Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 2: and this is Trumps, the podcast that looks at the
Speaker 2: economic world of Donald Trump, how he's shaking up the
Speaker 2: global economy and what on earth is going to happen next.
Speaker 2: And this week we're finally talking about the K shaped economy.
Speaker 2: And I say finally, I mean it's a phrase that's
Speaker 2: been with us since at least COVID times, and you
Speaker 2: find increasingly often in the debates about the US economy.
Speaker 2: One reason we haven't talked about it until now is
Speaker 2: I can't decide what I think about it. On the
Speaker 2: one hand, the basic idea that wealthier people are thriving
Speaker 2: in today's economy while the poorer segments are doing worse
Speaker 2: and worse seems to capture how many people feel about
Speaker 2: the US recovery and about the way the world's going.
Speaker 2: More and more the rich seem to lead different lives
Speaker 2: from the rest of the population. There was a very
Speaker 2: striking episode of the New York Times Daily podcast looking
Speaker 2: at how even going to Disney World was no longer
Speaker 2: easily in reach for many middle class families and when
Speaker 2: they did go, they felt they had a very different
Speaker 2: experience from those with much deeper pockets who were jumping
Speaker 2: all the lines and all of that, and that did
Speaker 2: seem to capture something about the increasingly stratified nature of
Speaker 2: US society and of its consumption patterns. But and this
Speaker 2: is the key part for trumponomics, people who talk about
Speaker 2: the K shaped economy usually aren't just saying that the
Speaker 2: US is very unequal, but that it's getting more unequal
Speaker 2: in its wealth distribution and consumption as the economy grows,
Speaker 2: and that the recovery itself is increasingly dependent on the
Speaker 2: richest and therefore more vulnerable or lopsided than usual. So
Speaker 2: it's not just that it's sort of unappealing or maybe
Speaker 2: unfair that we have all this inequality, but that it's
Speaker 2: actually sort of risky for the economy. And it may
Speaker 2: be also explains why or suggests that the macroeconomic data
Speaker 2: that we're looking at doesn't tell the whole story of
Speaker 2: what's going on on the ground. It's all of that
Speaker 2: that I want to try and get into in a
Speaker 2: relatively short time, because I think it matters if any
Speaker 2: or all of that is true. Mark Zandy I'm very
Speaker 2: glad is joining us for this. He's chief economist at
Speaker 2: Moody's Analytics and one of the economists who's been perhaps
Speaker 2: more associated with this extremely buzzy phrase, and he has
Speaker 2: written recently in his research notes about how the economy
Speaker 2: has become steadily more case shaped. Mark, thank you very
Speaker 2: much for joining us. I think this is the first
Speaker 2: time we've had.
Speaker 1: You buzzy phrase.
Speaker 2: You're a very buzzy economist. I would say you specialize
Speaker 2: in buzziness and busyness.
Speaker 1: I'm sure there you go.
Speaker 2: We have another person making his trumpanomic's debut who's only
Speaker 2: recently joined Bloomberg Economics US team, Andrew Sacker. He's previously
Speaker 2: worked at senior levels at Jordan Park Advisors and the
Speaker 2: Managed funds associated pen Warton Budget Model, and a long
Speaker 2: time ago also the National Economic Council. Andrew, thank you
Speaker 2: for joining us.
Speaker 3: Thank you, Stephanie.
Speaker 1: Mark.
Speaker 2: You heard my sort of spiel there about the K
Speaker 2: shaped economy? Would you say that sort of stronger claim
Speaker 2: not just that the US is very unequal and rich
Speaker 2: people spend a lot more than poor people. Do you
Speaker 2: think that this K shaped narrative does tell us something
Speaker 2: valuable and important about this recovery.
