Shownotes Transcript
Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and this is kind of a rare treat. It's just the two co-hosts and me. Wow. Marissa DiNatale and Chris Taurides. That's rare, isn't it, guys? Yeah, I love it. It definitely is. Just the family. It's been a while. Yeah. It's been a while since we've just had the floor to ourselves, so it feels good. We're taping the podcast a little bit early. This is a Thursday afternoon. And why are we doing that exactly?
Why not? Well, we have a half day tomorrow. Oh, is that right? Leading up to Easter. Is that why? I don't know. I don't know why we're doing it. That may be it. Yeah. Early Easter. We have half the day off tomorrow? We do. Oh, cool. Did you know that, Chris? I did not know that. You didn't? Chris views that as a time to get ahead of everybody else. Everybody else shuts down. That's a nice quiet time. You can get a lot of work done. Get a lot of work done. I'll be using it to write a...
A commentary that's a week overdue. Oh, there you go. It'll all be working. And Sarah told us before we got on, this is the four-year anniversary of Inside Economics. Four years at this podcast. Wow. That's pretty amazing. Congratulations. So what do you think? Well, I haven't been on for four years. I think I've only been on for two and a half, but- Two and a half? I can't believe it's been that long, actually. Yeah. Yeah.
Right. You know, most TV shows, they end after four seasons. What do you think? I think not anymore. Not anymore? Lots of seasons. Okay, then we'll be on for a while. We're going to drag this out. People can't stand it anymore. Yeah, we'll drag this out. Yeah, good. Yeah, it's been a good four years. We've covered a lot of ground in four years. Yeah. Yeah. A lot of things going on.
Of course, we're in the middle of a pretty serious global trade war. A lot going on there. Really? Yeah. You've been following? A lot going on. The most recent thing is...
- Chair Powell, Fed Chair Powell gave a talk at the Economic Club of Chicago. Did you guys read that? It was a really short speech. Did you guys read the speech? - I watched it live. - Oh, you watched it live? - And then I watched the interview afterward, yeah. - Yeah, why don't you paraphrase? What did he say in the talk? - He thinks that given heightened uncertainty, the Fed is going to be having to balance likely inflation with slower growth.
And the upshot of that, his comments were, I mean, he thinks that the trade war will do damage to the economy. They're still focused on their dual mandate of full employment and bringing inflation down to the 2% bound.
He said that when asked about this push and pull between slower growth and inflation and how they're going to deal with that, he said that they've decided that what they're going to do is they're just going to have to look at the data and see which mandate they're further away from, like which one seems more pressing at the time and deal with that. So if it looks like
you know, growth is hanging in there, but inflation is running away, then they may raise rates. And if it's the opposite, they may lower rates. And so he seems really focused on data. Those were his remarks. And then there was an interview after that where they delved into other things, such as Fed independence. And that came to the fore overnight and today, right? Because I guess President Trump has been
posting on social media his, what would be the right word, his annoyance umbrage with Chair, I mean, the bottom line of Chair Powell's statement was, or speech was that
at least from my vantage point, was he's not going to be moving on rates anytime soon, certainly not cutting rates, right? Because inflation is going to be the initial effect of these higher tariffs, and inflation expectations are pretty elevated. Certainly consumer inflation expectations are elevated. And given that, that argues for, I don't know that it argues at this point for rate increases, but it certainly doesn't argue for rate cuts. So he's going to sit on his hands. And President Trump
I sound like he got pretty annoyed at that and said, you're always too late and kind of intimated. I thought, correct me if I'm wrong, that, you know, he might figure out, try to figure out a way to replace Powell before Powell's term is up, which I believe is May 2026, a little over a year from now. Yeah, said his termination can't come fast enough. That's what he said. Right. Right. What do you think of that, Chris? I mean,
Yeah, is that meaning May or March 2026 can't come fast enough? Or is it? Right. Or is he going to accelerate the timeline here? Yeah. Yeah. I mean, surprised that he actually. Well, I don't know if I would be surprised anymore, but that he would actually take action because that's going to be a legal fight as well. Well, there's a case before the Supreme Court right now that is.
that kind of deals with this, right? It's looking at a precedent that goes back to the 1930s that says a president can't fire a political appointee for policy differences. And this was in response to Trump firing the head of the NLRB and another agency. I can't remember. And Powell commented on this yesterday, which I think is part of the other reason why President Trump, you know, responded. Yeah. And
Jay Powell said, I don't think that this applies to the Fed, you know, this law, but he's not concerned. He thinks the Federal Reserve Act and precedent give the Fed independence and
It's against the law to fire him without cause. So I think partially President Trump's response was to those comments as well. And then, of course, the European Central Bank cut rates this morning. Right. So that kind of added fuel to the fire, too, I think. Of course, the Europeans aren't raising tariffs like the U.S. is. Right. No, they just have to react. Right. Yeah. And of course, the growth effects in Europe are much more significant. Right. So.
Yeah. Well, Chris, what do you think about what this all means for central bank Fed independence? It's a risk, certainly. Even if the direct actions aren't taken, even if it doesn't terminate them or it takes a while, whatever, it's still, it's polluting the waters, right? It's certainly got to make investors nervous that maybe there won't be that independence, right? It's just not clear. So I don't think it helps the cause. Let's put it that way.
Yeah, the thing that always – absolutely. I mean, this is a – it feels like a direct affront to central bank independence, right? I mean, he's saying, hey, cut rates, you know, or I'm going to terminate you. I don't know how else you articulate what's going on here other than that's a direct affront to central bank independence.
I mean, to the point where Chair Powell is actually having to explain why he can't be thrown out. You know, I mean, that's that's pretty significant stuff. And, you know, a couple of things perplex me about that. One is I would have expected a more negative reaction in markets like today. This all happened. Powell was yesterday on on Wednesday and President Trump was was posting on this last night.
and earlier, talking about it earlier today, Thursday, in the markets, they, you know, I don't know where they ended, but they weren't up, but I don't think they were down that much either. So I found that a little perplexing. And the other thing I, more fundamentally,
It just feels counterproductive to me for the president to kind of hammer the Fed chief over this. I mean, then he's saying, look, I don't want you to use your best judgment about the economy and the dual mandate of low and stable inflation and full employment. I want you to lower rates because, you know, I'm more worried for me from a political perspective. I think that's better, you know, for how this will play out.
