WEBVTT - US Economy Faces Risks From strikes to Higher Rates

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Tim Stenebek on Bloomberg Radio. There's a major auto strike,

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<v Speaker 1>student loan payments are starting up again, check tech. A

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<v Speaker 1>shutdown may come back after the stopgap spending deal lapses.

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<v Speaker 1>That could easily shave a percentage point off of GDP

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<v Speaker 1>growth in the fourth quarter. All those things combined.

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<v Speaker 2>Yeah, Okay, it's a big list of worries. So let's

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<v Speaker 2>get to it. Because those shocks add them all up,

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<v Speaker 2>and you're talking about powerful forces at work on the economy,

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<v Speaker 2>and so it makes you think, could a recession be

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<v Speaker 2>just around the corner. Anna Wong and Tom Orlek write

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<v Speaker 2>about it in today's Bloomberg Big Take, which reminds everybody

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<v Speaker 2>that when everybody expects a soft landing, brace for impact,

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<v Speaker 2>always run in the other direction when the packforms. And

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<v Speaker 2>of course is chief US Economist for Bloomberg Economics joining

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<v Speaker 2>us here in our Bloomberg Interactive Broker Studio. Love love

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<v Speaker 2>your story. We've all been talking about it, and I

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<v Speaker 2>love how you kick it off. That when everybody expects

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<v Speaker 2>a soft landing, brace for impact. That's the lesson of

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<v Speaker 2>recent economic history and it's an uncomfortable one for the US.

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<v Speaker 2>Right now, what does history tell us about where we

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<v Speaker 2>are today?

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<v Speaker 3>Right So, when we look back at forty to fifty

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<v Speaker 3>years of recession history, it's interesting that soft landing, the

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<v Speaker 3>mention of the word soft landing, constantly peaks right before

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<v Speaker 3>the recession. Soteen. We saw it in nineteen ninety, saw

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<v Speaker 3>in two thousand, saw in two thousand and seven, saw

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<v Speaker 3>in twenty nineteen, and so that made us think that

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<v Speaker 3>maybe there is something, there's a reason why soft landing

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<v Speaker 3>optimism tends to peak right before recession. And I think

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<v Speaker 3>that's why I think the number one reason why recession

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<v Speaker 3>is still our base case is that the legs of

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<v Speaker 3>monetary hiking cycle tends to be very different even within

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<v Speaker 3>a cycle. So just when those soft lending optimism peaks

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<v Speaker 3>is when the stuff that has short legs start improving.

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<v Speaker 3>So currently we see manufacturing cycle bottoming out, housing prices

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<v Speaker 3>start turning up. Those are the places which have historically

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<v Speaker 3>pretty short legs and entirely consistent with the models of

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<v Speaker 3>how you know, how we estimate the lags of monetary policy.

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<v Speaker 3>But where's the places which has very long legs? Are

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<v Speaker 3>the labor market, and also financial condition not so sorry,

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<v Speaker 3>labor market, and also credit markets. And that's where we

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<v Speaker 3>think when those lags finally hit, which is around the

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<v Speaker 3>end of this year and first quarter of next year,

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<v Speaker 3>is when you start to see these non linear dynamics

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<v Speaker 3>of recession kicking in. Okay.

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<v Speaker 1>So, speaking of soft landings, I just got to go

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<v Speaker 1>to this, Anna, I love this in the piece that

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<v Speaker 1>you and Tom wrote, quote the most likely outcome is

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<v Speaker 1>that the economy move forward toward a soft landing. Who

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<v Speaker 1>said that and when did they say it? That was

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<v Speaker 1>San Francisco FED President Janet Yellen back in October two

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<v Speaker 1>thousand and seven, two months before the Great Recession began. Okay,

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<v Speaker 1>so we talked about that. M hm, the idea of

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<v Speaker 1>soft landing. What about when it comes to the credit

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<v Speaker 1>conditions that you mentioned, Like, where are we right now

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<v Speaker 1>in the idea of you know, when there is going

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<v Speaker 1>to be a recession, Like, where are we in the

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<v Speaker 1>economic cycle? Exactly right now, based on your.