Speaker 1: I do you know, I think the income wealth distribution,
Speaker 1: the consumption distribution is very skewed and has become more skewed,
Speaker 1: particularly most recently with the run up in the equity market,
Speaker 1: the stock market because owner the ownership of stocks is
Speaker 1: very narrowly focused, and that is driving a lot of
Speaker 1: what's going on with regard to consumer spending and the
Speaker 1: broader economy. As a plus in that we're getting the
Speaker 1: spending and we need it to drive growth, but it
Speaker 1: also highlights vulnerability in the economy, and that is it's
Speaker 1: very dependent on the well to do and the wealth
Speaker 1: to do is very are very dependent on what's going
Speaker 1: on in the equity market. So if the equity market
Speaker 1: keeps going north, then all is okay, at least in
Speaker 1: the near term. But if it goes south, the stock
Speaker 1: market has a pension for going up and it has
Speaker 1: a pension for going down. That could be a problem,
Speaker 1: particularly in the current context with lower mill income households
Speaker 1: under significant financial pressure for lots of different reasons, most
Speaker 1: recently being the Iran War and the impact that's having
Speaker 1: on prices for everything that they need. You know, we're
Speaker 1: really focused on the here and now in the very
Speaker 1: near term, but longer run, I think the skewing of
Speaker 1: the income wealth consumption distribution has other broader implications we
Speaker 1: need to think about in terms of, you know, our
Speaker 1: societal ills or political fracturing. And that's all before AI
Speaker 1: kicks into any kind of gear here. So yeah, I
Speaker 1: think this is an important topic and has lots of implications.
Speaker 2: I want to get into several of those, I guess,
Speaker 2: just to establish some of the facts, and I don't
Speaker 2: want to get too caught up in sort of you
Speaker 2: know them terminological trumponomics, which facts, Okay, trumponomics is about
Speaker 2: a state of the world. We're not endorsing any particular
Speaker 2: kind of economics. I think there has been a lot
Speaker 2: of debate. I think you were associated with a sort of,
Speaker 2: you know, a quite dramatic statistic about what share of
Speaker 2: spending was now associated with the top ten percent, and
Speaker 2: there's been a sort of a lot of back and forth.
Speaker 1: We're talking about my estimates. The reason why we were
Speaker 1: having all this debate is that there is no definitive
Speaker 1: source of data here, right, There is no smoking gun
Speaker 1: data point we can all point to and coalesce around
Speaker 1: so we're all looking at different data constructing different estimates.
Speaker 1: And I've constructed an estimate with my colleagues that is
Speaker 1: based on a methodology that was first unveiled by the
Speaker 1: throwers or back and the Internet bubble, and used quite
Speaker 1: extensively during the housing bubble because that was another period
Speaker 1: when we're seeing tremendous wealth effect. So it's just an estimate,
Speaker 1: and I, you know, I'm not going to die on
Speaker 1: the hill on that hill. I just created the estimate
Speaker 1: because we need to get some sense of the numbers here.
Speaker 1: Whether the numbers are precisely right, I don't know, but
Speaker 1: I think directionally and spiritually they're telling us the reality.
Speaker 1: And just to give you the kind of the headline number,
Speaker 1: going back to the buzzy, the buzziness of all this,
Speaker 1: the folks in the top twenty percent of the income distribution,
Speaker 1: and to be in that top twenty percent nationwide, you
Speaker 1: need to make one hundred and seventy five K. I
Speaker 1: know that doesn't sound a whole lot, like a lot
Speaker 1: in London or in New York, but that's a big deal. Yeah, okay,
Speaker 1: very good. So you know, if your makeover one seventy
Speaker 1: five K you're in the top twenty percent. You account
Speaker 1: for sixty percent of personal outlays, and that's up from
Speaker 1: fifty percent back in the early nineties. So that's a
Speaker 1: pretty striking number. Is it exactly that number, Well, I'm
Speaker 1: not sure, but it's a big number, and I'm pretty
Speaker 1: confident that it's been increasing and most recently increasing because
Speaker 1: the obvious the stock market has gone skyward, sending wealth stratospheric,
Speaker 1: and we know that the bottom two thirds of the
Speaker 1: American population don't own a whole lot of stock of
Speaker 1: any stock. It's really the top third, and really the
Speaker 1: top twenty percent, in the top ten percent, and the
Speaker 1: top one percent, the top point one percent. So we
Speaker 1: know this for sure, and that's where the action is,
Speaker 1: and that wealth is driving spending and we can feel it.
