Hello, and welcome to another episode of the Odd Lots Podcast.
I'm Jill Wysenthal and I'm Tracy Alloway.
Tracy, I would say the last few weeks, in a very real way, I would say optimism over the soft landing scenario, or at least the end of the raid hikes has become like deeply conventional wisdom.
I think I would agree with that, although I think it's sort of started in the summer. We saw some inklings of it then, but you're right, it really seems to have crystallized in recent weeks. And of course the irony is that going into twenty twenty three, the consensus was really for recession. We had a number of people who were talking about the outlook for the economy this year and how bad it might be, and then going into twenty twenty four, it seems like we've completely flipped around.
So the hills are alive with the sound of soft landings.
Yeah, and I think you're right. Obviously, twenty twenty three has broken a lot of people's brains. Probably a broader theme, which is that the entire COVID cycle, people have been looking at it through the lens of a traditional business cycle or macrocycle, and it feels like a lot of that just hasn't worked, starting from probably the fast rebound in late twenty twenty oh totally.
So I feel like the indicator that everyone was looking at in sort of late twenty twenty two early twenty twenty three was the yield curve, the inverted yield curve, and there was this discussion of how you know, this is the traditional harbinger of a recession, but maybe things
are different this time for a variety of reasons. And then this year, you know, fast forward to November, sort of late October of twenty twenty three, it feels like the other indicator that everyone is starting to talk about or was starting to talk about, is the PAM rule. So the idea that you know, one measure of unemployment, the moving average, has been moving up, and traditionally this indicates an upcoming recession because unemployment increases non linearly in
every business cycle. And supposedly this was a hard and fast rule. But as we discussed with Claudia on one of our episodes of Lots More again, maybe things are different this time.
I do think it's important that you bring that up, because it does feel like the labor market situation is kind of the fly and the ointment of the soft landing scenario, which is that there's clearly some kind of softening. I guess I would say in the labor market, it's the question how far does that go? When will the FED have to cut? Should the FED be taking out some sort of insurance cut sooner rather than later to
forestall a downturn? All big macro questions. We are nowhere near the end of understanding this macrocycle, and I think we got to get a better handle.
On the good news about this macro cycle is I feel like twenty years from now, fifty years from now, there will still be studies coming about exactly what.
Just happened unambiguously. I am confident on that. All Right, Well, we do literally have the perfect guests to help us understand this moment in macro, what happened in twenty twenty three, what we should be looking forward to in twenty twenty four. I'm thrilled to welcome back on to the show, Jan Hatzias. We've had them on a few times. Jan Hatzias, chief economist at Goldman Sachs. Joan, thank you so much for coming into the studio and coming on odlots.
It's great to be back with you, Joe and Tracy. Always wonderful to be here.
Thank you so much. You put out a recent note, and what I really loved about it is that, you know, there's this cliche that many markets journalists, maybe even tracing myself at times, have used, where it's like, blah blah blah, happens now here comes the hard part. It's just one of those things that people love to say. It's this trope. All the easy money has been made, now here's the hard part. Inflation's gone down. Here, here's the hard part.
You and she said the opposite. You said, actually coming up next, there's quite a bit of disinflation in store, and that this stage of further declines and inflation should be the fairly easy part. That we've passed the hard part of fighting inflation. What do you let's start there? What gives you confidence that actually, regardless of what happened, there's more disinflation in the pipe.
You're right. The title of our annual Outlook Report, which we published a couple of weeks ago, is the hard part is over. And think the reason why I think the hard part is over is that we have a proof of concept that we can bring down inflation and rebalance the labor market without having to crush the economy and put the economy into recession. And I think we've
seen that very clearly in twenty twenty three. We've seen it in the US, but we've seen it much more broadly across G ten economies and EM economies that saw a big surge in inflation in twenty twenty one, Inflation has come down. If you take an average of all of these economies that saw a large and unwanted inflation surge across DM and EM went to six percent core inflation in twenty twenty two or six percents come back down to about three percent on a sequential, annualized basis
without any deterioration in the labor market across these economies. Yeah, in some places you've seen some increases in the unemployment rate. We have seen some increase in the US. In others you've seen some decline, but the average actually has been basically flat. And to me, that's very very telling.
Well, can I ask you something specifically about the US economy because I was reading another Goldman publication. You know this one. In addition to the outlook that Joe just mentioned. This was sort of a Q and A between you and someone internal at Goldman and they asked you about long and variable lags in monetary policy, and you sort of suggested that you don't really think that's a thing.