And if I were an investor, a bond investor listening to all this, I'd get the heebie-jeebies. I don't know if that's a word, but that describes what I'd get, the heebie-jeebies. Is that worse than the yips? I think it's worse than the yips in my nomenclature. The yips, I keep thinking of golf with the yips. The heebie-jeebies, you're shaking all over. It's like, this is really scary stuff, you know?
But that would argue for a higher long-term rates, all else equals. So even if you got the Fed to lower rates, it would result in higher long-term interest rates, intermediate-term rates, which-
From a macroeconomic perspective, for what it means for the real economy, it's probably worse, right? Because that means mortgage rates are higher. That means auto loan rates are higher. That means small business loans are higher, you know, all those kinds of things. So I find it really odd where you can, you know, one can think that by jawboning the Fed, by browbeating the Fed, that that actually ends things in a way that is in your favor. It just shows, I don't know what that shows. You know, I'm just perplexed by it.
Greed? So you should have asked for quantitative easing, I guess is the- That's right. Yeah. Yeah. Go out and buy bonds. I was going to ask for anything. Yeah. Go out and buy bonds. Right. That would help. Yeah. Right. Okay. Well, we got to watch this carefully. I do think that one of the cornerstones of a well-functioning economy, a market economy,
i think this has been well established over the decades as a independent central bank an independent fed they set policy based on uh what's going on in the economy and achieving their goals as opposed to anything political which always ends badly historically so you know this needs to be watched carefully now it also raises the the kind of the ante on who the president appoints for the next fed chair right
Right. Because, I mean, that's going to be a real tell, you know, so I don't know. It doesn't feel like it's a great time to be a bond investor. It's just you got a lot of things to worry about. Big deficits and debt, trade wars, etc.
questioning of the reserve currency status, the safe haven. What's that? Falling dollar. Falling dollar. Holy cow. What a mess. So are you surprised that the bond hasn't, Mark, hasn't even reacted more forcefully?
Yeah, I guess so. 4.3. Yeah, it got as high as 4.5. Yeah, 4.3. I did see a really interesting, and I think I sent it around to everybody, this interesting study. And I apologize to the authors. I don't remember who they were. But that showed the relationship between the spread between the 10-year treasury yield and the 10-year German Bund and the change in the euro-dollar exchange rate.
And these things are very closely related because interest rate differentials are key to determining short-term movements in currency. And they show this nice chart where the relationship is very, very strong. And then everything breaks apart since early April, since Liberation Day, where the 10-year yield has gone up and the dollar's value against the euro has gone down. And it's so –
counter to anything and strongly suggests that investors are nervous about the safe haven status of the US as a result of all of this. So it's not up as much as I thought, but still it's up, which is not what you would expect given what's going on. Yeah. I heard an interesting bot investor talking about the US behaving much more like an emerging market.
Oh, yeah. In terms of the bond relationship and the value of the dollar, when it's counter to what you would expect in a developed economy, but not counter to what you might expect in an emerging market where there's some political unrest. Oh, I see. Yeah, that's what you would expect in the economy. Yeah, exactly. I hadn't thought about it that way, but that's exactly right. Well, that's a sad commentary. Yeah. Yeah.
Anyway, well, this podcast is going to be different. We don't have a guest. We've had lots of guests recently. We're not going to play the game. We're just going to take listener questions. We've been getting a lot of questions, and I thought we'd just spend the rest of our time fielding. I haven't looked at the questions. Chris, I don't think you have. I think only Marissa has.
So maybe Mercy, you can kind of lead the way here and just fire away and we'll take a crack at answering these cues as best we can. Yeah, there's a ton. And please keep sending them in. We don't do this very often because we usually have a guest on, so we don't have time to take questions. But because I know what the questions are, you know, when we can, we try to work the answers in or steer the conversation to answer some of the questions. So appreciate everybody's questions and questions.
You know, guys, we have really smart listeners. We really do. We have very thoughtful, smart listeners that ask really, really good questions. Are you sucking up to the listeners? Is that what you're doing? I mean, we don't... I don't think we do. I think she wants fan mail, Chris. No, that's not what I want. I just want to say thank you to people. People write really nice stuff to us, and we don't often...
um, give it back. So I'm, you're right. You're absolutely right. I'll suck up. I, I, I love our listeners. You guys are great. Keep the, keep the questions coming.
Okay. So there's lots of different topics. I mean, we can go tariff, we can go labor market, we can go fed. Let's see. Do you think, do you have a preference? I thought maybe we should go tariff first because all the rest kind of flows from that. Don't you think? Yeah. No? Oh, I didn't mean to interrupt. Go ahead. Yeah. You do it the way you want to do it. I think that's the way I have it organized. Oh, okay. Okay, great. If we're sick of tariffs. I don't want to micromanage. I'm good at that, but you know. Yeah.
You're really not. I'm not? Okay, good. Oh, that's good to hear. You're a macro. I'm just the opposite. You're criticizing me because I'm not. I'm a macro. That wasn't a criticism. Okay, here we go. So concerning tariffs, do you think that maybe one of the reasons for these tariffs could be, because we hear a lot of reasons, right? Every day there's a new reason justifying this seemingly. Right.
could be to diversify supply chains to the U.S. I don't see jobs being created in the United States, given things could change in the next term at the absolute latest, but for pushing trade to other nations that may or may not be to our favor. That might make more sense, but it comes with repercussions. What are your thoughts? I don't know. What do you think, Chris? So I see it as a consequence, certainly, but I don't see it as the motivation, right? Certainly, if you're
Are there other ways you could diversify the supply chain more effectively, if that's really the objective, than just broad-based tariffs? Is the thinking that the supply chains are not resilient enough, not ... I guess they use the word diversified, therefore ... Right. I see.