Speaker 1: You can see it. You can see it, and you
Speaker 1: know how retailer is doing, which retailers doing good well,
Speaker 1: which retailers aren't doing well. So I think it's it's
Speaker 1: pretty and you can see in the consumer sentiment surveys
Speaker 1: and the polls and everything. I mean, it's we don't
Speaker 1: have a data point that says this is the precise number,
Speaker 1: but everything but that data point is screaming, we got
Speaker 1: this is what's going on.
Speaker 2: I want to get into that because I think it's
Speaker 2: as important as the exact facts. Is this sort of
Speaker 2: the fact that everyone believes it, because that also affects
Speaker 2: behavior because it's true.
Speaker 1: I mean, it's not there making this up.
Speaker 2: I mean, come on, okay, So I think get that
Speaker 2: upper end. We can have a debate about what the
Speaker 2: exact share is, but there's clearly a large share. I
Speaker 2: think the BLS suggested it's maybe closer to forty percent,
Speaker 2: but you know, there's clearly a large share of the
Speaker 2: economy is associated with a relatively small highest income part
Speaker 2: at the lower end. Though, you have had this debate
Speaker 2: since COVID about whether or not real wages, even adjusted
Speaker 2: for their consumption patterns of the lower twenty forty percent
Speaker 2: of the population have kept up with this inflation we've seen.
Speaker 2: I want to bring in Andrew here. I mean, when
Speaker 2: you just look at the sort of the wage picture,
Speaker 2: which defines this affordability debate, certainly, from twenty nineteen to
Speaker 2: twenty fourteen, seemed like real wages have been keeping up
Speaker 2: with this inflation and even have seen some growth, even
Speaker 2: though the cost of sort of day to day items
Speaker 2: has gone up a lot, Is that right? Andrew?
Speaker 1: Oh, can I just let me just weigh in on
Speaker 1: there before Andrew comes? Sorry, Andrew, I just got out,
Speaker 1: can't resist. That's true. You know, we're focused on the distribution,
Speaker 1: and that's what you just articulated. And that's very true.
Speaker 1: The wealth distribution bottom through the American population. They don't
Speaker 1: own anything. They owe stuff, but they are in the
Speaker 1: middle part of the distribution. They own homes, they do
Speaker 1: own stock.
Speaker 2: But that's completely true. But this is but it's an
Speaker 2: example of something that people feel equally strongly is true
Speaker 2: and actually it's just not in the data. People feel
Speaker 2: that their wages have not kept up, even though everything
Speaker 2: in the data suggests that they have.
Speaker 1: Actually in the last year, it hasn't, right, I mean,
Speaker 1: it has not right. The data now say the real
Speaker 1: wages aren't rising for the folks in the bottom part
Speaker 1: of the distribution. In fact, real after tax income, so
Speaker 1: that's after inflation, after tax income has gone nowhere in
Speaker 1: the past year. And that's for the typical America in
Speaker 1: the middle of the distribution. So we know that real
Speaker 1: after tax income for people in the bottom half of
Speaker 1: the institution is probably falling, you know, at this point,
Speaker 1: so we know that for sure.
Speaker 3: And then at the bottom of the distribution, also the
Speaker 3: spending is a higher share of their income, so any
Speaker 3: inflation or you know, particularly gas prices is going to
Speaker 3: hit them harder. Having said that, how do you think
Speaker 3: about the sort of the medium term impact of AI
Speaker 3: where it would seem that people at the higher end
Speaker 3: of the distribution have more to fear.
Speaker 1: I don't know. I'm not sure. Like everything related to AI,
Speaker 1: I'm unsure. I'm uncertain. This can play on a gazillion
Speaker 1: different ways. You know, it feels like the workers that
Speaker 1: are most likely to be substituted out aren't the folks
Speaker 1: at the top, the highly skilled and with lots of
Speaker 1: experience they're going to be empowered by AI. It's really
Speaker 1: kind of folks in the middle part of the distribution,
Speaker 1: entry level, college educated with lesser experience. I should say,
Speaker 1: that's where it feels like the substitute ability is going
Speaker 1: to be most significant for the folks in the top part.
Speaker 1: It feels like a complimentute. So my intuition, my sense
Speaker 1: is that it's not going to hurt folks in the
Speaker 1: very bottom part of the distribution. It's going to benefit
Speaker 1: that folks in the top part of the distribution. The
Speaker 1: real pressure is going to be in the middle part
Speaker 1: of the distribution. But I say that with no confidence
Speaker 1: because there's just so many moving parts here.
