:12:14,480 Speaker 2: three five percentage point increase again in the three month 214 00:12:14,840 --> 00:12:17,640 Speaker 2: I think moving average of the U three unemployment rate. 215 00:12:17,960 --> 00:12:20,959 Speaker 2: How much attention are you paying to your own rule 216 00:12:21,520 --> 00:12:24,680 Speaker 2: in the current context of a softening labor market. Is 217 00:12:24,720 --> 00:12:27,000 Speaker 2: it a similar idea to what Claudia was telling us 218 00:12:27,040 --> 00:12:30,640 Speaker 2: that Again, maybe it's different this time it's just kind 219 00:12:30,640 --> 00:12:31,000 Speaker 2: of chill. 220 00:12:31,080 --> 00:12:35,280 Speaker 3: Yeah, there's different. There are different ways of characterizing the data. 221 00:12:35,320 --> 00:12:38,560 Speaker 3: It's a you know, time series that goes back to 222 00:12:39,160 --> 00:12:41,839 Speaker 3: the aftermath of World War Two. And it's certainly true, 223 00:12:42,200 --> 00:12:46,280 Speaker 3: however exactly you want to define it, that significant increases 224 00:12:46,320 --> 00:12:51,559 Speaker 3: in the unemployment rate have historically coincided with a recession 225 00:12:51,960 --> 00:12:55,120 Speaker 3: in the in the United States. This is a historical fact. 226 00:12:55,559 --> 00:12:59,920 Speaker 3: Now again, if this cycle is very different from past cycles, 227 00:13:00,120 --> 00:13:03,319 Speaker 3: maybe that historical fact is not as relevant as it 228 00:13:03,360 --> 00:13:08,520 Speaker 3: would be under other circumstances. I'd also note that we're 229 00:13:08,559 --> 00:13:12,240 Speaker 3: only talking about you know, twelve or thirteen business cycles here, 230 00:13:12,920 --> 00:13:16,560 Speaker 3: and it's not a huge sample. And lastly, I would say, 231 00:13:16,600 --> 00:13:19,960 Speaker 3: if you go outside the United States, you also find 232 00:13:20,080 --> 00:13:23,600 Speaker 3: that big increases in the unemployment rate have some predictive value. 233 00:13:23,679 --> 00:13:28,080 Speaker 3: But the rule in quotation marks doesn't work as well 234 00:13:28,559 --> 00:13:30,400 Speaker 3: as it does in the in the US. So when 235 00:13:30,440 --> 00:13:32,400 Speaker 3: I take all of these things together, where do it 236 00:13:32,440 --> 00:13:36,199 Speaker 3: come out. I would say significant changes in the unemployment 237 00:13:36,240 --> 00:13:39,520 Speaker 3: rate is certainly something I would pay attention to, but 238 00:13:39,679 --> 00:13:43,280 Speaker 3: I wouldn't, you know, elevate it to the status of 239 00:13:43,720 --> 00:13:46,600 Speaker 3: something that tells you you now have to switch to 240 00:13:46,720 --> 00:13:50,080 Speaker 3: a recession forecast if you know, if you do see 241 00:13:50,080 --> 00:13:52,920 Speaker 3: a significant increase. I'd also note a few other things 242 00:13:53,000 --> 00:13:57,440 Speaker 3: just about this particular episode. Other labor market indicators have 243 00:13:57,520 --> 00:14:02,479 Speaker 3: continued to be, you know, pretty strong payroll growth over 244 00:14:02,520 --> 00:14:05,160 Speaker 3: the six months in which the unemployment rate has been 245 00:14:05,160 --> 00:14:09,080 Speaker 3: going up, as I think totaled one point two million 246 00:14:09,200 --> 00:14:13,480 Speaker 3: or something on that order, The household survey employment numbers 247 00:14:13,559 --> 00:14:17,319 Speaker 3: adjusted to the definitions of the payroll survey have shown 248 00:14:17,400 --> 00:14:22,920 Speaker 3: a similar increase. Initial jobless claims remain quite low, not 249 00:14:23,080 --> 00:14:27,600 Speaker 3: consistent really with a major layoff cycle. And so I 250 00:14:27,680 --> 00:14:29,800 Speaker 3: take all of these things together, and I would say 251 00:14:30,280 --> 00:14:33,520 Speaker 3: I'm still pretty comfortable that the labor market's doing fine. 252 00:14:33,400 --> 00:14:35,960 Speaker 1: When would you be concerned? And I guess the reason 253 00:14:36,000 --> 00:14:38,680 Speaker 1: I ask is partly because this might determine when the 254 00:14:38,760 --> 00:14:42,080 Speaker 1: hiking cycle, which everyone basically thinks it, turns into a 255 00:14:42,120 --> 00:14:46,640 Speaker 1: cutting cycle. At what point would you be concerned such that, Okay, 256 00:14:46,640 --> 00:14:49,120 Speaker 1: the FED is going to need to move and maybe 257 00:14:49,160 --> 00:14:52,840 Speaker 1: take out some insurance to forestall a deeper downtern I. 258 00:14:52,760 --> 00:14:55,479 Speaker 3: Think it's always going to be a combination of indicator, 259 00:14:55,600 --> 00:14:58,800 Speaker 3: so I don't think I would want to necessarily draw 260 00:14:58,840 --> 00:15:00,520 Speaker 3: a line in the sand. But if we were to 261 00:15:00,560 --> 00:15:05,360 Speaker 3: see much more pervasive signs of labor market deterioration with 262 00:15:06,040 --> 00:15:11,240 Speaker 3: you know, jumps in initial claims and declines in payroll 263 00:15:11,320 --> 00:15:16,360 Speaker 3: growth to something clearly below the replacement rate, so let's 264 00:15:16,360 --> 00:15:20,000 Speaker 3: say in the fifty thousand range, or you know, moving 265 00:15:20,040 --> 00:15:23,080 Speaker 3: closer to zero, and you get increases in the unemployment rate, 266 00:15:23,640 --> 00:15:25,760 Speaker 3: that probably would be a reason to take out inshorance. 267 00:15:26,040 --> 00:15:29,600 Speaker 3: And you know, it's not limited to those indicators, obviously, 268 00:15:29,680 --> 00:15:32,600 Speaker 3: but if you got a combination of those indicators, I 269 00:15:32,600 --> 00:15:35,280 Speaker 3: think it would be time to cut rates on the 270 00:15:35,720 --> 00:15:38,240 Speaker 3: back of that. That doesn't happen in our forecast. Our 271 00:15:38,280 --> 00:15:43,640 Speaker 3: forecast has payrolls still growing above one hundred thousand a month, 272 00:15:43,840 --> 00:15:47,600 Speaker 3: and we have the unemployment rate going sort of broadly sideways, 273 00:15:47,680 --> 00:15:51,120 Speaker 3: if not even a little bit lower over the next year. 274 00:15:51,680 --> 00:15:56,120 Speaker 3: And in that kind of environment, I wouldn't expect early cuts. 275 00:15:56,160 --> 00:15:58,480 Speaker 3: I think it'll still be a while before the FED 276 00:15:58,560 --> 00:16:02,360 Speaker 3: does cut. But of course, one really important point now, 277 00:16:02,840 --> 00:16:04,880 Speaker 3: and that's very different from a year ago, is that 278 00:16:04,920 --> 00:16:09,480 Speaker 3: they can cut. They have the ability to respond to 279 00:16:09,520 --> 00:16:14,600 Speaker 3: any weakening, foreseen or unforeseen by taking out insurance. And 280 00:16:14,640 --> 00:16:17,880 Speaker 3: that's a really important reason for me why I think 281 00:16:17,960 --> 00:16:22,480 Speaker 3: the risk of recession is significantly low than it was 282 00:16:22,880 --> 00:16:25,920 Speaker 3: coming into this year. A year ago, we had a 283 00:16:25,960 --> 00:16:30,120 Speaker 3: twelve month recession probability of thirty five percent. Now we 284 00:16:30,200 --> 00:16:33,440 Speaker 3: have a twelve month recession probability of fifteen percent, and 285 00:16:33,520 --> 00:16:37,640 Speaker 3: a lot of the delta is the fedsibility to respond 286 00:16:37,960 --> 00:16:39,040 Speaker 3: to weakend numbers. 