WEBVTT - Goldman's Jan Hatzius Believes the Hard Part Is Over 0:00:10.680 --> 0:00:14.800 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.880 --> 0:00:17.200 I'm Jill Wysenthal and I'm Tracy Alloway. 0:00:17.440 --> 0:00:20.200 Tracy, I would say the last few weeks, in a 0:00:20.320 --> 0:00:23.640 very real way, I would say optimism over the soft 0:00:23.720 --> 0:00:26.920 landing scenario, or at least the end of the raid 0:00:26.960 --> 0:00:29.760 hikes has become like deeply conventional wisdom. 0:00:29.800 --> 0:00:31.840 I think I would agree with that, although I think 0:00:31.840 --> 0:00:34.839 it's sort of started in the summer. We saw some 0:00:35.040 --> 0:00:37.720 inklings of it then, but you're right, it really seems 0:00:37.720 --> 0:00:40.000 to have crystallized in recent weeks. And of course the 0:00:40.040 --> 0:00:44.680 irony is that going into twenty twenty three, the consensus 0:00:44.760 --> 0:00:47.960 was really for recession. We had a number of people 0:00:47.960 --> 0:00:50.879 who were talking about the outlook for the economy this 0:00:50.960 --> 0:00:55.000 year and how bad it might be, and then going 0:00:55.040 --> 0:00:58.040 into twenty twenty four, it seems like we've completely flipped around. 0:00:58.120 --> 0:01:01.600 So the hills are alive with the sound of soft landings. 0:01:01.920 --> 0:01:05.039 Yeah, and I think you're right. Obviously, twenty twenty three 0:01:05.280 --> 0:01:09.000 has broken a lot of people's brains. Probably a broader theme, 0:01:09.080 --> 0:01:13.800 which is that the entire COVID cycle, people have been 0:01:13.840 --> 0:01:16.200 looking at it through the lens of a traditional business 0:01:16.200 --> 0:01:19.000 cycle or macrocycle, and it feels like a lot of 0:01:19.040 --> 0:01:22.440 that just hasn't worked, starting from probably the fast rebound 0:01:22.480 --> 0:01:24.040 in late twenty twenty oh totally. 0:01:24.080 --> 0:01:26.640 So I feel like the indicator that everyone was looking 0:01:26.680 --> 0:01:30.160 at in sort of late twenty twenty two early twenty 0:01:30.200 --> 0:01:33.440 twenty three was the yield curve, the inverted yield curve, 0:01:33.520 --> 0:01:35.399 and there was this discussion of how you know, this 0:01:35.560 --> 0:01:40.119 is the traditional harbinger of a recession, but maybe things 0:01:40.160 --> 0:01:42.920 are different this time for a variety of reasons. And 0:01:42.959 --> 0:01:47.040 then this year, you know, fast forward to November, sort 0:01:47.040 --> 0:01:49.720 of late October of twenty twenty three, it feels like 0:01:49.840 --> 0:01:52.320 the other indicator that everyone is starting to talk about 0:01:52.640 --> 0:01:54.760 or was starting to talk about, is the PAM rule. 0:01:54.880 --> 0:01:57.520 So the idea that you know, one measure of unemployment, 0:01:57.560 --> 0:02:01.080 the moving average, has been moving up, and traditionally this 0:02:01.200 --> 0:02:06.800 indicates an upcoming recession because unemployment increases non linearly in 0:02:07.000 --> 0:02:10.160 every business cycle. And supposedly this was a hard and 0:02:10.200 --> 0:02:13.240 fast rule. But as we discussed with Claudia on one 0:02:13.280 --> 0:02:16.480 of our episodes of Lots More again, maybe things are 0:02:16.520 --> 0:02:17.320 different this time. 0:02:17.720 --> 0:02:19.400 I do think it's important that you bring that up, 0:02:19.400 --> 0:02:22.280 because it does feel like the labor market situation is 0:02:22.400 --> 0:02:24.640 kind of the fly and the ointment of the soft 0:02:24.720 --> 0:02:29.480 landing scenario, which is that there's clearly some kind of softening. 0:02:29.680 --> 0:02:31.960 I guess I would say in the labor market, it's 0:02:32.080 --> 0:02:34.920 the question how far does that go? When will the 0:02:34.960 --> 0:02:36.960 FED have to cut? Should the FED be taking out 0:02:36.960 --> 0:02:39.720 some sort of insurance cut sooner rather than later to 0:02:39.720 --> 0:02:43.000 forestall a downturn? All big macro questions. We are nowhere 0:02:43.040 --> 0:02:46.480 near the end of understanding this macrocycle, and I think 0:02:46.480 --> 0:02:47.679 we got to get a better handle. 