I definitely don't think that's a motivation. Right. I mean, what you're doing there then is...
raising costs, presumably significantly, it's making the supply chains less efficient. You would think you'd want to let the market... I guess the way I would think about this is, what's the market failure here? What are you trying to solve? I mean, don't you think the marketplace... Because this is pretty complex. These supply chains are very, very...
They're long and there's a lot of moving parts. They're very complex. And you would think the market would be the best arbiter of what is the most efficient way of organizing around these supply chains. You know, and they learn. I mean, I think we learned a lot after the pandemic. Right. We learned quite a bit when the number of the supply chains have been disrupted by different
Houthis in the Red Sea and the problems in the Suez Canal and the Panama Canal. So there's been a lot of, you know, stress is put on the supply chains and they've responded and, you know, reorganized. But, you know, really using tariffs to try to get supply chains to move in a certain direction, that's a pretty tenuous, seems almost impossible to execute on. And I'm not even sure...
I just don't see that working out well for anybody. I just really don't. So I haven't heard that explanation and I think with good reason, it's just not at all intuitive to me that that's what's going on here. Maybe a targeted tariff, you could make that argument, right? If you thought that we're overly dependent on China and you want to move that supply chain around.
But the broad-based tariff, right, tariff in Canada, tariff in Mexico, all around, that just throws everything in disarray. Well, let me say one other thing, and that is the way the tariffs are being set. It's not consistent with the idea that there's any...
any kind of grand plan here. I have a 10% across the board tariff. That's not going to change anything. And then I have these reciprocal, so-called reciprocal tariffs that are based on nothing other than I'm making this up, which has been shown very clearly that the formula used here is just the trade deficit. It has nothing to do with anything. So it's certainly not with supply chain resilience or
you know, even fair trade. It's just the deficit is large. Therefore you gotta, you gotta pay a higher reciprocal tariff. So I think it's, it's, it's being revealed to us that there is no grand plan here, you know, it has nothing to do with anything other than God knows what. Okay. Yeah.
- Do you have anything to add there? Do we miss anything, Marisa? - Well, just that, I mean, I do think there was certainly post pandemic, there was an effort by the Biden administration to try to divert production of semiconductors, chips, batteries, that kind of thing, bring that more to the US. So we were less reliant on China for that. And part of that was coming out of supply chain concerns. But to your point, that was very targeted,
Right. Whereas this time around, if there was a strategy to divert supply chains or diversify them, then you would think there would be carve out somewhere where they wanted those supply chains to go or divert to. But since we're tariffing everyone, it's not clear really who has any advantage here if everyone's being hurt by it. Yeah. The other thing is, and this is a good place to talk about the difference between
what President Trump is doing with the tariff and the trade war and what Biden did with tax incentives, you know, around the CHIPS Act and the Inflation Reduction Act. You know, those were big pieces of legislation that provided tax subsidy to the private sector to get the private sector to invest more in manufacturing activity, particularly
things like chips and clean energy, things that are deemed to be relative to national security. And in my view, the tariff approach absolutely will not work because no one knows what the tariffs will be next week, let alone three, 10 years from now when these investments come to fruition.
Whereas that we know for a fact it's empirical. You can go take a look. The tax subsidies worked by better than expected. In fact, you know, if you look at investment in manufacturing facilities, that's construction put in place in manufacturing facilities, factories.
I'm making this up, but you can Google it or chat GPT it. Before the CHIPS Act was passed in 2022, investment annually in manufacturing was about $75 billion per annum, give or take. Some years a little higher, some years a little lower. Last I looked, we were at over $200 billion annualized. That was a slam dunk success in getting chip plants to move here. Then the other
The Inflation Reduction Act, that's been oversubscribed. There was no limit on how much tax subsidy could be taken down, and it was taken down by orders of magnitude. Now, you could say the tariffs generate revenue and the other is a tax subsidy, but if you look at the legislation for the IRA and for the CHIPS Act, those pieces of legislation were paid for.
They had other pay-fors, tax increases and spending cuts to pay for. So they were deficit neutral and they were able to accomplish that. So I think the targeted nature and the very specific kind of focus in this tax subsidy, that's success to reorient manufacturing back here at home. But the tariffs, I really don't see it. I just don't see that happening. Okay. Okay.
Here's another tariff question. On the episode State of the American Consumer, which I think is when we had Scott on last, you discussed the risk to retailers of rising energy prices, and it seemed you were referring primarily to gas prices. I think we were saying that rising prices at the pump would
would lead to pullback in consumer spending. That's what we're saying. If that is the case, what are your thoughts on the mid-25 to late-26 impact of tariffs on Canada driving up energy, i.e. oil and gas prices at the pump here in the U.S.?
How do you think this further plays into the theme of over the past few years of the strong American consumer? Could this further impact corporation supply chain costs from a transportation standpoint, leading to additional price hikes in goods and services, in turn, less consuming and then further a broad market pullback?
Talk me off a cliff. Ha ha. Well done. Well executed. Well, I guess I'll take the first crack at that. Well, higher energy prices, higher, higher gasoline, oil, gasoline, natural gas prices would be,
a hit to the consumer. You know, it saps real purchasing power and hurts confidence and sentiment. You know, if you're paying more at the pump, nothing gets people more
upset, and hurts more than, you know, paying more at the gasoline pump. And it would result in higher costs for grocery stores, because a big part of getting food from the farm to the store shelf is diesel and affect other prices as well. So that's very negative. And the tariffs don't help their all else being equal. If there's tariffs on, you know, Canadian oil and
energy products coming into the U.S., then that adds to that concern. But I will say, I don't think we're going to see too large an increase in oil prices in the current context because the higher tariffs and trade war are crushing demand. They're weakening the economy, the global economy, not just the U.S. economy. The Chinese economy is a big consumer of energy and they're going to consume less. I mean, their manufacturing base must be
you know, starting to shut down, right? Because these higher tariffs are killing trade. And so that's probably affecting manufacturing and therefore their consumption of energy. So oil prices are actually down. So we're at 60 bucks, I think, close on the West Texas Intermediate, 65 or so on Brent. You know, cost of a gallon of regular lead and diesel is going to come in. So I
I'm less worried about higher energy prices in the current context just because of the hit to growth and the hit to demand. I don't expect oil prices to fall much further unless we really get into a rip-roaring recession and demand really gets crushed.
because we're now at break-even prices. The Dallas Fed just came out with their annual study of costs of producing in the fracking fields, and the marginal cost of the kind of the marginal fracking field is about, I believe if memory serves, is about 60 bucks a barrel, 65 bucks a barrel. So we're there. So if prices go much lower, they're going to start pulling back on production and supply.
