Surveillance: Expect Deceleration, Hatzius Says

the south Side research. In the near term, a complete service sector recovery will likely require fully overcoming virus fares and returning to office work patterns, both now appear likely to take longer than we anticipated. That was Janhattis and the team over at Goldman Sax, the chief economist joins us right now and yeah, because of that, you've downgraded your forecast. Can you just walk me through this just a little bit more that agree to think to which

you think we will decelerate in the coming quarters. We are looking for a pretty significant deceleration as we go into two thousand and twenty two. Right now, you know, obviously six and a half percent growth in Q two, probably more than that in Q three, But then we're at one and a half to two by the second half of two thousand and twenty two. And that's partly because the return to full utilization in the in the service sector is it's a slow process. Just one data

point that I think is very important. U. The office occupancy rate in the United States is still only thirty of the pre pandemic level, and even in Texas, which is most advanced, it's only fift And this you know, I do think those numbers are going to be much higher eventually, but we're we're still it's a very slow process. US.

You're one point five to trend growth. Yeah, and that was amazing just to read that one point five to two percent trend by the back end at two it's a second half of two young, you're looking for one point five to two percent GDP. Groves. Now that's the call. Help me understand how you reconcile that with your call from the Federal Reserve. How does the policy call reconcile

with the growth call that you're making. Well, the policy call is that the FED is still going to be very gradual in exiting from the current policy stands, or we have tapering starting in early two thousand and twenty two, announced that the decemberform C meeting. Then a pretty gradual,

you know, fifteen billion and meeting tapering pace. So it takes you until the end of two thousand twenty two until tapering is done, and then whether you get rate hikes thereafter, it's going to depend on whether the criteria that the Feds laid out are met. So what are the criteria two percent inflation, confidence that you'll be somewhat above two for a while, and full employment. When those

conditions are met, they will hike. Our baseline is that that happens in late two thousand twenty three, but I think the risks are towards the later side, could slip into two thousand and twenty four, and that is, you know, somewhat later than what markets are pricing I think for all of these things. So I think it's consistent with a growth forecast that is still strong in the short term but decelerates quite a lot because of the withdrawal

of fiscal stimulus and less of a boost from reopening. Okay, that said, some of the factors that you're talking about, like people getting back to the office and the delta variant will subside. Potentially, it will take a couple of months longer, but will subside. I mean, why do you disagree with City macro strategists that actually put out our report today saying that this stagflation surprise regime is tactical

in nature and shouldn't last more than a couple of months. Well, I certainly agree on the the inflation side of of things that we you know, I've seen obviously a big increase in inflation, and we do think that is transitory. We have a sharp deceleration in inflation in terms of core PC, you know, we think will be below two percent for much of two thousand and twenty two. So I think on that part, we you know, we certainly

have a similar view. You know. I think on the growth side, we've been very optimistic about the the rebound in growth in two thousand and twenty one basically because you've seen a massive amount of fiscal support and a big boost from reopening and those things have not quite played out yet, but they are temporary. The reopening is a is a one time boost to the growth rate

and you know, permanent boost to the level. But at one time boost to the growth rate, and fiscal actually turns into a neg to have impact in two thousand and twenty two because a lot of the enormous support of two thousand twenty one isn't repeated in twenty two. Sure, we're not going to get instant trillion dollar money dumps

like we got during the pandemic. It's not going to be instantaneous fiscal policy, but we're still talking about trillions of dollars in the longer term economics spending on Capitol Hill that is making progress. I know it's spread out over a long time, but how do you factor that in here? Well, I think that is the key point. That it's spread out over a long time. So the headline number is going to be very big. Let's say it's going to be three trillion dollars when all is

said and done. But there are two things to consider. One, um maybe one one and a half trillion of that is going to be offset by higher taxes. And number two, it's spread over a ten year horizon, So you basically have to divide all these numbers, you know, one and a half trillion or three trillion by ten and then you're talking about something that's sort of in the one percent of GDP range and nowhere near the support that the American Rescue Plan provided for two thousand and twenty one.