0:02:47.480 --> 0:02:49.600 On the good news about this macro cycle is I 0:02:49.600 --> 0:02:52.639 feel like twenty years from now, fifty years from now, 0:02:52.680 --> 0:02:56.120 there will still be studies coming about exactly what. 0:02:56.160 --> 0:02:59.480 Just happened unambiguously. I am confident on that. All Right, Well, 0:02:59.480 --> 0:03:02.680 we do literally have the perfect guests to help us 0:03:02.880 --> 0:03:06.520 understand this moment in macro, what happened in twenty twenty three, 0:03:06.639 --> 0:03:08.919 what we should be looking forward to in twenty twenty four. 0:03:09.240 --> 0:03:13.240 I'm thrilled to welcome back on to the show, Jan Hatzias. 0:03:13.240 --> 0:03:15.680 We've had them on a few times. Jan Hatzias, chief 0:03:15.680 --> 0:03:19.440 economist at Goldman Sachs. Joan, thank you so much for 0:03:19.520 --> 0:03:21.560 coming into the studio and coming on odlots. 0:03:21.680 --> 0:03:23.800 It's great to be back with you, Joe and Tracy. 0:03:24.120 --> 0:03:25.200 Always wonderful to be here. 0:03:25.280 --> 0:03:27.600 Thank you so much. You put out a recent note, 0:03:28.040 --> 0:03:30.480 and what I really loved about it is that, you know, 0:03:30.480 --> 0:03:34.960 there's this cliche that many markets journalists, maybe even tracing 0:03:35.040 --> 0:03:37.480 myself at times, have used, where it's like, blah blah blah, 0:03:37.560 --> 0:03:40.000 happens now here comes the hard part. It's just one 0:03:40.000 --> 0:03:42.400 of those things that people love to say. It's this trope. 0:03:42.640 --> 0:03:44.400 All the easy money has been made, now here's the 0:03:44.440 --> 0:03:47.000 hard part. Inflation's gone down. Here, here's the hard part. 0:03:47.240 --> 0:03:50.160 You and she said the opposite. You said, actually coming 0:03:50.240 --> 0:03:52.840 up next, there's quite a bit of disinflation in store, 0:03:52.920 --> 0:03:56.640 and that this stage of further declines and inflation should 0:03:56.680 --> 0:03:58.640 be the fairly easy part. That we've passed the hard 0:03:58.640 --> 0:04:01.600 part of fighting inflation. What do you let's start there? 0:04:01.960 --> 0:04:05.400 What gives you confidence that actually, regardless of what happened, 0:04:05.480 --> 0:04:07.400 there's more disinflation in the pipe. 0:04:07.600 --> 0:04:10.480 You're right. The title of our annual Outlook Report, which 0:04:10.480 --> 0:04:12.560 we published a couple of weeks ago, is the hard 0:04:12.560 --> 0:04:15.920 part is over. And think the reason why I think 0:04:15.960 --> 0:04:18.600 the hard part is over is that we have a 0:04:18.600 --> 0:04:22.760 proof of concept that we can bring down inflation and 0:04:23.000 --> 0:04:28.920 rebalance the labor market without having to crush the economy 0:04:28.960 --> 0:04:31.320 and put the economy into recession. And I think we've 0:04:31.360 --> 0:04:35.200 seen that very clearly in twenty twenty three. We've seen 0:04:35.240 --> 0:04:37.800 it in the US, but we've seen it much more 0:04:37.839 --> 0:04:44.080 broadly across G ten economies and EM economies that saw 0:04:44.200 --> 0:04:49.320 a big surge in inflation in twenty twenty one, Inflation 0:04:49.440 --> 0:04:52.880 has come down. If you take an average of all 0:04:52.920 --> 0:04:56.520 of these economies that saw a large and unwanted inflation 0:04:56.640 --> 0:05:00.240 surge across DM and EM went to six percent core 0:05:00.279 --> 0:05:03.240 inflation in twenty twenty two or six percents come back 0:05:03.279 --> 0:05:09.080 down to about three percent on a sequential, annualized basis 0:05:09.400 --> 0:05:14.440 without any deterioration in the labor market across these economies. Yeah, 0:05:14.520 --> 0:05:17.480 in some places you've seen some increases in the unemployment rate. 0:05:17.520 --> 0:05:20.560 We have seen some increase in the US. In others 0:05:20.560 --> 0:05:23.640 you've seen some decline, but the average actually has been 0:05:23.920 --> 0:05:27.400 basically flat. And to me, that's very very telling. 