So my question is, how do you square the idea that the hard part is over, that there's more disinflation with the idea that monetary policy, you know, maybe the long and variable lags aspect of it is over egged. Is it just a matter of degree? It's like the majority of disinflation has happened, and now we're going to see little bits and pieces.
Well.
On inflation, I think we will see additional declines in a few areas. One that's I think very clear is housing rent inflation and Honer's equivalent rent inflation is very likely to come down further. It's still running at about six percent on a again sequential annualized basis, and just looking at alternative rent indicators and where they've been running and continue to run, we would expect that to get back down to the three to four percent range by the
end of next year. In the core CPI rent and owner's equivalent rent has a forty percent weight in the core PCE index, it still has a seventeen percent weight, So these are are pretty significant reasons for expecting further deceleration. We've also seen a lot of labor market rebalancing. Job openings have come down substantially. The quid rate has gone
back to where it was in February twenty twenty. That is still feeding through to the wage numbers, and I think that's another source of disinflation, and then there's still some disinflation to come on the core goods side. So in that sense, I think the lagged effects of what's
already happened are indeed important. Where I don't agree with the sort of maybe cliche of long and variable lags is if I think about the gap between a monetary policy shock and the maximum impact on the growth rate of GDP, which for me on the growth side is really the most important question. How long does it take
until I see the maximum impact on growth? We think that's only about two quarters, which means that since the FED was most aggressive in tightening policy starting at the June twenty twenty two FORMC meeting, the biggest impact occurred really in late twenty and twenty two, early tw and twenty three, So it's quite important to think about what question you're asking. There are long lags in terms of
the impact on inflation. There are even some pretty long lags in terms of the impact of monetary policy on the level of GDP. But as a forecaster, what I care most about is the maximum impact on the growth rate. Because if I have a non recession forecast and we've already gotten through the biggest hit from the tightening without
the economy having entered recession. Now we're still seeing some negative impulses, that's it's not going to worry me that much because we've already survived the biggest hit.
Yeah, and since you mentioned the non recession call, I feel that we have to mention Joe that the last time we had yan on was in August I think of two, twenty twenty two, in an episode titled The Narrow Path to Avoid Hard Landing, basically laying out a lot of the soft landing scenario that seems to be coming to fruition.
So, yeah, if we've been able to see all of this realized disinflation, prime more to come without too much damage to the labor market. You know, the story goes, the FED hikes rates, it slows demand, people lose their jobs, prices compressed, but we didn't get the massive job losses. How do you even think about the link between the rate hikes that we've seen and the disinflation we've seen.
Are they connected? Is it the kind of thing where it's not entirely clear what has been the Fed's role in slowing down inflation.
I think they're connected in the sense that the economy grew more slowly than it otherwise would have done. If the FED had not tightened policy, we would have seen, you know, stronger growth and higher inflation. But I think the primary reason for why this cycle looks so different. Yeah, which, by the way, was the title of our Outlook report a year ago, this cycle is different.
Is that a lot of how did you feel publishing that? Because I feel every time I say this time might be different, I get really nervous because like, there's going to be dozens, probably hundreds of people online who are like, eh, it's never different this time.
But if you're not a little nervous, then you're probably not taking enough risky as a forecaster, because you're never going to be certain. So I felt that that was our core of you, and so I put it out there as the you know, as the title of the report. But of course there's always a risk that you're wrong about these things and end up with egg on your face.
But what I was going to say is that I think the cycle is very different because, as you said in the opening part, the core dynamic of this cycle, really going back to the spring of twenty and twenty has been COVID and its aftermath and all the imbalance that emerged either directly because of the pandemic or because
of policy responses. Then of course we've also had geopolitical shocks, the Russia Ukraine War in particular, But for me, it's really COVID and the recovery from COVID that makes this cycle soul different.
So I mentioned the PSALM rule in the intro, and I think that's been getting a lot of attention recently because it's been getting closer to triggering. I think the rule itself is something like if the three month average of the unemployment rate this is U three is half a percentage point more or above it's low in the prior twelve months, then the economy is in the early stages of her session, and the current values something like point three to three something like that. I didn't realize
that Goldman has a similar rule. Apparently it's a point three five percentage point increase again in the three month I think moving average of the U three unemployment rate. How much attention are you paying to your own rule in the current context of a softening labor market. Is it a similar idea to what Claudia was telling us that Again, maybe it's different this time it's just kind of chill.
Yeah, there's different. There are different ways of characterizing the data. It's a you know, time series that goes back to the aftermath of World War Two. And it's certainly true, however exactly you want to define it, that significant increases in the unemployment rate have historically coincided with a recession in the in the United States. This is a historical fact. Now again, if this cycle is very different from past cycles, maybe that historical fact is not as relevant as it
would be under other circumstances. I'd also note that we're only talking about you know, twelve or thirteen business cycles here, and it's not a huge sample. And lastly, I would say, if you go outside the United States, you also find that big increases in the unemployment rate have some predictive value. But the rule in quotation marks doesn't work as well as it does in the in the US. So when I take all of these things together, where do it
come out. I would say significant changes in the unemployment rate is certainly something I would pay attention to, but I wouldn't, you know, elevate it to the status of something that tells you you now have to switch to a recession forecast if you know, if you do see a significant increase. I'd also note a few other things
just about this particular episode. Other labor market indicators have continued to be, you know, pretty strong payroll growth over the six months in which the unemployment rate has been going up, as I think totaled one point two million or something on that order, The household survey employment numbers adjusted to the definitions of the payroll survey have shown a similar increase. Initial jobless claims remain quite low, not
consistent really with a major layoff cycle. And so I take all of these things together, and I would say I'm still pretty comfortable that the labor market's doing fine.
When would you be concerned? And I guess the reason I ask is partly because this might determine when the hiking cycle, which everyone basically thinks it, turns into a cutting cycle. At what point would you be concerned such that, Okay, the FED is going to need to move and maybe take out some insurance to forestall a deeper downtern I.
Think it's always going to be a combination of indicator, so I don't think I would want to necessarily draw
a line in the sand. But if we were to see much more pervasive signs of labor market deterioration with you know, jumps in initial claims and declines in payroll growth to something clearly below the replacement rate, so let's say in the fifty thousand range, or you know, moving closer to zero, and you get increases in the unemployment rate, that probably would be a reason to take out inshorance.
And you know, it's not limited to those indicators, obviously, but if you got a combination of those indicators, I think it would be time to cut rates on the back of that. That doesn't happen in our forecast. Our forecast has payrolls still growing above one hundred thousand a month, and we have the unemployment rate going sort of broadly sideways, if not even a little bit lower over the next year. And in that kind of environment, I wouldn't expect early cuts.
I think it'll still be a while before the FED does cut. But of course, one really important point now, and that's very different from a year ago, is that they can cut. They have the ability to respond to any weakening, foreseen or unforeseen by taking out insurance. And that's a really important reason for me why I think the risk of recession is significantly low than it was coming into this year. A year ago, we had a
twelve month recession probability of thirty five percent. Now we have a twelve month recession probability of fifteen percent, and a lot of the delta is the fedsibility to respond to weakend numbers.
I definitely want to ask you about more responses to slowing growth, including potentially on the fiscal side, but on the topic of the labor market. So one of the other things we've seen recently in terms of a slight softening of the data, has been job openings starting to come down. And on the one hand, people worry that
this is a so that the economy is slowing. But on the other hand, this could be interpreted as sort of good news if you look back at the beverage curve debate and the idea that the relationship between unemployment and job openings had somehow structurally shifted during the pandemic. When you're looking at openings now, A, how much stock do you put in that data? First of all, because this is another big controversy, But b what are openings telling you right now?
So I think it's very important to distinguish between good softening in the labor market and bad softening in the labor market. So the labor market was clearly out of balance, overheated.
We had a job's workers gap job openings minus unemployed workers that was by far the highest level on record, a difference of six million, a ratio of something like two to one, and that clearly had to be addressed in order to be on a path to non inflationary growth and wage growth that's consistent with something like two percent inflation over time. So the decline and job openings that we've seen over the last year and a half or so, I think is very much a good thing
because it puts us on a more sustainable footing. Where are we now. We've seen a drop in this job's workers gap from six million to about sort of two to three million, depending on which measure of job openings you use, and I would put some weight on the Jolts the official Libor Department data. I'd also put some weight on the link up data, some weight on the INDEED data, and that maybe answers the question about reliability
a bit. I do think these indicators are challenging, and the Jolts series suffers from quite a low response rate and has been quite noisy, But if you combine it with other indicators, I would put some weight on it. I think it's telling us a broadly reasonable story that the labor market's still strong in terms of the amount of job openings out there, but it's less overheated and it's closer to normal, although still not back to where it was before the pandemic.
You mentioned the response rate on the survey coming down, and that just reminded me of something else that sort of falls into this time might be different category, and that is that we have seen the response rates on a variety of economic surveys really come down quite dramatically in recent years, and there is this ongoing discussion of
whether or not that might be clouding the economic picture. So, for instance, if you look at something like a consumer sentiment survey, you know, if these aren't the actual stats,
I'm just making them up for illustrative purposes. But if fifty percent of those asked are now responding to the survey versus eighty percent ten years ago, you could imagine that maybe the people responding to the survey are you know, maybe they feel a little bit unrepresentative, unrepresentative, maybe they feel a little bit more strongly about certain aspects of the direction of the economy. Whatever is that on your radar,
and are you taking that into account at all? Is it causing problems for economists at this point in time, or are you still sort of using a lot of the soft data, the survey based data, the same as you used to.
I'd say you have to be aware of issues with economic data in a variety of areas. One thing that we actually have done over the last couple of years is probably putting more weight on hard data than on soft data. And we are i would say, pretty concerned about not just because of response rates, and things like that, but just for sentiment effect about the sentiment effects can
sort of overstate a weakening of the economy. I think we've had a couple of instances in two thousand and twenty three when the sentiment based indicators deteriorated a lot, and then even within for example, business surveys, something like general business confidence was significantly weaker than questions that asked about orders or production or employment, which in turn was
weaker than what the hard indicators were saying. And we have in those instances repeatedly put more weight on the hard indicators, and I think so far that's turned out to be the right choice.
I'm going to go back to something you said in the first answer, which is that we have gotten this proof of concept of significant disinflation and relatively mild, if not nonexistent, labor market weakening, especially if you look across G ten countries. There has been some you know, obviously the unemployment rate in the US has tacked higher, but globally it's pretty remarkable. Does this tell us something about
the degree to which economists understand the inflation process? Is there still more questions than as or do economists understand inflation except in weird business cycles that relate to pandemics.
I think it is telling us that in this cycle there was a common global factor that has really dominated everything else, and that's COVID's that's my main takeaway. Obviously, there were quite a lot of differences in terms of policy responses across countries, and that has had its effect
here and there. But the dominant issue that has faced the global economy over the last you know, three and a half to four years has been COVID and the recovery from COVID and betting on effectively convergence between different places, you know, in terms of the inflation experience, I think has been the right approach so far. I'll give you
an example. The European both your area and UK inflation data until recently looked significantly higher than what we were seeing in the US and Canada and maybe some of the em countries, and what I just outlined suggested we really should be putting weight on convergence, and indeed both the UK and Europe is now seeing significantly friendly inflation numbers.
I want to press on this point because again, up until recently, when inflation really did start coming down in Europe, and the UK. There was an argument out there that like, maybe the US had outperformed because of the fiscal response in twenty twenty and beyond, which was absolutely massive on
a sort of relative historic basis. How much weight do you place on the fiscal aspect of this at this moment in time, And then also going into twenty twenty four, there is this open question about whether or not the US will have the same fiscal capacity to keep on spending or maybe do some sort of emergency stimulus if needed. So how are you thinking about that aspect of it? Beyond the monetary side of things.
I think there are a lot of separate questions here. One is the size of the US fiscal response and then the impact of that on twenty twenty twenty twenty one GDP. Clearly the US did a lot and that did have a significant impact on growth at that point. I mean, there was a huge fiscal boost in that supported activity, and you know, I think it was very important. Then it's been much less important from a growth perspective
since then. I mean twenty twenty two there was a fiscal pullback which consumers were able to spend through in part because of a lot of the excess savings twenty twenty three, we actually don't get a significant fiscal impulse, and by fiscal impulse, I really mean basically the change in the deficit and the growth relevant changes in fiscal policy. We don't get a big impact here in twenty twenty three.
It's certainly true that the US federal deficit is very large six to seven percent of GDP depending on how you adjust for some of the one off items. But it's a very large number, especially relative to a three point nine percent unemployment rate. This is a very different deficit from the deficit that we had in the aftermath of the two thousand and eight crisis, when we also had a large deficit, but it was the flip side
of a depressed economy. And so this is more concerning because it's a structural deficit that will need to be addressed over time. I wouldn't expect it to get addressed anytime soon. I mean, twenty twenty four is a presidential election year, very little is likely to happen on fiscal policy, and even beyond that, the path to how we're ultimately going to address this is not clear.