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<v Speaker 3>Analysis, we are at this point in the hiking cycle

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<v Speaker 3>where the things are short legs from monitor policy, like

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<v Speaker 3>financial conditions, housing, housing market, manufacturing start bottoming up, and

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<v Speaker 3>you know that corner of the economy is reaccelerating.

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<v Speaker 2>We acknowledge that manufacturing.

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<v Speaker 3>Manufacturing, but the places with longer legs credit conditions, and

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<v Speaker 3>the legs we have found for credit conditions actually are

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<v Speaker 3>longer in this cycle than other cycles. And the reason

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<v Speaker 3>why is because the pandemic policies have led to you know,

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<v Speaker 3>many household having this buffer of excess cash. But even then,

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<v Speaker 3>we estimate that over eighty percent of the household are

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<v Speaker 3>now seeing their inflation adjusted amount that they have in

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<v Speaker 3>the bank is restoring back to twenty nineteen level. So

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<v Speaker 3>even there that buffer is going away, and which is

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<v Speaker 3>why we think that the lags should be kicking it

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<v Speaker 3>in terms of credit tightening.

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<v Speaker 2>And is that the big difference out of why this

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<v Speaker 2>cycle maybe in coming out of the economy falling off

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<v Speaker 2>a cliff, understandably so because of the pandemic. The cycle

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<v Speaker 2>maybe after it where things were feeling good getting better,

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<v Speaker 2>was longer because of the unprecedented amount of stimulus that

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<v Speaker 2>came in. And that's why we're just trying to figure

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<v Speaker 2>out when that's all over, and we're starting to see

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<v Speaker 2>signs right when it comes to household balance sheets, things are.

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<v Speaker 3>Changing, Yeah, Carol, I think so. We look at the

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<v Speaker 3>world with many models. We don't just look at one model.

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<v Speaker 3>We also look at use our common stunt's judgment, and

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<v Speaker 3>all of that would point to you that there is

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<v Speaker 3>a part of this economic cycle that's very predictable, like

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<v Speaker 3>the hit of initial rate hikes on manufacturing, completely predicted

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<v Speaker 3>by economic models. The part which is not is exactly

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<v Speaker 3>the credit conditions. And I think the reason that you

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<v Speaker 3>explained with is exactly right that it is that the

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<v Speaker 3>household have more money in the banks and because either

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<v Speaker 3>because they didn't spend as much during the pandemic when

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<v Speaker 3>everything is shut down, or because they have received these

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<v Speaker 3>fiscal similar tracks, or the stock market is booming. Right,

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<v Speaker 3>so now all those things are eventually going away, and

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<v Speaker 3>probably going away in a couple of months. Right, that's

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<v Speaker 3>where we expect to see.

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<v Speaker 2>The hit question for you, because the job market continues

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<v Speaker 2>to show signs of strength, although maybe a little bit

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<v Speaker 2>of softing, but it's still unbelievable. Will we potentially, though,

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<v Speaker 2>have that recession with a strong job market or no?

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<v Speaker 2>The job market again, the lag effect takes a little while,

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<v Speaker 2>and it's just a case before we start to see

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<v Speaker 2>the unemployment rate take hire.

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<v Speaker 3>Yes, you do need the labor market to turn down

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<v Speaker 3>in order to have a recession. And you know, Tim

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<v Speaker 3>just gave a quote of Jennet Yellen for seeing a

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<v Speaker 3>soft landing in two thousand and seven. In that same

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<v Speaker 3>month where Janet Yellen gave that quote, nonfarm payroll was

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<v Speaker 3>showing one hundred and sixty k of hiring. So you know,

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<v Speaker 3>this Friday we're to see around that ballpark around again.

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<v Speaker 3>But that does not tell you that you can't have

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<v Speaker 3>a recession two months later.

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<v Speaker 2>It can change that quickly. Yeah, the data point very much,

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<v Speaker 2>because I do feel like Tim, we're in this environment

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<v Speaker 2>right We've seen it where companies if they're getting a

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<v Speaker 2>little worried, a little bit nervous about the outlook, they

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<v Speaker 2>start to shed jobs pretty quickly.

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<v Speaker 1>They do. But you know, we've spoken to some analysts

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<v Speaker 1>who've said, you know what, they were so hard to

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<v Speaker 1>find these employees during the pandemic, that we're seeing labor

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<v Speaker 1>hoarding right now and that we you know, actually don't

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<v Speaker 1>companies don't want to let people go as a result

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<v Speaker 1>of that.

