WEBVTT - Apollo Chief Economist Torsten Slok Talks "Wait and See" Economy

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<v Speaker 1>Bloomberg Audio studios, podcasts, radio news.

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<v Speaker 2>Investors assessing the market impacts consumers and businesses already readjusting

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<v Speaker 2>torson Snock of Apollo, writing, this is a weight and

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<v Speaker 2>see economy. Consumers are more reluctant. The bottom line is

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<v Speaker 2>that this eventually needs to a slow down in the

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<v Speaker 2>hard data, and markets should prepare for that scenario. Towson

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<v Speaker 2>joins us now for more. Tourston, good morning.

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<v Speaker 1>Good morning.

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<v Speaker 2>We've seen the shift and the soft data. The last

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<v Speaker 2>time we spoke, you raise the issue are believe Lisar

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<v Speaker 2>asked the question, with that soft data bleed into the

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<v Speaker 2>hard data, do you sense inevitability now toward that?

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<v Speaker 1>We are beginning to see that if you look at

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<v Speaker 1>high frequency data, so over the last several weeks, we

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<v Speaker 1>have seen and I know some of these indicators are

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<v Speaker 1>a little bit special, but we've seen the number of

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<v Speaker 1>people who are going to movie theaters, a number of

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<v Speaker 1>people going to Broadway shows. If you look at the

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<v Speaker 1>TSA data for how many people flying airplanes, even if

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<v Speaker 1>you look at how many people are visiting the Statue

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<v Speaker 1>of Liberty here in New York City. All that has

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<v Speaker 1>actually started weeken and now we get another soft data

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<v Speaker 1>print here at ten with the Michigan centiment for consumers.

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<v Speaker 1>So overall it is still a little bit too early,

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<v Speaker 1>but given that we have this weight and see situation

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<v Speaker 1>both for consumers and for corporates, it does make sense

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<v Speaker 1>that the soft data should eventually begin to spill over

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<v Speaker 1>to at least some weakening in the hot data.

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<v Speaker 2>One feature of this cycle that I think a lot

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<v Speaker 2>of people underestimated, you not included is the resilience of

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<v Speaker 2>this economy. What is our capacity to absorb sharks now

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<v Speaker 2>has that been reduced?

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<v Speaker 1>Well, that's a very important question because that depends on

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<v Speaker 1>the nature of the sharks, and we're facing two sharks

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<v Speaker 1>at the moment, name the DOGE, which is laying off

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<v Speaker 1>government workers. Estimates suggests that will be around three hundred

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<v Speaker 1>thousands workers that might be losing their jobs. Remember that

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<v Speaker 1>for every federal worker, there are two contractors, according to Brookings.

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<v Speaker 1>So Brooking starties show that in total, true employment in

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<v Speaker 1>the federal government is roughly around nine ten million people.

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<v Speaker 1>So if you now think about total above households one

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<v Speaker 1>hundred and thirty million, and someone in the federal work

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<v Speaker 1>or contract that lives together with someone in the private sector.

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<v Speaker 1>You get that as much as ten fifteen percent of

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<v Speaker 1>all households in some way or another is being impacted

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<v Speaker 1>from a sentiment perspective by doose A loan and tariffs

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<v Speaker 1>of course, also in particular impacts anyone who is associated

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<v Speaker 1>with trade with Canada and Mexico, and you have that

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<v Speaker 1>that is also a particular of course across the border

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<v Speaker 1>to the north and to the south, playing a significant

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<v Speaker 1>role in a number of states. So the bottom line

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<v Speaker 1>is is not only terriffs and trade warm. It's also

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<v Speaker 1>the combination of the risk that government workers and contractors

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<v Speaker 1>potentially losing their jobs. That are the main reasons why

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<v Speaker 1>the soft data is weakening the way it is. And

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<v Speaker 1>it's not only consumer soft data is also corporate. If

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<v Speaker 1>you look at the CAPEX planning from the regional feds

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<v Speaker 1>Dallas FED, Field, Delpha FED, New York FED, that's showing

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<v Speaker 1>that businesses in those districts are saying we're beginning to

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<v Speaker 1>cut back CAPEX plans. Likewise, NFIB also roundtable surveys KAPEX

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<v Speaker 1>planning is also moving lower. So both consumer confidence moving

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<v Speaker 1>lower corporate confidence moving lower. It is a precursor for

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<v Speaker 1>slow downcoming in the hot data.