In September, and I guess the first half of October when rates were galloping higher. Suddenly one of the big themes people were talking about was not just the size of the deficit, but the size of the interest payments on the deficit, arguably the inflationary impulse of those interest payments in the sense that those interest payments are a fiscal outlay, and then this idea of a snowball and
compounding effect of large deficits. When you say you're concerned, or when you say it is concerning, or at some point would we need to address, what does that look like for you in terms of the problems that arise if politicians don't do something to close the structural deficit, And what would be the point at which it becomes a major problem for the economy if interest payments as a share of GDP start to become very large.
I think it's hard to have a very crisp answer to that, and I don't think we're close to a crisis point. I think over time, though, if the deficit continues to be as large as it is now or rise from here, maybe on the back of increases in interest payments as the dead stock gets rolled over, that is going to crowd out other types of outlays in
the in the economy. It's clearly going to be an issue for the federal budget itself, and in may, if we're in a broadly full employment environment, may also crowd out, you know, other types of private sector investments in the in the economy. Crowding out is a you know, long debate in economics and.
What does it mean to you?
Would you say it?
Yeah, like, what is it?
It basically means that federal deficits squeeze private sector investment. There was a big debate about this again in the aftermath of the two thousand and eight crisis. I was on the other side of that debate at the time because we had an clearly underemployed economy. We were away from the full employment level of output, and so there was no taking away from private sector expenditure because of
fiscal deficits. But we're in a if we're going to be in a full employment economy, then I think it's going to be more of an issue.
Speaking of spending, this is a very clumsy segue the consumer. We haven't really dived into what's been going on with the consumer, but of course, if you look at the surprising resilience of the US economy, A lot of it
seems to have been underpinned by consumer spending. So what's been driving that going into twenty twenty three, and then also what's the outlook because again going back to the soft data, you look at survey after survey and certainly spending time online and on Twitter slash x, you do get the sense that people are struggling with inflame. And yet if you look at the hard data, the actual consumer spending number, I mean, it just keeps going.
So twenty twenty two you had a huge decline in real disposable personal income because of this inflation spike and the end of the COVID support payments. So real disposable income was down something like six percent, biggest decline in post war history, much bigger than an eight or nine. But households were able to spend through it because of
the stock of excess savings. So that stock of excess savings has now diminished, and there's a lot of concern what happens when people run out of excess savings, what's going to support their spending. The answer is that real income is now growing, and it's growing at a very healthy pace. Twenty twenty three about four percent growth in real disposable income, as wages are still growing at a decent pace four to four and a half percent headline inflation has come back down to the law threes, so
real wages are now going up. Employment is still growing at a healthy pace. Interest income is rising, while on the other side of the balance sheet, mortgage interest paid is barely rising because most people have thirty year fixed rate mortgages. That's really the driver of continued increases in consumer spending, and I think we'll see something similar next year.
Maybe not four percent for disposable income, maybe three or a little bit low three, but still enough to keep consumer spending growing in real terms at something like a two percent rate.
One of the things that's a recurring theme on the show that we talk about a lot is this sort of acyclical investment, the green transition, all of the IRA spending, the tax credits, the various incentive new battery plant. Seemingly every day it seems like twenty twenty four is going to be another big year for a lot of sort of government incentivized domestic manufacturing. Of course, you have chips,
you have vvs, you have batteries. You have investments on tackling domestic sources of raw materials for batteries and so forth. How much does that boy the US economy keep a floor under activity? And how are you thinking the sort of macro impact from some of these large pieces of legislation.
So the numbers end up being relatively small if you divide it by twenty seven trillion dollars, that being US nominal GDP. So I think these are very important developments in particular parts of the economy. Obviously in the clean energy sector. They're very important from a growth perspective. I don't think that's where the action has been even with this. We don't think that there's been a large, meaningful booths
to growth in twenty twenty three from fiscal changes. Actually, the investments next year probably going to be a little bit smaller than in twenty twenty three, just looking at some of the bottom up project data. But yeah, it's this is still there's still a high investment level in that part of the economy. It's very important for certain parts of the economy and from a climate perspective and clean energy perspective, but it's not a major macro issue.
One other big macro dynamic that I don't know. It seems like it's in the realm of interesting or people are paying attention to it but not sure quite what yet. To make of it is that we've gotten some good productivity readings lately, and there's all these questions about, you know, a how do you measure productivity? Because it's just sort of a Tracy's telling me over I read that I stole her question.
Joe asked for a follow up and then went to a completely different talk. Kind of no, but that's fair. Look, we're recording this on November twenty first. Open AI has been in the news, and certainly the idea of AI and productivity the boosts have been in a lot of analyst research notes.
Exactly so, how much of productivity is, in your view, something exogenous, a tech breakthrough that allows work to be done more productive? How much is it about Okay, this is just what happens in this stage of the cycle. Could it be a reverse historicis effect, in which when you have periods of very intense high unemployment then companies
have to find ways to improve productivity. Other theories is that it's actually a function of the employment mix and that if you have more people working in factories, etc. Then you're going to have higher productivity growth than if you have more people working in daycares and healthcare centers, where it's hard to achieve productivity. What do you make of the gains and what do you think are the prospects for something like this being sustained.
The main thing is that the productivity data are always noisy, and have been incredibly noisy in the last three and
a half or four years. So I like to look at things over a somewhat longer time horizons, and in particular, what's the question, what's happened since the fourth quarter of twenty nineteen, And the latest numbers are showing just under one and a half percent annualized growth in non farm business labor productivity, which is a little bit better than what we saw in the five or ten years before
the pandemic, but not by a lot. It's a few tents, and I think that's probably a reasonable starting point of where we are from a productivity growth perspective. We do expect a boost from AI to productivity growth, but probably not for a number of years. I don't think. In fact, I'm pretty certain that we're not seeing that right now, and I wouldn't really expect it over the next couple
of years. Maybe late in the decade, we can see a lift there, and I think it could be sizable, but I don't think that that's what we're looking at at the moment, Joe.
I just had a flashback. You know. One of the first pieces you ever commissioned for me when we started working together at Bloomberg was actually one of Yan's notes on productivity and how if you look at video games like Grand Theft Auto. I don't know if you remember this, Yeah, like the video games have gotten yes, yeah, so terrible times. No, anyway,
that was just a random walk down memory lane. But just on this topic of AI, you know, one of the themes running through this conversation has sort of been it's different this time and in addition to things like AI and chat GPT, we've had the supply side factors that we've been discussing the role in inflation and things like that. It feels like the economics profession has had to deal with like these brand new sort of topics or themes running through the macro picture from AI to
supply side. How do you go about incorporating these new things into your research and your forecast, because I can't imagine that, you know, pre twenty twenty you were an expert. I mean, please tell me if this is wrong, but you were an expert on logistics or shipping or things like that. The same goes for us, by the way.
Yeah, we've had to pick up an unusually large number of new things over the last several years. I mean, there's always some of that, because the most interesting things that happen in the economy are often not once that you can just look up a in a textbook. But it's been definitely sort of an overload of new things to get smart on and be able to assess. And AI is a great example of that. You know, the
supply chain disruptions. The virus obviously is maybe the canonical example of something that you know, most of us had no idea about and then had to get at least somewhat familiar with. You know, I'd say you have to be eclectic in terms of what kind of information you're
going to draw on. If I take AI for example, we've spent quite a lot of time looking at occupational classifications that the US labor Department or the European Union put together that break down the labor market into in the case of the US Labor Department, nine hundred occupations and then provide a pretty detailed accounting of what tasks workers in each of these occupations fulfill in order to be able to assess, you know, what part of this
could be replaced by AI. So it's pretty detailed quantitative work, although there's obviously a large speculative component to it because we're making informed guesses of what could be replaced. We don't know how powerful AI is going to be ultimately, but that's the sort of analysis that we've had to do in other contexts a number of times, especially in recent years.
Didn't you start looking at I can't remember the name of it, but that layoffs, the layoff filings, the ones that if companies are.
Like the war notices, Yeah, that's it.
Didn't you build an indicator for that?
Yes?
So what is that telling you now? Because again, in twenty twenty two, that was a big year for mass layoffs, especially in the tech industry. But maybe some of those big on mass layoffs have sort of eased a bit.
