WEBVTT - Is a Trump Recession on the Way? 0:00:02.720 --> 0:00:09.600 Bloomberg Audio Studios, podcasts, radio news. Tariffs are about making 0:00:09.640 --> 0:00:13.440 America rich again and making America great again. And it's happening, 0:00:13.480 --> 0:00:17.200 and it will happen rather quickly. There'll be a little disturbance, 0:00:18.239 --> 0:00:20.000 but we're okay with that. 0:00:29.720 --> 0:00:32.479 Welcome to Trumponomics, the podcast that looks at the economic 0:00:32.520 --> 0:00:36.120 world of Donald Trump, how he's already shaped the global economy, 0:00:36.240 --> 0:00:40.479 and what on earth is going to happen next. Today 0:00:40.520 --> 0:00:44.440 we're asking have Donald Trump and Elon Musk stalled the 0:00:44.600 --> 0:00:48.159 US economy? A week or two ago, the highly influential 0:00:48.640 --> 0:00:52.040 now cast of the US economy that updates every day 0:00:52.560 --> 0:00:54.680 was suggesting that the US economy was going to grow 0:00:54.680 --> 0:00:57.480 at an annual rate of two point three percent in 0:00:57.480 --> 0:00:59.720 the first three months of this year. But now a 0:01:00.080 --> 0:01:03.560 lieu of negative data just in the past week has 0:01:03.600 --> 0:01:07.920 that measure predicting the economy will shrink by nearly three percent. Now, 0:01:07.959 --> 0:01:11.240 that's the first time that gauge has turned negative since 0:01:11.280 --> 0:01:14.240 twenty twenty two. Now it's just one measure, it's a 0:01:14.319 --> 0:01:17.680 now cast, It jumps around, But several prominent Wall Street 0:01:17.720 --> 0:01:21.640 forecasters are also now expecting the US economy to shrink 0:01:22.120 --> 0:01:25.520 just in those first three months of the year, and investors, 0:01:25.760 --> 0:01:28.880 amid all the gloom, amid all the worry about tariffs 0:01:28.920 --> 0:01:32.360 and other things, are betting on three interest rate cuts 0:01:32.560 --> 0:01:35.240 by the US Central Bank, the FED to support the 0:01:35.280 --> 0:01:38.040 economy this year, rather more than they were expecting a 0:01:38.160 --> 0:01:41.679 while back. So is this all Donald Trump an Elon 0:01:41.800 --> 0:01:45.000 Musk's fault instead of that Trump bump to the economy 0:01:45.000 --> 0:01:46.600 that we were talking about at the beginning of the year. 0:01:46.880 --> 0:01:51.440 Has a combination of layoffs in the federal government, sweeping tariffs, 0:01:51.440 --> 0:01:54.680 and a whole lot of uncertainty raised the prospect of 0:01:54.680 --> 0:01:57.760 a Trump slump or is it as the Treasury sectary 0:01:57.840 --> 0:02:02.720 Scott bessn't reassured us this week, just a period of transition. Well, 0:02:03.240 --> 0:02:06.160 to answer that, we felt here at Trumponomics that we 0:02:06.240 --> 0:02:08.360 had to double down on the number of economists on 0:02:08.400 --> 0:02:11.200 the show. So we have two pH d economists, both 0:02:11.200 --> 0:02:14.200 of whom spent time one time or another in the 0:02:14.200 --> 0:02:23.040 President's Council of Economic Advisors in the recent past. First 0:02:23.120 --> 0:02:26.200 our guest Catherine Holston, new to the show now at 0:02:26.200 --> 0:02:30.120 Evercore ASI Research, was a senior economist in the White 0:02:30.120 --> 0:02:32.840 House last year and before that in the Office of 0:02:32.840 --> 0:02:35.919 the chief Economists of the World Bank. Catherine, very good 0:02:35.960 --> 0:02:36.760 of you to be here. 0:02:37.040 --> 0:02:38.800 Thank you so much for having me. It's great to 0:02:38.840 --> 0:02:39.200 be here. 0:02:39.360 --> 0:02:41.880 And our regular in house guest, Anna Wong, chief US 0:02:41.919 --> 0:02:45.400 economists for Bloomberg Economics and also formerly an economist at 0:02:45.400 --> 0:02:48.320 the Federal Reserve and at the Council of Economic Advisors 0:02:48.320 --> 0:02:51.320 in the White House swamps comment during Donald Trump's first 0:02:51.360 --> 0:02:53.520 time Anna, always good to have you. 0:02:54.000 --> 0:02:55.280 Oh, it's good to be here again. 