So, yeah, you're right. Higher oil energy prices, higher tariffs, all else equal, not good. But I think there's all these other forces at work, dynamics that suggest oil prices will remain down and not really play that much of a role in how things play out here going forward. Chris, any other perspective? Or do you have a different perspective or any other perspective? I agree with all that. The weakness of the demand is likely to offset any major increase in price. But I guess conceptually, it...
it runs counter to this idea that we want to actually attract more manufacturing back to the United States. One of the most attractive features of the US is that we have a reliable, fairly low cost of energy outside of the tariffs. That's one reason why firms have been coming to the US. So now if we are instituting this very large tax, it seems like on the one hand we are giving, on the other hand we're taking away in terms of how
companies make their decision. I think that just adds to the complication of a manufacturer trying to decide, should I really open this plant in the US or not? Right? Because the tariffs are one thing, but now I have maybe higher costs potentially down the line due to higher energy prices. So...
That's an interesting point. We're kind of getting into second, third, fourth, fifth order effects here, which is, I think, important. Certainly, the folks setting this policy should be doing that. That would be nice if they kind of thought about that more deeply. But one thing that kind of occurs to me is, one,
We had our webinar this week on the trade war. And by the way, folks, I thought it was a pretty good webinar. It was long, but it was good on the trade war. And I think there's a replay out there. You might want to take a look. And we had Gaurav Gangulyan, who's our economist in Europe who runs that economics team, who
And he was talking about the EU and what is it that they could buy more of from the US to help bring down the tensions here around EU trade with the US. And one thing was natural gas. The natural gas prices are still relatively high in Europe. They spiked when Russia invaded Ukraine because the Europeans got a lot of their natural gas from Russia.
But a lot of LNG, liquefied natural gas, is now flowing from the US into Europe. And that's, you know, on one level, that's a good thing, I guess, because we're exporting more. But it's raising the price of natural gas here in the United States. So natural gas prices are up for probably lots of different reasons, including a cold winter in many parts of the country. But, you know, natural gas, last I look, we're close to $4 per million BTU, up from like $3.
And that was one, the low natural gas prices was one of the calling cards of producing, to have manufacturing here in the US. So if you have-
you know, more LNG and more natural gas flowing from here to there and that our prices go up, their prices go down, then it becomes less attractive as a destination for manufacturing. So that's just that's, you know, that's probably a fifth order effect, but still something to consider, you know, how complicated this is and trying to disentangle what it all means, you know, for the economy.
Marissa, do you have anything to add on that, on the energy question? No. I mean, we do import a lot of energy from Canada. I think the Canadian marginal cost of producing is also quite high, particularly in some of the...
What is it called? Oh, yeah, the heavy... We have to bring it out of the sands. The tar sands, that's right, right? Like that's very expensive to produce too. So, yeah, I think with energy prices going down, with weaker demand around the corner happening and also potentially intensifying that probably offsets any tariff impact. And we also... Oh, go ahead. You know, we may be able to...
We are producing a lot here, too. I mean, we are now the world's largest oil producer. So we have plenty of our own energy that we could cover the cost of, I think, if for some reason the tariffs distorted energy imports to the point where it was actually causing real economic harm. Mm-hmm. Mm-hmm.
Good question. It goes to the supply chain because we think oil is just oil, but it's very specific, right? We have refineries that are very keyed into that Canadian pipeline. They've optimized their processes around it. And now if you take that away, they have to source it from somewhere else. That can add increased costs, right? So it's almost certainly will, right? Commodities seem like they're just commodities, but there's a lot of variation within them.
Yeah, because it's heavy. I'm sure I'm not going to get this exactly right, but Canadian oil, tar sands, heavy oil, it has to be refined in a certain way. And the Midwest refineries are, as you said, optimized to process that kind of oil.
And there's no other options here, right? So it's not like you can ship that oil somewhere else or these refineries can take oil from other places. So you're mucking with the system that's been optimized and making it just by definition inefficient and raising costs. Good. That's a good one. What's up next? There's so many good ones. Really? Okay, cool. Okay, here's a good one. Tariff? Tariff.
No, this is recession related. Recession related? This is a direct response, Mark, to something you slash Sarah posted on LinkedIn. Oh, cool. So-
So the possibility of recession is elevated. By the way, I like being linked to Sarah like that. Mark, you slash Sarah. We know who's pulling the strings here. Everyone knows. We know what's going on here. All right. Okay. So the possibility of recession is elevated and trending up because, quoting an abridging Mark's LinkedIn post from a couple of weeks ago, one, tariffs and possible trade war. Two, stock prices are down.
three, haphazard doge cuts, and four, government shutdown and debt limit. But in that same post, Marx states that a recession occurs every six to seven years, presumably not related to political changes. So my questions are, why are we trying to fight against what is normal and inevitable? And two, going even further, why did we want a, quote, soft landing at all? Seems like we would just want to keep flying, to stay with the analogy.
Well, the six, seven years is on average. And we've had much longer expansions, and there's no reason why we can't enjoy those longer expansions. Generally, recessions come to an end because there's some significant, for lack of a better term, imbalance in the economy. Too much leverage, overvalued asset prices. I'm thinking of the housing market.
and the financial crisis, pandemic. I think if we have a recession here, this would be the first, I'm trying to think, but maybe we had, I was going to say this is maybe the first recession that's entirely self-induced. It's not like,
Yeah, the weeks could have there's no reason why we're experiencing this recession other than policy other than the trade war and doge and those other policies that you mentioned. So it's not inevitable.