0:05:27.960 --> 0:05:31.080 Well, can I ask you something specifically about the US 0:05:31.200 --> 0:05:35.280 economy because I was reading another Goldman publication. You know 0:05:35.360 --> 0:05:38.400 this one. In addition to the outlook that Joe just mentioned. 0:05:38.400 --> 0:05:40.400 This was sort of a Q and A between you 0:05:40.480 --> 0:05:45.039 and someone internal at Goldman and they asked you about 0:05:45.120 --> 0:05:48.719 long and variable lags in monetary policy, and you sort 0:05:48.720 --> 0:05:52.720 of suggested that you don't really think that's a thing. 0:05:53.279 --> 0:05:56.120 So my question is, how do you square the idea 0:05:56.160 --> 0:05:59.680 that the hard part is over, that there's more disinflation 0:06:01.000 --> 0:06:03.680 with the idea that monetary policy, you know, maybe the 0:06:03.760 --> 0:06:07.160 long and variable lags aspect of it is over egged. 0:06:07.279 --> 0:06:09.279 Is it just a matter of degree? It's like the 0:06:09.320 --> 0:06:11.720 majority of disinflation has happened, and now we're going to 0:06:11.760 --> 0:06:13.200 see little bits and pieces. 0:06:13.640 --> 0:06:13.839 Well. 0:06:13.880 --> 0:06:18.680 On inflation, I think we will see additional declines in 0:06:18.760 --> 0:06:23.640 a few areas. One that's I think very clear is 0:06:24.080 --> 0:06:29.400 housing rent inflation and Honer's equivalent rent inflation is very 0:06:29.600 --> 0:06:32.880 likely to come down further. It's still running at about 0:06:32.920 --> 0:06:39.520 six percent on a again sequential annualized basis, and just looking 0:06:39.560 --> 0:06:43.520 at alternative rent indicators and where they've been running and 0:06:43.600 --> 0:06:46.640 continue to run, we would expect that to get back 0:06:46.680 --> 0:06:49.240 down to the three to four percent range by the 0:06:49.839 --> 0:06:52.880 end of next year. In the core CPI rent and 0:06:52.960 --> 0:06:56.159 owner's equivalent rent has a forty percent weight in the 0:06:56.200 --> 0:06:59.360 core PCE index, it still has a seventeen percent weight, 0:06:59.440 --> 0:07:05.040 So these are are pretty significant reasons for expecting further deceleration. 0:07:05.720 --> 0:07:09.640 We've also seen a lot of labor market rebalancing. Job 0:07:09.680 --> 0:07:13.320 openings have come down substantially. The quid rate has gone 0:07:13.360 --> 0:07:17.400 back to where it was in February twenty twenty. That 0:07:17.640 --> 0:07:21.480 is still feeding through to the wage numbers, and I 0:07:21.480 --> 0:07:24.440 think that's another source of disinflation, and then there's still 0:07:24.480 --> 0:07:28.040 some disinflation to come on the core goods side. So 0:07:28.800 --> 0:07:31.680 in that sense, I think the lagged effects of what's 0:07:31.720 --> 0:07:36.040 already happened are indeed important. Where I don't agree with 0:07:36.160 --> 0:07:39.239 the sort of maybe cliche of long and variable lags 0:07:39.840 --> 0:07:43.800 is if I think about the gap between a monetary 0:07:43.840 --> 0:07:47.160 policy shock and the maximum impact on the growth rate 0:07:47.200 --> 0:07:50.040 of GDP, which for me on the growth side is 0:07:50.040 --> 0:07:52.400 really the most important question. How long does it take 0:07:52.480 --> 0:07:55.680 until I see the maximum impact on growth? We think 0:07:55.720 --> 0:07:59.920 that's only about two quarters, which means that since the 0:08:00.120 --> 0:08:04.440 FED was most aggressive in tightening policy starting at the 0:08:04.480 --> 0:08:09.480 June twenty twenty two FORMC meeting, the biggest impact occurred 0:08:09.960 --> 0:08:13.600 really in late twenty and twenty two, early tw and 0:08:13.640 --> 0:08:18.080 twenty three, So it's quite important to think about what 0:08:18.280 --> 0:08:21.960 question you're asking. There are long lags in terms of 0:08:22.040 --> 0:08:24.560 the impact on inflation. There are even some pretty long 0:08:24.680 --> 0:08:27.040 lags in terms of the impact of monetary policy on 0:08:27.080 --> 0:08:29.960 the level of GDP. But as a forecaster, what I 0:08:30.040 --> 0:08:33.319 care most about is the maximum