Speaker 1: You're listening to Bloomberg Business Week with Carol Messer and
Speaker 1: Tim Stenebek on Bloomberg Radio. There's a major auto strike,
Speaker 1: student loan payments are starting up again, check tech. A
Speaker 1: shutdown may come back after the stopgap spending deal lapses.
Speaker 1: That could easily shave a percentage point off of GDP
Speaker 1: growth in the fourth quarter. All those things combined.
Speaker 2: Yeah, Okay, it's a big list of worries. So let's
Speaker 2: get to it. Because those shocks add them all up,
Speaker 2: and you're talking about powerful forces at work on the economy,
Speaker 2: and so it makes you think, could a recession be
Speaker 2: just around the corner. Anna Wong and Tom Orlek write
Speaker 2: about it in today's Bloomberg Big Take, which reminds everybody
Speaker 2: that when everybody expects a soft landing, brace for impact,
Speaker 2: always run in the other direction when the packforms. And
Speaker 2: of course is chief US Economist for Bloomberg Economics joining
Speaker 2: us here in our Bloomberg Interactive Broker Studio. Love love
Speaker 2: your story. We've all been talking about it, and I
Speaker 2: love how you kick it off. That when everybody expects
Speaker 2: a soft landing, brace for impact. That's the lesson of
Speaker 2: recent economic history and it's an uncomfortable one for the US.
Speaker 2: Right now, what does history tell us about where we
Speaker 2: are today?
Speaker 3: Right So, when we look back at forty to fifty
Speaker 3: years of recession history, it's interesting that soft landing, the
Speaker 3: mention of the word soft landing, constantly peaks right before
Speaker 3: the recession. Soteen. We saw it in nineteen ninety, saw
Speaker 3: in two thousand, saw in two thousand and seven, saw
Speaker 3: in twenty nineteen, and so that made us think that
Speaker 3: maybe there is something, there's a reason why soft landing
Speaker 3: optimism tends to peak right before recession. And I think
Speaker 3: that's why I think the number one reason why recession
Speaker 3: is still our base case is that the legs of
Speaker 3: monetary hiking cycle tends to be very different even within
Speaker 3: a cycle. So just when those soft lending optimism peaks
Speaker 3: is when the stuff that has short legs start improving.
Speaker 3: So currently we see manufacturing cycle bottoming out, housing prices
Speaker 3: start turning up. Those are the places which have historically
Speaker 3: pretty short legs and entirely consistent with the models of
Speaker 3: how you know, how we estimate the lags of monetary policy.
Speaker 3: But where's the places which has very long legs? Are
Speaker 3: the labor market, and also financial condition not so sorry,
Speaker 3: labor market, and also credit markets. And that's where we
Speaker 3: think when those lags finally hit, which is around the
Speaker 3: end of this year and first quarter of next year,
Speaker 3: is when you start to see these non linear dynamics
Speaker 3: of recession kicking in. Okay.
Speaker 1: So, speaking of soft landings, I just got to go
Speaker 1: to this, Anna, I love this in the piece that
Speaker 1: you and Tom wrote, quote the most likely outcome is
Speaker 1: that the economy move forward toward a soft landing. Who
Speaker 1: said that and when did they say it? That was
Speaker 1: San Francisco FED President Janet Yellen back in October two
Speaker 1: thousand and seven, two months before the Great Recession began. Okay,
Speaker 1: so we talked about that. M hm, the idea of
Speaker 1: soft landing. What about when it comes to the credit
Speaker 1: conditions that you mentioned, Like, where are we right now
Speaker 1: in the idea of you know, when there is going
Speaker 1: to be a recession, Like, where are we in the
Speaker 1: economic cycle? Exactly right now, based on your.
Speaker 3: Analysis, we are at this point in the hiking cycle
Speaker 3: where the things are short legs from monitor policy, like
Speaker 3: financial conditions, housing, housing market, manufacturing start bottoming up, and
Speaker 3: you know that corner of the economy is reaccelerating.
Speaker 2: We acknowledge that manufacturing.
Speaker 3: Manufacturing, but the places with longer legs credit conditions, and
Speaker 3: the legs we have found for credit conditions actually are
Speaker 3: longer in this cycle than other cycles. And the reason
Speaker 3: why is because the pandemic policies have led to you know,
Speaker 3: many household having this buffer of excess cash. But even then,
Speaker 3: we estimate that over eighty percent of the household are
Speaker 3: now seeing their inflation adjusted amount that they have in
Speaker 3: the bank is restoring back to twenty nineteen level. So
Speaker 3: even there that buffer is going away, and which is
Speaker 3: why we think that the lags should be kicking it
Speaker 3: in terms of credit tightening.
Speaker 2: And is that the big difference out of why this
Speaker 2: cycle maybe in coming out of the economy falling off
Speaker 2: a cliff, understandably so because of the pandemic. The cycle
Speaker 2: maybe after it where things were feeling good getting better,
Speaker 2: was longer because of the unprecedented amount of stimulus that
Speaker 2: came in. And that's why we're just trying to figure
Speaker 2: out when that's all over, and we're starting to see
Speaker 2: signs right when it comes to household balance sheets, things are.
Speaker 3: Changing, Yeah, Carol, I think so. We look at the
Speaker 3: world with many models. We don't just look at one model.