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<v Speaker 3>Yeah, I've heard that as well, and we did look

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<v Speaker 3>very deeply into this issue, and what we have found

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<v Speaker 3>is that in all the other recessions in the past

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<v Speaker 3>fifty years. This idea of labor hoarding always is very

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<v Speaker 3>popular on.

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<v Speaker 2>The eve of a recession.

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<v Speaker 3>It's not new, it's not new. It's even in the

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<v Speaker 3>first quarter or second quarter of a recession. Because this

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<v Speaker 3>is there's the aspiration aspect of it, right. Nobody wants

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<v Speaker 3>to fire anybody, so of course I want to hold

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<v Speaker 3>on to, you know, work. But when reality hits the

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<v Speaker 3>corporate balance sheet where you're nobody spending your profits falling away,

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<v Speaker 3>you cannot hold onto those workers. So layoffs usually happen

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<v Speaker 3>about three quarters into a recession.

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<v Speaker 2>How quickly does inflation though, get back to that two

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<v Speaker 2>percent target then? Because i feel like I'm listening to

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<v Speaker 2>you and I'm thinking if inflation still somehow stays above

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<v Speaker 2>two percent for whatever reason, and I'm wondering if it

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<v Speaker 2>could still stay high even in a recessionary environment, could

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<v Speaker 2>we have that and does the FED continue to raise rates?

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<v Speaker 3>Our baseline outlook is that we will see a stagflationary

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<v Speaker 3>light kind of situation going forward, where you have growth

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<v Speaker 3>slowing down, but inflation, the sticky part of inflation, still

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<v Speaker 3>hanging around about three percent. This is why it's stagflation

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<v Speaker 3>light because it's not like inflation is going to ten percent, right,

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<v Speaker 3>It's just three percent, still above the fed's two percent target.

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<v Speaker 3>And the FED has been very clear that if they

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<v Speaker 3>see that inflation is stick around three percent, they will

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<v Speaker 3>do more to get back down to two percent.

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<v Speaker 2>Okay, nervous, especially if the economy is starting to come undone.

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<v Speaker 1>Yeah, this is a nerve wracking story. The first thing

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<v Speaker 1>I read for the week, and I'm like, oh, this

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<v Speaker 1>is some great news.

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<v Speaker 2>Happy Monday.

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<v Speaker 1>So where are the cracks starting to appear? Like, where

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<v Speaker 1>should we be looking right now?

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<v Speaker 3>I think the shocks that we're hitting. So the history

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<v Speaker 3>of recession shows that there are only really two reasons

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<v Speaker 3>why we fall into a recession. Number one, FED rate hikes,

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<v Speaker 3>FED always murder expansions. Number two shocks and oil shocks.

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<v Speaker 3>Particularly so when you have all these shocks, you know,

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<v Speaker 3>we mentioned there are piece we are having an oil shock,

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<v Speaker 3>were student repayment of and also UAW strikes. All these

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<v Speaker 3>individually are very small shocks, but when you have all

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<v Speaker 3>of them at the same time, like the UAW strikes

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<v Speaker 3>by itself. We estimate that the twenty five thousand ua

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<v Speaker 3>W strikers could affect you know, one hundred and thirty

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<v Speaker 3>thousand jobs right in about or two. So once you

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<v Speaker 3>have that unemployment rate jump, then you could kick off

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<v Speaker 3>like these non leaders.

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<v Speaker 2>So Anna, you're telling us Taylor Swift cannot save this economy.

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<v Speaker 3>I saw that Beyonce's on screen tour is only coming

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<v Speaker 3>in December. It's too late for Q four.

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<v Speaker 2>Taylor has already kicked in about five billion into the economy.

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<v Speaker 2>Not enough, not enough. All right, this is a must

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<v Speaker 2>read story. It is among our most read and it

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<v Speaker 2>is today's Bloomberg Big Take, which means our editorial team

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<v Speaker 2>says you should be reading this the world, that Lauren

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<v Speaker 2>should be reading it. Anna Wong is, of course, chief

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<v Speaker 2>US economist for Bloomberg Economics. Here in our studio