impact on the growth rate. 0:08:33.400 --> 0:08:36.840 Because if I have a non recession forecast and we've 0:08:36.840 --> 0:08:42.200 already gotten through the biggest hit from the tightening without 0:08:42.360 --> 0:08:45.360 the economy having entered recession. Now we're still seeing some 0:08:45.440 --> 0:08:48.600 negative impulses, that's it's not going to worry me that 0:08:48.760 --> 0:08:50.920 much because we've already survived the biggest hit. 0:08:51.440 --> 0:08:54.800 Yeah, and since you mentioned the non recession call, I 0:08:54.880 --> 0:08:57.600 feel that we have to mention Joe that the last 0:08:57.600 --> 0:08:59.679 time we had yan on was in August I think 0:08:59.720 --> 0:09:02.760 of two, twenty twenty two, in an episode titled The 0:09:02.880 --> 0:09:07.640 Narrow Path to Avoid Hard Landing, basically laying out a 0:09:07.679 --> 0:09:10.600 lot of the soft landing scenario that seems to be 0:09:10.600 --> 0:09:11.600 coming to fruition. 0:09:11.960 --> 0:09:15.000 So, yeah, if we've been able to see all of 0:09:15.040 --> 0:09:18.120 this realized disinflation, prime more to come without too much 0:09:18.200 --> 0:09:21.440 damage to the labor market. You know, the story goes, 0:09:21.760 --> 0:09:25.840 the FED hikes rates, it slows demand, people lose their jobs, 0:09:26.400 --> 0:09:29.319 prices compressed, but we didn't get the massive job losses. 0:09:29.440 --> 0:09:31.840 How do you even think about the link between the 0:09:31.920 --> 0:09:34.360 rate hikes that we've seen and the disinflation we've seen. 0:09:34.600 --> 0:09:36.920 Are they connected? Is it the kind of thing where 0:09:36.960 --> 0:09:40.040 it's not entirely clear what has been the Fed's role 0:09:40.120 --> 0:09:41.240 in slowing down inflation. 0:09:42.080 --> 0:09:45.000 I think they're connected in the sense that the economy 0:09:45.120 --> 0:09:48.560 grew more slowly than it otherwise would have done. If 0:09:48.600 --> 0:09:51.559 the FED had not tightened policy, we would have seen, 0:09:52.440 --> 0:09:56.760 you know, stronger growth and higher inflation. But I think 0:09:56.800 --> 0:10:01.360 the primary reason for why this cycle looks so different. Yeah, which, 0:10:01.400 --> 0:10:04.200 by the way, was the title of our Outlook report 0:10:04.200 --> 0:10:06.000 a year ago, this cycle is different. 0:10:06.840 --> 0:10:10.280 Is that a lot of how did you feel publishing that? 0:10:10.400 --> 0:10:12.959 Because I feel every time I say this time might 0:10:13.000 --> 0:10:16.160 be different, I get really nervous because like, there's going 0:10:16.200 --> 0:10:19.319 to be dozens, probably hundreds of people online who are like, eh, 0:10:19.400 --> 0:10:20.640 it's never different this time. 0:10:20.800 --> 0:10:23.600 But if you're not a little nervous, then you're probably 0:10:23.679 --> 0:10:27.400 not taking enough risky as a forecaster, because you're never 0:10:27.480 --> 0:10:31.000 going to be certain. So I felt that that was 0:10:31.720 --> 0:10:33.920 our core of you, and so I put it out 0:10:33.960 --> 0:10:37.240 there as the you know, as the title of the report. 0:10:37.440 --> 0:10:40.240 But of course there's always a risk that you're wrong 0:10:40.240 --> 0:10:43.120 about these things and end up with egg on your face. 0:10:43.640 --> 0:10:45.880 But what I was going to say is that I 0:10:45.920 --> 0:10:49.080 think the cycle is very different because, as you said 0:10:49.160 --> 0:10:53.600 in the opening part, the core dynamic of this cycle, 0:10:53.640 --> 0:10:56.480 really going back to the spring of twenty and twenty 0:10:56.559 --> 0:10:59.920 has been COVID and its aftermath and all the imbalance 0:11:00.960 --> 0:11:05.600 that emerged either directly because of the pandemic or because 0:11:05.640 --> 0:11:11.320 of policy responses. Then of course we've also had geopolitical shocks, 0:11:12.160 --> 0:11:14.719 the Russia Ukraine War in particular, But for me, it's 0:11:14.800 --> 0:11:19.679 really COVID and the recovery from COVID that makes this 0:11:19.920 --> 0:11:20.960 cycle soul different. 