0:02:55.720 --> 0:02:58.040 Look, there's two pieces of this, and I told you 0:02:58.080 --> 0:03:01.600 before we started recording a little bit about having so 0:03:01.720 --> 0:03:05.200 many super smart economists, though very happy that we're all women, 0:03:05.639 --> 0:03:09.040 to talk about the impact of tariffs, of the so 0:03:09.120 --> 0:03:14.880 called Department of Government efficiency, and just generally this mood 0:03:14.960 --> 0:03:17.800 of gloom that seems to have been starting to descend 0:03:17.880 --> 0:03:20.080 around the US economy in the last week or so 0:03:20.160 --> 0:03:24.160 after so much optimism about in the first weeks after 0:03:24.320 --> 0:03:27.200 President Trump was reelected. We're going to get into all that, 0:03:27.280 --> 0:03:29.239 but maybe we could just have a top line view 0:03:29.280 --> 0:03:32.360 of how you both think these two shocks, the tariff 0:03:32.400 --> 0:03:36.800 shocks and what's happening to the federal government will affect 0:03:36.800 --> 0:03:39.360 the economy. Catherine, I know that you are my old 0:03:39.480 --> 0:03:42.800 friend and your colleague Krishna Guha have looked at both 0:03:42.880 --> 0:03:47.680 trade policy uncertainty and the impact of Elon Musk's DOGE 0:03:47.720 --> 0:03:50.000 efforts and how they affect growth this year. 0:03:50.560 --> 0:03:52.920 So I'll start on the tariff side, and I'll mention 0:03:53.040 --> 0:03:55.400 that I'm going to be comparing apples and oranges a 0:03:55.400 --> 0:03:58.000 little bit in our estimates here, So I just want 0:03:58.040 --> 0:04:01.480 to flag that. But this tariff scenario with twenty five 0:04:01.520 --> 0:04:04.440 percent on Canada and Mexico going to twenty percent on 0:04:04.520 --> 0:04:08.560 China matches the kind of max tariff scenario that we 0:04:08.680 --> 0:04:11.360 laid out in a recent note. We think this could 0:04:11.440 --> 0:04:15.320 add fifty basis points to core PCEE inflation in twenty 0:04:15.360 --> 0:04:18.880 twenty five, another twenty basis points in twenty twenty six. 0:04:19.279 --> 0:04:22.119 That's pretty substantially more than our base case in terms 0:04:22.120 --> 0:04:24.840 of what the FED is looking at. That includes two 0:04:24.880 --> 0:04:28.040 pieces in this shock here. One is the actual impact 0:04:28.080 --> 0:04:31.440 of the tariffs, and then second the really big uncertainty 0:04:31.440 --> 0:04:34.799 that we're seeing trade policy uncertainty, and there's good reason 0:04:34.839 --> 0:04:37.279 to think that's going to continue to remain quite high, 0:04:37.560 --> 0:04:41.120 potentially pushing up inflation expectations, which is what the FED 0:04:41.200 --> 0:04:46.000 is of course worried about on the DOGE side of things. 0:04:46.040 --> 0:04:49.360 Within the government, we think the impact in March, April 0:04:49.400 --> 0:04:52.560 and May could lead to payroll employment growth that is 0:04:52.720 --> 0:04:55.680 seventy thousand less than expected in a baseline, which is 0:04:55.720 --> 0:04:58.440 a pretty big hit considering where we're at with payroll 0:04:58.480 --> 0:04:59.160 growth right now. 0:04:59.240 --> 0:05:01.680 We'll get into how that compares with the overall size 0:05:01.720 --> 0:05:04.279 of the economy. But Anna, I mean just the same 0:05:04.360 --> 0:05:06.600 question to you, your sort of top line thoughts on 0:05:06.680 --> 0:05:10.440 this sort of double whammy that we have now coming 0:05:10.920 --> 0:05:13.839 you know, at very similar time hitting the US economy 0:05:13.839 --> 0:05:17.160 on the tariffs and the DOGE cuts. 0:05:17.600 --> 0:05:22.760 Right, So my top line effect estimates on the direct tariff, 0:05:22.920 --> 0:05:26.159 not including the uncertainty, or at least what I think 0:05:26.200 --> 0:05:29.320 the FED will have is quite similar to Catherine's estimate. 