Speaker 2: I suspect we'll go down the black hole if we
Speaker 2: think about it. Yeah, we'll try not to think about
Speaker 2: a just one episode. Not thinking about it.
Speaker 1: I will say though, for the next six, twelve, eighteen months,
Speaker 1: that is less relevant I think. I mean, clearly that's
Speaker 1: a big deal dead ahead, but I don't know that
Speaker 1: that's a bigger deal you know, through the ind of
Speaker 1: the year and through twenty twenty seven. That's going to
Speaker 1: play out for a longer period of time. I would think.
Speaker 2: So, Andrew. One of the reasons I want to have
Speaker 2: you on is that we were sort of playing around
Speaker 2: with this idea how much we thought was true. We
Speaker 2: all agree that this element of capital income and the
Speaker 2: pciation of the higher end, the people who own shares
Speaker 2: doing extraordinary well, and how that's driving a lot spending.
Speaker 2: But it is interesting some of the things that feel
Speaker 2: true so far we haven't been able to get data on.
Speaker 2: And you've been looking at the earnings and sales of
Speaker 2: stores that sort of sell to different segments of the
Speaker 2: income scale.
Speaker 3: Yeah, so we use the asp Bloomberg function and sorted
Speaker 3: the retailers into sort of mid range, low end like
Speaker 3: the Dollar Generals, and high end like Lulu Lemon, And
Speaker 3: over the last few years the sort of revenue growth
Speaker 3: was roughly the same in all three buckets. Mister, do
Speaker 3: you see something very different.
Speaker 1: Please call me. Mark. Sounds so forrrible. I know I'm
Speaker 1: getting older though, maybe that's what it is when you
Speaker 1: have no hair called mister more often. You know, I
Speaker 1: haven't looked at it as carefully as you, Andrew. My
Speaker 1: sense is listening to retailers, and it's all it's more anecdotal. Obviously.
Speaker 1: The folks that are the retailers are catering to the wealthier.
Speaker 1: They're doing quite well. And it goes beyond retail. When
Speaker 1: I think about it, I think about homebuilders, I think
Speaker 1: about vehicle sales, you know, I think more broadly about
Speaker 1: what people are spending their money on travel. Folks in
Speaker 1: the middle part of retailers that kind of cater to
Speaker 1: the middle and lower part, it's more difficult. It's been
Speaker 1: more of a slog. The lower end It's a little
Speaker 1: bit complicated, right, because you can see trading down right,
Speaker 1: because people in the middle part might be under a
Speaker 1: lot of pressure, and so they start shopping at low
Speaker 1: end retailers like a Dollar General. So it's hard to know,
Speaker 1: you know, exactly what the dynamics are there. We get
Speaker 1: all the credit files in the country from Equifax every month.
Speaker 3: I've got a.
Speaker 1: Census of all the credit files and anonymized obviously through
Speaker 1: May of this year. So it's a high quality data.
Speaker 1: Can't get any better than that data, and it's showing stress.
Speaker 1: I mean, if you're subprime borrower origination, and I talked
Speaker 1: I define subprime. There's a lot of debata as to
Speaker 1: what's subprime, but I defined subprime is below six sixty score.
Speaker 1: The typical American has a score that's kind of just
Speaker 1: over seven hundred, like seven ten, seven twenty, just for context,
Speaker 1: So if you're really six sixty. The delinquency rate, that's
Speaker 1: the percent of all loans outstandings that's across the whole
Speaker 1: shooting match, you know, that's cards and auto, consumer finance
Speaker 1: by now pay later, mortgage, so forth, and so on,
Speaker 1: is now over ten percent, and it's the highest it's
Speaker 1: been since twenty fourteen in the direction of travel is
Speaker 1: not very comforting. It's moving straight up. This is through May,
Speaker 1: and of course through May, everyone's getting tax refunds, big
Speaker 1: tax refunds because of the OBBA legislation, and that you
Speaker 1: know generally historically that goes to paying credit card debt
Speaker 1: and keeping current on your debt. So despite that, we've
Speaker 1: had this delinquency rate rise, and those taxi funds are
Speaker 1: now behind us, they're in the review mirror, and so
Speaker 1: we're and we're still with four dollars and fifty cents
Speaker 1: for a gallon of regular unleaded. It feels like that
Speaker 1: might even go higher at given events. So that's real data,
Speaker 1: and that's saying to me that you know, these folks
Speaker 1: are under a lot of stress, and consistent with the
Speaker 1: with the observation that retailers that are carrying to the
Speaker 1: folks in the bottom middle parts of the distribution have
Speaker 1: got a tougher time than the folks that are carrying
Speaker 1: to the top part of the distribution.
Speaker 2: And actually, just to your point on the tax refunds,
Speaker 2: with a few weeks into the Iran crisis, the US
Speaker 2: Economics team had of telling the analysis which showed that
Speaker 2: even by that point, all the benefit of those refunds
Speaker 2: was going to be completely offset by the impact on
Speaker 2: incomes of those high higher gas prices, and we've obviously
Speaker 2: seen that continue even longer than we originally expected. Andrew,
Speaker 2: that's the piece of this that we think is most
Speaker 2: relevant on the K shaped aspect. If you're thinking about
Speaker 2: those assets that people have, the real difference between one side,
Speaker 2: you know, whether it's K or whether it's E. You know,
Speaker 2: the difference between the higher end in this kind of
Speaker 2: environment and the lower end is the higher end, you know,
Speaker 2: they're hit by higher gas prices, they don't necessarily have
Speaker 2: to reduce their consumption. They have things to fall back on,
Speaker 2: whereas it's going to have a much bigger impact on
Speaker 2: those in the lower part of the distribution.
Speaker 3: Absolutely, and then with the they have ten percent more EXTI,
Speaker 3: they have stocks in their portfolio than they did six
Speaker 3: months ago.
Speaker 2: In terms of the sort of macroeconomic impact, how does
Speaker 2: that feed into when we're thinking about the forecast for
Speaker 2: the next year or so, Given this hit, but different
Speaker 2: parts of the economy reacting differently, does that make it
Speaker 2: harder for us to forecast the economy or is it
Speaker 2: something we just have to look through.
Speaker 3: I think the volatility in stocks and acid prices obviously
Speaker 3: makes the forecast more difficult. But at the same time,
Speaker 3: people very much smooth and damp their responses to sudden moves. It's,
Speaker 3: you know, just part of the game what they we
Speaker 3: always have to deal with, Mark.
Speaker 2: I know you write quite a lot about Kevin Walsh
Speaker 2: and how he's you know, the kind of FED that
Speaker 2: he may lead and the policy that's appropriate for him.
Speaker 2: Does any of this change the way the FED should
Speaker 2: think about the economy and think about whether or not
Speaker 2: the macro data it's looking at is an appropriate thing
Speaker 2: to focus on when it comes to policy.
Speaker 1: Not first order, right, I mean first order, what's going
Speaker 1: on with the economy, But what is the mandate? The
Speaker 1: dual mandate? You know, am I full employment or how
Speaker 1: close am I? And what about inflation and inflation expectations
Speaker 1: all this other stuff we've been talking about. Obviously they're
Speaker 1: critical to both those mandates, but you know they're more
Speaker 1: second third order kind of things. First order, you know.
Speaker 1: There it's all very confusing with regard to what should
Speaker 1: be done here. I mean, the economy is soft in
Speaker 1: my humble opinion, job growth is very weak, even despite
Speaker 1: the slow labor force growth because of immigration policy. Demand
Speaker 1: for is even weaker because unemployment's drifting higher and participation
Speaker 1: is drifting lower. That would argue for obviously rate cuts
Speaker 1: all OUSEQL. But of course now we've got inflation and
Speaker 1: inflation expectations which are getting to a place where we
Speaker 1: should pay attention. They're high by any historical standard, and
Speaker 1: they feel like they're going to break out to the
Speaker 1: upside here pretty soon, and that argues for obviously rate increases.
Speaker 1: But so the net of all that is, you know,
Speaker 1: sit on your hand. You don't know what to do
Speaker 1: until things kind of clear. But all these other you know,
Speaker 1: things that we've been talking about obviously are very important
Speaker 1: to understanding you know what that means for the growth
Speaker 1: in inflation mandates, but they're more second third order, I
Speaker 1: think at this point.
Speaker 2: So Mark, I just wanted to sort of get a
Speaker 2: sort of final takeaway where we started, really whether we
Speaker 2: should consider this recovery and this economy to be unusually
Speaker 2: vulnerable or lopsided, not from an equity standpoint, inequality standpoint,
Speaker 2: but also in terms of its potential for suddenly reversing.
Speaker 2: If you're sitting at the FED, or even if you're
Speaker 2: just working in a big company, should you feel that
Speaker 2: this is a sort of unusually insecure recovery, should put
Speaker 2: it that way in terms of how many legs it
Speaker 2: has and what parts of the economy are growing.
Speaker 1: Yes, I mean, I'm searching for the right word, but
Speaker 1: you know, I'm.
Speaker 2: Sure it'll be buzzy when you come up with it.
Speaker 1: But yeah, tenure is precarious, vulnerable, fragile. I've used all
Speaker 1: those words. None of them feel exactly right, So we
Speaker 1: got to come up with another one. You're right, we
Speaker 1: got to come up with another buzzphrase. But yeah, it
Speaker 1: feels like we're growing two percent ish, maybe a little
Speaker 1: bit below at that point. This is below the economy's potential.
Speaker 1: That means unemployment is rising and labor force participation is falling.
Speaker 1: With some combination of the two. That's just a very
Speaker 1: uncomfortable place to be, particularly in the context of much
Speaker 1: of the growth is being driven by one sector of
Speaker 1: the economy and one group of America and the households,
Speaker 1: and that's just not, you know, a comfortable place. And
Speaker 1: it's a very very come back to the word, it
Speaker 1: feels very tenuous and precarious to make.
Speaker 2: Also that it's incredible. I mean, that's not a bad word,
Speaker 2: but it's just that people don't believe in it. I
Speaker 2: mean when you look at these numbers, and even the
Speaker 2: people that are doing well, except I feel I guess
Speaker 2: right at the top, will still feel that they're being
Speaker 2: strained by various things. You've been in this business for
Speaker 2: a long time. Do you feel that the consumer sentiment
Speaker 2: numbers are just no longer reliably connected to the data?
Speaker 1: Well, depends on what survey you look at. The University
Speaker 1: of Michigan is clearly over because that's at a record low,
Speaker 1: all time low, and that's been around since the fifties.
Speaker 1: It feels like it's overstating the case, but it's making
Speaker 1: a case, and the other sentiment surveys are making similar cases.
Speaker 1: There's a lot of discomfort out there, but people are
Speaker 1: very nervous about their financial situation, and certainly if you're
Speaker 1: in the bottom two thirds of the distribution of income
Speaker 1: or wealth, you've got reason to be nervous and upset
Speaker 1: about the way things are going. And I think that's
Speaker 1: reflected in the survey numbers. But you're right there are
Speaker 1: survey numbers have become more disconnected from the actual spending
Speaker 1: that's been occurring, at least up until this point in time.
Speaker 1: I still think there's a message there, you know, it's
Speaker 1: still there's information there that we should we shouldn't discount.
Speaker 2: Okay, well, we're going to keep looking at the information.
Speaker 2: And I do actually think this earning season, we're getting
Speaker 2: all the numbers in and we can take another look
Speaker 2: at whether or not there is a real a K
Speaker 2: shape narrative for the earnings that companies have had because
Speaker 2: they tend to talk about K shaped in their earnings calls,
Speaker 2: but it isn't always born out by their actual earning
Speaker 2: sombers but Andrew Second and Mark Sandy, thank you very much.
Speaker 1: Thank you. It is a blual pleasure.
Speaker 4: Thank you thanks.
Speaker 2: For listening to trump Nomics from Bloomberg. It was hosted
Speaker 2: by me Stephanie Flanders. I was joined by Moody's and
Speaker 2: A six chief economist Mark Sandy and by Bloomberg US
Speaker 2: economist Andrew Sakker. Trumponomics was produced by Samasadi and Moses
Speaker 2: And with help from Amy Keen, and sound design was
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Speaker 2: Please rate and review us highly Wherever you listen