Speaker 1: The President, speaking on television the other day, talked about
Speaker 1: the fact that there is the possibility to the U. S.
Speaker 1: Economy could be heading towards a recession. From Bloomberg News
Speaker 1: and I Heart Radio. It's the big take, I'm west
Speaker 1: Kasova today. Recession or no recession? That is the question.
Speaker 1: For months now, economists have been weighing and measuring the U. S.
Speaker 1: Economy to try to answer that question. Are we heading
Speaker 1: into a recession or will we be spared the pain
Speaker 1: of a full fledged downturn. It's not looking very good.
Speaker 1: It's it's looking pretty ugly in the next year or so.
Speaker 1: Bloomberg Economics sees the benchmark interest rate rising to almost
Speaker 1: five percent by the end of and near certain in
Speaker 1: recession during that time. I would stick with my view
Speaker 1: that a recession this year is more likely than not.
Speaker 1: The general consensus to answer your question is it's either
Speaker 1: a mild recession or a soft landing. It is saying
Speaker 1: recessions coming, it's saying recession is not opening now, but
Speaker 1: a recession coming in. But predicting the direction of an
Speaker 1: economy that is so huge twenty six trillion dollars is
Speaker 1: not so easy. My colleague Katya Dmitrieva in Washington writes
Speaker 1: all about the U. S. Economy, and she's here with
Speaker 1: me now to explain. Kandya, you've just written a story
Speaker 1: that shows why economic forecasting is such a tricky business,
Speaker 1: why it's so hard to predict a recession. Can you
Speaker 1: describe what you were trying to find and what you're
Speaker 1: reporting shows. Yeah, I was trying to find whether we're
Speaker 1: going to head into a recession, like all the other
Speaker 1: economists and market watchers out there right now. So the
Speaker 1: good news is that there are a lot of different
Speaker 1: ways of measuring the economy and whether we're actually slipping
Speaker 1: into a recession. The bad news is that it still
Speaker 1: really is more of an art than a science. Exactly
Speaker 1: what do you mean by that? Like with anything in
Speaker 1: the economy, there are so many different components to it.
Speaker 1: You have consumer spending, you have corporate investment decisions, You
Speaker 1: have all of these moving parts and they don't all
Speaker 1: move at the same time, especially right now, especially in
Speaker 1: this weird kind of economy we're in right now where
Speaker 1: the pandemic happened. Would still argue that we're in that
Speaker 1: recovery phase. You know, a lot of the data is
Speaker 1: still out of whack, i should say, and economists and
Speaker 1: market watchers are really struggling to unpack even the trends,
Speaker 1: even the trajectory. So if you take the labor market
Speaker 1: as one component, you know, as one of the puzzle
Speaker 1: pieces that go into this broader image of the economy,
Speaker 1: even that itself right now is not very clear. So
Speaker 1: you have within the labor market itself different signs. One
Speaker 1: thing will show you like the unemployment rate will show
Speaker 1: you that the labor market is at a half century
Speaker 1: level of tightness. You look at another indicator, looking at
Speaker 1: the sector of temporary help in the labor market, and
Speaker 1: that has now declined for several months in a row.
Speaker 1: And that's usually a component that's an indicator of whether
Speaker 1: a recession is coming, because that's the segment of the
Speaker 1: market that's like first fired, first hired. So economists will
Speaker 1: just tell you we don't really have a clear answer
Speaker 1: from that. We don't have a clear message from even
Speaker 1: the labor market itself. And so that labor market, of
Speaker 1: course is one of the really big traditional indicators. You
Speaker 1: in your story went beyond those big end hitters that
Speaker 1: everyone looks at to look at ones that maybe people
Speaker 1: don't think about. So let's talk about some of them.
Speaker 1: One of them that stood out to me was even
Speaker 1: looking at things like restaurant reservations on apps like Open
Speaker 1: Table and hotel reservations. How are they able to add
Speaker 1: that to this, as you say, picture of the economy.