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<v Speaker 3>There's an argument being made that if what was propping

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<v Speaker 3>up the United States economy was goverm meant spending, it

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<v Speaker 3>wasn't that strong to begin with, And this is actually

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<v Speaker 3>somewhat of a withdrawal from a sugar high from an

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<v Speaker 3>incredible amount of fiscal spend in the direct aftermath of

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<v Speaker 3>the pandemic.

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<v Speaker 1>Do you buy that there is some truth to the

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<v Speaker 1>detox argument in the sense that if you look at

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<v Speaker 1>hiring in nonfound payrolls over the last two years, twenty

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<v Speaker 1>five percent of jobs created in twenty twenty three and

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<v Speaker 1>twenty four were government jobs. The previous years it was

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<v Speaker 1>like five ten percent much months or less, So a

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<v Speaker 1>very significant part of jobs in the last two years

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<v Speaker 1>had been coming from the government sector. So it is

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<v Speaker 1>true that job growth has been slowing in the private sector,

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<v Speaker 1>even going into these shocks that we're looking at the moment.

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<v Speaker 3>Heading into twenty twenty five, you are pretty clear that

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<v Speaker 3>you think that the inflationary shock was going to be

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<v Speaker 3>maintained and that it was going to create a real

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<v Speaker 3>problem for the FED to actually offer response to that

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<v Speaker 3>kind of weakness in the economy. Do you continue to

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<v Speaker 3>see that even though the shocks that we're seeing right

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<v Speaker 3>now to policy might have a bigger ramification on growth

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<v Speaker 3>than you'd previously expected.

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<v Speaker 1>Well, the real challenge is that going to tariffs, we

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<v Speaker 1>had that inflation unfortunately was still too high at around

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<v Speaker 1>three percent, and most calculations suggest that you will add

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<v Speaker 1>roughly half a percent's point to core PCE as a

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<v Speaker 1>result of terriffs. So it makes a huge difference where

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<v Speaker 1>you start. If you start with inflation at three and

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<v Speaker 1>you add half a percent, of course, the risk is

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<v Speaker 1>that you will have too much upside and we're way

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<v Speaker 1>above the FETs target. Whereas if inflation had started at

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<v Speaker 1>one and a half, which is where we were in

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<v Speaker 1>twenty sixteen, and you add half a percent, then inflation

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<v Speaker 1>will move up towards the FEEDS target. So the problem

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<v Speaker 1>was really that the starting point for inflation when these

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<v Speaker 1>policies came along was that it was unfortunately well above

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<v Speaker 1>the FETs target. So the risk is in this situation

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<v Speaker 1>that you have inflation moving higher and growth flowing down,

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<v Speaker 1>which of course is a definition of as deflationary shock.

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<v Speaker 3>We were talking to Mohammad Olarian earlier this week and

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<v Speaker 3>he made the point that given these dual shocks, the

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<v Speaker 3>FED should probably allow inflation to run a little bit

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<v Speaker 3>hotter for a longer period of time and address the

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<v Speaker 3>growth issues and cut rates at least once this year.

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<v Speaker 3>Do you agree that that's more prudent at a time

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<v Speaker 3>where there are these stagflationary forces starting to loom?

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<v Speaker 1>Absolutely, because the FED has the dual mandate. On the

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<v Speaker 1>one side, if growth is slowing is saying the fat

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<v Speaker 1>should be cutting. If inflation is going up is saying

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<v Speaker 1>the feature should be hiking. I think the FED will

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<v Speaker 1>look at if growth starts to slow, and if we're

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<v Speaker 1>with the next several weeks, begin to see that unemployment

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<v Speaker 1>begins to go up. Let's not forget that non farm

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<v Speaker 1>payroll is always done in the week of the twelfth

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<v Speaker 1>means this week, so this is the week when they

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<v Speaker 1>do the survey for the employment report. And if we

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<v Speaker 1>do believe that this week was somewhat intense on the

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<v Speaker 1>policy front, then there is of course a chance that

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<v Speaker 1>non farm payrolls for March could be on the weaker side.

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<v Speaker 1>And if that's the case, then in the next seven

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<v Speaker 1>weeks and particularly going into April and with the April

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<v Speaker 1>second deadline also from Trump, with a reciprocal tariffs. We

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<v Speaker 1>come to the conclusion that the risk is that we

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<v Speaker 1>might begin to see growth slow down, and the FED

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<v Speaker 1>will say, well, as long as inflation expectations are anchored, yes,

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<v Speaker 1>actually inflation may be higher. But if inflation explctiations are anchored,

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<v Speaker 1>they will be focusing on growth slowing down, and therefore

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<v Speaker 1>the risks are that markets will be pricing in more

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<v Speaker 1>cuts at the time. By the way, it looks like

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<v Speaker 1>from stock markets that they are almost saying, well, the

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<v Speaker 1>fit should be cutting many more times, whereas race markets

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<v Speaker 1>are saying, no, no, we only need two more cuts.

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<v Speaker 1>So there's almost an inconsistency between the messaging from stocks

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<v Speaker 1>that are now in correction territory and race markets saying no, no,

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<v Speaker 1>we only need two more cuts.

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<v Speaker 2>In the news conference on March nineteenth, next Wednesday, how

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<v Speaker 2>does Chairman Pound address those issues? What are you looking for?

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<v Speaker 1>So I'm looking very much for how much he's focusing

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<v Speaker 1>on the soft data slowing down. He did do that

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<v Speaker 1>at the USMPF last Friday here in New York City,

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<v Speaker 1>where he was in his prepared remarks saying, ah, everything

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<v Speaker 1>is generally okay. But when he was sitting down with

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<v Speaker 1>Andrew Cashev and asked questions. He was more saying, hey,

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<v Speaker 1>something is going on that has some downside risks that

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<v Speaker 1>we maybe should be putting more weight on. So I

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<v Speaker 1>do think that he will begin to talk about, well,

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<v Speaker 1>there's softness in the soft data, but maybe we're also

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<v Speaker 1>worry about softness in the hot data.

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<v Speaker 2>We have seen this incremental shift from the November meeting

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<v Speaker 2>into December. We don't assume, we don't guess, we don't speculate.

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<v Speaker 2>Then in December there was some assumption, some guessing, some speculation,

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<v Speaker 2>and then I agree with you the recent address we

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<v Speaker 2>had from Chairman Power, there was another subtle shift. Just

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<v Speaker 2>started to tackle policy issues head on in a way

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<v Speaker 2>he hadn't done in the previous few months.

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<v Speaker 3>And on some level he kind of has to, because

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<v Speaker 3>there is a sort of scenario analysis that has to

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<v Speaker 3>come from the FED for them to even be relevant

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<v Speaker 3>about how they're measuring some of these aspects. And that's

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<v Speaker 3>probably why the statement of economic projections, which could be

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<v Speaker 3>a darkboard, but it is sort of a messaging tool

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<v Speaker 3>about how they're going to potentially respond to what is

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<v Speaker 3>transpiring in policy and how it's transpiring and data even

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<v Speaker 3>if it doesn't necessarily come to full pass.

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<v Speaker 2>The difference now, I guess is we're actually getting the policy.

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<v Speaker 2>They don't have to speculate about it anymore. But that

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<v Speaker 2>policy comes with a lot of volatility and tours, and

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<v Speaker 2>they've got to manage interest rates through the cycle. Maybe

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<v Speaker 2>Chairman Power steps down in the next couple of years.

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<v Speaker 2>I imagine he will. I don't know for sure, but

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<v Speaker 2>I think we all think he will. I want to

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<v Speaker 2>understand from that perspective. You sit there and you acknowledge

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<v Speaker 2>the risks right now, but also you've got to think

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<v Speaker 2>about tax cuts, the potential for looseid regulation further down

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<v Speaker 2>the road. How do you manage through the cycle with

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<v Speaker 2>that in mind.

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<v Speaker 1>Well, that's why this did betabout is it policy dependent?

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<v Speaker 1>Is it data dependent? Becomes really really important because of

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<v Speaker 1>course the policy that's in place suggests that well so far,

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<v Speaker 1>the two things that we have seen from the beginning

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<v Speaker 1>is those which is putting the unemployment rate up, and

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<v Speaker 1>also terrorists, which is putting inflation up. So if that's

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<v Speaker 1>the case, they need to deal with that shock as

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<v Speaker 1>the first thing. Even as you say, if there are

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<v Speaker 1>other policies coming on deregulation, on lower taxes and potentially

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<v Speaker 1>also more energy production.

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<v Speaker 2>Toston Clinic has always got to say, sir. Looking ahead

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<v Speaker 2>to next week March nineteenth for Federal Reserve next Wednesday

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<v Speaker 2>for that meeting, including a news conference and forecast for

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<v Speaker 2>the Chairman J. Powell tosson slock of Apollo