0:11:36.600 --> 0:11:39.440 So I mentioned the PSALM rule in the intro, and 0:11:39.480 --> 0:11:41.920 I think that's been getting a lot of attention recently 0:11:42.000 --> 0:11:45.400 because it's been getting closer to triggering. I think the 0:11:45.480 --> 0:11:49.160 rule itself is something like if the three month average 0:11:49.200 --> 0:11:52.760 of the unemployment rate this is U three is half 0:11:52.800 --> 0:11:55.400 a percentage point more or above it's low in the 0:11:55.440 --> 0:11:58.280 prior twelve months, then the economy is in the early 0:11:58.320 --> 0:12:00.840 stages of her session, and the current values something like 0:12:00.880 --> 0:12:05.280 point three to three something like that. I didn't realize 0:12:05.679 --> 0:12:10.560 that Goldman has a similar rule. Apparently it's a point 0:12:10.679 --> 0:12:14.480 three five percentage point increase again in the three month 0:12:14.840 --> 0:12:17.640 I think moving average of the U three unemployment rate. 0:12:17.960 --> 0:12:20.959 How much attention are you paying to your own rule 0:12:21.520 --> 0:12:24.680 in the current context of a softening labor market. Is 0:12:24.720 --> 0:12:27.000 it a similar idea to what Claudia was telling us 0:12:27.040 --> 0:12:30.640 that Again, maybe it's different this time it's just kind 0:12:30.640 --> 0:12:31.000 of chill. 0:12:31.080 --> 0:12:35.280 Yeah, there's different. There are different ways of characterizing the data. 0:12:35.320 --> 0:12:38.560 It's a you know, time series that goes back to 0:12:39.160 --> 0:12:41.839 the aftermath of World War Two. And it's certainly true, 0:12:42.200 --> 0:12:46.280 however exactly you want to define it, that significant increases 0:12:46.320 --> 0:12:51.559 in the unemployment rate have historically coincided with a recession 0:12:51.960 --> 0:12:55.120 in the in the United States. This is a historical fact. 0:12:55.559 --> 0:12:59.920 Now again, if this cycle is very different from past cycles, 0:13:00.120 --> 0:13:03.319 maybe that historical fact is not as relevant as it 0:13:03.360 --> 0:13:08.520 would be under other circumstances. I'd also note that we're 0:13:08.559 --> 0:13:12.240 only talking about you know, twelve or thirteen business cycles here, 0:13:12.920 --> 0:13:16.560 and it's not a huge sample. And lastly, I would say, 0:13:16.600 --> 0:13:19.960 if you go outside the United States, you also find 0:13:20.080 --> 0:13:23.600 that big increases in the unemployment rate have some predictive value. 0:13:23.679 --> 0:13:28.080 But the rule in quotation marks doesn't work as well 0:13:28.559 --> 0:13:30.400 as it does in the in the US. So when 0:13:30.440 --> 0:13:32.400 I take all of these things together, where do it 0:13:32.440 --> 0:13:36.199 come out. I would say significant changes in the unemployment 0:13:36.240 --> 0:13:39.520 rate is certainly something I would pay attention to, but 0:13:39.679 --> 0:13:43.280 I wouldn't, you know, elevate it to the status of 0:13:43.720 --> 0:13:46.600 something that tells you you now have to switch to 0:13:46.720 --> 0:13:50.080 a recession forecast if you know, if you do see 0:13:50.080 --> 0:13:52.920 a significant increase. I'd also note a few other things 0:13:53.000 --> 0:13:57.440 just about this particular episode. Other labor market indicators have 0:13:57.520 --> 0:14:02.479 continued to be, you know, pretty strong payroll growth over 0:14:02.520 --> 0:14:05.160 the six months in which the unemployment rate has been 0:14:05.160 --> 0:14:09.080 going up, as I think totaled one point two million 0:14:09.200 --> 0:14:13.480 or something on that order, The household survey employment numbers 0:14:13.559 --> 0:14:17.319 adjusted to the definitions of the payroll survey have shown 0:14:17.400 --> 0:14:22.920 a similar increase. Initial jobless claims remain quite low, not 0:14:23.080 --> 0:14:27.600 consistent really with a major layoff cycle. And so I 0:14:27.680 --> 0:14:29.800 take all of these things together, and I would say 0:14:30.280 --> 0:14:33.520 I'm still pretty comfortable that the labor market's doing fine. 0:14:33.400 --> 0:14:35.960 When would you be