0:05:29.400 --> 0:05:33.320 So I have one point three percent hit on GDP 0:05:33.960 --> 0:05:38.279 and also zero point eight percent increase on core PCE. 0:05:39.040 --> 0:05:42.479 And these are the estimates implied from the general qualiber 0:05:42.560 --> 0:05:46.039 model that the International Finance Division at the FED use 0:05:46.160 --> 0:05:49.719 as a dashboard to track coming trade policy in the 0:05:49.720 --> 0:05:53.480 first Trump administration, and typically the horizon is about two 0:05:53.600 --> 0:05:57.000 years or two or three years. That's because that's usually 0:05:57.040 --> 0:06:00.440 our forecast horizon. So if you take that point eight 0:06:00.680 --> 0:06:04.679 percent core PCE inflation hit spread over to R three years, 0:06:04.680 --> 0:06:08.240 with the maximum arriving in the first two years, that's 0:06:08.320 --> 0:06:11.960 very close to where Catherine has on the uncertainty piece. 0:06:12.000 --> 0:06:15.480 Though the experience of the First Trade War has taught 0:06:15.680 --> 0:06:19.880 I think the FED economist that the general equilibrim model 0:06:20.200 --> 0:06:23.800 the estimate might be a maximum take, because ultimately in 0:06:23.839 --> 0:06:26.160 the First Trade War, both a GDP estimate and the 0:06:26.160 --> 0:06:30.120 core PC estimate actually undershot what the model suggests. The 0:06:30.240 --> 0:06:34.159 bigger piece is actually uncertainty, and the FED has developed 0:06:34.160 --> 0:06:38.919 a trade policy uncertainty. Currently, the index of that trade 0:06:38.960 --> 0:06:43.400 policy uncertainty developed by my former colleagues at a monthly 0:06:43.520 --> 0:06:48.159 level is eleven standard deviation above historical norms, and it's 0:06:48.279 --> 0:06:53.039 almost doubled the size of the first Trump administration trade 0:06:53.040 --> 0:06:57.520 policy uncertainty. So that piece should be translating to a 0:06:57.640 --> 0:07:01.040 hit GDP. Hit based on that value should be aboutero 0:07:01.040 --> 0:07:06.160 point eight percent GDP and on DOGE, So I think 0:07:06.200 --> 0:07:09.680 that the DOGE cuts so far or very small relative 0:07:09.720 --> 0:07:13.160 to GDP, so really it doesn't really work in terms 0:07:13.160 --> 0:07:16.280 of translating to GDP. However, keep in mind that it 0:07:16.360 --> 0:07:21.360 is the difference in the fiscal impulse that affects GDP growth. Right, 0:07:21.440 --> 0:07:24.720 So if the first two quarters of the DOCHE cuts 0:07:24.920 --> 0:07:28.640 has generated a bigger change a decline in fiscal spending 0:07:28.680 --> 0:07:32.520 compared to last year, which is the quarter still under Biden, 0:07:33.080 --> 0:07:36.640 then that rate of change annualized could generate a pretty 0:07:36.720 --> 0:07:40.640 large decline in GDP growth. And according to the shock 0:07:40.920 --> 0:07:45.120 model that Bloomberg Economics has developed, the contour of the 0:07:45.200 --> 0:07:49.560 GDP growth from DOCHE excitivities should begin to show up 0:07:49.560 --> 0:07:52.320 in the first and second quarter of this year, and 0:07:52.560 --> 0:07:57.679 especially peaking in terms of GDP growth in the fourth quarter. However, 0:07:57.960 --> 0:08:02.400 the impact on payrolls, as Catherine suggested, will be more 0:08:02.440 --> 0:08:06.160 obvious sooner, and the February payrolls, which we will be 0:08:06.200 --> 0:08:09.280 receiving this Friday, we expect we won't be seeing much 0:08:09.320 --> 0:08:12.600 of that yet. However you'll start to see that in 0:08:12.640 --> 0:08:16.360 the next month. And also just again the uncertainty alone 0:08:16.800 --> 0:08:20.280 you talked about the domain gloom economic data we have received. 0:08:20.800 --> 0:08:21.560 What is a. 0:08:21.480 --> 0:08:25.920 Sign of weakness is the pullback in consumption which we 0:08:25.960 --> 0:08:29.920 saw in January. Last December it was very strong, but 0:08:30.000 --> 0:08:33.560 then in January the consumers pulled back, so there's no 0:08:33.760 --> 0:08:37.319 underlying strength and consumptions just pulling back. And as we 0:08:37.360 --> 0:08:40.040 see more of this pullback as a retrenchment to the 0:08:40.080 --> 0:08:43.080 strength last fall, you're going to see more and more 0:08:43.400 --> 0:08:46.160 impetus on this pressure on GDP growth. 