287 00:16:39,760 --> 00:16:42,760 Speaker 2: I definitely want to ask you about more responses to 288 00:16:43,880 --> 00:16:47,600 Speaker 2: slowing growth, including potentially on the fiscal side, but on 289 00:16:47,680 --> 00:16:50,200 Speaker 2: the topic of the labor market. So one of the 290 00:16:50,240 --> 00:16:52,520 Speaker 2: other things we've seen recently in terms of a slight 291 00:16:52,600 --> 00:16:56,680 Speaker 2: softening of the data, has been job openings starting to 292 00:16:56,720 --> 00:16:59,400 Speaker 2: come down. And on the one hand, people worry that 293 00:16:59,480 --> 00:17:02,240 Speaker 2: this is a so that the economy is slowing. But 294 00:17:02,320 --> 00:17:05,760 Speaker 2: on the other hand, this could be interpreted as sort 295 00:17:05,800 --> 00:17:08,240 Speaker 2: of good news if you look back at the beverage 296 00:17:08,600 --> 00:17:12,600 Speaker 2: curve debate and the idea that the relationship between unemployment 297 00:17:12,840 --> 00:17:17,080 Speaker 2: and job openings had somehow structurally shifted during the pandemic. 298 00:17:17,520 --> 00:17:22,000 Speaker 2: When you're looking at openings now, A, how much stock 299 00:17:22,240 --> 00:17:24,520 Speaker 2: do you put in that data? First of all, because 300 00:17:24,520 --> 00:17:28,160 Speaker 2: this is another big controversy, But b what are openings 301 00:17:28,160 --> 00:17:29,040 Speaker 2: telling you right now? 302 00:17:29,440 --> 00:17:32,880 Speaker 3: So I think it's very important to distinguish between good 303 00:17:32,960 --> 00:17:35,560 Speaker 3: softening in the labor market and bad softening in the 304 00:17:35,600 --> 00:17:40,720 Speaker 3: labor market. So the labor market was clearly out of balance, overheated. 305 00:17:41,400 --> 00:17:46,320 Speaker 3: We had a job's workers gap job openings minus unemployed 306 00:17:46,359 --> 00:17:50,080 Speaker 3: workers that was by far the highest level on record, 307 00:17:50,600 --> 00:17:53,359 Speaker 3: a difference of six million, a ratio of something like 308 00:17:53,400 --> 00:17:58,000 Speaker 3: two to one, and that clearly had to be addressed 309 00:17:58,480 --> 00:18:03,200 Speaker 3: in order to be on a path to non inflationary 310 00:18:03,280 --> 00:18:07,440 Speaker 3: growth and wage growth that's consistent with something like two 311 00:18:07,440 --> 00:18:12,080 Speaker 3: percent inflation over time. So the decline and job openings 312 00:18:12,080 --> 00:18:14,320 Speaker 3: that we've seen over the last year and a half 313 00:18:14,440 --> 00:18:16,560 Speaker 3: or so, I think is very much a good thing 314 00:18:16,680 --> 00:18:20,880 Speaker 3: because it puts us on a more sustainable footing. Where 315 00:18:20,920 --> 00:18:23,680 Speaker 3: are we now. We've seen a drop in this job's 316 00:18:23,720 --> 00:18:28,040 Speaker 3: workers gap from six million to about sort of two 317 00:18:28,040 --> 00:18:32,000 Speaker 3: to three million, depending on which measure of job openings 318 00:18:32,080 --> 00:18:34,240 Speaker 3: you use, and I would put some weight on the 319 00:18:34,320 --> 00:18:38,119 Speaker 3: Jolts the official Libor Department data. I'd also put some 320 00:18:38,200 --> 00:18:41,320 Speaker 3: weight on the link up data, some weight on the 321 00:18:41,359 --> 00:18:45,600 Speaker 3: INDEED data, and that maybe answers the question about reliability 322 00:18:45,640 --> 00:18:49,240 Speaker 3: a bit. I do think these indicators are challenging, and 323 00:18:49,440 --> 00:18:54,120 Speaker 3: the Jolts series suffers from quite a low response rate 324 00:18:54,200 --> 00:18:57,399 Speaker 3: and has been quite noisy, But if you combine it 325 00:18:57,440 --> 00:18:59,760 Speaker 3: with other indicators, I would put some weight on it. 326 00:18:59,880 --> 00:19:03,600 Speaker 3: I think it's telling us a broadly reasonable story that 327 00:19:04,200 --> 00:19:07,400 Speaker 3: the labor market's still strong in terms of the amount 328 00:19:07,440 --> 00:19:10,959 Speaker 3: of job openings out there, but it's less overheated and 329 00:19:11,000 --> 00:19:14,920 Speaker 3: it's closer to normal, although still not back to where 330 00:19:14,960 --> 00:19:16,760 Speaker 3: it was before the pandemic. 331 00:19:17,359 --> 00:19:20,320 Speaker 2: You mentioned the response rate on the survey coming down, 332 00:19:20,359 --> 00:19:22,960 Speaker 2: and that just reminded me of something else that sort 333 00:19:23,000 --> 00:19:26,280 Speaker 2: of falls into this time might be different category, and 334 00:19:26,280 --> 00:19:28,800 Speaker 2: that is that we have seen the response rates on 335 00:19:28,880 --> 00:19:34,280 Speaker 2: a variety of economic surveys really come down quite dramatically 336 00:19:34,800 --> 00:19:38,159 Speaker 2: in recent years, and there is this ongoing discussion of 337 00:19:38,400 --> 00:19:42,280 Speaker 2: whether or not that might be clouding the economic picture. So, 338 00:19:42,320 --> 00:19:44,600 Speaker 2: for instance, if you look at something like a consumer 339 00:19:44,640 --> 00:19:48,000 Speaker 2: sentiment survey, you know, if these aren't the actual stats, 340 00:19:48,000 --> 00:19:50,800 Speaker 2: I'm just making them up for illustrative purposes. But if 341 00:19:51,160 --> 00:19:54,399 Speaker 2: fifty percent of those asked are now responding to the 342 00:19:54,400 --> 00:19:58,600 Speaker 2: survey versus eighty percent ten years ago, you could imagine 343 00:19:58,600 --> 00:20:01,320 Speaker 2: that maybe the people responding to the survey are you know, 344 00:20:01,600 --> 00:20:04,840 Speaker 2: maybe they feel a little bit unrepresentative, unrepresentative, maybe they 345 00:20:04,880 --> 00:20:07,800 Speaker 2: feel a little bit more strongly about certain aspects of 346 00:20:07,800 --> 00:20:11,520 Speaker 2: the direction of the economy. Whatever is that on your radar, 347 00:20:11,800 --> 00:20:14,359 Speaker 2: and are you taking that into account at all? Is 348 00:20:14,400 --> 00:20:17,560 Speaker 2: it causing problems for economists at this point in time, 349 00:20:17,640 --> 00:20:19,560 Speaker 2: or are you still sort of using a lot of 350 00:20:19,600 --> 00:20:22,199 Speaker 2: the soft data, the survey based data, the same as 351 00:20:22,240 --> 00:20:22,639 Speaker 2: you used to. 352 00:20:23,400 --> 00:20:27,639 Speaker 3: I'd say you have to be aware of issues with 353 00:20:28,000 --> 00:20:31,720 Speaker 3: economic data in a variety of areas. One thing that 354 00:20:31,800 --> 00:20:35,639 Speaker 3: we actually have done over the last couple of years 355 00:20:35,800 --> 00:20:38,600 Speaker 3: is probably putting more weight on hard data than on 356 00:20:39,080 --> 00:20:43,959 Speaker 3: soft