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