And what I'm most interested in in terms of the impulse to growth is what's the change from one year to the next. What do we get there? Fiscal support worth about twelve percent of GDP in two thousand and twenty one, and even with our assumption on fiscal which is actually fairly expensive, we only get four percent of GDP in two thousand twenty two. So that's an eight

percentage point reduction. Now that's not an eight percentage point negative impulse, because some of this, of course is the flip side of a more normal economy, but it's still pretty sizeable negative impulse. And just quickly, just around things up, we've done a beautiful job of explaining how you think growth will decelerate in the coming years to coming quarters. Can you help me also understand how you expect their

READI of inflation to decelerate as well? From the high rates we're at right now, does that persist into the new year. We don't think so, because if you look at the high rate right now and the upside surprise, it's very concentrated in a small number of areas that are very likely to be temporary. The single most important one is used cars, and the used car market is already showing some signs of relaxation. We have data on auction prices which have been going down over the last

six weeks or so. That hasn't shown up in the in the CPI and PC yet, but it will show up over the next several months. And so you're going to go from positive impulse to to a negative impulse, not just neutral, but a negative impulse as you go into into next year. Other observations. I think wage pressure has been sizeable but looks quite temporary and probably related at least in part to the top up unemployment benefits which are expiring. And then lastly, inflation expectations still seem

very anchored, at least for the longer term. You have always super sharp and credit cant shop with you on the WEEKI down credit growth. You're Nhancys Government Sex chief economist, look Fairy stay Street, head of mac Rice Strategy North America, joined us now lee this conversation about stagflation light just give me a pushback if you want to push back, leak,

I'd love to push back. I mean stag stagflation. It's a phrase that comes up virtually every slowdown we have or if we have a high inflation print and growth is not about high people talk about stagflation. Real stagflation is really, really, really hard to get in an economy, and really the last time was probably in the seventies. But that's when you've got price controls, right, you know, because if you have a slowdown the economy, price pressures diminished.

That's in a normal functioning market economy, that's what happened. So this idea of stagflation, this growth is going to be you know, let's just say north of five percent this year. We've got some reopening inflation pressures that we're seeing. Now, that's not stagflation. I mean, you can call it stag light if you want, but you're basically saying it's not stagflation. Let's call it something new that actually doesn't exist. Important

to recognize where the price pressure is coming from. Is it coming from demand that's too big, or is it coming from supply constraints that could persist. How would you characterize it? Um it's a good question. Actually, I mean it's from supply you know, in my mind this is from supply constraints. Um that yes, they could persist. But listen, what what we need to do and what people aren't doing?

Not even the FREED really is to work out or to to to define what's the difference between transitory and persistent right, And the difference between the two is transitory will go away on its own without the FED having to do anything. Right, price pressures will diminish, they will come back down towards two percent or maybe even below

without any FED action. Persistent means that without the FED tightening and slowing the economy and reducing demand, we will have constantly rising inflation for the foreseeable future with no change in that part. That will neither shot from outside to stop inflation rising. That's not where we are. These are reopening pressures. Yes, some retailers, your restaurants, et cetera, taking the opportunity of the reopening to raise prices from

where they were pre pandemic. And people are desperate to go out again, the desper to go to restaurants, etcetera. And they're paying those higher prices. Well, but that doesn't mean that they'll raise prices again next year or the year after in six months time. And that's what persistent inflation is. This is transitory lee. One of the key determining factors, as many people say, as wages. Right, if we start to see wage pressure, that could change the

equation to a more persistent inflationary impulse. And I have to pair these ideas of sag inflation, light and higher wages with this statistic. The biggest US single family landlord boosted rents by eight percent nationwide just in the second quarter, giving you a sense, as have the basic costs of life going up, how much do you expect wages to

have to increase? With the labor shortages and fact the fact that consumers are looking at these costs and saying I can't afford to get the same wage that I got last year. That may be the case, but are they going to get paid more? You know, when we talk about labor shortages, there are six point eight million people out of work, more than they were pre pandemic. Yes, we have labor shortages now because of the you know, because of the supplementary unemployment insurance, but that runs out

