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Right now, we're going to start strong this twenty twenty five. Seth Carpenter manages a heritage at Morgan Stanley.
I can't say enough about what Stephen.
Roach years ago wrought at Morgan Stanley, where he and Richard Berner said, we're not on one page, We're not a marketing exercise. We're going to argue and it's going to be a constructive, visible argument on domestic and global economics. Seth Carpenter handles that heritage as Morgan Stanley is chief economist. Seth, what's the biggest thing you and your team argue about.
Wow, it's hard to narrow it down, but I think right now it is a question about what should our assumptions be for things like tariff policy and how big of an effect is global trade going to be for the global economy across the world in twenty twenty five.
What is defuse of technology or Ed Ludlow will speak with Jensen waiting from Nvidia here tomorrow near eleven o'clock. What is a diffusement, as trche would say, the diffusement of productivity from technology.
Oh, that's a really critical question. My colleagues, especially in equity research, but across the whole research group here, we've been hyper focused on AI for quite a long time, I have to say, and translating the micro into the macro is super tricky. So some things that people see as clearly increasing productivity, seeing when that's going to show up in the macro data is a little bit tricky. Right.
So if you think about my industry, the financial services industry, if a bunch of hedge funds all use large language models and are able to cover a lot more stocks, get more efficient, cover three, four or five times as many stocks as they had historically, I think everyone would think of that as being more productive. And yet if they're competing with each other and they can I'll do it, we might see some of those games get competed away and they still don't show up in the macro data.
So translating the micro AI use cases to the macro data, that for me, is a really interesting but super tricky question.
So Seth, what are you and your team telling your clients about the incoming Trump administration and the economic policies that may accompany this administration. Is there any way to kind of position for that or is it just too unknown at this point a.
Little bit of both. What we've said, you know, usually we do our year ahead forecast and it's supposed to be a bit of a roadmap for people, but now this time around, it's more of a set of risks and how to start to create a framework for those risks. So for economic policies that might move the macro needle, you know, we break it down into trade policy, tariffs,
immigration policy, fiscal policy, and then deregulation. And what might be slightly controversial is we've said for those last two fiscal policy and deregulation, maybe move those off the table for twenty twenty five for macro implications. Deregulation I think is going to be huge at a micro level and definitely for individual sectors in parts of the equity market, But in terms of GP inflation, that sort of thing, I'm not convinced it matters at all, at least for
twenty twenty five. Similarly, fiscal policy, we're at least for now assuming the Congress spends the better part of the year extending the tax cuts, and so again it takes it off the table for twenty twenty five. So we're really looking at tariff policy and immigration policy as the key factors here, and so that's part of how we're trying to let people sort of narrow down at least a wide range of possible outcomes. Tariffs are push up
inflation and they restrict growth. Immigration restriction would do the same thing. It would restrict growth and push up inflation. The key questions, and this is an area where we say forecast early, but forecast often. Are he's going to come in in one fell swoop? Are they going to get phased in over time over the whole of twenty twenty five or some combination. I think that's where the irreducible uncertainty is.
Given that backdrop SETH does the what is your call there for twenty twenty five for this federal reserve given some of those policy unknowns, I.
Guess absolutely so. Right now, what we're saying is the Fed is going to cut again in March and then in June. Chair Powell struck a more cautious tone at the December meeting. We think inflation, though, is coming down in the near term, and so that's going to give them a little bit of momentum to keep cutting rates. But you know, we've assumed that the Trump administration is going to restrict immigration over time. It'll be gradual, so a step down for this year, but not a dropping
off the cliff. And similarly, we've assumed of gradual phasing in of tariff policy, and so you don't really start to see the effects of that inflation until maybe midway through the year. And that's why we've assumed two very tentative rate cuts from the FED. Much like what they wrote in their toplot at the December meeting.
You are a deputy director of the Division of Monetary Fares, which means Seth Carpenter, Doctor Carpenter. Folks had a shingle out front of his door at the FED where it said, this is where we readjust the statistics.
Are we going to.
Readjust statistics a lot this year, Seth? Are we going to have jobs reports amended? GDP amended? It's it going to be a year of oops, we got it wrong.