0:08:46.520 --> 0:08:50.440 ANA in the sort of educational byways department, just to 0:08:50.480 --> 0:08:53.160 get our sense around this trade policy uncertainty, and you 0:08:53.200 --> 0:08:57.320 talk about it being eleven standard deviations from so when 0:08:57.360 --> 0:09:01.520 you sit roughly meaning when we say that. 0:09:01.640 --> 0:09:04.240 In terms of the index, this index goes back to 0:09:04.280 --> 0:09:09.360 the nineteen sixties and the Fed Economist collected mentions of 0:09:09.440 --> 0:09:13.520 the trade policy uncertainty or references of trade policy uncertainty 0:09:13.920 --> 0:09:17.880 in media and social media and all the newspapers, and 0:09:18.280 --> 0:09:23.160 right now the index has doubled the level of twenty sixteen, 0:09:23.400 --> 0:09:27.320 which means that uncertainty is through the roof and there's 0:09:27.440 --> 0:09:31.560 just no historical comparisons. Is nineteen sixty at the level 0:09:31.600 --> 0:09:33.360 of uncertainty we're facing right now. 0:09:34.120 --> 0:09:36.160 And I guess we have been saying that the tariffs 0:09:36.160 --> 0:09:39.040 that were announced this week are taking US tariffs back 0:09:39.040 --> 0:09:41.199 to where they were in the forties. Obviously we're still 0:09:41.240 --> 0:09:45.280 not at the levels of that preceded that era, there 0:09:45.280 --> 0:09:48.320 were much higher tariffs than the global economy before that, 0:09:48.400 --> 0:09:50.720 and I guess that's one thing that the President says 0:09:50.800 --> 0:09:54.160 is we're in some sense going back to some previous 0:09:54.160 --> 0:09:58.240 eras for that, Anna was mentioning the fed's Trade policy 0:09:58.360 --> 0:10:02.000 Uncertainty measure, which has become something as a sort of 0:10:02.000 --> 0:10:05.079 standard thing that people refer to. But I noted in 0:10:05.120 --> 0:10:09.600 your recent research with Krishna, you're also thinking about DOGE 0:10:09.679 --> 0:10:13.960 policy uncertainty and starting to think that that might be 0:10:14.480 --> 0:10:17.240 almost of the same order of magnitude. So could you 0:10:17.280 --> 0:10:19.080 just talk us through it, because obviously I suspect you 0:10:19.120 --> 0:10:23.560 agree that the narrow impact of those federal layoffs is 0:10:23.600 --> 0:10:26.320 not necessarily going to move the dial that much. But 0:10:26.400 --> 0:10:30.160 it's this sort of broader ripple effect that's. 0:10:30.120 --> 0:10:32.920 Right, and we think it plays out, you know, maybe 0:10:32.960 --> 0:10:37.200 quite similarly to how adding trade policy uncertainty to our 0:10:37.480 --> 0:10:41.240 general equilibrium models does. Because the thing that's unique about 0:10:41.240 --> 0:10:44.240 trade policy uncertainty right now is that it's much larger 0:10:44.240 --> 0:10:46.720 in level terms, as Anna said, but it's also has 0:10:46.720 --> 0:10:49.600 the potential to be very long lasting. And this is 0:10:49.640 --> 0:10:52.240 really not what you would model if you were seeking 0:10:52.280 --> 0:10:55.079 efficiency in the model, and so we wanted to think 0:10:55.080 --> 0:10:58.800 about how the same impact might be coming out of DOGE, 0:10:59.080 --> 0:11:04.960 and specifically how the uncertainty for private sector firms that 0:11:05.080 --> 0:11:10.560 are heavily exposed to federal contracts and grants might weigh 0:11:10.720 --> 0:11:15.480 on decisions to hire or potentially even do layoffs at 0:11:15.559 --> 0:11:19.120 these firms. So there's three pieces that we look at here. 0:11:19.320 --> 0:11:22.200 The first, as you mentioned, is the direct impact of 0:11:22.720 --> 0:11:26.520 firing probationary employees and other employees in the federal government, 0:11:26.920 --> 0:11:30.320 and that's relatively small given the number of workers that 0:11:30.360 --> 0:11:32.920 we have in the US. There are two point four 0:11:33.000 --> 0:11:36.800 million federal civilian employees. We don't know how many federal 0:11:36.840 --> 0:11:40.440 contractors there are, but some estimates from Brookings suggest there 0:11:40.440 --> 0:11:42.520 are more than five million, more than a two to 0:11:42.559 --> 0:11:47.280 one ratio between federal contractors and federal employees, and another 0:11:47.400 --> 0:11:51.439 two point four million employees potentially connected to grants. So 0:11:51.600 --> 0:11:55.040 what we do is we look at first our baseline 0:11:55.120 --> 0:12:00.199 