in September. We're going to get a huge increase in supply of labor in September, right, and we had a three and a half percent unemployment rate before the pandemic with no wage inflation or no meaningful wage inflation. Why do we think we're going to get it now? What do we think has changed in the labor market well during the pandemic, which means certainly workers have all this bartling power, they're going to get all these wage increases. Yes,

we get headline stories now. Absolutely. In the summer we talked about sign on bonuses and shortage of workers. But as the unemployment insurance runs out in September, you're going to see that supply of labor come back and suddenly you're not going to have sign on bonuses and you're not going to have wage increases in the same extent. So yeah, I mean, you're absolutely right on the rents

and that's a huge problem for people. But this is where we come back to the stagflation and stag like whatever. Just a champ in medium rents in New York. And I understand New York's not America, but medium it's in New York with down, But this is the distinction between big cities that have gotten slammed indiosyncratically by the pandemic, and some suburban areas that have gotten their prices increased to record highs and it record paces. But you make

up good point. It's not consistent across the board, and people can move if they so choose. But Lee, honestly, you raise actually a very controversial point, which is the gap in how quickly people are coming back online, the low participation rate, despite the fact that the economy does seem to be going back, and the fact that a lot of companies say that we need workers, we want

to hire people. Is it really just that simple that the enhanced unemployment benefits will roll off and that people will go back and see their kids go back to school and kumbaya, It's solved. I think. So, I mean, where are the six point eight million people gone that do they not need to work anymore? You know, once

the unemployment insurance has rolled off? And you make a good point about childcare, because I think that's been a factor as well, is childcare, and that this sub nervous there's still about COVID quite rightly with the delta varian. But the fact is those six point eight million people who are working pre pandemic still need to work. And we could argue that some might have retired, et cetera.

But but but even so, there's a large number of people who aren't working now who were working before the pandemic. Why do we think they're not going to need a job. They're going to need a job when the unemployment insurance runs out. How do you think the FED views all of this week? I think the FED views this that

you know, they haven't got a clear picture yet. I think the Freed views is that we're going to have to wait until later this year and maybe even the first part of next year to get a clear picture of the labor market and what's going on. And the labor market is the key thing for the FED now.

I mean, you know, powers told us this over and over again, but they don't know what's happened in the labor market yet none of us do because of these uncertainties we're talking about now, it's probably November December data, maybe even into two before we start to get some sort of clear picture of the labor market. I mean, you mentioned before about the consensus risk in Q four and and you're the uncertainty there and the absolutely right. And the same goes for the picture in the labor market.

So while there are still so many known unknowns while we try and figure out what the trajectory of monetary policy is going to look like, the resurgence of COVID nighteen in the delta area is going to look like. How do you construct a portfolio? How defensive would you recommend being here? I wouldn't be that defensive at all. I'd be absolutely honest, because we're still getting a hundred and twenty billion dollars a month of liquidity. You know,

we're still hitting all time highers and equity markets. I think there are certain areas you can be more defensive. I mean, clearly emerging markets are more of a challenge perhaps that than a lot of people think they should be, because valuations are more attractive. But the thing is that we're still seeing you know, exty markets hit all time highs because we've still got a huge amount of liquidity.

Now what we're seeing is the duration trade, the sort of cap that the high tech sort of large cap high tech stops. They're the ones doing well now, whereas you sort of rustle two thousands your meatcaps, which is more. The reflation trade of certainly underperformed over the last few months, and I think that's sort of duration that Nastack over Russell trade is probably the one that's going to continue over the next couple of months. We have these growth fears,

but we have the liquidity. But you know, it's too soon to be defensive, I think. I mean, once we get a clarity on taper and how fast it will be, I think it will be very gradually. One starts will probably early next year. You can't sit on the sidelines with add billion dollars a month being printed. A lot of people feel that way. Lee gonna catch our buddy as always, Lee Farage, their State Street, head of macro Strategy for North America. Some news out this morning from

the Washington Post. That story published in the last couple of hours. Lisa, here's the quote that's going to get a lot of runtime today. Vaccinated people infected with the data variant may be able to spread the virus as easily as unvaccinated people. This according to unpublished data cited in a federal presentation obtained by the Post. And the question I have is why did the federal government not really least this data publicly when they were reimplementing mask mandates.