Speaker 1: These were all new indicators that popped up during the pandemic,
Speaker 1: and so now they're using them instead of to track
Speaker 1: the economic recovery from the pandemic, they're using them to
Speaker 1: track perhaps growing signs of a recession. You know, are
Speaker 1: people uh in restaurants? Are people coming back to kind
Speaker 1: of in person gatherings. Now that's a sign of consumer spending.
Speaker 1: So are people going out to spend their money on
Speaker 1: food and drinks. A few of the other things include
Speaker 1: mobility data, so are people moving around office occupancy vacancy rates?
Speaker 1: Are people coming back to the office, and if you're
Speaker 1: in the office, you're going out, You're going to a
Speaker 1: lot of restaurants or places to buy your lunch, So
Speaker 1: that's additional spending into the economy. These are all things
Speaker 1: that economists are still looking at to track what's happening.
Speaker 1: And there are also kind of some weirder ones. Let's
Speaker 1: have it. Uh, plastic surgery is one. Yeah. I spoke
Speaker 1: with one economist who is adamant that plastic surgery spending
Speaker 1: is probably the best tracker of discretionary spending because think
Speaker 1: about it, like, you don't need plastic surgery, you spend
Speaker 1: it when you have a lot of extra money. And
Speaker 1: so after the pandemic sort of two, there was a
Speaker 1: boom in in plastic surgery. And now in the past
Speaker 1: month or so, this economist tells me there's been a
Speaker 1: bit of a pullback in that activity. Like so many
Speaker 1: of these other indicators were coming off of a high.
Speaker 1: So the past year year and a half, we had
Speaker 1: so many companies hiring excessively labor, hoarding for plastic surgery.
Speaker 1: We had a boom in procedures. You know, people maybe
Speaker 1: are own zoom, they want to change something up. But
Speaker 1: now we're coming off of the high. And so the
Speaker 1: question I think is is that a sign of a
Speaker 1: moderation and it slowed down and it returned to normal,
Speaker 1: or is this the beginning crack of a recession that's
Speaker 1: really just gonna get wider. Another thing that people wouldn't
Speaker 1: immediately think about is lipstick. That's right, Yeah, this is
Speaker 1: a favorite one because in a downturn, people stop spending
Speaker 1: on very big ticket, brandname item. So let's say you
Speaker 1: want to buy something Chanel. You wouldn't buy a Chanelle
Speaker 1: person anymore, but you still want to have that luxury,
Speaker 1: so you're gonna buy a Chanel lipstick. So you're gonna
Speaker 1: swap out your spending. And does that actually happen? Like,
Speaker 1: are their data to show that, say, Chanell handbag sales
Speaker 1: go down, but Chanelle lipstick sales go up. Not for
Speaker 1: a few decades, but it certainly was the case before. Okay,
Speaker 1: so this is like an old favorite that mean that's right? Yeah,
Speaker 1: it's the same with men's underwear sales. Sorry, that came
Speaker 1: out of the blue men's underweal as song as we
Speaker 1: went there. What are you talking about? Yeah, it's a
Speaker 1: basic rights, not plastic surgery. You kind of have to
Speaker 1: have it. I imagine you buy it whether the economy
Speaker 1: is good or bad, if you need it. So how
Speaker 1: is that an indicator? In very bad times you tend
Speaker 1: to delay your purchases. So for example, instead of buying
Speaker 1: brand new underwear, you might hold off if some of
Speaker 1: your underwear has a rippen it if you're in a
Speaker 1: recession or very bad times, you just lost your job,
Speaker 1: You're just going to keep holding onto it. We're joking
Speaker 1: around about it, but former Federal Reserve head Alan Greenspan
Speaker 1: tracks this stuff. He tracks the sale of men's underwear
Speaker 1: as a real indicator of consumer spending and potentially economic
Speaker 1: growth or you know, a potential downturn. I think it's
Speaker 1: more of um, one of the many things that some
Speaker 1: economists would look at to sort of gauge are we
Speaker 1: sort of at the bottom of a recession right now?
Speaker 1: There really are little signs of that. So luxury sales
Speaker 1: are still elevated. For example, Um, we still have class
Speaker 1: sick surgery happening at levels not seen pre twenty nineteen,
Speaker 1: but it's just moderating. So these are things that they're
Speaker 1: watching for, not things that they've necessarily seen start to happen,
Speaker 1: which would indicate a recession, but just like a little
Speaker 1: bit of a downturn, and then they want to watch
Speaker 1: it for a while. That's right. That question gets at
Speaker 1: the really tricky thing with recession prediction, and that tricky
Speaker 1: thing is that it's usually impossible to predict exactly when
Speaker 1: a recession will hit you can see signs of it,
Speaker 1: you can see a trend, but it's really difficult with
Speaker 1: any certainty. One of the most scientific measures is the
Speaker 1: some rule developed by former Fed economists Claudia Palm. Essentially,
Speaker 1: it's if the unemployment rate, this is the main U
Speaker 1: three rate we track, and every single monthly jobs report,
Speaker 1: if you see the three month moving average of that
Speaker 1: take up oh point five percentage points above the previous
Speaker 1: twelve months low, then a recession has probably already started.
Speaker 1: And what's it showing now? That model shows that there
Speaker 1: is no recession right now, and there is no recession
Speaker 1: in the I mean foreseeable future because the reading is
Speaker 1: so low. If you look at the chart online, it's
Speaker 1: still pretty much close to zero. So some of these
Speaker 1: indicators are forward looking, right, So some of these indicators
Speaker 1: you can look at and say, Okay, in like three
Speaker 1: months to six months, we will probably have a recession.
Speaker 1: Some of them are in the moment, Like the Sam
Speaker 1: rules is a great indicator of where we are right now,
Speaker 1: right the second and so any one thing. You know,
Speaker 1: we're joking around a little bit talking about lipstick in underwear,
Speaker 1: but people kind of have their favorite things that they watch.
Speaker 1: But Trying to peg a recession to anyone or two
Speaker 1: or even three things is not really going to be
Speaker 1: your most accurate way of doing it. You need sort
Speaker 1: of to take all of these components together. And I
Speaker 1: think that's why, especially since the pandemic, I think economists
Speaker 1: have realized that they need as much data as possible
Speaker 1: because some of these issues start to form in parts
Speaker 1: the economy that you may not have thought about or
Speaker 1: may not have seen before. You know, the last two
Speaker 1: recessions really caught a soft guard. They were kind of
Speaker 1: unforeseen events, black swan events. Right, you had the COVID pandemic,
Speaker 1: and then prior to that you had this massive, spectacular
Speaker 1: housing crash starting in the credit market. And so I
Speaker 1: think taking, you know, as much as you can fill
Speaker 1: your basket with different components and different items, you'll get
Speaker 1: a much clearer picture of what's happening in the economy
Speaker 1: and if potentially a downturn is coming. Godya Dmitrieva, thanks
Speaker 1: so much for talking with me today. Thanks so much.
Speaker 1: When we come back. How economists decide when a recession
Speaker 1: has arrived, So, as Katya says, given how hard it
Speaker 1: is to tell the future, how do policymakers decide whether
Speaker 1: to titan or loosen the reigns on the economy. One
Speaker 1: person who knows is Simon Kennedy. He oversees economic coverage
Speaker 1: for Bloomberg and he's here with me now from London. Simon.
Speaker 1: We've been talking about how difficult it is to predict
Speaker 1: when or if a recession will happen. But what measures
Speaker 1: do economists used to declare that a recession has arrived. Well,
Speaker 1: there's two measures. One is the internationally recognized definition of
Speaker 1: a recession, and that's two quarters in which the economy contracts,
Speaker 1: in which gross domestic product, which is all the output
Speaker 1: of an economy, shrinks over two quarters. But in America
Speaker 1: it's slightly different. Obviously, we get those measurements, but an
Speaker 1: official resignation is defined by a group of academics at
Speaker 1: the National Bureau of Economic Research, which assembles this panel.
Speaker 1: Ben Bernankee, who used to run the Federal Reserve, was
Speaker 1: once on that panel, and they look at a wider
Speaker 1: amount of data. They look at things like a labor
Speaker 1: market and data and the like, and they then report
Speaker 1: the start of a recession and the end of recession.
Speaker 1: But they do so a long time after the event,
Speaker 1: it can be up to a year even longer perhaps,
Speaker 1: in which they crunch the numbers and then they almost
Speaker 1: like tablets of stone coming down a mountain, declare that
Speaker 1: a recession occurred starting this state, which by then is
Speaker 1: obviously a lagging indicator to some extent, the sense though
Speaker 1: that two quarters of contraction is internationally recognized, and then
Speaker 1: the NBARE panel come back a bit later and rule it.
Speaker 1: So it is that why some academists say, even though
Speaker 1: we haven't been officially declared to be in a recession,
Speaker 1: they kind of think we may already be in one now.
Speaker 1: They will only find out later. Absolutely, And you've seen
Speaker 1: cases going back to the financial crisis in which actually
Speaker 1: the recession then was started much earlier than the data
Speaker 1: initially showed. And now the feeling is is that if
Speaker 1: the US isn't in a recession now, it might soon be,
Speaker 1: based on the forecast based on the huge amount of
Speaker 1: interest rate hikes that the Fed has delivered in the
Speaker 1: past year, and this would be more of a I
Speaker 1: guess running the mills sort of traditional recession, is there, right? Yeah,
Speaker 1: And there's the the old joke that the Federal Reserve
Speaker 1: has has murdered several expansions over the centuries and or
Speaker 1: over the decades, and again it seems that bad news
Speaker 1: for Chairman Jerome Pow. But this would be made by
Speaker 1: the FED recession to squeeze the inflation out of the economy.
Speaker 1: That obviously, as prices surge last year, the FED was
Speaker 1: a bit surprised. It had to catch up with that
Speaker 1: and heighted interest rates quite aggressively last year. Um is
Speaker 1: now continuing hypely interest rates, but but perhaps at a
Speaker 1: slower pace. But the more it squeezes now, the greater
Speaker 1: the chances of recession. And and then it said it's
Speaker 1: a hard act to pull off this soft landing where
Speaker 1: the economy slows down enough to control inflation and then
Speaker 1: takes off again very rare feet rarely ever occurs. The
Speaker 1: FED would like to think it can do it, but
Speaker 1: obviously the majority of economists think it would. One of
Speaker 1: the things that's also different about what we're seeing now
Speaker 1: is that inflation. Of course, it's high, we're all feeling that,
Speaker 1: and yet the job market is still pretty hot. We
Speaker 1: see a lot of big layoffs from the tech sector
Speaker 1: that are getting headlines, but there are still a lot
Speaker 1: more jobs available than people who are willing to fill them,
Speaker 1: and that's providing a nice buffer. And for those who
Speaker 1: don't think there's going to be a recession this year,
Speaker 1: and there are economists out there Morgan Stanley, Goldman Sacks
Speaker 1: take the other side of the bet and don't think
Speaker 1: there's a going to be a recessional that the risk
Speaker 1: is smaller than most. They point to that labor market,
Speaker 1: they point to unemployment being solo. Obviously, if you're in
Speaker 1: a job, you're getting paid, that helps your your ability
Speaker 1: to spend and keep spending. It bolts up your your savings.
Speaker 1: So I think if there is a recession or not,
Speaker 1: the hope is that it will be at least a
Speaker 1: mild one because so many people are in work, because
Speaker 1: there's such so much demand for labor, we'll be right
Speaker 1: back after the break. So, I mean, how likely do
Speaker 1: you think it is that the Federal Reserve could manage
Speaker 1: to cool off the economy without tipping into recession, this
Speaker 1: fabled soft landing. So I think we've started two thousand
Speaker 1: and twenty three on quite a stronger or stronger footing
Speaker 1: than perhaps anticipated at the end of last year. Two
Speaker 1: things behind that, the reopening of China is going to
Speaker 1: create a source of demand around the world. And at
Speaker 1: the second time, inflation has come down, perhaps slower than expected.
Speaker 1: It has potentially peaked in the fall of last year.
Speaker 1: And if inflation comes down and demand is supported, the
Speaker 1: Federal Reserve feels it can take its foot off the brake,
Speaker 1: so to speak, that there will be more chances of
Speaker 1: a soft landing. Certainly in recent weeks that the chatter
Speaker 1: around a soft landing has built. The tight labor market
Speaker 1: means workers have been able to demand higher pay and
Speaker 1: other benefits. If the Fed succeeds in cooling the jobs
Speaker 1: market and unemployment rises, do you think that that balance
Speaker 1: of power will shift sharply back toward employers. I think
Speaker 1: that's probably going to be a theme for the year.
Speaker 1: It's hard for Jerne Power at the FED and other
Speaker 1: central bankers to communicate because who wants to go out
Speaker 1: there and say, we really need unemployment to go up,
Speaker 1: we really need your wages to stop rising. Um. It's
Speaker 1: not a great look. It is a look that if
Speaker 1: you're the central banker, you have to adopt at the moment.
Speaker 1: The argument would be from their point of view is
Speaker 1: if we is that the bigger threat to the medium
Speaker 1: to your long term lifestyle is inflation. So we need
Speaker 1: to get that back under control, and that would allow
Speaker 1: the labor market to to sustain growth over a much
Speaker 1: longer period of time. But it's a hard message to
Speaker 1: convey that actually, when you look at it, um, central
Speaker 1: bankers wouldn't mind that labor market easy enough a bit.
Speaker 1: And what about the other side of the equation, which
Speaker 1: is corporate profits which have been really really high um.
Speaker 1: And you know, there's some debate about how much corporate
Speaker 1: profits are contributing to inflation versus how much it's the
Speaker 1: hat labor market. Are you anticipating that we're going to
Speaker 1: see these very profitable companies start to cool themselves to
Speaker 1: some extent, although when we voluntary, I don't know many
Speaker 1: companies that that try to to reduce their profits. But again,
Speaker 1: you were entering a space really where if you're the Fed,
Speaker 1: there's some there's somewhat of a risk here that you're
Speaker 1: going to be pulled into the political conversations on Capitol
Speaker 1: Hill because of the forces. You talk about workers wanting
Speaker 1: more wages, workers feeling they've got they've got or they
Speaker 1: had a small window to uh to kind of cash
Speaker 1: in and push for higher wages because they're in demand.
Speaker 1: The argument that that corporations are profiteering and taking advantage
Speaker 1: of a moment to boost their own balance sheets. So
Speaker 1: you've got all these forces out there. That puts the
Speaker 1: federal as a been a bit of a tricky position
Speaker 1: because if it's the one that's on the hook for
Speaker 1: causing the recession and companies are profiting and workers are
Speaker 1: missing out, then then it's a bit of a hard
Speaker 1: conversation to be having with the American public. I'm gonna
Speaker 1: put you in an unfair spat. Looking down the road
Speaker 1: to the rest of the year, do you think there's
Speaker 1: going to be a recession? I think so. I think
Speaker 1: the interest rates were yanked up so aggressively last year
Speaker 1: that it will be hard for any economy to kind
Speaker 1: of withstand that squeeze. The inflation at the start of
Speaker 1: last year that everyone thought would fade, the idea that
Speaker 1: even eighteen months ago, the bet was the inflation would
Speaker 1: fade after the pandemic faded, and then there'd be this
Speaker 1: opportunity for the Federal Reserve to not have to raise
Speaker 1: interest rates aggressively. That proved a wrong bet, but inflation
Speaker 1: has continued to gallop along. Interest rates have been squeezed
Speaker 1: um and aggressively, so the most in four generations. It
Speaker 1: would be very hard or very easy, i should say,
Speaker 1: for the economy just to tip into a into a
Speaker 1: brief recession, which seems to be the consensus forecast and
Speaker 1: most But as long as that labor market stay strong,
Speaker 1: there's a case to be made for no recession, or
Speaker 1: at least a mild one. Simon Kennedy, thanks for talking
Speaker 1: with me today. Thank you. You can read more from
Speaker 1: Simon Kennedy and Katya Dmitrieva at Bloomberg dot com. Thanks
Speaker 1: for listening to us here at The Big Take. It's
Speaker 1: a daily podcast from Bloomberg and I Heart Radio. For
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Speaker 1: producer of The Big Take is Vicky Bergolina. Our senior
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