Speaker 3: We also look at use our common stunt's judgment, and
Speaker 3: all of that would point to you that there is
Speaker 3: a part of this economic cycle that's very predictable, like
Speaker 3: the hit of initial rate hikes on manufacturing, completely predicted
Speaker 3: by economic models. The part which is not is exactly
Speaker 3: the credit conditions. And I think the reason that you
Speaker 3: explained with is exactly right that it is that the
Speaker 3: household have more money in the banks and because either
Speaker 3: because they didn't spend as much during the pandemic when
Speaker 3: everything is shut down, or because they have received these
Speaker 3: fiscal similar tracks, or the stock market is booming. Right,
Speaker 3: so now all those things are eventually going away, and
Speaker 3: probably going away in a couple of months. Right, that's
Speaker 3: where we expect to see.
Speaker 2: The hit question for you, because the job market continues
Speaker 2: to show signs of strength, although maybe a little bit
Speaker 2: of softing, but it's still unbelievable. Will we potentially, though,
Speaker 2: have that recession with a strong job market or no?
Speaker 2: The job market again, the lag effect takes a little while,
Speaker 2: and it's just a case before we start to see
Speaker 2: the unemployment rate take hire.
Speaker 3: Yes, you do need the labor market to turn down
Speaker 3: in order to have a recession. And you know, Tim
Speaker 3: just gave a quote of Jennet Yellen for seeing a
Speaker 3: soft landing in two thousand and seven. In that same
Speaker 3: month where Janet Yellen gave that quote, nonfarm payroll was
Speaker 3: showing one hundred and sixty k of hiring. So you know,
Speaker 3: this Friday we're to see around that ballpark around again.
Speaker 3: But that does not tell you that you can't have
Speaker 3: a recession two months later.
Speaker 2: It can change that quickly. Yeah, the data point very much,
Speaker 2: because I do feel like Tim, we're in this environment
Speaker 2: right We've seen it where companies if they're getting a
Speaker 2: little worried, a little bit nervous about the outlook, they
Speaker 2: start to shed jobs pretty quickly.
Speaker 1: They do. But you know, we've spoken to some analysts
Speaker 1: who've said, you know what, they were so hard to
Speaker 1: find these employees during the pandemic, that we're seeing labor
Speaker 1: hoarding right now and that we you know, actually don't
Speaker 1: companies don't want to let people go as a result
Speaker 1: of that.
Speaker 3: Yeah, I've heard that as well, and we did look
Speaker 3: very deeply into this issue, and what we have found
Speaker 3: is that in all the other recessions in the past
Speaker 3: fifty years. This idea of labor hoarding always is very
Speaker 3: popular on.
Speaker 2: The eve of a recession.
Speaker 3: It's not new, it's not new. It's even in the
Speaker 3: first quarter or second quarter of a recession. Because this
Speaker 3: is there's the aspiration aspect of it, right. Nobody wants
Speaker 3: to fire anybody, so of course I want to hold
Speaker 3: on to, you know, work. But when reality hits the
Speaker 3: corporate balance sheet where you're nobody spending your profits falling away,
Speaker 3: you cannot hold onto those workers. So layoffs usually happen
Speaker 3: about three quarters into a recession.
Speaker 2: How quickly does inflation though, get back to that two
Speaker 2: percent target then? Because i feel like I'm listening to
Speaker 2: you and I'm thinking if inflation still somehow stays above
Speaker 2: two percent for whatever reason, and I'm wondering if it
Speaker 2: could still stay high even in a recessionary environment, could
Speaker 2: we have that and does the FED continue to raise rates?
Speaker 3: Our baseline outlook is that we will see a stagflationary
Speaker 3: light kind of situation going forward, where you have growth
Speaker 3: slowing down, but inflation, the sticky part of inflation, still
Speaker 3: hanging around about three percent. This is why it's stagflation
Speaker 3: light because it's not like inflation is going to ten percent, right,
Speaker 3: It's just three percent, still above the fed's two percent target.
Speaker 3: And the FED has been very clear that if they
Speaker 3: see that inflation is stick around three percent, they will
Speaker 3: do more to get back down to two percent.
Speaker 2: Okay, nervous, especially if the economy is starting to come undone.
Speaker 1: Yeah, this is a nerve wracking story. The first thing
Speaker 1: I read for the week, and I'm like, oh, this
Speaker 1: is some great news.
Speaker 2: Happy Monday.
Speaker 1: So where are the cracks starting to appear? Like, where
Speaker 1: should we be looking right now?
Speaker 3: I think the shocks that we're hitting. So the history
Speaker 3: of recession shows that there are only really two reasons
Speaker 3: why we fall into a recession. Number one, FED rate hikes,
Speaker 3: FED always murder expansions. Number two shocks and oil shocks.
Speaker 3: Particularly so when you have all these shocks, you know,
Speaker 3: we mentioned there are piece we are having an oil shock,
Speaker 3: were student repayment of and also UAW strikes. All these
Speaker 3: individually are very small shocks, but when you have all
Speaker 3: of them at the same time, like the UAW strikes
Speaker 3: by itself. We estimate that the twenty five thousand ua
Speaker 3: W strikers could affect you know, one hundred and thirty
Speaker 3: thousand jobs right in about or two. So once you
Speaker 3: have that unemployment rate jump, then you could kick off
Speaker 3: like these non leaders.
Speaker 2: So Anna, you're telling us Taylor Swift cannot save this economy.
Speaker 3: I saw that Beyonce's on screen tour is only coming
Speaker 3: in December. It's too late for Q four.
Speaker 2: Taylor has already kicked in about five billion into the economy.
Speaker 2: Not enough, not enough. All right, this is a must
Speaker 2: read story. It is among our most read and it
Speaker 2: is today's Bloomberg Big Take, which means our editorial team
Speaker 2: says you should be reading this the world, that Lauren
Speaker 2: should be reading it. Anna Wong is, of course, chief
Speaker 2: US economist for Bloomberg Economics. Here in our studio