for direct impacts on federal payrolls. This year, I think 0:12:00.240 --> 0:12:03.880 there could be two hundred thousand federal workers fired over 0:12:03.920 --> 0:12:06.400 the year. That includes the seventy five thousand who have 0:12:06.480 --> 0:12:10.679 taken the deferred resignation scheme. But we also look at 0:12:10.679 --> 0:12:15.000 two impacts on private sector payrolls. The first is really 0:12:15.080 --> 0:12:18.600 just the direct impact for if there are substantial cuts 0:12:18.960 --> 0:12:21.960 to federal contracts and grants. So we're not seeing that 0:12:22.040 --> 0:12:25.040 yet on a large scale, but if that plays out, 0:12:25.360 --> 0:12:28.360 we think it's reasonable to assume that firms are not 0:12:28.440 --> 0:12:30.360 going to be able to hold onto all of their 0:12:30.400 --> 0:12:35.480 employees as these contracts and grants are cut. The piece 0:12:35.520 --> 0:12:40.680 that we're calling DOGE policy uncertainty or DPU, and here 0:12:40.720 --> 0:12:43.959 I would just say TPU trade policy uncertainty. This is 0:12:44.000 --> 0:12:46.959 something that's measured that we have an index going back 0:12:47.400 --> 0:12:50.480 really far. DPU we're putting forward as a proof of 0:12:50.559 --> 0:12:54.319 concept for just another form of uncertainty that's really unknown 0:12:54.320 --> 0:12:57.080 how this will operate. And so this is not meant 0:12:57.120 --> 0:12:59.920 to be precise estimates, but just to say, if we 0:13:00.120 --> 0:13:04.760 make what we think are pretty modest reasonable assumptions, can 0:13:04.800 --> 0:13:07.640 we see this having big impacts in the private sector. 0:13:07.920 --> 0:13:10.880 And the answer that we get is yes. So we 0:13:10.960 --> 0:13:14.320 first construct what we call employment at risk in the 0:13:14.360 --> 0:13:17.640 private sector, and so this is just if at the 0:13:17.760 --> 0:13:22.400 industry level, industries are receiving federal contracts, just look at 0:13:22.400 --> 0:13:25.520 that relative to the share of output in those industries 0:13:26.040 --> 0:13:28.719 and then look at how many employees we think might 0:13:28.760 --> 0:13:32.480 be supported by these contracts. And then once we have that, 0:13:32.679 --> 0:13:37.000 we can say, maybe, let's assume five percent of these 0:13:37.040 --> 0:13:41.640 employees at risk are not maintained in payroll growth because 0:13:41.640 --> 0:13:44.839 of this DOGE policy uncertainty. We want to think about 0:13:44.880 --> 0:13:48.800 two kind of distinct scenarios around the uncertainty. The first 0:13:49.040 --> 0:13:52.720 is uncertainty lasts for maybe three months. We can think 0:13:52.800 --> 0:13:55.480 of this as a case where if you're a federal 0:13:55.480 --> 0:14:00.760 contractor maybe you can maintain your current employees, you institute 0:14:00.760 --> 0:14:04.839 a hiring freeze, leading payroll growth to be lower than 0:14:04.920 --> 0:14:09.160 last year. And in this scenario, we might have uncertainty 0:14:09.240 --> 0:14:13.280 resolving when DOGE kind of finishes whatever it's choosing to 0:14:13.320 --> 0:14:15.560 do in a few months, and we might see some 0:14:15.679 --> 0:14:18.439 catchup hiring over the rest of the year as these 0:14:18.480 --> 0:14:21.760 firms go back and bring on workers. So in this case, 0:14:21.840 --> 0:14:24.600 we see some larger impacts in March, April, and May, 0:14:25.920 --> 0:14:29.120 but we then because of this catchup hiring in our baseline, 0:14:29.200 --> 0:14:32.320 only see about fifty thousand fewer payroll over the year 0:14:32.320 --> 0:14:34.680 coming out of this effect, which is really not very large. 0:14:35.120 --> 0:14:37.360 But then we look at another scenario where we still 0:14:37.400 --> 0:14:41.320 have a relatively low magnitude of uncertainty, but it drags 0:14:41.360 --> 0:14:44.960 out over the remainder of twenty twenty five, and in 0:14:45.000 --> 0:14:48.000 that case, we can get something like three hundred and 0:14:48.120 --> 0:14:51.600 thirty thousand fewer payrolls over the year just from this 0:14:51.760 --> 0:14:55.920 DPU effect, just by assuming that maybe initially firms are 0:14:56.000 --> 0:14:58.920 hiring less, but then over time they're actually having to 0:14:59.120 --> 0:15:02.440 go through with layof and the continued weight of this 0:15:02.560 --> 0:15:06.920 uncertainty induces kind of a paralysis effect on these firms 0:15:06.960 --> 0:15:09.880 that are pretty heavily exposed to federal contracts in grants. 