data. And we are i would say, pretty concerned 357 00:20:43,960 --> 00:20:48,280 Speaker 3: about not just because of response rates, and things like that, 358 00:20:48,359 --> 00:20:53,679 Speaker 3: but just for sentiment effect about the sentiment effects can 359 00:20:53,960 --> 00:20:57,680 Speaker 3: sort of overstate a weakening of the economy. I think 360 00:20:57,680 --> 00:20:59,840 Speaker 3: we've had a couple of instances in two thousand and 361 00:21:00,000 --> 00:21:04,040 Speaker 3: twenty three when the sentiment based indicators deteriorated a lot, 362 00:21:04,119 --> 00:21:08,280 Speaker 3: and then even within for example, business surveys, something like 363 00:21:08,400 --> 00:21:13,960 Speaker 3: general business confidence was significantly weaker than questions that asked 364 00:21:14,000 --> 00:21:18,080 Speaker 3: about orders or production or employment, which in turn was 365 00:21:18,119 --> 00:21:21,800 Speaker 3: weaker than what the hard indicators were saying. And we 366 00:21:21,880 --> 00:21:25,119 Speaker 3: have in those instances repeatedly put more weight on the 367 00:21:25,160 --> 00:21:28,520 Speaker 3: hard indicators, and I think so far that's turned out 368 00:21:28,560 --> 00:21:29,520 Speaker 3: to be the right choice. 369 00:21:29,680 --> 00:21:31,159 Speaker 1: I'm going to go back to something you said in 370 00:21:31,200 --> 00:21:33,280 Speaker 1: the first answer, which is that we have gotten this 371 00:21:33,400 --> 00:21:39,040 Speaker 1: proof of concept of significant disinflation and relatively mild, if 372 00:21:39,080 --> 00:21:43,040 Speaker 1: not nonexistent, labor market weakening, especially if you look across 373 00:21:43,119 --> 00:21:45,920 Speaker 1: G ten countries. There has been some you know, obviously 374 00:21:45,920 --> 00:21:48,879 Speaker 1: the unemployment rate in the US has tacked higher, but 375 00:21:49,000 --> 00:21:53,399 Speaker 1: globally it's pretty remarkable. Does this tell us something about 376 00:21:54,240 --> 00:21:58,439 Speaker 1: the degree to which economists understand the inflation process? Is 377 00:21:58,480 --> 00:22:02,840 Speaker 1: there still more questions than as or do economists understand 378 00:22:02,920 --> 00:22:07,480 Speaker 1: inflation except in weird business cycles that relate to pandemics. 379 00:22:08,119 --> 00:22:10,479 Speaker 3: I think it is telling us that in this cycle 380 00:22:10,560 --> 00:22:13,960 Speaker 3: there was a common global factor that has really dominated 381 00:22:14,000 --> 00:22:18,320 Speaker 3: everything else, and that's COVID's that's my main takeaway. Obviously, 382 00:22:18,840 --> 00:22:21,199 Speaker 3: there were quite a lot of differences in terms of 383 00:22:21,200 --> 00:22:26,480 Speaker 3: policy responses across countries, and that has had its effect 384 00:22:26,560 --> 00:22:30,560 Speaker 3: here and there. But the dominant issue that has faced 385 00:22:30,600 --> 00:22:33,119 Speaker 3: the global economy over the last you know, three and 386 00:22:33,160 --> 00:22:35,199 Speaker 3: a half to four years has been COVID and the 387 00:22:35,240 --> 00:22:43,320 Speaker 3: recovery from COVID and betting on effectively convergence between different places, 388 00:22:43,520 --> 00:22:45,480 Speaker 3: you know, in terms of the inflation experience, I think 389 00:22:45,520 --> 00:22:48,879 Speaker 3: has been the right approach so far. I'll give you 390 00:22:48,920 --> 00:22:53,480 Speaker 3: an example. The European both your area and UK inflation 391 00:22:53,640 --> 00:22:58,440 Speaker 3: data until recently looked significantly higher than what we were 392 00:22:58,440 --> 00:23:00,920 Speaker 3: seeing in the US and Canada and maybe some of 393 00:23:00,960 --> 00:23:05,760 Speaker 3: the em countries, and what I just outlined suggested we 394 00:23:05,840 --> 00:23:10,040 Speaker 3: really should be putting weight on convergence, and indeed both 395 00:23:10,040 --> 00:23:14,720 Speaker 3: the UK and Europe is now seeing significantly friendly inflation numbers. 396 00:23:15,000 --> 00:23:17,760 Speaker 2: I want to press on this point because again, up 397 00:23:17,840 --> 00:23:22,119 Speaker 2: until recently, when inflation really did start coming down in Europe, 398 00:23:22,160 --> 00:23:25,159 Speaker 2: and the UK. There was an argument out there that like, 399 00:23:25,359 --> 00:23:28,800 Speaker 2: maybe the US had outperformed because of the fiscal response 400 00:23:29,000 --> 00:23:32,800 Speaker 2: in twenty twenty and beyond, which was absolutely massive on 401 00:23:32,960 --> 00:23:36,600 Speaker 2: a sort of relative historic basis. How much weight do 402 00:23:36,680 --> 00:23:40,439 Speaker 2: you place on the fiscal aspect of this at this 403 00:23:40,560 --> 00:23:43,800 Speaker 2: moment in time, And then also going into twenty twenty four, 404 00:23:43,880 --> 00:23:46,040 Speaker 2: there is this open question about whether or not the 405 00:23:46,160 --> 00:23:50,080 Speaker 2: US will have the same fiscal capacity to keep on 406 00:23:50,200 --> 00:23:53,960 Speaker 2: spending or maybe do some sort of emergency stimulus if needed. 407 00:23:54,400 --> 00:23:56,800 Speaker 2: So how are you thinking about that aspect of it? 408 00:23:56,920 --> 00:23:59,280 Speaker 2: Beyond the monetary side of things. 409 00:23:59,200 --> 00:24:01,920 Speaker 3: I think there are a lot of separate questions here. 410 00:24:02,040 --> 00:24:05,800 Speaker 3: One is the size of the US fiscal response and 411 00:24:05,840 --> 00:24:11,159 Speaker 3: then the impact of that on twenty twenty twenty twenty 412 00:24:11,200 --> 00:24:14,440 Speaker 3: one GDP. Clearly the US did a lot and that 413 00:24:14,560 --> 00:24:17,640 Speaker 3: did have a significant impact on growth at that point. 414 00:24:17,760 --> 00:24:22,040 Speaker 3: I mean, there was a huge fiscal boost in that 415 00:24:22,200 --> 00:24:26,960 Speaker 3: supported activity, and you know, I think it was very important. 416 00:24:27,000 --> 00:24:30,880 Speaker 3: Then it's been much less important from a growth perspective 417 00:24:31,280 --> 00:24:33,800 Speaker 3: since then. I mean twenty twenty two there was a 418 00:24:33,840 --> 00:24:38,639 Speaker 3: fiscal pullback which consumers were able to spend through in 419 00:24:38,720 --> 00:24:42,160 Speaker 3: part because of a lot of the excess savings twenty 420 00:24:42,320 --> 00:24:46,600 Speaker 3: twenty three, we actually don't get a significant fiscal impulse, 421 00:24:47,119 --> 00:24:50,520 Speaker 3: and by fiscal impulse, I really mean basically the change 422 00:24:50,560 --> 00:24:56,720 Speaker 3: in the deficit and the growth relevant changes in fiscal policy. 423 00:24:56,760 --> 00:25:00,160 Speaker 3: We don't get a big impact here in twenty twenty three. 