So I think every year and there's a bit of revision. I suspect there is a good chance that we're going to see a bit more of that. I think in the near dart right over the next three months. That so called residual seasonality that we've seen in the PCEE inflation numbers. I think that's a real possibility here that could throw the throw a real curveball for the FED.
I will say the numbers on employment right, given how much immigration we've had over the past couple of years, and as the BLS tries to catch up with sort of their different surveys, I think we could see some more revisions this year. Twenty twenty five is probably the most difficult forecasting year since twenty twenty and maybe early twenty twenty one when we had COVID. I mean, this is a really tricky year for forecasting.
It's really important. Folks like Paul, I've got a non firm payrolls. Yeah to twenty seven, a moldy thirty six, two fifty five, a moldy seventy eight. You know it looks like a rorsash test dunk carpenter, and you know you.
Got revisions in there as well. What's the real run rate?
Now?
You know, take a six month moving average. Be Jason Furman for a moment. He was up at a small college north of Princeton.
I can't remember I came in, but do a Jason Furman for me right now, Seth Carpenter, And if you got a three months six month annualized non firm payrolls, the answer is it's going to drop down.
Is that what I'm hearing?
I think that's right. So we're looking at about one seventy or so for Friday's number. Look, the tricky part is immigration has clearly been a big thing. So the monthly run rate that would keep the unemployment rate constant is higher than it was historically. We know, the unemployment rate went off of its lows of about three and a half percent up to about four and a quarter percent.
So the run rate then, or the prints that we've been getting have averaged a little bit less than what that run rate is, and so you know, maybe we're falling from the peak of immigration, a run rate of about two hundred and fifty down to something closer to
two hundred or one seventy five. We're looking for a roughly stable unemployment rate over the first half of this year because we do think things slowed down a little bit, but the immigration inflows also slowed down a little bit, so you get a bit of a balancing act there. Super tricky times for economics, what has.
Been the Morgan Stanley call, your call about immigration and its impact on the labor market, because it seems like no matter how many people come in, this economy absorbs them, they get jobs, they start paying their fight, gad whatever, how's that really impacted? Do we have a good feel for that over the last several years.
Yeah, I mean, I think there's a lot of uncertainty, but I think a few things are pretty clear. One, there's been a big increase in labor supply from immigration, and that's part of how we were able to get three percent growth or a little bit more in twenty twenty three, close to three percent growth again in twenty twenty four, and yet inflation kept coming down. So this
positive supply shock, I think is valuably there. There's got to be a demand component to it as well, and so all of that means part of the strong growth and yet falling inflation is a parcel this immigration serge. So a restriction of that, especially if you talk to the folks, for instance, done at Brookings, they would say, really good chance we get net immigration at zero or even negative this year. That's a huge advertise to growth.
Seth tells us about the dollar dynamics.
I've got a two day jump condition here and a managed Chinese red men be resilient.
Dollar is well, what.
Is the distinction within six seven eight pages of foreign exchange analysis on the dollar?
What's the paragraph that matters?
I think the paragraph that matters, To come back to one of the uncertaties I was going to say that I was talking about before, is what did tariffs do to the dollar, to currencies and to global growth. So part of our view has been the dollar rallied going into the election. There's been some dollar strength. Is that overdone? Well? Now we're seeing a little bit maybe more of a hawkish fed But I still think the market is wrestling back and forth with what tar are we going to see?
Just the movement overnight and this morning after the news reports in the Washington boast about maybe a narrowing in the scope of some of the tariff policies coming out of administration. I think that's the real question there is how much do the tariff slow US growth versus how much do they slow growth in the rest of the world.
Seth, They're got to make some news. Has mister called you? This is mister Treasury designate. Has he dialed one to eight hundred Carpenter and said come on board.
He has not, he is not. I'm always happy to take calls, though from from the from any public servant, because after my twenty years in Washington, DC, I think the best thing folks in markets can do is to give an unvarnished, arnest opinion of what's going on so that the policymakers can make their best decision.
There you go. I'm sure he's listened. Seth Carpenter, Thank you so much. Get the get out the moving vans.
Seth Carpenter with Morgan Stanley and their chief economist, and again public service to the nation with a federal Reserve and Treasury as well,