WEBVTT - Neil Dutta and Conor Sen on the Chances of a US Soft Landing 0:00:10.160 --> 0:00:14.360 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.520 --> 0:00:18.600 I'm Joe Wisenthal and I'm Tracy. I have to say 0:00:19.360 --> 0:00:22.759 that at this point maybe in my career, at this 0:00:22.800 --> 0:00:26.680 stage in the economy, I can't remember a time in 0:00:26.720 --> 0:00:30.080 which I feel like there are so many, like legitimate, 0:00:31.880 --> 0:00:34.199 divergent views on the direction of the economy. Like some 0:00:34.240 --> 0:00:37.400 people will say, like inflation is going to stay high 0:00:37.560 --> 0:00:41.919 through all of three and the economy isn't gonna slow down. 0:00:42.040 --> 0:00:44.040 Some people are saying, Okay, we're heading for a recession 0:00:44.040 --> 0:00:46.440 because the FEDS hight rates and housing is plunging and 0:00:46.520 --> 0:00:49.640 other things. Oh, where's this is getting stagflation? Because there's 0:00:49.640 --> 0:00:54.000 in trench, Like there are many very legitimate views in 0:00:54.040 --> 0:00:57.720 my perception about where things could head from here. It 0:00:57.800 --> 0:01:01.960 does feel very bifurcated at the moment, like two very 0:01:02.000 --> 0:01:06.320 extreme paths, like either you get a massive global recession 0:01:06.800 --> 0:01:10.319 and ensuing deflation, or you have this period of nineteen 0:01:10.400 --> 0:01:14.319 seventies style hyper inflation, or you have something even worse, 0:01:14.319 --> 0:01:18.920 which would be stagflation. And you know, people used to 0:01:18.959 --> 0:01:22.120 talk about the prospect of the soft landing that kind 0:01:22.120 --> 0:01:24.200 of went away for a while. This idea that the 0:01:24.200 --> 0:01:29.080 FED could raise rates and quash inflation without necessarily engineering 0:01:29.200 --> 0:01:32.080 a huge knock to economic growth. It kind of went 0:01:32.080 --> 0:01:35.120 away for a while, I think when the inflation readings 0:01:35.200 --> 0:01:39.000 kept coming in higher than expected. But we're recording this 0:01:39.160 --> 0:01:42.440 on January six, and we just had a really good 0:01:42.480 --> 0:01:46.400 payrolls report. From the perspective of the soft landing thesis, 0:01:46.440 --> 0:01:50.960 we had I think unemployment dropping but wages easing a 0:01:51.000 --> 0:01:53.000 little bit, so we don't have to worry about that 0:01:53.120 --> 0:01:57.279 wage price spiral that central banks were all scared about. 0:01:57.480 --> 0:01:59.520 And so now we have a lot of talk again 0:01:59.600 --> 0:02:02.840 about the possibility of the soft landing. Yeah. I mean 0:02:02.880 --> 0:02:05.840 the way I've been thinking about it is that until 0:02:06.160 --> 0:02:09.720 unemployment actually really starts jumping, and it hasn't jumped at all, 0:02:09.760 --> 0:02:13.480 because we're back down to three point five percent like 0:02:13.800 --> 0:02:17.560 the historic lows. I think I saw a tweet that actually, 0:02:17.560 --> 0:02:19.480 if you were like go out to the sixth decimal point, 0:02:19.520 --> 0:02:22.240 it really is like the lowest and like fifty years now. 0:02:22.280 --> 0:02:24.520 I don't know I did in fact check it, but 0:02:24.720 --> 0:02:27.280 you should do a post on it if that's true. 0:02:27.880 --> 0:02:30.280 This way, this is why we need like each other, 0:02:30.400 --> 0:02:32.320 like in the office, so that someone's like don't just like, 0:02:32.520 --> 0:02:34.760 don't just look at the tweet post. But in all 0:02:34.840 --> 0:02:37.040 seriess is, you know, like until my view is like 0:02:37.120 --> 0:02:39.960 until unemployment like really starts to rise, like until we 0:02:40.160 --> 0:02:42.800 really have that like the soft landing scenario like can't 0:02:42.800 --> 0:02:47.160 be disproven, right because there's always the chance that inflation 0:02:47.280 --> 0:02:50.679 comes down and employment doesn't go up, Like it's a 0:02:50.760 --> 0:02:52.840 hope like you know, knock on live we all wanted 0:02:52.880 --> 0:02:55.640 to happen. But you know, until like unemployment really starts 0:02:55.680 --> 0:02:58.519 falling apart, that can't be disproven. And then there's the 0:02:58.560 --> 0:03:01.639 additional layer, which is, let's say, inflation where to come 0:03:01.680 --> 0:03:04.720 down and get closer to the FEDS goal, but the 0:03:04.800 --> 0:03:07.960 unemployment rate refuses to budge. Does the FED believe it 0:03:08.080 --> 0:03:09.640 or does the FED say, know, like, we have to 0:03:09.720 --> 0:03:12.520 keep hammering. We have to keep hiking rates in order 0:03:12.560 --> 0:03:15.000 to get unemployment up the only so that we can 0:03:15.040 --> 0:03:19.200 be confident that this decline and inflation is sustained. I 0:03:19.280 --> 0:03:21.280 do have to say, like part of me still still 0:03:21.320 --> 0:03:23.880 feels a little weird when we're talking about the FED 0:03:24.000 --> 0:03:27.640 explicitly trying to push up unemployment and also like the 0:03:27.680 --> 0:03:30.720 idea that oh it's good that wages aren't going up 0:03:30.720 --> 0:03:33.679 in a period of high inflation. We're all kind of poorer. 0:03:33.720 --> 0:03:35.760 But on the other hand, we don't have un anchored 0:03:35.960 --> 0:03:40.040 inflation expectations. But setting that aside, the thing I'm getting 0:03:40.080 --> 0:03:41.960 from this conversation is that we have a lot to 0:03:41.960 --> 0:03:44.520 talk about. That's right, and we could keep talking because 0:03:44.560 --> 0:03:46.760 we have plenty of thoughts. But why don't we talk 0:03:46.800 --> 0:03:48.640 to two guests who we've both had on before that 0:03:48.760 --> 0:03:51.560 also plenty of thoughts, some of our favorite sort of 0:03:51.600 --> 0:03:55.839 like big picture, a coom thinkers. A great conversation, I'm 0:03:56.400 --> 0:04:01.200 hopefully a great conversation to start twenty twenty three destined 0:04:01.240 --> 0:04:04.160 to be a great conversation. I'm sure. Yes, we're gonna 0:04:04.160 --> 0:04:07.560 be speaking with connorson a columnist here in Bloomberg Opinion, 0:04:07.680 --> 0:04:12.080 as well as Neil Dutta, head of Economics Renaissance, macros So, 0:04:12.400 --> 0:04:14.440 Connor and Neil. Thank you so much for coming back 0:04:14.440 --> 0:04:18.080 on odd lot. Great to be here. Thank you. I'll 0:04:18.080 --> 0:04:21.000 start with you, Neil, because you know you're you're you know, 0:04:21.040 --> 0:04:23.240 I think at some point last summer you're starting to 0:04:23.279 --> 0:04:26.400 get a little bit more negative on the economy these days. 0:04:26.440 --> 0:04:29.120 I feel like you're a little bit more optimistic, can 0:04:29.160 --> 0:04:31.640 we get the soft landing like is this still in 0:04:31.680 --> 0:04:35.960 the cards? Well, first, thanks for having the the Harold 0:04:36.000 --> 0:04:39.880 and Kumara find into it on on on your on 0:04:39.920 --> 0:04:43.880 your podcast. We definitely appreciate it. But you start a competitor, 0:04:44.040 --> 0:04:46.719 start a competitor. I had to get that in there. 0:04:48.400 --> 0:04:50.520 But but at any rate, yeah, I mean the news 0:04:51.080 --> 0:04:53.640 today was good for the soft landing bulls. I don't 0:04:53.680 --> 0:04:55.480 really see how you can cut it any other way. 0:04:56.040 --> 0:04:58.000 One of the data points that we like to look 0:04:58.040 --> 0:05:01.120 at is UH, the index of aggrega weekly perils, right, 0:05:01.160 --> 0:05:05.159 which is the some product of job of jobs the 0:05:05.200 --> 0:05:08.039 work week and UH and hourly earnings. And you know, 0:05:08.080 --> 0:05:10.960 over the last three months that's up, you know, just 0:05:11.200 --> 0:05:13.760 under four percent at an annual rate. So that's basically 0:05:13.760 --> 0:05:16.520 your proxy phenomenal growth, right, I mean jobs and hours 0:05:16.520 --> 0:05:20.680 that's real GDP and wages you can consider is basically 0:05:20.720 --> 0:05:23.280 your inflation proxy. You put it all together, you're around 0:05:23.279 --> 0:05:26.120 four percent. That's the kind of number that will make 0:05:26.160 --> 0:05:29.039 the Fed very happy and I think lead them away 0:05:29.160 --> 0:05:33.240 from a more aggressive rate tightening campaign at least in 0:05:33.279 --> 0:05:35.919 the short run. But I think to something that you 0:05:35.960 --> 0:05:39.520 were getting at earlier, the unemployment rate is three and 0:05:39.520 --> 0:05:41.280 a half percent. I mean, there was a lot of 0:05:41.440 --> 0:05:45.000 discussion around this sort of yawning gap between the household 0:05:45.320 --> 0:05:50.960 measure of employment and the establishment Perill figure. That gap 0:05:51.000 --> 0:05:55.320 basically narrowed substantially in December, right, And the unemployment rate 0:05:55.360 --> 0:05:59.040 is three and a half percent, And you know, ultimately 0:06:00.440 --> 0:06:02.760 it's hard to for me at least to push the 0:06:02.880 --> 0:06:08.160 kind of immaculate disinflation thesis that much if the unemployment 0:06:08.240 --> 0:06:10.560 rate is three and a half percent. And you know, 0:06:10.720 --> 0:06:16.360 ultimately the FED views the labor markets as the conduit 0:06:16.440 --> 0:06:20.360 to achieve their inflation objectives, and you know, by that standard, 0:06:20.400 --> 0:06:23.960 they're not really succeeding. And so you know, and remember 0:06:24.040 --> 0:06:26.200 that the inflation numbers will look a lot better over 0:06:26.200 --> 0:06:28.960 the next several months, right, I mean, you have gas 0:06:29.000 --> 0:06:33.119 prices coming down, you hustle utility bills will probably come down, 0:06:33.240 --> 0:06:37.400 food prices will probably moderate, but aggregate incomes growth, you know, 0:06:37.440 --> 0:06:39.919 are still okay. And so it just means that you 0:06:39.960 --> 0:06:43.880 have this pick up and real disposable income. So that 0:06:43.960 --> 0:06:47.479 to me puts pressure on capacity, right, I mean, real 0:06:47.560 --> 0:06:52.160 growth takes away you know, resources, real resources and um 0:06:52.200 --> 0:06:55.320 and ultimately as you put pressure on on physical capacity, 0:06:55.360 --> 0:06:58.480 whether it's labor or product and resource markets, that will 0:06:58.560 --> 0:07:01.480 ultimately put pressure up on an inflation. So I hate 0:07:01.520 --> 0:07:03.640 to say it, but you know, it may well be 0:07:03.760 --> 0:07:07.240 that the improvement that we see, or or the sort 0:07:07.240 --> 0:07:09.320 of the soft landing bulls having their day in the sun, 0:07:09.400 --> 0:07:13.040 maybe that proves transitory. So that that that that's sort 0:07:13.040 --> 0:07:15.480 of how I'm thinking about it right now. But I 0:07:15.520 --> 0:07:18.400 definitely think the wind is behind the soft landing bulls 0:07:18.480 --> 0:07:25.080 is back at the moment. Connor, Yeah, I think right 0:07:25.120 --> 0:07:27.080 now it's easier to think about what's happening in the 0:07:27.080 --> 0:07:29.000 economy at the moment and over the next three to 0:07:29.080 --> 0:07:31.680 six months than to talk about sort of the more 0:07:31.720 --> 0:07:35.560 abstract does this level of labor market utilization mean this 0:07:35.680 --> 0:07:37.360 for inflation in that for a session. I think that's 0:07:37.360 --> 0:07:39.240 a conversation really for the second half of this year 0:07:39.680 --> 0:07:42.040 and right now, because people came into the year so negative. 0:07:42.640 --> 0:07:45.000 I think the bigger story is just that real growth 0:07:45.040 --> 0:07:47.080 was very good and Q three looks like Q four 0:07:47.520 --> 0:07:50.679 and we're kind of entering with good momentum on that side, 0:07:51.280 --> 0:07:53.880 and then at the same time we see inflation really 0:07:53.960 --> 0:07:58.040 rapidly coming off between core goods, which we've seen for 0:07:58.080 --> 0:08:00.680 several months now, gas prices, which is just phenomenal thing 0:08:00.760 --> 0:08:03.440 but still matters to the consumers. And then also in 0:08:03.480 --> 0:08:06.400 the rental market, we're seeing market rents really start to 0:08:06.520 --> 0:08:09.760 decrease pretty rapidly over the past few months. So the 0:08:09.760 --> 0:08:11.840 the outlook at the moment is very very good, and 0:08:11.880 --> 0:08:14.400 we can sort of think about later later, but I 0:08:14.440 --> 0:08:16.120 think the story for now is just how good things 0:08:16.160 --> 0:08:19.920 are heading in. So, Neil, you sort of touched on 0:08:19.960 --> 0:08:22.480 this um, the idea of the FED at some point 0:08:22.640 --> 0:08:26.320 starting to slow down its rate increases, and we had 0:08:26.400 --> 0:08:29.440 something else this week again you know, we're recording it. 0:08:29.480 --> 0:08:31.640 The first week of three, we had the Fed Minutes 0:08:31.640 --> 0:08:35.240 where the Fed was talking about the difficulty of tightening 0:08:35.360 --> 0:08:39.560 financial conditions, and financial conditions, you know, relative to the 0:08:39.600 --> 0:08:42.520 pace and extent of rate increases, you could argue have 0:08:42.760 --> 0:08:46.360 been relatively loose. So I guess my question is, like, 0:08:46.480 --> 0:08:50.240 what would be the catalyst for the FEDS starting to 0:08:50.480 --> 0:08:53.480 take its foot off the pedal if we haven't really 0:08:53.520 --> 0:08:57.920 seen a big tightening of financial conditions. Well, part of 0:08:57.960 --> 0:09:00.920 that's implicit in their forecast, right, I mean, to me, 0:09:01.000 --> 0:09:03.440 I think a lot of this is just optics, right, Tracy. 0:09:03.600 --> 0:09:06.680 I mean, how there's no denying that financial conditions have 0:09:06.720 --> 0:09:08.920 actually eased over the last couple of months, even as 0:09:08.960 --> 0:09:11.400 the FETE has been, um, you know, trying to job 0:09:11.440 --> 0:09:14.400 bone markets and has been hiking you know, seventy basis 0:09:14.400 --> 0:09:18.280 points fifty basis points, signaling more to come. But to 0:09:18.360 --> 0:09:21.640 me it's optics. Yeah, I guess my question is more like, 0:09:21.880 --> 0:09:26.160 when do they feel comfortable stopping the jaw boning because 0:09:26.200 --> 0:09:28.160 it is clear that they're talking about, you know, higher 0:09:28.240 --> 0:09:31.719 rates for longer, and the market isn't necessarily believing them. Well, 0:09:31.720 --> 0:09:34.160 they're getting there. I mean they're getting there already, but 0:09:34.280 --> 0:09:35.680 I don't I mean, I don't know that that that 0:09:35.760 --> 0:09:37.920 it's formulaic. I mean it's sort of like a touch 0:09:37.960 --> 0:09:40.439 and field type of approach. I mean they go around. 0:09:40.440 --> 0:09:43.040 I mean Bullard is talking about how okay, we're getting 0:09:43.040 --> 0:09:45.400 close to the end. I mean, he he was a hockey, 0:09:45.520 --> 0:09:47.840 had some comments this week that would rent a little 0:09:47.840 --> 0:09:50.440 bit more devish Lee. But we don't know, you know, 0:09:50.559 --> 0:09:53.280 sort of x Anti, you know what the right and 0:09:53.480 --> 0:09:55.440 level for the for the fet funds, right should be 0:09:55.440 --> 0:09:57.080 to cool the economy. I mean it could be multi 0:09:57.160 --> 0:09:59.199 vers I mean, it could be you know, different rates 0:09:59.200 --> 0:10:00.719 at different points and time. I mean, this is not 0:10:00.760 --> 0:10:02.720 I mean to me, this is more like this is 0:10:02.760 --> 0:10:05.800 not an exact science, honestly, and I just think that 0:10:06.720 --> 0:10:10.320 you are going to get much softer inflation between now 0:10:10.360 --> 0:10:12.560 and the March off MC meeting. And for me, the 0:10:12.600 --> 0:10:16.560 tension is think about what the Fed did in December, right, 0:10:16.640 --> 0:10:20.800 I mean they raised their their inflation forecast and they 0:10:20.880 --> 0:10:25.200 marked down their growth forecast. So the bar for them 0:10:25.320 --> 0:10:28.360 has been changed in a way that you know, right, 0:10:28.400 --> 0:10:31.560 I mean, you're being very polite, but yeah, you could be. 0:10:31.640 --> 0:10:33.920 You could easily come back in March and they'll be 0:10:33.960 --> 0:10:40.040 revising down their inflation forecast potentially considerably, and they're gonna 0:10:40.160 --> 0:10:42.720 what say that they're going to accelerate the pace of 0:10:42.800 --> 0:10:44.800 rate hikes at that point. That to me is a 0:10:44.800 --> 0:10:47.240 little bit difficult to see. So so that that's sort 0:10:47.240 --> 0:10:50.760 of where I'm at. Go ahead, Connor to Niel's point 0:10:50.840 --> 0:10:54.440 right now, you've been pretty critical of this that like, Okay, 0:10:54.480 --> 0:10:58.040 the way the FED is talking is we're seeing an 0:10:58.080 --> 0:11:01.600 economy with accelerating and fflation and weakening growth, and yet 0:11:01.600 --> 0:11:03.840 the actual data seems to be the exact opposite. We 0:11:03.920 --> 0:11:06.600 seem to have pretty solid growth in the second half 0:11:06.600 --> 0:11:11.760 of first quarter and declining inflation, Like, what's your take here, 0:11:11.800 --> 0:11:14.319 what's going on? I think what's going on is that? 0:11:14.840 --> 0:11:17.360 And you know, you two had on Neil cash Carey 0:11:17.400 --> 0:11:20.120 if Minneapolis fed and maybe August, and he was saying 0:11:20.120 --> 0:11:23.280 how he was unhappy with the stock market rallying, and 0:11:23.320 --> 0:11:25.680 they sort of felt like their messaging wasn't being understood 0:11:25.720 --> 0:11:27.640 by the market, and so at that point they really 0:11:27.720 --> 0:11:30.440 changed their messaging to focus on a higher unemployment rate 0:11:30.800 --> 0:11:33.560 and kind of this whatever this, whatever it takes, determination 0:11:33.600 --> 0:11:37.200 to rate and inflation. Markets got the message, and by 0:11:37.200 --> 0:11:39.320 September October they were probably in the place where they 0:11:39.320 --> 0:11:41.319 wanted to be in terms of what the market was pricing, 0:11:41.880 --> 0:11:44.160 the level of financial conditions that they wanted to see. 0:11:44.520 --> 0:11:46.880 And to be fair, at that point, inflation was running 0:11:46.880 --> 0:11:50.200 really hot and growth was slowing, And the data has 0:11:50.240 --> 0:11:51.880 changed a lot over the past three months, where to 0:11:51.920 --> 0:11:54.600 your point, inflation now looks like it's coming off pretty rapidly. 0:11:55.440 --> 0:11:58.960 Growth has picked up, but they want financial conditions to 0:11:58.960 --> 0:12:01.000 stay in this place until to have more confidence on 0:12:01.040 --> 0:12:03.160 where things are going. So they're kind of sticking with 0:12:03.200 --> 0:12:05.280 this matches that is really out of sync with what's 0:12:05.280 --> 0:12:08.400 happened in the economy. But since markets are by and 0:12:08.480 --> 0:12:10.600 large not running away from them, they're kind of okay 0:12:10.640 --> 0:12:13.480 with it. But it's going to become increasingly out of data. 0:12:13.520 --> 0:12:16.040 Is you know, you look at the unemployment rate at 0:12:16.040 --> 0:12:18.199 three and a half percent at the start of three 0:12:18.280 --> 0:12:20.679 they forecasted at going to four point seven percent at 0:12:20.679 --> 0:12:23.040 the end of this year. That not only would certainly 0:12:23.040 --> 0:12:25.000 not be a soft landing, it's just wildly out of 0:12:25.040 --> 0:12:26.719 sync with what we're seeing in the data. So it's 0:12:27.160 --> 0:12:28.840 they're just really not in a place that's in sync 0:12:28.880 --> 0:12:47.880 with what's happening in the economy. Ground Neil, I want 0:12:47.880 --> 0:12:50.480 to go back to something you said in your first answer, 0:12:50.480 --> 0:12:53.120 because I've I've you know, I don't troll on Twitter, 0:12:53.160 --> 0:12:58.640 but I do sometimes joke very very convincing laugh there. 0:12:59.559 --> 0:13:03.440 But you know that that um, falling gas prices are 0:13:03.679 --> 0:13:07.400 bad for inflation because falling gas prices mean more money 0:13:07.400 --> 0:13:10.360 and consumer pockets. More money and consumer pockets mean more 0:13:10.440 --> 0:13:14.120 spending power. More spending power means higher prices. But you 0:13:14.200 --> 0:13:16.480 kind of said that in your first answer. You're like, look, 0:13:16.840 --> 0:13:20.719 real real wage growth with this decline in inflation is 0:13:20.760 --> 0:13:23.280 picking up. That makes it hard to get any is 0:13:23.320 --> 0:13:26.480 sort of like any kind of landing. So is there 0:13:26.559 --> 0:13:29.559 something where like falling gas prices and field their categories 0:13:29.760 --> 0:13:33.280 is not actually good news for inflation. Well, I think 0:13:33.320 --> 0:13:35.480 it moves things in place, right, I mean, you're talking 0:13:35.520 --> 0:13:38.480 about relative price shifting, right, So if if the labor 0:13:38.520 --> 0:13:40.600 markets are study and people see, I mean, it's like saying, 0:13:40.600 --> 0:13:43.680 I mean, do you think a tax cut is inflationary? 