The idea here recommending masks, you could get people to do it if they understood what the logic was behind it. If that's the case, why isn't there more clarity on this chart? Well, let's try and get some clarity now. Andy Pekhos joins us Jones Hopkins University, Bloomberg School, public health professor and virologists and he got to catch you up as always, and how for me to get you to comment on an internal document that you haven't seen either?

But does this reconcile with your experience at the moment as well? Well? What we've been hearing anecdotally is that you know, there have been cases of delta in vaccinated people. I think the other thing to emphasize is as case numbers increase, the number of exposures that vaccinated people have to Delta virus increases as well, So we would expect to see some slight increase in cases and vaccinated people. Now.

The critical thing that we're learning now though, is just how much more are dangerous the delta variant is compared to others other variant strains, And it really does seem like the data that was first coming out and unvaccinated people is really being amplified in that population, and that is that this virus is incredibly more contagious. Um, if you get infected, you get more virus in your system after infection, and what follows from that is that you

become more contagious. So even if vaccinated people have a tend to a hundredfold lower amount of virus in their system, that still may push them over the limit of when they could be showing symptoms or spreading the virus. So, Andy, I wonder what this would mean for restrictions, because just because you can spread it as easily as the unvaccinated, it doesn't mean that you are necessarily more likely to be infected by it. Of course that's not the case.

It's so so, Wendy, what do you think this would make for restrictions. Yeah, I think it's it's it's a cause for concern. So I've got my mask on again. Here today, our hospital complex today just want reinstituted masking policies, even among vaccinated people, simply because we as an institution need to be much more careful about potential infections and the spread of infections. Here, So I think this is all going to go back to what's your local situation

look like. If you're in a place where Delta is really really spreading fast, then extra precautions need to be put in place. But but let's be clear, if we had a higher vaccinated population in this country, these concerns would be released, and that comes back to the core issue. Masking vaccinated people helps. The critical thing would be to increase the number of vaccinated people in this country and

to do it rapidly. Andy, what's the latest on the efficacy rate of preventing infection among vaccinated individuals from the various vaccines. So the numbers that I've seen so far is that the efficacy has dropped from about to somewhere in the seventy percentage range with delta variant. But again that data is a couple of weeks old, and we know that the virus has been surging, so we're waiting

to see some more reports there. Efficacy against severe disease is still maintained relatively high in vaccinated populations, which again is a good sign. So I think that the emergence of Delta shouldn't make people more hesitant about getting the vaccine. In fact, just the opposite. It's it's the best tool that we have right now to prevent infections, and so DELTA should be a warning to people more of a

motivation than anything else to get the vaccine. Andrew, Andrew, what can we learn from the other regions of the world that have already seen this happen? In India, you saw a big spike in DELTA cases that then went way lower. You're seeing the same thing playing out in the UK. Now, is there any reason to believe that the US will not follow that path? We absolutely will. The question becomes what's the magnitude of the number of cases UM infections like this spread in peaks and valleys.

UM vaccines and other public health interventions can help lower of that peak so that we don't have as many serious cases and deaths UM. And that's where we're trying to sort of work with some of these masking policies right now. Lower that peak, don't let it get to the to a to an uncontrolled stage, and then we can recover faster and have less UM cases and less of a strain in our hospital systems. And he just quickly.

The original goal, of course, was to protect the most at risk in society and in doing so, protect the healthcare system, not just in this country, but our swhere. Israel has really led the way on vaccine distribution over the last year or so. They're going on now to give a third shot to the over sixties. Do you think we're going to see more of that now, swear?