And certainly this was nowhere close to inevitable. In fact, we came into the year, the economy was in a really good place. Strong growth, lots of job creation, unemployment was low, stock market was at a record high, housing values were at record highs. You know, inflation was a bit elevated, but it's coming in. And as we can see with the more subsequent data through March, it was going to come right into target, thus the soft landing.
So there's nothing in about inevitable about a recession, certainly not this recession, completely, you know, our own do our own doing, but based on the policy steps that are being taken. So, um, you know, I, I, I don't, I don't, I don't think we need to be here, you know, talking about this. What was the other part of that question? Um, there was a corollary to that. Um,
Oh, why did we want a soft landing? Like, oh, instead of just keep going at the pace we were going. Oh, I see. Yeah, I, a definition of a soft landing in kind of my nomenclature is that the economy grows at its potential if it's at full employment. So once you get back to full employment,
And I think we've been there. 4% unemployment rate would be, that's where we've been, we had, you know, for the past three plus years, that would be very consistent with the full employment economy. So when you're there, what you want and the best you can, you know, do is have an economy that grows at its best.
at its potential, meaning that it's consistent with the growth in the labor force and the productivity growth of that labor force. If you have growth that's stronger than that for an extended period and unemployment continues to fall, that'll engender inflationary pressures, higher interest rates, and ultimately you may in fact suffer a recession. That would be a recession that's more typical kind of the way the past business cycles come to an end.
So the ideal world is one where your economy is operating at full employment, it's growing at its potential, and inflation's at target. And we were pretty close to doing that at the beginning of the year. Now we've blown that all apart with the policy decisions that have been made. Chris?
Anything to add there? Yeah, all good. I guess if you wanted to fly higher, you would increase the potential growth rate on the supply side. So certainly, soft landing is the objective, but that doesn't mean we stop there. We still would like to increase the supply side, whether that's increasing immigration, so we have the labor force we need, or other supply constraints. So that's the-- I wouldn't say that potential growth where it is should be our ultimate target. We'd like to continue to grow that as well.
Yeah, actually a lot of that potential depends in part on policy, like for example, immigration policy, right? Right. I mean, one reason why the economy was able to grow so fast in 2024 was the large number of immigrants that were coming into the country, adding to the labor force, they went right to work. You know, the immigration had other costs, but one of the benefits was the fact that it allowed for more job creation and more economic growth. We grew 2.8%.
in 2024 calendar year. And that, you know, in more typical times, we think that's well above the economy's potential, but-
No, the unemployment rate actually stayed low and actually I think it moved up a little bit. We could have grown even a little bit more in 2024. The other thing is technological change, things that are much more difficult to know and predict, certainly the timing of. We saw some very strong productivity gains in 2024. We've had podcasts in the past discussing what that's all about. There's a lot of theories.
But there's also things like artificial intelligence that are coming down the pike here that might lift the underlying potential growth. But in the near term, what's going to happen in the next year, the goal would be you want to have an economy that's growing very close to its potential growth.
If you're at a full employment economy. If you're below full employment, then have at it. We want more growth. But if we're at full employment, then you just, if you grow much above that, you'll get inflation. And that's not what you want. Have you revised your potential growth forecast? These policies? I think all else equal, these policies will diminish the economy's potential growth. Yes. I mean, one thing we've learned about tariffs, and there was, I think I've mentioned this
before in other podcasts. There's a study out from the Fed showing that the productivity of the steel and aluminum industry has fallen very sharply since the tariffs that were put in place back under President Trump's first term. And the explanation or intuition is that with tariffs,
These industries are protected. The markets are less competitive and there's less incentive for them to innovate and adopt new technology. And actually, they do the opposite and we get a reduction in productivity. So yeah, I think if these tariffs remain in place or anything close to them, they will diminish long-term productivity growth and therefore the potential growth rate of the economy. Yeah. Yeah.
There's other things going on that could more than offset that effect. I mentioned AI. The more we use artificial intelligence, the more we understand it, the more innovation that's occurring there, the faster changes are occurring, and they're now occurring very quickly. It's hard not to become more of a...
a convert to the idea that this is going to generate a lot of productivity growth at some point. There's a lot of productivity gains to be had here from AI. And I don't know that that hasn't kicked in yet, but it feels like that at some point down the road here in the not too distant future that it will. Agreed?
Yeah, you sound a little like President Reagan there. Yeah. Really? On the protectionist tariffs. Yeah, he had a whole speech about protectionist tariffs in the 80s, remember? Oh, that's right, he did. Yeah, yeah, I think he passed that around. He mentioned the same things about lack of innovation, protected industry. Right, right, exactly. Great. Merced, do you want to do another question? Oh, yeah. Okay.
Okay. Let's keep going. Keep going. Okay. This one is actually about productivity, so it's a good segue. Okay. So my question is related to an idea that Vice President J.D. Vance brought up in a recent speech where he said, quote, cheap labor cannot be used as a substitute for the productivity gains that come with innovation. And then I watched part of this speech where he says it. He linked a YouTube to it. And he was talking about
The context of the speech was about illegal immigration and cracking down on illegal immigration. So that's the context of the comment. Our listener says, if I understood him correctly in the speech, VP Vance was essentially arguing U.S. businesses have become addicted to cheap labor over the last several decades. And that was a main cause of the stagnation in productivity and innovation experienced in the U.S.,
I was just curious, politics aside, if the team thinks there's any merit to this idea. I'm not sure it's one I've heard before. I'm also not sure how one measures innovation. So I have no idea how to validate that part of the claim. But I do know prior to the recent uptick, productivity had stagnated to some effect. Although isn't U.S. productivity generally higher than any other advanced economy? Yeah, Chris, you want to? There's a lot there. A lot there, yeah. Yeah.