0:15:10.160 --> 0:15:13.040 It's interesting, just while we're recording this, which is on 0:15:13.080 --> 0:15:16.640 a Tuesday afternoon, the S and P five hundred has 0:15:16.720 --> 0:15:19.960 lost all the gains that it made since Donald Trump 0:15:20.080 --> 0:15:23.720 was elected in November. We've had something like three point 0:15:23.760 --> 0:15:26.160 four trillion dollars increase in the S and P five 0:15:26.240 --> 0:15:29.480 hundred index that we'd had in the weeks after Donald 0:15:29.520 --> 0:15:33.160 Trump's election win, and that has now all been completely 0:15:33.200 --> 0:15:35.480 wiped out in a big chunk of it from this 0:15:35.760 --> 0:15:39.000 the negativity around the tariff news. So neither of you 0:15:39.040 --> 0:15:41.080 are market analysts, and I wouldn't ask you to comment 0:15:41.120 --> 0:15:44.480 on that but is this overdone? How likely is it 0:15:44.560 --> 0:15:48.520 that we will actually have a recession or a serious 0:15:48.560 --> 0:15:53.400 bout of stagflation as a result of this, These policies 0:15:53.520 --> 0:15:56.400 that have been it's fair to say, you know, unexpectedly 0:15:56.960 --> 0:16:00.000 aggressive in the first few weeks of the Trump ad ministry. 0:16:01.080 --> 0:16:07.160 Stackflation requires the word stack. Typically in a recession, with 0:16:07.360 --> 0:16:13.040 contraction of economic activities, you also have a decline in inflation. 0:16:13.680 --> 0:16:18.040 So for inflation to be rising, meaning that firms continuing 0:16:18.320 --> 0:16:23.200 to be successful, not just trying, but successful at passing 0:16:23.240 --> 0:16:27.080 through higher prices. For stackflation to happen, we will need 0:16:27.120 --> 0:16:29.960 to see this. And that's not my baseline because I 0:16:30.040 --> 0:16:34.600 still agree with Powell that inflation expectations are anchored and 0:16:34.680 --> 0:16:38.560 from what we're seeing, firms actually have very little pricing 0:16:38.640 --> 0:16:42.360 power left to pass through these price increase And second 0:16:42.360 --> 0:16:44.880 of all, the second piece of these is that I 0:16:44.920 --> 0:16:48.440 think that there's just structural component to tariffs and a 0:16:48.560 --> 0:16:53.200 negotiation component to the tariffs, and the tariffs on Canada 0:16:53.320 --> 0:16:58.600 and Mexico are the negotiation pillar of tariffs, and those 0:16:58.680 --> 0:17:01.600 will go away. My baseline is that they'll come and 0:17:01.640 --> 0:17:05.200 go really quickly. The ones on China was the ones 0:17:05.280 --> 0:17:08.200 I have in my baseline, in my earlier baseline last year, 0:17:08.240 --> 0:17:12.159 I have the tariffs on Chinese goods going to forty 0:17:12.200 --> 0:17:15.960 five percent. We're very close to that. Now those will stick, 0:17:16.400 --> 0:17:18.679 and I think that is the piece that to me, 0:17:18.920 --> 0:17:24.040 is the biggest source of permanent inflationary risk, particularly because 0:17:24.440 --> 0:17:27.800 a larger portion of the goods we import from China 0:17:27.880 --> 0:17:32.200 are consumption goods as opposed to our trade with Canada 0:17:32.400 --> 0:17:36.400 and Mexico, which are primarily intermediate goods. 0:17:37.520 --> 0:17:39.040 And let just quickly come back on you, I mean, 0:17:39.080 --> 0:17:42.280 careful listeners to this show will maybe note that though 0:17:42.280 --> 0:17:45.000 you may well think there's an emphasis on negotiation in 0:17:45.040 --> 0:17:47.679 the Canada and Mexico tariffs, we have all been and 0:17:47.720 --> 0:17:51.760 you have been surprised so far by how willing and 0:17:52.000 --> 0:17:55.440 aggressive Donald Trump has been to put these tariffs on. 0:17:56.119 --> 0:17:59.520 We had a delay, but now against expectations, he's gone 0:17:59.560 --> 0:18:02.920 ahead with full rate of twenty five percent. Many people 0:18:02.920 --> 0:18:05.160 thought it would be graduated. It's fair to say you've 0:18:05.200 --> 0:18:06.080 been a bit surprised. 0:18:07.320 --> 0:18:10.160 Yeah, I was a bit surprised. Then I went back 0:18:10.240 --> 0:18:14.480 to look at his playbook in twenty eighteen and twenty nineteen. 0:18:14.880 --> 0:18:18.159 Then I realized there was a long period of the 0:18:18.240 --> 0:18:22.359 FED in the first half of twenty nineteen where all 0:18:22.359 --> 0:18:25.639 we worried about actually is not the Chinese tariffs, but 0:18:25.760 --> 0:18:30.080 on auto tariffs and on tariffs on Canada and Mexico. 0:18:30.720 --> 0:18:34.280 And recall that Trump was very close to using AIBA 0:18:34.320 --> 0:18:38.439 on Mexico. Mexico was the country that was able to 0:18:38.680 --> 0:18:41.879 push the line on using emergency power. This time he 0:18:42.000 --> 0:18:46.720 actually used it. So what that period of tariffs spears 0:18:46.880 --> 0:18:50.440 on Canada and Mexico shows is that it turns out 0:18:50.480 --> 0:18:53.879 that those two countries are always on Trump's list to hit, 0:18:54.280 --> 0:18:55.040 even back then. 0:18:55.640 --> 0:18:58.000 Catherine, I think there's a few forecasses that are now 0:18:58.000 --> 0:19:00.960 suggesting that no one is suggesting really that there will 0:19:00.960 --> 0:19:03.080 be a recession. I mean, are we overdoing this or 0:19:03.160 --> 0:19:07.960 is there actually in all this uncertainty a possible sort 0:19:08.000 --> 0:19:11.080 of trigger point where we could be kind of find 0:19:11.119 --> 0:19:12.359 ourselves in recession. 0:19:12.960 --> 0:19:15.359 I don't think it's overdoing it that there's a trigger 0:19:15.400 --> 0:19:18.240 point out there. I share a kind of Anna's base 0:19:18.320 --> 0:19:21.199 case that the twenty five percent tariffs on Canada and 0:19:21.240 --> 0:19:24.680 Mexico likely will not hold for very long, but that's 0:19:24.840 --> 0:19:28.119 because they're just too economically damaging if they do. And 0:19:28.280 --> 0:19:30.560 of course, if we end up in that scenario, it 0:19:30.720 --> 0:19:34.040 changes the call. I think now I'm not seeing stagflation, 0:19:34.280 --> 0:19:36.879 but if that seems like it's going to maintain, it 0:19:36.920 --> 0:19:37.840 does change things. 0:19:38.000 --> 0:19:39.840 So if we just carry on with the policies that 0:19:39.880 --> 0:19:43.800 we now have implemented by the administration, the twenty five 0:19:43.840 --> 0:19:47.000 percent tariffs against our two most important trading partners and 0:19:47.040 --> 0:19:49.160 the ones that are forecast to come in I mean 0:19:49.680 --> 0:19:53.320 actually have been declared to come in, that that would 0:19:53.320 --> 0:19:56.480 potentially be ass cause of a recession where just everyone's 0:19:56.560 --> 0:19:57.760 vetting on that they won't stick. 0:19:58.520 --> 0:20:00.840 I don't think it's automatic res but I think the 0:20:01.040 --> 0:20:06.560 risk really is there, and particularly there's so much trade 0:20:06.600 --> 0:20:09.520 between these three countries, there's supply chain impacts that are 0:20:09.520 --> 0:20:11.920 going to be really damaging. We've just seen the effects 0:20:11.960 --> 0:20:15.240 of big supply chain disruptions. Of course, this is a 0:20:15.240 --> 0:20:18.280 different way would play out than during the pandemic, but 0:20:18.720 --> 0:20:22.520 we know that that can be quite inflationary, and I 0:20:22.520 --> 0:20:26.080 would just stress that the economic fundamentals going into this 0:20:26.240 --> 0:20:29.280 administration were quite good. So this is really kind of 0:20:29.280 --> 0:20:32.960 a test case of how much policy uncertainty and actual 0:20:33.000 --> 0:20:36.080 policies now with the tariffs, can we throw at things. 0:20:36.200 --> 0:20:39.600 And to Anna's point about inflation expectations, the FED is 0:20:39.640 --> 0:20:43.160 really trying to assess two things. They're trying to assess, 0:20:43.800 --> 0:20:46.560 is weakening growth that we're now seeing in the data 0:20:46.600 --> 0:20:50.720 going to feed into unemployment? And they're trying to assess 0:20:51.680 --> 0:20:55.240 is the inflation risk going to show up in inflation expectations. 