I really do. I haven't seen the data yet, but if everything continues on the trends here, what we're probably going to see is that the elderly are going to have a more waning of the antibody responses induced by vaccination, and with a more suscept more more transmissible virus, that population becomes the most important one for us to focus on. So it wouldn't surprise me if we see a vaccination or a booster vaccination come out specifically targeting those high

risk populations. Interesting. Andy, it's good to catch up. As always, It's good to see you and thanks for your heart work, sir, Andy peckos that Johns Hopkins University, Bloomberg School of Public Health professor and virologists Terry Haines joined us now Pangea Policy found it. Terry, it's great a catch up, Lisa forwarded on your note. I should have read it. I've read it now. Five chance that we get infrastructure in October. Just walking through the timeline for you and which bill

is which? Good morning, all there are four. The reason why it's October is that there are for for for final action. Is there are four things going on that then that will all sort of collide um and at the end of the fiscal year, the end of September, which is why I pick October. You have two things that absolutely have to happen. The federal government has to be funded, and we have to deal with the debt limit or debt ceiling, which needs to be extended or

or suspended. Uh. Then we get to the physical infrastructure bill, which is almost ready almost based. But the fourth thing is there's really a intro war, intermural war among Democrats about this human infrastructure piece, which hasn't really even been defined yet, much less speed been given a budget top line or a maximum spending amount, and Democrats are gonna have to fight among themselves for quite a while to figure out exactly how much they want to spend and

what's going to be in that My view is very simple. UH, work expands to fill the time allotted. Uh. The time allotted is the end of the fiscal year, when all this other stuff has to happen. Uh. And what I think happens is we get funded, we get a debt ceiling, We almost certainly get infrastrated with the physical infrastructure bill. But what ends up happening is uh, the human infrastructure piece I think is only about likely in any form

right now. Terry, the idea of this infrastructure plan being market positive, as you say, is interesting to me, and loot of the fact that it's five fifty billion dollars, which is substantially low the numbers being thrown around earlier this year. Why is this a market positive when people had expected so much more earlier? To me, Lisa, Uh, And I think it's a perfectly valid point. Uh. To me,

it's a market positive and sentiment more than anything else. Uh. There's an awful lot of talking up about how how this is going to help stimulate the economy and move things forward and help fix our infrastructure problem. Uh. Frankly, you know, I think there's truth to all of that, but I think it's a great deal overblown. Uh. In others, you know, there's no urgency about how this money is going to get spent, or when road projects take years

to start, much less to finish. My favorite example, this is a forty mile stretch near my UH, near my UH the place where I grew up in Pennsylvania. Let's take in ten years to UH to to become permitted dolfed and it's still not finalized. UH. You know, this is gonna take a long time, and I think the economic impact UH is overblown. But that said, market sentiment

being what it is, this is a positive terry. You mentioned earlier the fact that we're going to have to deal with the debt ceiling in the fall in September October, even though it expires tomorrow. And something else that expires tomorrow is the eviction moratorium. And yet Joe Biden, the President, waited until yesterday to actually say something about it and ask Congress to act. Is there any likelihood that something

can be done by tomorrow? Hi? Kaylee. Two things. One, the debt limit is everyone on this program knows certainly UH does expire tomorrow, But Treasury usually employs this thing they call extraordinary circumstances in other words, you know, shoveling the additional amounts of coal under the fire to keep things going for as long as possible, so that in real in reality, the debt ceiling is gonna is gonna end up hitting uh in late September, early October, maybe

even November, recording the Congressional Budget Office. Uh. The other thing is on on the eviction moratorium. Um. What I'm hearing and understand is that the president's last minute ask uh certainly didn't help martial forces behind it. Number one. Number two, there's a lot of people in the House that want to do this. Number three, it's gonna be very difficult to pass in the Senate, so I tend to think it it probably doesn't happen, uh, and I

think people ought to prepare for that. Uh. They may end up sticking something in the infrastructure bill if it goes very well and ends up and ends up getting passed by next week, which is a possibility, although I think it's a little murky right now. Uh. But other than that, I don't think I would look for smoother quick action here on Congress's part. Terry, go ahead from me, sir as always, thank you, Terry hins that Pantia policy

found up. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live we days from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg