Claudia Sahm Talks 2025 Economy, Stagflation Risk

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Let's bring in Claudia Slam. She's a New Century Advisor's chief economists, former Federal Reserve economist as well, and a good friend of a Bloomberg. Claudia. Let's think about twenty twenty five. I mean, I've got an economy that I think is you know, kind of puts it along pretty darn well. I got inflation, then well, I'd like it to be a little bit lower. The Fed would like it to be a little bit lower. It's reasonable the labor market, people who want a job generally have a job.

Don't be complacent.

I mean these, as you said, if we could keep it as it is right now, largely, this would be another great year.

Ahead of us.

You know, we've been surprised at how well the past two years have gone, particularly when you think about growth and how the.

Consumers have held up that. But that doesn't have to keep going.

So what we really want people to focus on are what like the blind spots right?

What could go wrong? Where who who isn't getting enough attention.

And I think one area, you know, if I had to maybe point some FED officials to a blind spot, I think they showed a lot of complacency in their last summary of economic projections on how well the labor market would continue to hold up.

You know what we saw them.

Kind of write down the typical official was something that basically has the unemployment rate sticking out where it is right now for the next three years. That's a pretty remarkable and frankly not would be very unusual path to the labor market. And that's and yet there was all kinds of concerns about inflation and the answer to round inflation.

And that's that's one.

So if I ask which is a bigger risk, weakening labor market or a stubborn inflation, you're going with the former rather than the latter.

Inflation's fine right now, I mean, we are really not that far from two percent, and we've seen a lot of encouraging signs under the hood that this we are getting to this last mile on inflation.

But right now, before tariffs, that's before we deep work, before millions of workers, that's before Donald Trump comes into office. So things could change drastically after January twentieth.

Absolutely, they could change drastically.

And I think it's appropriate that we have had a very deep conversation about the policies that have been put on the table. There have been a lot of policies put on the table, and it's really important to have this conversation and talk about some of their potential pitfalls.

And maybe we won't see all of them put into place, and that probably would be a good thing, uh, for the economy.

And yet, you know, kind of taking for granted the good stuff that we've got going in the economy that's a little more nuts and bolts, like the labor market functioning, and just saying, oh, well, that'll just keep going. That's all fine, it's in a good place. I think that's a real that could be a real mistake in terms of because the labor market in particular is always and has been the past year, is such a lynchpin to

I think I'm very unpopular for asking this question repeatedly. I know, you've got to look at all the risks, right, and if you have to think about potentially inflationary policies and sticky areas of inflation next year, and worries about growth as well, especially if you have kind of a fiscal appetite to pull back, how big of an issue with stagflation or big of a worry is it.

There are absolutely paths we could go down where we end up in a stag inflationary environment. We're good ways from that point, because again we're starting from a well above trend growth and U and inflation is relatively low. It's not to do percent, but it's relatively low. But there are absolutely paths we could go on that are

Bigger problems, right.

Solving a stagflationary economic environment. Like policy solutions for that are a lot trickier because, say, for the FED example, they're fighting both inflation and trying to keep employment high, right, and their tools are going to be at odds with each other.

So there's some like.

Dark corners of the economic world that we want to stay away from, because if we get there, they're a big problems.

So I think it's important to think about stagflation.

I don't think that's one that's like highest probability, but if we get there, is probably one of the highest probability of being a big map.

How does the consumer look to you, Claudia, Because as you pointed out at the top, the consumer held up much better than we had anticipated in twenty twenty four, and yet all the savings, I would guess are spent off the pandemic era savings. This is a consumer that at least the bottom you know four Quinn tiles, is not well prepared for retirement. The housing market is a tough one to get into if you aren't already, and I guess if you are, that's how you fund your retirement.

In the US?

So as a whole, the consumer is still in a good place. We certainly as time has gone on, we have seen more strains at lower income household That's why I keep coming back to the labor market as so essential because for most Americans that's where the money comes from, that they're going to be spending.

So you need a vibrant labor market that has.

Good strong wage growth as we have seen, and good job opportunities. So that is so important for the bulk of America's bulk of consumers. You know, we've also seen really positive trends with some probably middle class, upper middle class, wealthier consumers.

Bolstered by you know, the stock market has been very good.

We've had you know, we've had some trends that have continued to bolster the consumer and their demand. And you know, I mean I always say, don't bet against the American consumer, right Like, if they have if they have the music and spend, they're gonna they're going to spend.

And that's what we have. That's what we have seen the past few years.

Should I be concerned about this this weakness in the manufacturing sector, I know it's only and I just underline only thirty percent of the US economy. But what does that tell you? How do you think about that?

I think we've.

Seen not just one more data point of weakness from the manufacturing sector. I mean, we've seen years of uh, what could be seen as contractionary trends in manufacturing and and they're you know, we have to have a discussion that's more about a structural you know, this this is an economy that just hasn't been based on manufacturing the same.

Way it had been many decades ago.

And this is a transition that's been happening very slowly over time. And it's probably one of the discussions that's hardest to have data release date to data release, right because it just kind of the trends get glom together. So and then you know, and we're having a very robust and I think a lot you know, this year, a big part of this policy discussion is going to be center around do you revive the manufacturing sector in the United States?

And how do you do it best?

I Mean, we certainly saw under President Biden a lot of tax incentives and big large programs. We're trying to give money to companies to build up manufacturing in different specific sectors, and we may see an approach that's quite different in using tariffs to protect domestic industries and manufacturing

Like Clauie, you know, you look at the long end of the curve and just how much tenure thirty year rates have decoupled. How much ConTroll does the Federal Reserve really have over that longer end when you see investors equally concerned about other issues like the fiscal term premium needed.

So the Fed never hasn't never will have full control over a ten year horizon. So that much shorter horizons of treasury is like the two year you can really have a conversation about the FED is very active in what those treasure yields look like out of the tenure There always are a host of concerns about or issues in the US economy that are going to fit into

Is actually one where while it comes out.

Of FED official's mouths, it is tied very much back to these structural features of the economy and that and those are things like productivity or concerns about debt, sustainability, demographics, other big issues.

And those then can get I mean, those.

Are also issues that the tenure treasury plays into. So while as you said, the FED doesn't control the tenure Treasury, and maybe we're seeing that potentially some of those links weaken even more just because the room is getting crowded in terms of issues that people in the treasure markets need to absorb.

But I don't. It's it's nothing unusual per se.

It's what's maybe more unusual is we're having there's big question marks out there about the structure of the economy, like are.

We are we a stronger economy?

Are we going to withstand and really thrive with higher interest rates than we.

Did before the pandemic?

I mean these and they're very much open questions right now and very very central to where those longer data treasury markets will land.

I have a curveball question for you, Claudia as Good an economist. Were you at the Beta Theta pie house in March of nineteen ninety No, I'm kidding, what do you think about the effect of GLP one drugs on the US economy? We had a listener right in earlier asking why you know the government doesn't just subsidize these things and save US billions of dollars a year in terms of healthcare. What do you think about the effect of this drug? Have you given it any thought?

I think the way an economists like I said, would probably tie this back in into this economic discussion would be to think about the ability it gives individuals to

Do, and not.

You know, there absolutely will be disruption under the hood in terms of winners and losers in the economy from you know, particular industries or particular institutions, and there will be I mean, there is an answer to that question in the beginning. I mean, the massive budgetary impacts if say Medicare or large government programs pick up these these kind of drugs.

Right, So there's all kinds of issues here.

But I think in terms of you know, quality of life, a healthier, healthier population, there is a lot of both individual benefits and then their social benefits from you know, if a healthier population as a whole.

Claudie, we have to leave it there. Thank you so very much for joining us today. Of course, it's a wild bond market out there, and expectation expectations changing quickly around the course for next year as well, of course, and happy New Year to you, of course, Happy holidays