concerned? And I guess the reason 0:14:36.000 --> 0:14:38.680 I ask is partly because this might determine when the 0:14:38.760 --> 0:14:42.080 hiking cycle, which everyone basically thinks it, turns into a 0:14:42.120 --> 0:14:46.640 cutting cycle. At what point would you be concerned such that, Okay, 0:14:46.640 --> 0:14:49.120 the FED is going to need to move and maybe 0:14:49.160 --> 0:14:52.840 take out some insurance to forestall a deeper downtern I. 0:14:52.760 --> 0:14:55.479 Think it's always going to be a combination of indicator, 0:14:55.600 --> 0:14:58.800 so I don't think I would want to necessarily draw 0:14:58.840 --> 0:15:00.520 a line in the sand. But if we were to 0:15:00.560 --> 0:15:05.360 see much more pervasive signs of labor market deterioration with 0:15:06.040 --> 0:15:11.240 you know, jumps in initial claims and declines in payroll 0:15:11.320 --> 0:15:16.360 growth to something clearly below the replacement rate, so let's 0:15:16.360 --> 0:15:20.000 say in the fifty thousand range, or you know, moving 0:15:20.040 --> 0:15:23.080 closer to zero, and you get increases in the unemployment rate, 0:15:23.640 --> 0:15:25.760 that probably would be a reason to take out inshorance. 0:15:26.040 --> 0:15:29.600 And you know, it's not limited to those indicators, obviously, 0:15:29.680 --> 0:15:32.600 but if you got a combination of those indicators, I 0:15:32.600 --> 0:15:35.280 think it would be time to cut rates on the 0:15:35.720 --> 0:15:38.240 back of that. That doesn't happen in our forecast. Our 0:15:38.280 --> 0:15:43.640 forecast has payrolls still growing above one hundred thousand a month, 0:15:43.840 --> 0:15:47.600 and we have the unemployment rate going sort of broadly sideways, 0:15:47.680 --> 0:15:51.120 if not even a little bit lower over the next year. 0:15:51.680 --> 0:15:56.120 And in that kind of environment, I wouldn't expect early cuts. 0:15:56.160 --> 0:15:58.480 I think it'll still be a while before the FED 0:15:58.560 --> 0:16:02.360 does cut. But of course, one really important point now, 0:16:02.840 --> 0:16:04.880 and that's very different from a year ago, is that 0:16:04.920 --> 0:16:09.480 they can cut. They have the ability to respond to 0:16:09.520 --> 0:16:14.600 any weakening, foreseen or unforeseen by taking out insurance. And 0:16:14.640 --> 0:16:17.880 that's a really important reason for me why I think 0:16:17.960 --> 0:16:22.480 the risk of recession is significantly low than it was 0:16:22.880 --> 0:16:25.920 coming into this year. A year ago, we had a 0:16:25.960 --> 0:16:30.120 twelve month recession probability of thirty five percent. Now we 0:16:30.200 --> 0:16:33.440 have a twelve month recession probability of fifteen percent, and 0:16:33.520 --> 0:16:37.640 a lot of the delta is the fedsibility to respond 0:16:37.960 --> 0:16:39.040 to weakend numbers. 0:16:39.760 --> 0:16:42.760 I definitely want to ask you about more responses to 0:16:43.880 --> 0:16:47.600 slowing growth, including potentially on the fiscal side, but on 0:16:47.680 --> 0:16:50.200 the topic of the labor market. So one of the 0:16:50.240 --> 0:16:52.520 other things we've seen recently in terms of a slight 0:16:52.600 --> 0:16:56.680 softening of the data, has been job openings starting to 0:16:56.720 --> 0:16:59.400 come down. And on the one hand, people worry that 0:16:59.480 --> 0:17:02.240 this is a so that the economy is slowing. But 0:17:02.320 --> 0:17:05.760 on the other hand, this could be interpreted as sort 0:17:05.800 --> 0:17:08.240 of good news if you look back at the beverage 0:17:08.600 --> 0:17:12.600 curve debate and the idea that the relationship between unemployment 0:17:12.840 --> 0:17:17.080 and job openings had somehow structurally shifted during the pandemic. 0:17:17.520 --> 0:17:22.000 When you're looking at openings now, A, how much stock 0:17:22.240 --> 0:17:24.520 do you put in that data? First of all, because 0:17:24.520 --> 0:17:28.160 this is another big controversy, But b what are openings 0:17:28.160 --> 0:17:29.040 telling you right now? 0:17:29.440 --> 0:17:32.880 So I think it's very important to distinguish between good 0:17:32.960 --> 0:17:35.560 softening in the labor market and bad softening in the 0:17:35.600 --> 0:17:40.720 labor market. So the labor market was clearly out of balance, overheated. 0:17:41.400 --> 0:17:46.320 We had a job's workers gap job openings minus unemployed 0:17:46.359 --> 0:17:50.080 workers that was by far the highest level on record, 0:17:50.600 --> 0:17:53.359 a difference of six million, a ratio of something like 0:17:53.400 --> 0:17:58.000 two to one, and that clearly had to be addressed 0:17:58.480 --> 0:18:03.200 in order to be on a path to non inflationary 0:18:03.280 --> 0:18:07.440 growth and wage growth that's consistent with something like two 0:18:07.440 --> 0:18:12.080 percent inflation over time. So the decline and job openings 0:18:12.080 --> 0:18:14.320 that we've seen over the last year and a half 0:18:14.440 --> 0:18:16.560 or so, I think is very much a good thing 0:18:16.680 --> 0:18:20.880 because it puts us on a more sustainable footing. Where 0:18:20.920 --> 0:18:23.680 are we now. We've seen a drop in this job's 0:18:23.720 --> 0:18:28.040 workers gap from six million to about sort of two 0:18:28.040 --> 0:18:32.000 to three million, depending on which measure of job openings 0:18:32.080 --> 0:18:34.240 you use, and I would put some weight on the 0:18:34.320 --> 0:18:38.119 Jolts the official Libor Department data. I'd also put some 0:18:38.200 --> 0:18:41.320 weight on the link up data, some weight on the 0:18:41.359 --> 0:18:45.600 INDEED data, and that maybe answers the question about reliability 0:18:45.640 --> 0:18:49.240 a bit. I do think these indicators are challenging, and 0:18:49.440 --> 0:18:54.120 the Jolts series suffers from quite a low response rate 0:18:54.200 --> 0:18:57.399 and has been quite noisy, But if you combine it 0:18:57.440 --> 0:18:59.760 with other indicators, I would put some weight on it. 0:18:59.880 --> 0:19:03.600 I think it's telling us a broadly reasonable story that 0:19:04.200 --> 0:19:07.400 the labor market's still strong in terms of the amount 0:19:07.440 --> 0:19:10.959 of job openings out there, but it's less overheated and 0:19:11.000 --> 0:19:14.920 it's closer to normal, although still not back to where 0:19:14.960 --> 0:19:16.760 it was before the pandemic. 0:19:17.359 --> 0:19:20.320 You mentioned the response rate on the survey coming down, 0:19:20.359 --> 0:19:22.960 and that just reminded me of something else that sort 0:19:23.000 --> 0:19:26.280 of falls into this time might be different category, and 0:19:26.280 --> 0:19:28.800 that is that we have seen the response rates on 0:19:28.880 --> 0:19:34.280 a variety of economic surveys really come down quite dramatically 0:19:34.800 --> 0:19:38.159 in recent years, and there is this ongoing discussion of 0:19:38.400 --> 0:19:42.280 whether or not that might be clouding the economic picture. So, 0:19:42.320 --> 0:19:44.600 for instance, if you look at something like a consumer 0:19:44.640 --> 0:19:48.000 sentiment survey, you know, if these aren't the actual stats, 0:19:48.000 --> 0:19:50.800 I'm just making them up for illustrative purposes. But if 0:19:51.160 --> 0:19:54.399 fifty percent of those asked are now responding to the 0:19:54.400 --> 0:19:58.600 survey versus eighty percent ten years ago, you could imagine 0:19:58.600 --> 0:20:01.320 that maybe the people responding to the survey are you know, 0:20:01.600 --> 0:20:04.840 maybe they feel a little bit unrepresentative, unrepresentative, maybe they 0:20:04.880 --> 0:20:07.800 feel a little bit more strongly about certain aspects of 0:20:07.800 --> 0:20:11.520 the direction of the economy. Whatever is that on your radar, 0:20:11.800 --> 0:20:14.359 and are you taking that into account at all? Is 0:20:14.400 --> 0:20:17.560 it causing problems for economists at this point in time, 0:20:17.640 --> 0:20:19.560 or are you still sort of using a lot of 0:20:19.600 --> 0:20:22.199 the soft data, the survey based data, the same as 0:20:22.240 --> 0:20:22.639 you used to. 0:20:23.400 --> 0:20:27.639 I'd say you have to be aware of issues with 0:20:28.000 --> 0:20:31.720 economic