So I guess, well, my initial reaction is if we're thinking about things over a longer period of time, right, I think the timing doesn't match here. If you're talking about the immigration surge since 2020, right, that actually coincides with a period of heightened productivity growth. The period before that, the 10 years before that, was lower productivity growth, but I don't see any evidence of massive use or increase in undocumented workers or lower productivity.
lower skilled or less productive workers. So that part of the argument doesn't really fit for me. And then the other thought I have is, you know, it's a global economy, right? It's not just in the US. So of course, capital is going to look around and find where the most productive labor is for a given activity, right? So
I don't know that that's an addiction of businesses to cheaper labor, but they're certainly looking for opportunities to increase their margins or produce more cheaply around the world. And in some cases, right, for very manual labor, right, they're going to go to those parts of the world that have that resource. So, yeah, it doesn't really hold water for me if I'm understanding the –
The point correctly. Yeah, you know, I didn't see the speech, so I don't want to be I don't want to state too strongly. I think I need to take a close look. But it feels almost backwards to me. I mean, the one thing I do know is that immigrants tend to be more productive than native born.
that there's strong evidence of this. A lot of research. And more innovative, too. Because they start companies at a higher rate. By definition, they're risk takers. You don't pick up and leave one country, go to another with your family unless you've got something. You've got some kind of moxie because that's not easy to do. It's a pretty scary thing to do for many people. Language issues and cultural issues and everything else. So strong evidence. And I would proffer, and here it might be a bit of a stretch, but I would proffer a
that one of the reasons we've seen such high business formation rates since the pandemic is it correlates very highly with the strong amount of immigration that come in, immigrants that have come into the country. So, and we've actually done some work relating
where the immigrants are settling and you know are different estimates of productivity and they you know line up in a way that's consistent with this this thought that this view that immigrants tend to be more innovative start companies at a higher rate are more risk-taking and therefore are good for productivity growth so my sense of it is just the opposite you know it's not immigrant immigration is not weighing on the nation's productivity it's not a
Paul over productivity. It's a supercharger for productivity. We want more immigrants. Now, obviously, I do think it makes a difference of what kind of immigrants you have. And we do want immigrants with the right kinds of skills. Although having said that, we need immigrants of all skill levels. I mean, high skill for sure. People that run our companies. Go take a look at the folks that are running these big tech companies. And they're all...
first or second generation immigrants. I think most of them are. But we need low skilled too because to be in the agricultural and construction and manufacturing industries because the domestic population, working age population is declining. We're getting older and it's declining. So my instinct is just to take the opposite side. But again, I didn't read the speech. I don't want to be overly
combative here because I'm not sure what I don't know. Make sense? Yeah. I mean, that was my reaction was that immigration is actually strongly correlated with higher rates of productivity and business formation and patent filings and those kinds of things. But those are probably higher skilled immigrants than what we're talking about here. But I'm still with Chris. I'm not sure that the
The dots connect on these two things. And yes, the U.S. does have higher productivity than a lot of other developed countries, certainly higher productivity than Europe. And a lot of that is due to the fact that we have higher business formation rates, more entrepreneurship here, laws that are more favorable to business formation and that sort of thing.
Yeah, I'll tell you the one thing, and this may be a corollary to the discussion, but in the same ballpark, I do worry about all of the pressure being put on foreign students. We read lots of stories of visas being revoked and students being forced back and students leaving because they're scared and other countries like China saying providing guidance
not to go to the U.S. as students. And I think it's pretty clear that the secret sauce, one of the key ingredients of the nation's secret sauce, the thing that makes us tick as a nation, is that we attract and keep the best and the brightest on the planet. And if we lose that, you know, that ingredient is gone, and I just don't see us performing at all well. So just that will undermine productivity growth and long-term potential. So
The more I think about this question, the more I'm getting irritated. It's just the opposite. Just the opposite. Yeah. I was thinking about the industrial mix component of it. If the tariffs are distortionary and we end up attracting a lot of business, lower, less productive type of industries, then the overall composition of the productivity is going to look a lot worse than it potentially could be. We're not optimizing the
right we're building i don't know textiles here or manufacturing textiles in a way that's far less efficient than than other parts of the world yeah good point that's my concern here that the tariffs again provide this distortionary effect do we there's a great dave chappelle clip did you see it oh what's that oh you should my my wife plays these instagram reels for me after dinner
Just a bit of levity. Late night TV like Colbert or whatever. And there was this one clip of, and I think that's the right word, clip of Dave Chappelle. And he goes, you know, I don't want to make a Nike shoe. I want to wear a Nike shoe. So I thought that was pretty funny. To your point, do we really want to have...
you know, shoe manufacturing back in the United States. You know, that's a low value added kind of activity. Do we really? The answer is no. That's not what we want. Anyway. Okay. Here's a Doge question.
I want to know, at what point do we consider all of the funding cuts a form of austerity? I mean, maybe it is. What sort of effects do you foresee with the cuts? For instance, I heard of a study that says for every $1 spent on IRS enforcement, $6 in revenue are collected. If the inverse is true or similar, could we come quite short on revenue collection?
I understand conservatives' desire to cut spending. However, is seemingly random firing of federal employees a good way to go about it? Do you think that they'll just end up replacing many of them with private sector contract workers? Isn't that even more costly?
Yeah. I mean, I'm not a fan of the doge cuts, job cuts or funding cuts, just because it's seemingly and I think actually just haphazard. It is a headwind to growth. You know, I think...
Not a large one because, you know, the actual dollars that are being saved here. I mean, if you look at even the Doge website of cost saving, and obviously that's been exaggerated. But if you look at it, it's not, you know, we're close to $2 trillion or $1 trillion or $500 billion. You know, we're talking maybe tens of billions of dollars. And even then, I'm not sure. So I don't know that that is really saving a lot. The job cuts may save, you know, maybe more money.
may save more and be more contractionary and actually from a an accounting GDP perspective it may show up in you know some weaker GDP numbers I think
And this is from recollection, so I may not have exactly right, but I believe that the way the Bureau of Economic Analysis calculates government expenditures is by looking at the number of people working in the federal government and their compensation. So if you're doing big cuts to...
federal government jobs and comp, that's going to push down measured GDP and will be a weight on economic growth. So yeah, these cuts are a near-term headwind to growth. But I think in the grand scheme of things, from a macro US perspective, small. I mean, obviously it has big regional implications for DC, which is probably now in recession and the broader Washington metropolitan area and some other
areas that are heavily reliant on federal government employment. But for the nation as a whole, I don't know that it's that big a deal. I do worry. And so therefore, I don't know it's going to go anywhere to help address our long-term fiscal situation to any meaningful degree. I do worry that it has the potential for creating significant problems down the road that something might break. I mean, these folks...
that are losing their jobs, you know, they're doing real stuff, you know, stuff that matters, you know. NOAA and FDA, SEC, FTC, CFPB, you know,
These guys are critical to making sure that a lot of what goes on in our world functions well and properly. Answering questions from Social Security recipients and people at the VA and so forth and so on. And if we're cutting these jobs and it goes well beyond anything related to improving efficiency, you're actually cutting jobs.
you know, services, then something may break. Something might go badly wrong. We may have a, you know, outbreak of measles in broader parts of the country. We may have, you know, a problem with the quality of our food and, you know, people might get ill. You know, the inspections for pharmaceuticals may be impaired. We might not get good, you
weather reports that are critical to evacuating people that are going to be hit by a hurricane or may even affect the ability to clean up after the hurricane. So I do worry about those things. And I think, but those play out over a long period of time and it's hard to connect the dots back. But I think we should expect some of that as a result of all this.
What do you think, Chris? Yeah, I'd be concerned about those longer-term effects as well, even on research, right? Research. That's the hardest one, I think, to quantify because in the short term, you know, you don't see the result. It's easy. You cut the grant and it looks like you have big saving and, you know, nothing really changed. But then later down the line, you realize, you know,
what that research was supporting, right? Maybe there's more greater outbreak of disease, maybe we're not prepared the next time, or maybe there's we miss out on some great innovation and that's going to our adversaries overseas, right? So, you know, really there should be some more of a cost benefit analysis with these types of cuts. Undoubtedly, there's things we could cut, but...
It hasn't been done in a way that's very thoughtful. Yeah, I'm listening to our answers and we're in agreement. Is it a problem that should we in the coming year add someone who's going to disagree with us? It feels like we're more, you know, very consistent in our thinking. Does that mean that we're right or does that mean something else? Just asking. Well, we can ponder it. Yeah. Yeah. Yeah.
I think we're in agreement, though, that it's not so much the cutting, it's the manner of cutting, right? Yeah, I mean, I don't think anybody... When you say, like, let's find waste in government and cut it, everybody would say, yeah, that's a great idea, right? I think the problem here is...
This is done, well, for me, the problem is it's done under the guise of cleaning up the fiscal situation. This comes nowhere near that. I mean, none of this cutting of discretionary spending is anywhere near addressing the longer run fiscal problem, which has to do with entitlements and increasingly interest that we're paying on the national debt.
This doesn't get there. And I would have no problem with getting rid of jobs or waste in government, but it just doesn't seem, I haven't seen any sort of like
evidence that what they're actually doing is getting rid of waste that's there or fraud, right? It's just kind of like, let's get rid of this entire agency and let's cut 10,000 people from this agency. I don't know how those decisions are being arrived at. It doesn't seem like there's a lot of
pre-planning that's gone into it. Yeah, I think we're confusing cuts and efficiency, right? The idea of efficiency is great. Let's find a better way to collect taxes, you know, more efficient, fewer people. Let's use modernized computers, what have you, AI. But that's not what's being done here. It's just slash and then, I guess, hope that we figure it out later on or it's not clear. You want to take one more?
Yeah. How many more can we take? Let's take two more. Let's take two more. Okay. Because that would take us to probably an hour and 10 minutes, which is exactly how long every podcast is, no matter how we try. Okay. Here's one. This is also related to the fiscal situation. Okay. Yeah.
How much truth is there to the idea that U.S. federal budget deficits are the cause of the U.S. massive trade imbalance and trade deficit? And if somehow the trade deficit is cut, that it would also lower federal borrowing. And this came up on our podcast last week when we had John Carney and Jim Parrott on. And there were several questions slash comments related to that podcast questioning Mr. Carney's
cause and effect there on the trade deficit and the fiscal deficit. Right, right, right. Okay. Well, I've got an answer. Marissa, do you want to take that or Chris, or do you want me to do it? Who wants to take that one? Why don't you take it? Yeah. Okay. Yeah. I think there is a relationship between the budget deficits and the trade deficit.
A trade deficit means that you're consuming more than you're producing. And if you run a budget deficit, that's more likely to be the case, right? You're borrowing money to consume government services. So now I'm simplifying to a significant degree because I'm assuming that household saving is adequate, and it is, I think. And corporate saving, retained earnings used for investment is adequate, and I think it is.
But our deficits are large. As a share of GDP, the deficit is 6%. Even excluding interest payments, so looking at the so-called primary deficit, we're 3% of GDP. That's a large deficit in a world in full employment. We should be at zero. We should even have something of a surplus, at least on the primary deficit, and we don't.
So because we're running these large deficits, the government is, we're consuming more than we're producing. Therefore, you have large trade deficits. So the question is, what do you do about, is this a problem? What should you do about it? And I say, yeah, what's a problem is the large deficits. Because again, these are being done in the context of a full employment economy where
And I wouldn't be as worried, except that our debt load is already pretty high. And our interest payments on that debt is rising now very rapidly as well. We're going to spend, I think, more on interest payments this year than on federal defense. And that doesn't make sense to me or anybody else. So the solution to that is to address those deficits. And that's a whole other topic.
3,000 podcasts, you know, what do I do about revenue? What I do about spending? How do I get more growth? You know to to address these deficits and by so doing you'll get the trade deficit down So the causality is the budget deficit consumer spending more than we are producing and By addressing that issue you will us you'll address the trade deficit now trying to go at the trade deficit is
to address the budget deficit is working backwards and will be very counterproductive because the only way you're going to get the trade deficit down through a trade war is by pushing the economy into recession. That's the only way. So you're going to tariff everybody, put a tax on, you go into recession. And I think at the end of that process, you end up with a smaller trade deficit, but
But you're going to have a smaller economy and bigger budget deficits because all your other revenues are going to be hit by the weaker economy. You're going to have less in personal income tax, corporate tax, income revenue. And you're going to have more spending because of income support, unemployment insurance,
rental assistance, so forth and so on. So it's really backwards thinking. And the backwards thinking, I wouldn't really worry about it too much, except that if you're thinking backwards about what's going on, you're going to get the wrong policy. And that's what we're getting here. We're getting the wrong policy. So they got it all wrong in terms of how things are working. Therefore, they got the policy all wrong. And that's what's so...
scary about this you know what makes it such a you know a uh you know a very disconcerting kind of process and uh the things here that are unfolding are very disconcerting chris what do you think that makes perfect sense to me okay sounds like you went to johns hopkins right i did phd johns hopkins yeah okay if you say so great school yeah marissa what do you think
I also went to Johns Hopkins. Okay. There we go. Maybe that's the problem, though. Maybe that's why we're all in agreement. Yeah. Chris was my professor. Yeah. What's that, Marissa? Chris was my professor. So maybe that's why we don't have different thinking. I keep forgetting that. I keep forgetting that. Although it was econometrics. It wasn't. Oh.
Yeah. I keep forgetting that you had that relationship. Wow. That's so cool. And I think it's so cool every time I hear it because I just forget it. It's like that movie. Remember that movie with- Memento? No, that's a good movie too. Barrymore. It's
Drew Barrymore. The Deeper States. Yeah. Wasn't that a great movie? I love that movie. You know, I don't think I've seen that movie. You got to go watch it. No. Does she have amnesia or something and forgets that she's going on a date with- Every 24 hours she goes to sleep and she forgets who she is and she needs to be reminded. Okay. Yeah. You like this setup because Groundhog Day, it says very much Groundhog Day. I know. It's your favorite genre of movie. It is. Amnesia. It is.
You know what it is? Because it's a matter of every day is about trying to make it better than the previous day. Right. And you have an opportunity to make it, you have another crack at it. And if you do that every day, it feels like that's the, I'm waxing philosophical here, but in my view, and this could be the foundation for a new faith, that it's
That is the secret of happiness. Every day, trying to make that a better day than the one that preceded it. What do you think? Do you like that philosophy? The church of the groundhog. Oh, I love that. That is really good. That's really good. I'm going to have to keep that in mind. I like that. A religion based on...
Early 2000s rom-coms. Yes. Oh, that's the common denominator. Maybe that's what it is. Mm-hmm. Early, right. You got me pegged. You got me pegged. Let's do one more. Okay, one more. There's actually two questions that are very similar, so I'm going to kind of weave them together. This is a question about data, economic data. So I'll read the first question in its entirety because it's short. So, hope you're all well. I love the podcast.
I work in portfolio management for high net worth individuals at one of the largest U.S. banks. The bank collects and aggregates credit and debit card spending data from all our customers. And I believe our economics team relies heavily on it. Do you all think relying on a source like this instead of typical government data is reasonable or does it have its pitfalls? So that's...
Then there's another question very close to that, asking about other sort of more real time up to the minute potential data sources, one from credit card companies. This other person cites the Atlanta Fed having something like a close to real time GDP tracking method. We also do something like that, too. And what are the benefits and the tradeoffs of these kinds of data versus, you know, your standard data?
data collected by government statistical agencies that also get revised and have their own issues, right? Well, why don't you take that, Marissa? Yeah. So we use data like that too. We use data that comes from private sector sources. We look at data that are aggregated by credit card companies. I think all of it, it's kind of...
regardless of the data source, it just comes down to you have to know the data really well. You have to know it's
it's where is it coming from? How is it collected? What is the sample? What are its pitfalls? And if you know that, then you know how you can and cannot use it in the caveats that go along with that. So for example, data aggregated from credit card files, obviously that's not a fully representative sample of the US population, right? It might be like this
like this listener is saying he works for a bank that caters to high net worth individuals. That's not going to be representative of your average American. So you have to know that, not that it's not...
useful in what it's showing us, but you have to understand that it's not showing you a representative sample of the whole country. And that's kind of true of a lot of these private sector data sources that we see, whereas something like a government data source like, say, the BLS and its sources on consumer prices or employment are
That is a designed sample that is specifically designed by scientists who have degrees in sample design that attempt to put together a sample that is representative and properly weighted of the entire U.S. population so that you're getting a more unbiased view of
So on the one hand, that makes that data better. On the other hand, like the reader or the listener is saying, some of that data is more lagged and backward looking. It can get revised because there is this tradeoff between getting data out in a timely manner versus...
you know, getting all the responses in before you release it. That's why GDP gets revised three times. That's why employment gets revised three times, right? We get all these revisions because of that. But so they're all, I think they're all good sources. You just have to know what their fallbacks are. Yeah. Chris, anything to add there? I think she covered it very well. Yeah.
I think the other thing I'd add is just you have to know which question to ask, right? Which question can this data answer, right? Versus assuming that any piece of data could apply. So I think it's important, as you said, to really understand the nuances of the data. And you need it all of the above. You need all the private. You need the public sources to kind of fill in the gaps and paint a complete picture of what's going on.
Great. Well, it sounds like we have even more questions. Maybe we'll do this again soon. They were all excellent questions. All great questions. And just to restate what you said already, keep them coming, right? Keep them coming. They're very, very helpful. Very useful. Okay. Anything else, guys, before we call it a podcast? No?
No. Okay. Well, I hope you have a great weekend. I did notice here in Philly, it's going to be in the eighties on Saturday. Can you believe that? Yeah. Yeah. Happy Easter to everyone and Passover to everybody. So yeah. Well, with that, we're going to call this a podcast. Take care, everyone. Talk to you next week.