0:13:44.200 --> 0:13:47.280 I mean, I think most macro models will probably say yes. Right, 0:13:47.320 --> 0:13:49.600 So I think that the fact that the fact that 0:13:49.640 --> 0:13:53.080 gasoline prices are declining, all that does is is shift 0:13:53.120 --> 0:13:56.960 consumer purchasing power to other areas of their you know, 0:13:57.120 --> 0:13:59.520 goods and services basket, and that drives out the prices 0:13:59.559 --> 0:14:01.680 for those good and services. I don't think it has 0:14:01.720 --> 0:14:05.960 an overall impact on on inflation. But again, I mean 0:14:06.280 --> 0:14:08.240 the reason I think the FED looks at it through 0:14:08.280 --> 0:14:12.200 the conduit of the labor markets is this identity, right, 0:14:12.240 --> 0:14:14.400 I mean, as so much of economics is identity, whether 0:14:14.400 --> 0:14:16.920 you're talking about corporate profits or in this case, inflation, 0:14:17.120 --> 0:14:21.520 and for them, compensation equals inflation plus productivity. Powell has 0:14:22.000 --> 0:14:26.120 basically talked about that equation multiple times over the last year. 0:14:26.720 --> 0:14:29.560 And if the labor markets are tight and unemployment is 0:14:29.560 --> 0:14:32.480 three and a half percent, that's going to keep compensation 0:14:32.520 --> 0:14:36.280 growth steady. And we're not particularly in a strong productivity 0:14:36.320 --> 0:14:39.280 environment right now. I mean, productivity is notoriously hard to forecast, 0:14:39.320 --> 0:14:42.400 but it's not particularly strong. So that leaves a lot 0:14:42.440 --> 0:14:44.400 of pressure on inflation, and I think that's one of 0:14:44.400 --> 0:14:46.000 the reasons why the FED is looking at the labor 0:14:46.040 --> 0:14:49.320 markets so strongly. And by the way, a lot of 0:14:49.360 --> 0:14:51.880 the improvement and inflation that we're talking about right now 0:14:52.000 --> 0:14:54.680 has almost nothing to do with the FED, right I 0:14:54.680 --> 0:14:57.120 mean that that that that's that's part of the issue. 0:14:57.240 --> 0:15:01.240 I mean, use car prices, supply chain, and provement. You know, 0:15:01.320 --> 0:15:03.880 it's not like people put their rent on on the 0:15:03.880 --> 0:15:08.080 credit card, so so you know, the slowing and rental 0:15:08.120 --> 0:15:10.240 inflation has almost nothing to do with what's going on 0:15:10.280 --> 0:15:12.520 with the labor market or tightening credit or anything like that. 0:15:12.560 --> 0:15:14.600 I mean, it's just sort of it's happening kind of 0:15:14.600 --> 0:15:16.960 independently I think of what the FED is doing. So 0:15:17.440 --> 0:15:21.840 to me, the Feed's got some explaining to do. It 0:15:21.920 --> 0:15:24.320 wasn't Tracy. Wasn't there some term we were using, like 0:15:25.160 --> 0:15:31.840 one about inflation coming down for reasons other than monetary policy. Well, okay, 0:15:31.880 --> 0:15:34.240 this is my new This is my new conspiracy theory 0:15:34.240 --> 0:15:38.040 about financial conditions, which is, I believe the Fed thinks 0:15:38.280 --> 0:15:42.040 still thinks inflation is transitory and is actually comfortable with 0:15:42.080 --> 0:15:45.440 financial conditions not actually tightening that much because they think 0:15:45.440 --> 0:15:47.560 the things that are making prices go up are the 0:15:47.600 --> 0:15:50.480 transitory supply chain stuff, and so it's just, you know, 0:15:50.600 --> 0:15:54.200 talk your way out of the period of adjustment without 0:15:54.240 --> 0:15:57.920 actually tightening too much that would cause a recession. That's 0:15:57.920 --> 0:16:02.920 my new conspiracy theory. Okay, there's silence, so I guess 0:16:03.680 --> 0:16:06.880 no one else agrees with me. Okay, well, Connor, you know, 0:16:06.960 --> 0:16:10.040 we talked a little bit, I think, in private about productivity, 0:16:10.080 --> 0:16:13.680 and you have seen companies come out and talk about 0:16:13.720 --> 0:16:18.480 the difficulty of replacing the older workforce that left during 0:16:18.520 --> 0:16:22.600 the pandemic, and we are having basically this productivity adjustment. 0:16:22.640 --> 0:16:25.720 How are you viewing that component of it, because, as 0:16:25.760 --> 0:16:28.400 Neil just mentioned, you know, it is a tough thing 0:16:28.560 --> 0:16:31.120 to forecast, and so far all we seem to have 0:16:31.280 --> 0:16:34.640 is anecdotes about what companies are doing here well. We 0:16:34.680 --> 0:16:37.080 know that labor market turnover has declined over the past 0:16:37.200 --> 0:16:40.000 six months at least, and companies say they're better staff 0:16:40.040 --> 0:16:41.760 they say they're in a better place. I think supply 0:16:41.840 --> 0:16:44.640 chains getting better is maybe it's kind of squishy, but 0:16:44.840 --> 0:16:47.080 helps with the margin things like being able to turn 0:16:47.120 --> 0:16:49.640 your capital faster because you're getting shipments more quickly and 0:16:49.640 --> 0:16:51.200 can sell them more quickly, so you're not waiting a 0:16:51.200 --> 0:16:53.680 long time for orders. But I think the challenge with 0:16:53.720 --> 0:16:56.560 productivity is to Neil's point, there's this very standard model 0:16:56.600 --> 0:17:00.440 of real economic growth is ours work plus productivity. But 0:17:00.520 --> 0:17:02.760 a lot of what's happening with real eccuon onic growth 0:17:02.800 --> 0:17:05.800 that we saw, what we're seeing right now doesn't really 0:17:05.800 --> 0:17:07.920 fit into that framework very well. And for instance, you 0:17:07.960 --> 0:17:11.040 look take the rental market, where we added four plus 0:17:11.119 --> 0:17:15.120 million jobs in two but actually new leases on rentals 0:17:15.240 --> 0:17:17.760 was negative in two for the first time since two 0:17:17.800 --> 0:17:21.080 thousand nine because we unwound some of the excess household 0:17:21.119 --> 0:17:23.760 formation we got during the pandemic. As a result, rents 0:17:23.760 --> 0:17:26.920 are falling and shelter is a huge part that goes 0:17:26.920 --> 0:17:30.320 into inflation, so inflation could come off very very rapidly 0:17:31.000 --> 0:17:34.000 for sort of reasons unrelated to sort of standard business productivity, 0:17:34.520 --> 0:17:37.480 just due to sort of households deciding not to get 0:17:37.520 --> 0:17:40.880 new leases, maybe fund roommates again. And as I don't 0:17:40.920 --> 0:17:42.760 know if that's like if if people decide to get 0:17:42.800 --> 0:17:45.639 a roommate, is that productivity growth? Not really, but it 0:17:45.720 --> 0:17:48.840 also frees up capacity for other people. So I think 0:17:48.840 --> 0:17:51.200 this sort of standard way of thinking about productivity isn't 0:17:51.280 --> 0:17:54.000 very helpful at the moment. So basically Powell needs to 0:17:54.040 --> 0:17:56.720 go out and say, get a roommate, folks, if you 0:17:56.640 --> 0:17:58.919 you we we can do this the hard way you 0:17:59.200 --> 0:18:02.160 lose more people lose their jobs, or the less hard way, 0:18:02.280 --> 0:18:05.240 like get a room that does So I haven't thought 0:18:05.240 --> 0:18:07.440 about it before, but like if two people share a 0:18:07.520 --> 0:18:10.480 space versus one, that is a kind of productivity growth, 0:18:10.480 --> 0:18:14.239 isn't it. Yeah. And the scenario that's really weird for three, 0:18:14.280 --> 0:18:16.800 which I think is possible, is we know that sort 0:18:16.840 --> 0:18:18.919 of that core goods inflation is negative right now, So 0:18:19.000 --> 0:18:21.359 let's say that's zero in three, and then you tended 0:18:21.359 --> 0:18:23.840 to be pretty low heading into the pandemic, and then 0:18:23.960 --> 0:18:25.879 we know rent growth is negative. At the moment, it 0:18:25.920 --> 0:18:29.440 was about negative three percent annualized in Q four two, 0:18:29.920 --> 0:18:32.240 what if the shelter component of CPI is is flat 0:18:32.280 --> 0:18:36.119 in and this is not assuming any job losses, just 0:18:36.119 --> 0:18:38.480 sort of due to these weird effects going on right now, 0:18:38.840 --> 0:18:41.520 and then that sort of core services x shelter component 0:18:41.600 --> 0:18:45.240 even caught five percent because maybe wage growth is still hot. 0:18:45.520 --> 0:18:47.919 That gets you to a core CPI number below two percent. 0:18:48.760 --> 0:18:50.880 So you could have a soft landing with sub two 0:18:50.880 --> 0:18:53.880 percent core inflation in a in a good growth environment. 0:18:54.160 --> 0:18:56.199 I wouldn't say that's the new normal or anything, but 0:18:56.280 --> 0:18:58.199 just that's what the data could show based on all 0:18:58.240 --> 0:19:01.640 these weird dynamics happening at the moment. Neil, I think 0:19:01.680 --> 0:19:04.119 it's it's totally plausible. The question is what does that 0:19:04.160 --> 0:19:07.520 mean for right? You know, look like, let's say everyone 0:19:07.560 --> 0:19:10.600 decides to get a roommate, right, and you had this 0:19:10.960 --> 0:19:13.920 big burst of household formation that drove up shelter prices, 0:19:14.000 --> 0:19:16.520 and now people decide to get a roommate and that 0:19:16.600 --> 0:19:19.159 you know, we can shustle formation, and now shelter costs 0:19:19.160 --> 0:19:22.520 go down. You're still love with this idea around the 0:19:22.600 --> 0:19:26.200 labor market, right, I mean, for whatever reason, Okay, the 0:19:26.280 --> 0:19:30.560 FED views the labor market as the conduit for achieving 0:19:30.600 --> 0:19:33.320 their inflation objectives. That is the principal issue right now. 0:19:33.680 --> 0:19:37.159 Powell keeps talking about pain and rebalancing the labor market. 0:19:37.400 --> 0:19:39.560 If that is what the FETE is trying to achieve, 0:19:40.760 --> 0:19:43.840 they're not doing it. Okay, they're not doing it. And 0:19:45.040 --> 0:19:47.680 that's why I think maybe where Connor and I disagree 0:19:47.680 --> 0:19:50.159 a little bit is what does that mean for the 0:19:50.160 --> 0:19:52.360 interest rate outlook in the back half of the year. 0:19:52.680 --> 0:19:54.439 And let's just keep in mind, right, I mean, and 0:19:54.480 --> 0:19:57.399 so there is a good reason. I mean, I think 0:19:57.440 --> 0:20:00.000 there's a pretty you can make a pretty compelling argument 0:20:00.200 --> 0:20:06.200 that growth is likely to accelerate over the next several months. Okay, 0:20:06.240 --> 0:20:09.080 because of the loosening of financial conditions that we've seen 0:20:09.600 --> 0:20:12.000 over the over the last few months. Right, so you 0:20:12.000 --> 0:20:16.920 get a positive impulse from from housing. Maybe government spending 0:20:17.040 --> 0:20:19.879 is a bit better. We talked about real incomes and 0:20:19.920 --> 0:20:22.159 what that could mean for consumption. So if you have 0:20:22.320 --> 0:20:26.840 real growth above trend again for the next quarter or two, 0:20:27.440 --> 0:20:29.560 what do you think that's gonna mean for the labor markets. 0:20:30.920 --> 0:20:34.120 It's gonna mean continue tightening, which in turn means what 0:20:35.240 --> 0:20:39.080 potentially higher wage inflation, which in turn will push prices 0:20:39.119 --> 0:20:41.560 up and I mean to me, that's that's really the issue. 0:20:41.640 --> 0:20:43.560 And this is all happening at a time when the 0:20:43.600 --> 0:20:49.560 FED is increasingly not just doves but hawks like Bullard 0:20:49.600 --> 0:20:52.320 that they're a little bit more comfortable with the way 0:20:52.359 --> 0:20:54.320 things stand and that they're going to back off to 0:20:56.000 --> 0:20:59.480 So if you know, and Connors talked about this as well, 0:21:00.000 --> 0:21:03.000 of the extent that twenty two was about them hiking 0:21:03.040 --> 0:21:05.439 aggressively into a slowdown, what does it mean that they 0:21:05.480 --> 0:21:09.320 may be pausing into an acceleration. And I think he's 0:21:09.400 --> 0:21:11.840 right that sort of I can that the data is 0:21:11.880 --> 0:21:14.080 sometimes I don't want to say it lies, but it's 0:21:14.119 --> 0:21:16.480 sort of not really telling the whole picture because of 0:21:16.560 --> 0:21:19.200