424 00:25:00,280 --> 00:25:03,200 Speaker 3: It's certainly true that the US federal deficit is very 425 00:25:03,280 --> 00:25:07,480 Speaker 3: large six to seven percent of GDP depending on how 426 00:25:07,520 --> 00:25:09,639 Speaker 3: you adjust for some of the one off items. But 427 00:25:09,680 --> 00:25:14,160 Speaker 3: it's a very large number, especially relative to a three 428 00:25:14,160 --> 00:25:17,320 Speaker 3: point nine percent unemployment rate. This is a very different 429 00:25:17,400 --> 00:25:20,960 Speaker 3: deficit from the deficit that we had in the aftermath 430 00:25:21,520 --> 00:25:24,840 Speaker 3: of the two thousand and eight crisis, when we also 431 00:25:24,880 --> 00:25:27,160 Speaker 3: had a large deficit, but it was the flip side 432 00:25:27,400 --> 00:25:31,840 Speaker 3: of a depressed economy. And so this is more concerning 433 00:25:32,000 --> 00:25:36,639 Speaker 3: because it's a structural deficit that will need to be 434 00:25:36,680 --> 00:25:39,960 Speaker 3: addressed over time. I wouldn't expect it to get addressed 435 00:25:40,480 --> 00:25:44,840 Speaker 3: anytime soon. I mean, twenty twenty four is a presidential 436 00:25:44,880 --> 00:25:50,240 Speaker 3: election year, very little is likely to happen on fiscal policy, 437 00:25:50,720 --> 00:25:54,000 Speaker 3: and even beyond that, the path to how we're ultimately 438 00:25:54,040 --> 00:25:56,200 Speaker 3: going to address this is not clear. 439 00:26:11,960 --> 00:26:15,120 Speaker 1: In September, and I guess the first half of October 440 00:26:15,160 --> 00:26:18,320 Speaker 1: when rates were galloping higher. Suddenly one of the big 441 00:26:18,359 --> 00:26:21,520 Speaker 1: themes people were talking about was not just the size 442 00:26:21,520 --> 00:26:24,800 Speaker 1: of the deficit, but the size of the interest payments 443 00:26:24,840 --> 00:26:29,399 Speaker 1: on the deficit, arguably the inflationary impulse of those interest 444 00:26:29,400 --> 00:26:31,800 Speaker 1: payments in the sense that those interest payments are a 445 00:26:31,800 --> 00:26:34,480 Speaker 1: fiscal outlay, and then this idea of a snowball and 446 00:26:34,640 --> 00:26:39,920 Speaker 1: compounding effect of large deficits. When you say you're concerned, 447 00:26:40,240 --> 00:26:41,879 Speaker 1: or when you say it is concerning, or at some 448 00:26:41,880 --> 00:26:44,320 Speaker 1: point would we need to address, what does that look 449 00:26:44,480 --> 00:26:47,880 Speaker 1: like for you in terms of the problems that arise 450 00:26:48,000 --> 00:26:51,680 Speaker 1: if politicians don't do something to close the structural deficit, 451 00:26:52,080 --> 00:26:54,960 Speaker 1: And what would be the point at which it becomes 452 00:26:55,000 --> 00:26:59,760 Speaker 1: a major problem for the economy if interest payments as 453 00:26:59,760 --> 00:27:02,720 Speaker 1: a share of GDP start to become very large. 454 00:27:03,240 --> 00:27:06,240 Speaker 3: I think it's hard to have a very crisp answer 455 00:27:06,240 --> 00:27:09,520 Speaker 3: to that, and I don't think we're close to a 456 00:27:09,560 --> 00:27:14,280 Speaker 3: crisis point. I think over time, though, if the deficit 457 00:27:14,800 --> 00:27:18,320 Speaker 3: continues to be as large as it is now or 458 00:27:18,440 --> 00:27:22,239 Speaker 3: rise from here, maybe on the back of increases in 459 00:27:22,240 --> 00:27:26,359 Speaker 3: interest payments as the dead stock gets rolled over, that 460 00:27:26,520 --> 00:27:30,720 Speaker 3: is going to crowd out other types of outlays in 461 00:27:30,760 --> 00:27:33,040 Speaker 3: the in the economy. It's clearly going to be an 462 00:27:33,040 --> 00:27:36,280 Speaker 3: issue for the federal budget itself, and in may, if 463 00:27:36,280 --> 00:27:40,200 Speaker 3: we're in a broadly full employment environment, may also crowd out, 464 00:27:40,640 --> 00:27:44,280 Speaker 3: you know, other types of private sector investments in the 465 00:27:44,480 --> 00:27:47,240 Speaker 3: in the economy. Crowding out is a you know, long 466 00:27:47,280 --> 00:27:49,320 Speaker 3: debate in economics and. 467 00:27:49,160 --> 00:27:50,119 Speaker 1: What does it mean to you? 468 00:27:50,160 --> 00:27:50,879 Speaker 2: Would you say it? 469 00:27:50,960 --> 00:27:51,719 Speaker 1: Yeah, like, what is it? 470 00:27:51,720 --> 00:27:57,080 Speaker 3: It basically means that federal deficits squeeze private sector investment. 471 00:27:57,600 --> 00:27:59,560 Speaker 3: There was a big debate about this again in the 472 00:27:59,560 --> 00:28:01,960 Speaker 3: aftermath of the two thousand and eight crisis. I was 473 00:28:02,000 --> 00:28:03,800 Speaker 3: on the other side of that debate at the time 474 00:28:03,960 --> 00:28:08,840 Speaker 3: because we had an clearly underemployed economy. We were away 475 00:28:08,880 --> 00:28:12,640 Speaker 3: from the full employment level of output, and so there 476 00:28:12,800 --> 00:28:17,439 Speaker 3: was no taking away from private sector expenditure because of 477 00:28:17,440 --> 00:28:20,560 Speaker 3: fiscal deficits. But we're in a if we're going to 478 00:28:20,560 --> 00:28:22,560 Speaker 3: be in a full employment economy, then I think it's 479 00:28:22,600 --> 00:28:24,119 Speaker 3: going to be more of an issue. 480 00:28:24,400 --> 00:28:28,000 Speaker 2: Speaking of spending, this is a very clumsy segue the consumer. 481 00:28:28,480 --> 00:28:30,359 Speaker 2: We haven't really dived into what's been going on with 482 00:28:30,400 --> 00:28:32,359 Speaker 2: the consumer, but of course, if you look at the 483 00:28:32,520 --> 00:28:36,280 Speaker 2: surprising resilience of the US economy, A lot of it 484 00:28:36,359 --> 00:28:41,400 Speaker 2: seems to have been underpinned by consumer spending. So what's 485 00:28:41,440 --> 00:28:44,760 Speaker 2: been driving that going into twenty twenty three, and then 486 00:28:44,840 --> 00:28:48,000 Speaker 2: also what's the outlook because again going back to the 487 00:28:48,040 --> 00:28:51,640 Speaker 2: soft data, you look at survey after survey and certainly 488 00:28:51,760 --> 00:28:56,640 Speaker 2: spending time online and on Twitter slash x, you do 489 00:28:56,720 --> 00:29:00,440 Speaker 2: get the sense that people are struggling with inflame. And 490 00:29:00,520 --> 00:29:02,360 Speaker 2: yet if you look at the hard data, the actual 491 00:29:02,360 --> 00:29:05,200 Speaker 2: consumer spending number, I mean, it just keeps going. 492 00:29:05,800 --> 00:29:09,520 Speaker 3: So twenty twenty two you had a huge decline in 493 00:29:09,600 --> 00:29:14,760 Speaker 3: real disposable personal income because of this inflation spike and 494 00:29:14,960 --> 00:29:19,080 Speaker 3: the end of the COVID support payments. So real disposable 495 00:29:19,120 --> 00:29:23,000 Speaker 3: income was down something like six percent, biggest decline in 496 00:29:23,080 --> 00:29:26,200 Speaker 3: post war history, much bigger than an eight or nine. 497 00:29:26,720 --> 00:29:29,760 Speaker 3: But households were able to spend through it because of 498 00:29:29,960 --> 00:29:33,920 Speaker 3: the stock of excess savings. So that stock of excess 499 00:29:33,960 --> 00:29:37,800 Speaker 3: savings has now diminished, and there's a lot of concern 500 00:29:38,280 --> 00:29:41,960 Speaker 3: what happens when people run out of excess savings, what's 501 00:29:42,000 --> 00:29:44,840 Speaker 3: going to support their spending. The answer is that real 502 00:29:44,880 --> 00:29:48,640 Speaker 3: income is now growing, and it's growing at a very 503 00:29:48,640 --> 00:29:53,520 Speaker 3: healthy pace. Twenty twenty three about four percent growth in 504 00:29:53,640 --> 00:29:57,640 Speaker 3: real disposable income, as wages are still growing at a 505 00:29:57,680 --> 00:30:01,000 Speaker 3: decent pace four to four and a half percent headline 506 00:30:01,040 --> 00:30:03,520 Speaker 3: inflation has come back down to the law threes, so 507 00:30:03,880 --> 00:30:06,920 Speaker 3: real wages are now going up. Employment is still growing 508 00:30:06,960 --> 00:30:12,239 Speaker 3: at a healthy pace. Interest income is rising, while on 509 00:30:12,280 --> 00:30:15,800 Speaker 3: the other side of the balance sheet, mortgage interest paid 510 00:30:16,200 --> 00:30:20,280 Speaker 3: is barely rising because most people have thirty year fixed 511 00:30:20,360 --> 00:30:25,160 Speaker 3: rate mortgages. That's really the driver of continued increases in 512 00:30:25,200 --> 00:30:29,160 Speaker 3: consumer spending, and I think we'll see something similar next year. 513 00:30:29,440 --> 00:30:32,640 Speaker 3: Maybe not four percent for disposable income, maybe three or 514 00:30:32,680 --> 00:30:35,160 Speaker 3: a little bit low three, but still enough to keep 515 00:30:35,200 --> 00:30:38,280 Speaker 3: consumer spending growing in real terms at something like a 516 00:30:38,320 --> 00:30:39,080 Speaker 3: two percent rate. 517 00:30:39,800 --> 00:30:42,200 Speaker 1: One of the things that's a recurring theme on the 518 00:30:42,240 --> 00:30:44,280 Speaker 1: show that we talk about a lot is this sort 519 00:30:44,320 --> 00:30:50,000 Speaker 1: of acyclical investment, the green transition, all of the IRA spending, 520 00:30:50,040 --> 00:30:53,840 Speaker 1: the tax credits, the various incentive new battery plant. Seemingly 521 00:30:53,880 --> 00:30:56,960 Speaker 1: every day it seems like twenty twenty four is going 522 00:30:57,080 --> 00:31:00,920 Speaker 1: to be another big year for a lot of sort 523 00:31:00,960 --> 00:31:04,320 Speaker 1: of government incentivized domestic manufacturing. Of course, you have chips, 524 00:31:04,320 --> 00:31:06,960 Speaker 1: you have vvs, you have batteries. You have investments on 525 00:31:07,280 --> 00:31:11,720 Speaker 1: tackling domestic sources of raw materials for batteries and so forth. 526 00:31:11,880 --> 00:31:15,040 Speaker 1: How much does that boy the US economy keep a 527 00:31:15,160 --> 00:31:18,440 Speaker 1: floor under activity? And how are you thinking the sort 528 00:31:18,480 --> 00:31:22,080 Speaker 1: of macro impact from some of these large pieces of legislation. 529 00:31:22,840 --> 00:31:26,120 Speaker 3: So the numbers end up being relatively small if you 530 00:31:26,440 --> 00:31:30,520 Speaker 3: divide it by twenty seven trillion dollars, that being US 531 00:31:30,560 --> 00:31:35,160 Speaker 3: nominal GDP. So I think these are very important developments 532 00:31:35,320 --> 00:31:37,920 Speaker 3: in particular parts of the economy. Obviously in the clean 533 00:31:38,040 --> 00:31:43,040 Speaker 3: energy sector. They're very important from a growth perspective. I 534 00:31:43,080 --> 00:31:47,360 Speaker 3: don't think that's where the action has been even with this. 535 00:31:47,680 --> 00:31:53,000 Speaker 3: We don't think that there's been a large, meaningful booths 536 00:31:53,000 --> 00:31:58,680 Speaker 3: to growth in twenty twenty three from fiscal changes. Actually, 537 00:31:58,760 --> 00:32:01,960 Speaker 3: the investments next year probably going to be a little 538 00:32:02,000 --> 00:32:04,600 Speaker 3: bit smaller than in twenty twenty three, just looking at 539 00:32:04,640 --> 00:32:08,400 Speaker 3: some of the bottom up project data. But yeah, it's 540 00:32:08,440 --> 00:32:11,479 Speaker 3: this is still there's still a high investment level in 541 00:32:11,480 --> 00:32:14,560 Speaker 3: that part of the economy. It's very important for certain 542 00:32:14,600 --> 00:32:18,560 Speaker 3: parts of the economy and from a climate perspective and 543 00:32:18,760 --> 00:32:22,160 Speaker 3: clean energy perspective, but it's not a major macro issue. 544 00:32:22,760 --> 00:32:26,560 Speaker 1: One other big macro dynamic that I don't know. It 545 00:32:26,640 --> 00:32:29,160 Speaker 1: seems like it's in the realm of interesting or people 546 00:32:29,160 --> 00:32:31,680 Speaker 1: are paying attention to it but not sure quite what yet. 547 00:32:31,720 --> 00:32:33,680 Speaker 1: To make of it is that we've gotten some good 548 00:32:33,960 --> 00:32:39,040 Speaker 1: productivity readings lately, and there's all these questions about, you know, 549 00:32:39,280 --> 00:32:41,560 Speaker 1: a how do you measure productivity? Because it's just sort 550 00:32:41,600 --> 00:32:45,120 Speaker 1: of a Tracy's telling me over I read that I 551 00:32:45,160 --> 00:32:46,000 Speaker 1: stole her question. 552 00:32:46,240 --> 00:32:47,960 Speaker 2: Joe asked for a follow up and then went to 553 00:32:48,000 --> 00:32:51,600 Speaker 2: a completely different talk. Kind of no, but that's fair. Look, 554 00:32:51,640 --> 00:32:56,000 Speaker 2: we're recording this on November twenty first. Open AI has 555 00:32:56,080 --> 00:32:59,120 Speaker 2: been in the news, and certainly the idea of AI 556 00:32:59,240 --> 00:33:01,720 Speaker 2: and productivity the boosts have been in a lot of 557 00:33:01,720 --> 00:33:02,880 Speaker 2: analyst research notes. 558 00:33:02,960 --> 00:33:06,480 Speaker 1: Exactly so, how much of productivity is, in your view, 559 00:33:06,800 --> 00:33:10,920 Speaker 1: something exogenous, a tech breakthrough that allows work to be 560 00:33:10,960 --> 00:33:13,800 Speaker 1: done more productive? How much is it about Okay, this 561 00:33:13,920 --> 00:33:16,040 Speaker 1: is just what happens in this stage of the cycle. 562 00:33:16,800 --> 00:33:19,640 Speaker 1: Could it be a reverse historicis effect, in which when 563 00:33:19,640 --> 00:33:23,520 Speaker 1: you have periods of very intense high unemployment then companies 564 00:33:23,600 --> 00:33:27,160 Speaker 1: have to find ways to improve productivity. Other theories is 565 00:33:27,160 --> 00:33:29,800 Speaker 1: that it's actually a function of the employment mix and 566 00:33:29,840 --> 00:33:32,600 Speaker 1: that if you have more people working in factories, etc. 567 00:33:32,960 --> 00:33:35,040 Speaker 1: Then you're going to have higher productivity growth than if 568 00:33:35,040 --> 00:33:38,320 Speaker 1: you have more people working in daycares and healthcare centers, 569 00:33:38,360 --> 00:33:40,560 Speaker 1: where it's hard to achieve productivity. What do you make 570 00:33:40,600 --> 00:33:42,080 Speaker 1: of the gains and what do you think are the 571 00:33:42,120 --> 00:33:44,080 Speaker 1: prospects for something like this being sustained. 572 00:33:44,320 --> 00:33:48,800 Speaker 3: The main thing is that the productivity data are always noisy, 573 00:33:48,880 --> 00:33:51,800 Speaker 3: and have been incredibly noisy in the last three and 574 00:33:51,800 --> 00:33:53,960 Speaker 3: a half or four years. So I like to look 575 00:33:54,040 --> 00:33:59,800 Speaker 3: at things over a somewhat longer time horizons, and in particular, 576 00:34:00,200 --> 00:34:03,600 Speaker 3: what's the question, what's happened since the fourth quarter of 577 00:34:03,720 --> 00:34:10,080 Speaker 3: twenty nineteen, And the latest numbers are showing just under 578 00:34:10,120 --> 00:34:13,800 Speaker 3: one and a half percent annualized growth in non farm 579 00:34:13,880 --> 00:34:19,040 Speaker 3: business labor productivity, which is a little bit better than 580 00:34:19,239 --> 00:34:21,640 Speaker 3: what we saw in the five or ten years before 581 00:34:21,640 --> 00:34:24,240 Speaker 3: the pandemic, but not by a lot. It's a few tents, 582 00:34:24,440 --> 00:34:29,239 Speaker 3: and I think that's probably a reasonable starting point of 583 00:34:29,520 --> 00:34:33,759 Speaker 3: where we are from a productivity growth perspective. We do 584 00:34:33,880 --> 00:34:39,800 Speaker 3: expect a boost from AI to productivity growth, but probably 585 00:34:39,880 --> 00:34:43,320 Speaker 3: not for a number of years. I don't think. In fact, 586 00:34:43,440 --> 00:34:46,439 Speaker 3: I'm pretty certain that we're not seeing that right now, 587 00:34:46,440 --> 00:34:49,640 Speaker 3: and I wouldn't really expect it over the next couple 588 00:34:49,680 --> 00:34:52,040 Speaker 3: of years. Maybe late in the decade, we can see 589 00:34:52,040 --> 00:34:54,320 Speaker 3: a lift there, and I think it could be sizable, 590 00:34:54,360 --> 00:34:58,239 Speaker 3: but I don't think that that's what we're looking at 591 00:34:58,280 --> 00:34:59,399 Speaker 3: at the moment, Joe. 592 00:34:59,440 --> 00:35:01,359 Speaker 2: I just had a flashback. You know. One of the 593 00:35:01,360 --> 00:35:05,280 Speaker 2: first pieces you ever commissioned for me when we started 594 00:35:05,320 --> 00:35:09,120 Speaker 2: working together at Bloomberg was actually one of Yan's notes 595 00:35:09,480 --> 00:35:13,600 Speaker 2: on productivity and how if you look at video games 596 00:35:13,640 --> 00:35:16,520 Speaker 2: like Grand Theft Auto. I don't know if you remember this, Yeah, 597 00:35:17,840 --> 00:35:25,120 Speaker 2: like the video games have gotten yes, yeah, so terrible times. No, anyway, 598 00:35:25,160 --> 00:35:28,319 Speaker 2: that was just a random walk down memory lane. But 599 00:35:29,320 --> 00:35:31,759 Speaker 2: just on this topic of AI, you know, one of 600 00:35:31,760 --> 00:35:34,319 Speaker 2: the themes running through this conversation has sort of been 601 00:35:34,719 --> 00:35:39,279 Speaker 2: it's different this time and in addition to things like 602 00:35:39,400 --> 00:35:44,120 Speaker 2: AI and chat GPT, we've had the supply side factors 603 00:35:44,160 --> 00:35:46,839 Speaker 2: that we've been discussing the role in inflation and things 604 00:35:46,920 --> 00:35:50,759 Speaker 2: like that. It feels like the economics profession has had 605 00:35:50,800 --> 00:35:54,560 Speaker 2: to deal with like these brand new sort of topics 606 00:35:54,680 --> 00:35:58,440 Speaker 2: or themes running through the macro picture from AI to 607 00:35:58,719 --> 00:36:02,759 Speaker 2: supply side. How do you go about incorporating these new 608 00:36:02,800 --> 00:36:05,719 Speaker 2: things into your research and your forecast, because I can't 609 00:36:05,760 --> 00:36:10,200 Speaker 2: imagine that, you know, pre twenty twenty you were an expert. 610 00:36:10,280 --> 00:36:11,759 Speaker 2: I mean, please tell me if this is wrong, but 611 00:36:11,800 --> 00:36:14,880 Speaker 2: you were an expert on logistics or shipping or things 612 00:36:14,920 --> 00:36:18,600 Speaker 2: like that. The same goes for us, by the way. 613 00:36:17,719 --> 00:36:20,879 Speaker 3: Yeah, we've had to pick up an unusually large number 614 00:36:20,960 --> 00:36:23,040 Speaker 3: of new things over the last several years. I mean, 615 00:36:23,080 --> 00:36:25,960 Speaker 3: there's always some of that, because the most interesting things 616 00:36:25,960 --> 00:36:29,040 Speaker 3: that happen in the economy are often not once that 617 00:36:29,120 --> 00:36:31,400 Speaker 3: you can just look up a in a textbook. But 618 00:36:31,600 --> 00:36:36,280 Speaker 3: it's been definitely sort of an overload of new things 619 00:36:36,280 --> 00:36:39,759 Speaker 3: to get smart on and be able to assess. And 620 00:36:40,000 --> 00:36:43,040 Speaker 3: AI is a great example of that. You know, the 621 00:36:43,120 --> 00:36:47,600 Speaker 3: supply chain disruptions. The virus obviously is maybe the canonical 622 00:36:47,680 --> 00:36:50,759 Speaker 3: example of something that you know, most of us had 623 00:36:50,840 --> 00:36:54,240 Speaker 3: no idea about and then had to get at least 624 00:36:54,800 --> 00:36:58,000 Speaker 3: somewhat familiar with. You know, I'd say you have to 625 00:36:58,000 --> 00:37:01,719 Speaker 3: be eclectic in terms of what kind of information you're 626 00:37:01,760 --> 00:37:05,840 Speaker 3: going to draw on. If I take AI for example, 627 00:37:06,000 --> 00:37:09,840 Speaker 3: we've spent quite a lot of time looking at occupational 628 00:37:09,880 --> 00:37:13,880 Speaker 3: classifications that the US labor Department or the European Union 629 00:37:13,920 --> 00:37:18,560 Speaker 3: put together that break down the labor market into in 630 00:37:18,600 --> 00:37:21,759 Speaker 3: the case of the US Labor Department, nine hundred occupations 631 00:37:22,080 --> 00:37:25,719 Speaker 3: and then provide a pretty detailed accounting of what tasks 632 00:37:25,840 --> 00:37:29,000 Speaker 3: workers in each of these occupations fulfill in order to 633 00:37:29,000 --> 00:37:31,160 Speaker 3: be able to assess, you know, what part of this 634 00:37:31,360 --> 00:37:36,440 Speaker 3: could be replaced by AI. So it's pretty detailed quantitative work, 635 00:37:36,840 --> 00:37:40,760 Speaker 3: although there's obviously a large speculative component to it because 636 00:37:41,320 --> 00:37:46,920 Speaker 3: we're making informed guesses of what could be replaced. We 637 00:37:46,960 --> 00:37:49,719 Speaker 3: don't know how powerful AI is going to be ultimately, 638 00:37:50,080 --> 00:37:52,480 Speaker 3: but that's the sort of analysis that we've had to 639 00:37:53,160 --> 00:37:56,520 Speaker 3: do in other contexts a number of times, especially in 640 00:37:56,600 --> 00:37:57,360 Speaker 3: recent years. 641 00:37:57,600 --> 00:38:00,000 Speaker 2: Didn't you start looking at I can't remember the name 642 00:38:00,200 --> 00:38:04,080 Speaker 2: of it, but that layoffs, the layoff filings, the ones 643 00:38:04,080 --> 00:38:05,280 Speaker 2: that if companies are. 644 00:38:05,120 --> 00:38:06,880 Speaker 3: Like the war notices, Yeah, that's it. 645 00:38:06,920 --> 00:38:08,680 Speaker 2: Didn't you build an indicator for that? 646 00:38:09,040 --> 00:38:09,279 Speaker 3: Yes? 647 00:38:09,680 --> 00:38:12,200 Speaker 2: So what is that telling you now? Because again, in 648 00:38:12,239 --> 00:38:14,760 Speaker 2: twenty twenty two, that was a big year for mass layoffs, 649 00:38:14,840 --> 00:38:18,520 Speaker 2: especially in the tech industry. But maybe some of those 650 00:38:18,600 --> 00:38:21,640 Speaker 2: big on mass layoffs have sort of eased a bit. 651 00:38:21,840 --> 00:38:24,839 Speaker 3: Yeah, it's not telling us anything very different from other 652 00:38:24,920 --> 00:38:29,719 Speaker 3: more conventional data sets like initial jobless claims or the 653 00:38:30,080 --> 00:38:33,399 Speaker 3: jolt's layoff rate. And I also would say this one 654 00:38:33,480 --> 00:38:35,799 Speaker 3: is a little bit closer to the beaten path. It's 655 00:38:35,840 --> 00:38:39,160 Speaker 3: been around for a while, and we're obviously trying to 656 00:38:39,239 --> 00:38:43,840 Speaker 3: measure something that is very core to any economic model. 657 00:38:44,320 --> 00:38:47,040 Speaker 3: But yeah, it's definitely been a helpful indicator that has 658 00:38:47,560 --> 00:38:51,759 Speaker 3: generally sort of told a slightly more reassuring story and 659 00:38:51,800 --> 00:38:53,040 Speaker 3: continues to do so. 660 00:38:53,040 --> 00:38:54,719 Speaker 1: So we just have a few minutes left. Let's talk 661 00:38:54,760 --> 00:38:57,120 Speaker 1: a little bit more about twenty twenty four. I think 662 00:38:57,120 --> 00:39:00,279 Speaker 1: you said right now your odds of recession are teen 663 00:39:00,280 --> 00:39:01,239 Speaker 1: percent in the next fule month. 664 00:39:01,320 --> 00:39:01,719 Speaker 3: That's right. 665 00:39:01,840 --> 00:39:04,280 Speaker 1: You do see cuts on the horizon, just not imminately. 666 00:39:04,360 --> 00:39:06,040 Speaker 1: Talk to us a little bit about how you see 667 00:39:06,080 --> 00:39:07,320 Speaker 1: the next twelve months unfolding. 668 00:39:07,760 --> 00:39:10,080 Speaker 3: Yeah, we have, I would say, on the growth side, 669 00:39:10,200 --> 00:39:14,800 Speaker 3: more of the same twoish percent growth I mean annual average. 670 00:39:15,520 --> 00:39:17,600 Speaker 3: You know, we're two point one percent at the moment, 671 00:39:17,640 --> 00:39:20,960 Speaker 3: which is a little bit below where twenty twenty three 672 00:39:21,000 --> 00:39:24,400 Speaker 3: is probably going to come out. So call that broadly 673 00:39:24,520 --> 00:39:29,839 Speaker 3: trend growth with the unemployment rate going sideways to you know, 674 00:39:29,920 --> 00:39:34,640 Speaker 3: maybe a touch lore. We have inflation still coming down 675 00:39:34,760 --> 00:39:37,320 Speaker 3: from you know, certainly on a year on year basis 676 00:39:37,880 --> 00:39:41,000 Speaker 3: coming down. We have core PC inflation in the fourth 677 00:39:41,120 --> 00:39:44,520 Speaker 3: quarter of next year at you know, two point four percent, 678 00:39:45,000 --> 00:39:48,320 Speaker 3: so still above the official target, but within the zone 679 00:39:48,360 --> 00:39:50,920 Speaker 3: that I think would be pretty comfortable for FED officials 680 00:39:51,360 --> 00:39:55,120 Speaker 3: in that kind of baseline scenario. I don't think that 681 00:39:55,160 --> 00:39:58,280 Speaker 3: the FED is going to be in any hurry to cut, 682 00:39:58,840 --> 00:40:01,840 Speaker 3: so we don't have cut until the fourth quarter of 683 00:40:02,600 --> 00:40:06,279 Speaker 3: next year. The risks to that baseline path for the 684 00:40:06,320 --> 00:40:10,080 Speaker 3: funds RAID though, are strongly on the downside. It's very 685 00:40:10,160 --> 00:40:12,759 Speaker 3: unlikely that we're going to see a significant amount of 686 00:40:12,760 --> 00:40:18,680 Speaker 3: additional hikes, but it's very possible that we'll see cuts 687 00:40:18,800 --> 00:40:21,080 Speaker 3: if there is, you know, more of an air pocket 688 00:40:21,239 --> 00:40:23,799 Speaker 3: in growth than what we have in our forecast. And 689 00:40:23,880 --> 00:40:27,320 Speaker 3: I certainly would if I put myself in the shoes 690 00:40:27,440 --> 00:40:30,719 Speaker 3: of FED officials faced with a significant air pocket that 691 00:40:30,840 --> 00:40:33,520 Speaker 3: looks like a bigger risk of recession, I'd certainly be 692 00:40:33,600 --> 00:40:35,920 Speaker 3: very comfortable in cutting. In response to that. 693 00:40:36,960 --> 00:40:39,719 Speaker 2: You know, I tried to ask Michael Barr from the 694 00:40:39,760 --> 00:40:45,040 Speaker 2: FED this question and was completely unsuccessful recently. But in 695 00:40:45,160 --> 00:40:49,480 Speaker 2: terms of a slowdown in US growth or a recession indicator. 696 00:40:49,600 --> 00:40:52,239 Speaker 2: If you had to choose one thing to look at, 697 00:40:52,520 --> 00:40:55,799 Speaker 2: you know, you're stranded on a desert island and you 698 00:40:55,840 --> 00:40:58,360 Speaker 2: can only look up one chart on your Bloomberg terminal, 699 00:40:58,680 --> 00:41:00,000 Speaker 2: what would it be at this point? 700 00:41:00,560 --> 00:41:03,680 Speaker 3: It would be a labor market indicator. I mean initial 701 00:41:03,760 --> 00:41:06,719 Speaker 3: claims is I think a very traditional one. The unemployment 702 00:41:06,800 --> 00:41:09,120 Speaker 3: rate would obviously receive quite a lot of weight. The 703 00:41:09,160 --> 00:41:13,000 Speaker 3: payroll numbers, I mean, that's usually what tells you that 704 00:41:13,120 --> 00:41:18,440 Speaker 3: a recession really has started. GDP is obviously heavily revised 705 00:41:18,640 --> 00:41:21,719 Speaker 3: and can be quite noisy, especially after a four point 706 00:41:21,800 --> 00:41:24,239 Speaker 3: nine percent number in Q three. If you had a 707 00:41:24,239 --> 00:41:26,600 Speaker 3: weaker number, you might want to average that. But if 708 00:41:26,600 --> 00:41:30,960 Speaker 3: you have material deterioration in the labor market, something much 709 00:41:31,000 --> 00:41:33,120 Speaker 3: more material than what we've seen so far, which I 710 00:41:33,160 --> 00:41:36,839 Speaker 3: think is still very debatable, then that would obviously be 711 00:41:36,920 --> 00:41:37,680 Speaker 3: an alarm sign. 712 00:41:38,120 --> 00:41:41,319 Speaker 1: Jan Hatzius, chief economist at Goldman Sex, thank you so 713 00:41:41,400 --> 00:41:42,760 Speaker 1: much for coming back on outlage. 714 00:41:42,800 --> 00:41:53,000 Speaker 3: That was great, great to be with you. Thanks. 715 00:41:57,280 --> 00:41:59,560 Speaker 1: You know what point I really like Tracy. First of all, 716 00:41:59,600 --> 00:42:02,480 Speaker 1: obviously I really enjoy talking to Yan every time a 717 00:42:02,520 --> 00:42:04,839 Speaker 1: point that he made, and I guess I think It's 718 00:42:04,880 --> 00:42:07,120 Speaker 1: also kind of a point that Austin Gorle has been 719 00:42:07,120 --> 00:42:09,400 Speaker 1: made when we talked about, like economists talk about all 720 00:42:09,400 --> 00:42:13,279 Speaker 1: these historical patterns, there are so few examples of all this. 721 00:42:13,560 --> 00:42:15,440 Speaker 1: It sort of makes a mockery of the idea of 722 00:42:15,440 --> 00:42:17,920 Speaker 1: statistical significance. The idea is like, oh, we're going to 723 00:42:17,920 --> 00:42:21,120 Speaker 1: build these rules on thirteen events or four events. It 724 00:42:21,160 --> 00:42:23,200 Speaker 1: always sort of blows my mind that people take that 725 00:42:23,239 --> 00:42:23,920 Speaker 1: too seriously. 726 00:42:24,120 --> 00:42:26,840 Speaker 2: Well, how many business cycles was it that Yan mentioned, 727 00:42:26,920 --> 00:42:30,480 Speaker 2: like twelve something like that. I can't remember this specific number, 728 00:42:30,520 --> 00:42:33,520 Speaker 2: but you're right, it's a pretty small sample. On the 729 00:42:33,520 --> 00:42:37,480 Speaker 2: one hand, I can understand the allure of having a 730 00:42:37,560 --> 00:42:41,279 Speaker 2: sort of hard rule that's grounded in I don't mean 731 00:42:41,320 --> 00:42:45,120 Speaker 2: simple in a pejorative sense, but in a simple rule. 732 00:42:45,160 --> 00:42:47,560 Speaker 2: You know, if the moving average of the unemployment rate 733 00:42:47,640 --> 00:42:49,960 Speaker 2: is above this, then like it's time to watch out. 734 00:42:50,080 --> 00:42:54,200 Speaker 2: That's intrinsically attractive, and you can see why people would 735 00:42:54,200 --> 00:42:57,040 Speaker 2: gravitate towards that. But on the other hand, I do 736 00:42:57,080 --> 00:42:59,759 Speaker 2: take the point that in a business cycle that has 737 00:42:59,760 --> 00:43:03,200 Speaker 2: been so unusual, you should be allowed to make sort 738 00:43:03,239 --> 00:43:07,799 Speaker 2: of qualitative judgments on what's happening with the sort of 739 00:43:07,960 --> 00:43:09,040 Speaker 2: hard data. 740 00:43:09,520 --> 00:43:11,640 Speaker 1: Yeah, I think that's spot on, right. The key thing 741 00:43:11,719 --> 00:43:13,640 Speaker 1: is like some humility because A you don't have a 742 00:43:13,640 --> 00:43:17,400 Speaker 1: ton of examples, and B this is a very weird example. 743 00:43:17,480 --> 00:43:20,080 Speaker 1: It's just really was not Twenty twenty was not a 744 00:43:20,120 --> 00:43:24,240 Speaker 1: normal recession. The policy response was not normal, the shift 745 00:43:24,320 --> 00:43:27,480 Speaker 1: of consumption from services to goods was not normal. There 746 00:43:27,480 --> 00:43:30,520 Speaker 1: were many very weird things that happened over the last 747 00:43:30,800 --> 00:43:34,360 Speaker 1: three years. And so yeah, the idea that these rules 748 00:43:34,400 --> 00:43:37,960 Speaker 1: that are formed based on a limited number of historical 749 00:43:38,040 --> 00:43:41,359 Speaker 1: examples to apply to a situation that is not now 750 00:43:41,880 --> 00:43:45,000 Speaker 1: seems like a very good reason for general humility. But 751 00:43:45,120 --> 00:43:48,000 Speaker 1: as he points out, you look at the scoreboard all 752 00:43:48,040 --> 00:43:51,040 Speaker 1: around the world and it's really not just US. We've 753 00:43:51,080 --> 00:43:54,200 Speaker 1: seen this decline in inflation without much labor market weakness. 754 00:43:54,200 --> 00:43:54,920 Speaker 1: It is possible. 755 00:43:55,120 --> 00:43:57,920 Speaker 2: Yeah, and that's really interesting because again, like the explanation 756 00:43:58,080 --> 00:44:01,400 Speaker 2: for it just six months ago was fiscal response from 757 00:44:01,440 --> 00:44:03,719 Speaker 2: the US, and now maybe that's not so much. The 758 00:44:03,760 --> 00:44:06,200 Speaker 2: case of inflation is coming down everywhere. You know what 759 00:44:06,239 --> 00:44:08,480 Speaker 2: I was thinking when you were sort of listing all 760 00:44:08,560 --> 00:44:12,200 Speaker 2: those one off events, it'd be really interesting to compile 761 00:44:12,400 --> 00:44:15,520 Speaker 2: like all the things that are sort of unusual about 762 00:44:15,520 --> 00:44:18,480 Speaker 2: this cycle because there are also less obvious ones. I mean, yeah, 763 00:44:18,640 --> 00:44:20,920 Speaker 2: touched on some of them. But the idea that the 764 00:44:20,920 --> 00:44:24,880 Speaker 2: majority of homeowners now have lost in those thirty year rates, 765 00:44:24,920 --> 00:44:29,480 Speaker 2: so the pass through from higher benchmark rates just isn't there. 766 00:44:29,560 --> 00:44:33,360 Speaker 2: Like that seems kind of unusual. There's so many that 767 00:44:33,440 --> 00:44:36,800 Speaker 2: you could actually go through. The change in like survey 768 00:44:36,920 --> 00:44:40,520 Speaker 2: responses would be an interesting one. So obviously the stuff 769 00:44:40,560 --> 00:44:43,760 Speaker 2: we've seen on the supply side, I mean there dozens. 770 00:44:43,880 --> 00:44:46,600 Speaker 1: It really is different this time you said it. 771 00:44:46,600 --> 00:44:49,759 Speaker 2: It makes me so nervous whenever anyone says that, I 772 00:44:49,760 --> 00:44:53,720 Speaker 2: feel like we're just a teching shade. Yeah really, but okay, 773 00:44:53,800 --> 00:44:55,040 Speaker 2: on that note, shall we leave it there? 774 00:44:55,160 --> 00:44:55,839 Speaker 1: Let's leave it there. 775 00:44:55,920 --> 00:44:56,320 Speaker 3: Okay. 776 00:44:56,600 --> 00:44:59,480 Speaker 2: This has been another episode of the Odd Thoughts podcast. 777 00:44:59,600 --> 00:45:03,000 Speaker 2: I'm tre you can follow me at Tracy Alloway. 778 00:45:02,600 --> 00:45:05,440 Speaker 1: And I'm Joe Wisenthal. You can follow me at The Stalwart. 779 00:45:05,600 --> 00:45:09,160 Speaker 1: Follow our producers Carmen Rodriguez at Carmen armand dash El 780 00:45:09,160 --> 00:45:12,200 Speaker 1: Bennett at Dashbot and kel Brooks at Kelbrooks and a 781 00:45:12,239 --> 00:45:15,920 Speaker 1: special thanks to our producer Moses Ondam. For more Oddlots content, 782 00:45:16,040 --> 00:45:18,400 Speaker 1: go to Bloomberg dot com slash odd Lots, where we 783 00:45:18,440 --> 00:45:20,840 Speaker 1: have a blog we post the transcripts, and we have 784 00:45:20,880 --> 00:45:24,280 Speaker 1: a weekly newsletter. And check out our discord where listeners 785 00:45:24,280 --> 00:45:26,520 Speaker 1: are chatting twenty four to seven about all of the 786 00:45:26,560 --> 00:45:29,400 Speaker 1: topics that we like to discuss on the show. Discord 787 00:45:29,640 --> 00:45:31,399 Speaker 1: dot gg slash. 788 00:45:31,120 --> 00:45:34,239 Speaker 2: Odd Lots and if you enjoy odd Lots, if you 789 00:45:34,360 --> 00:45:36,680 Speaker 2: like it when we have these big macro discussions, then 790 00:45:36,719 --> 00:45:40,640 Speaker 2: please leave us a positive review on your favorite podcast platform. 791 00:45:40,680 --> 00:45:41,480 Speaker 2: Thanks for listening 792 00:46:06,920 --> 00:46:06,960 Speaker 1: In