data in a variety of areas. One thing that 0:20:31.800 --> 0:20:35.639 we actually have done over the last couple of years 0:20:35.800 --> 0:20:38.600 is probably putting more weight on hard data than on 0:20:39.080 --> 0:20:43.959 soft data. And we are i would say, pretty concerned 0:20:43.960 --> 0:20:48.280 about not just because of response rates, and things like that, 0:20:48.359 --> 0:20:53.679 but just for sentiment effect about the sentiment effects can 0:20:53.960 --> 0:20:57.680 sort of overstate a weakening of the economy. I think 0:20:57.680 --> 0:20:59.840 we've had a couple of instances in two thousand and 0:21:00.000 --> 0:21:04.040 twenty three when the sentiment based indicators deteriorated a lot, 0:21:04.119 --> 0:21:08.280 and then even within for example, business surveys, something like 0:21:08.400 --> 0:21:13.960 general business confidence was significantly weaker than questions that asked 0:21:14.000 --> 0:21:18.080 about orders or production or employment, which in turn was 0:21:18.119 --> 0:21:21.800 weaker than what the hard indicators were saying. And we 0:21:21.880 --> 0:21:25.119 have in those instances repeatedly put more weight on the 0:21:25.160 --> 0:21:28.520 hard indicators, and I think so far that's turned out 0:21:28.560 --> 0:21:29.520 to be the right choice. 0:21:29.680 --> 0:21:31.159 I'm going to go back to something you said in 0:21:31.200 --> 0:21:33.280 the first answer, which is that we have gotten this 0:21:33.400 --> 0:21:39.040 proof of concept of significant disinflation and relatively mild, if 0:21:39.080 --> 0:21:43.040 not nonexistent, labor market weakening, especially if you look across 0:21:43.119 --> 0:21:45.920 G ten countries. There has been some you know, obviously 0:21:45.920 --> 0:21:48.879 the unemployment rate in the US has tacked higher, but 0:21:49.000 --> 0:21:53.399 globally it's pretty remarkable. Does this tell us something about 0:21:54.240 --> 0:21:58.439 the degree to which economists understand the inflation process? Is 0:21:58.480 --> 0:22:02.840 there still more questions than as or do economists understand 0:22:02.920 --> 0:22:07.480 inflation except in weird business cycles that relate to pandemics. 0:22:08.119 --> 0:22:10.479 I think it is telling us that in this cycle 0:22:10.560 --> 0:22:13.960 there was a common global factor that has really dominated 0:22:14.000 --> 0:22:18.320 everything else, and that's COVID's that's my main takeaway. Obviously, 0:22:18.840 --> 0:22:21.199 there were quite a lot of differences in terms of 0:22:21.200 --> 0:22:26.480 policy responses across countries, and that has had its effect 0:22:26.560 --> 0:22:30.560 here and there. But the dominant issue that has faced 0:22:30.600 --> 0:22:33.119 the global economy over the last you know, three and 0:22:33.160 --> 0:22:35.199 a half to four years has been COVID and the 0:22:35.240 --> 0:22:43.320 recovery from COVID and betting on effectively convergence between different places, 0:22:43.520 --> 0:22:45.480 you know, in terms of the inflation experience, I think 0:22:45.520 --> 0:22:48.879 has been the right approach so far. I'll give you 0:22:48.920 --> 0:22:53.480 an example. The European both your area and UK inflation 0:22:53.640 --> 0:22:58.440 data until recently looked significantly higher than what we were 0:22:58.440 --> 0:23:00.920 seeing in the US and Canada and maybe some of 0:23:00.960 --> 0:23:05.760 the em countries, and what I just outlined suggested we 0:23:05.840 --> 0:23:10.040 really should be putting weight on convergence, and indeed both 0:23:10.040 --> 0:23:14.720 the UK and Europe is now seeing significantly friendly inflation numbers. 0:23:15.000 --> 0:23:17.760 I want to press on this point because again, up 0:23:17.840 --> 0:23:22.119 until recently, when inflation really did start coming down in Europe, 0:23:22.160 --> 0:23:25.159 and the UK. There was an argument out there that like, 0:23:25.359 --> 0:23:28.800 maybe the US had outperformed because of the fiscal response 0:23:29.000 --> 0:23:32.800 in twenty twenty and beyond, which was absolutely massive on 0:23:32.960 --> 0:23:36.600