0:20:55.760 --> 0:20:58.800 These are really the two triggers for movement one way 0:20:58.880 --> 0:21:01.840 or the other. But the FED, the markets, the three 0:21:01.880 --> 0:21:05.960 of us are all facing the same uncertainty in actually 0:21:06.000 --> 0:21:09.119 seeing that underlying data. And so what's really difficult right 0:21:09.160 --> 0:21:12.800 now is the TPU. The trade uncertainty is likely to 0:21:12.840 --> 0:21:16.480 remain quite high. We think that this doge uncertainty could 0:21:16.480 --> 0:21:20.639 be kind of clouding what's going on with underlying payrolls 0:21:20.680 --> 0:21:24.360 and really giving us some actual negative effects on unemployment. 0:21:25.280 --> 0:21:27.800 And this just makes it very hard for the FED 0:21:27.840 --> 0:21:32.760 to assess do the underlying fundamentals warrant a rate cut 0:21:32.880 --> 0:21:35.600 or even a rate increase in the face of inflation 0:21:35.720 --> 0:21:38.880 expectations really becoming unanchored. The other thing that I would 0:21:38.880 --> 0:21:41.800 just stress is very different from twenty eighteen to nineteen 0:21:42.280 --> 0:21:46.240 is the initial conditions of this economy and the idea 0:21:46.240 --> 0:21:47.760 that the FED might have a little bit of a 0:21:47.800 --> 0:21:53.119 lower threshold for allowing inflation expectations to go up at all. 0:21:53.480 --> 0:21:57.119 Here I'm talking about longer term inflation expectations, but I 0:21:57.160 --> 0:21:59.280 think if those start to move up, it's going to 0:21:59.320 --> 0:22:01.800 be very hard that have Fed to say, actually, this 0:22:01.960 --> 0:22:04.960 is just one time tariffs and we'll look through it, 0:22:05.040 --> 0:22:07.720 because there are so many other shocks in the economy 0:22:07.720 --> 0:22:09.800 that it's just really hard to make that determination. 0:22:10.760 --> 0:22:12.600 I guess I had had a final question for Anna, 0:22:12.640 --> 0:22:14.920 which is sort of slightly stepping back. I mean, having 0:22:15.040 --> 0:22:18.360 been through Brexit in the UK and from a lot 0:22:18.359 --> 0:22:21.199 of these trade things, there's a hit to the economy 0:22:21.440 --> 0:22:25.240 that's not a fatal, but a sort of measurable hit 0:22:25.600 --> 0:22:28.280 that you didn't need to have if you hadn't reduced 0:22:28.280 --> 0:22:31.639 your openness to your major trading partners, something that the 0:22:31.720 --> 0:22:35.320 UK has done with Brexit. And the implication of that, 0:22:35.400 --> 0:22:37.000 it seemed to me, was that you're sort of in 0:22:37.040 --> 0:22:39.199 a hole, and then you have to find positives that 0:22:39.240 --> 0:22:41.639 are going to offset that hole. You shut yourself in 0:22:41.640 --> 0:22:43.359 the foot, or at least you know, stubbed your toe 0:22:43.359 --> 0:22:45.679 pretty badly, and you have to find some way to 0:22:45.720 --> 0:22:48.199 make it up. It feels like we're in that kind 0:22:48.240 --> 0:22:51.480 of situation. We've decided, for whatever reason, to do this 0:22:51.600 --> 0:22:54.919 damage to our trading situation, and that's going to have 0:22:54.960 --> 0:22:58.320 a certain hit, not necessarily a fatal hit, but a 0:22:58.320 --> 0:23:01.800 certain hit the recovery and to growth and maybe to 0:23:02.760 --> 0:23:05.840 other things. But do you think and are the kind 0:23:05.960 --> 0:23:09.600 of policies that investors were focused on at the beginning 0:23:09.600 --> 0:23:13.840 of the administration that made them positive about growth and investment, 0:23:14.000 --> 0:23:18.600 you know, the tax cuts being made permanent, the deregulation agenda, 0:23:19.240 --> 0:23:23.200 potentially a smaller, leaner government. Do you think all those 0:23:23.240 --> 0:23:27.840 things are still much bigger, potentially positives than the negatives 0:23:27.840 --> 0:23:30.239 that we're going to see from this uncertainty and this 0:23:30.400 --> 0:23:34.439 trade hit. Or do you think, actually we're not talking 0:23:34.480 --> 0:23:37.200