Yeah, it's not telling us anything very different from other more conventional data sets like initial jobless claims or the jolt's layoff rate. And I also would say this one is a little bit closer to the beaten path. It's been around for a while, and we're obviously trying to measure something that is very core to any economic model. But yeah, it's definitely been a helpful indicator that has generally sort of told a slightly more reassuring story and continues to do so.
So we just have a few minutes left. Let's talk a little bit more about twenty twenty four. I think you said right now your odds of recession are teen percent in the next fule month.
That's right.
You do see cuts on the horizon, just not imminately. Talk to us a little bit about how you see the next twelve months unfolding.
Yeah, we have, I would say, on the growth side, more of the same twoish percent growth I mean annual average. You know, we're two point one percent at the moment, which is a little bit below where twenty twenty three is probably going to come out. So call that broadly trend growth with the unemployment rate going sideways to you know, maybe a touch lore. We have inflation still coming down from you know, certainly on a year on year basis
coming down. We have core PC inflation in the fourth quarter of next year at you know, two point four percent, so still above the official target, but within the zone that I think would be pretty comfortable for FED officials in that kind of baseline scenario. I don't think that the FED is going to be in any hurry to cut, so we don't have cut until the fourth quarter of next year. The risks to that baseline path for the
funds RAID though, are strongly on the downside. It's very unlikely that we're going to see a significant amount of additional hikes, but it's very possible that we'll see cuts if there is, you know, more of an air pocket in growth than what we have in our forecast. And I certainly would if I put myself in the shoes of FED officials faced with a significant air pocket that looks like a bigger risk of recession, I'd certainly be very comfortable in cutting. In response to that.
You know, I tried to ask Michael Barr from the FED this question and was completely unsuccessful recently. But in terms of a slowdown in US growth or a recession indicator. If you had to choose one thing to look at, you know, you're stranded on a desert island and you can only look up one chart on your Bloomberg terminal, what would it be at this point?
It would be a labor market indicator. I mean initial claims is I think a very traditional one. The unemployment rate would obviously receive quite a lot of weight. The payroll numbers, I mean, that's usually what tells you that a recession really has started. GDP is obviously heavily revised and can be quite noisy, especially after a four point nine percent number in Q three. If you had a
weaker number, you might want to average that. But if you have material deterioration in the labor market, something much more material than what we've seen so far, which I think is still very debatable, then that would obviously be an alarm sign.
Jan Hatzius, chief economist at Goldman Sex, thank you so much for coming back on outlage.
That was great, great to be with you. Thanks.
You know what point I really like Tracy. First of all, obviously I really enjoy talking to Yan every time a point that he made, and I guess I think It's also kind of a point that Austin Gorle has been made when we talked about, like economists talk about all these historical patterns, there are so few examples of all this. It sort of makes a mockery of the idea of statistical significance. The idea is like, oh, we're going to
build these rules on thirteen events or four events. It always sort of blows my mind that people take that too seriously.
Well, how many business cycles was it that Yan mentioned, like twelve something like that. I can't remember this specific number, but you're right, it's a pretty small sample. On the one hand, I can understand the allure of having a sort of hard rule that's grounded in I don't mean simple in a pejorative sense, but in a simple rule. You know, if the moving average of the unemployment rate is above this, then like it's time to watch out.
That's intrinsically attractive, and you can see why people would gravitate towards that. But on the other hand, I do take the point that in a business cycle that has been so unusual, you should be allowed to make sort of qualitative judgments on what's happening with the sort of hard data.
Yeah, I think that's spot on, right. The key thing is like some humility because A you don't have a ton of examples, and B this is a very weird example. It's just really was not Twenty twenty was not a normal recession. The policy response was not normal, the shift of consumption from services to goods was not normal. There were many very weird things that happened over the last
three years. And so yeah, the idea that these rules that are formed based on a limited number of historical examples to apply to a situation that is not now seems like a very good reason for general humility. But as he points out, you look at the scoreboard all around the world and it's really not just US. We've seen this decline in inflation without much labor market weakness. It is possible.
Yeah, and that's really interesting because again, like the explanation for it just six months ago was fiscal response from the US, and now maybe that's not so much. The case of inflation is coming down everywhere. You know what I was thinking when you were sort of listing all those one off events, it'd be really interesting to compile like all the things that are sort of unusual about this cycle because there are also less obvious ones. I mean, yeah,
touched on some of them. But the idea that the majority of homeowners now have lost in those thirty year rates, so the pass through from higher benchmark rates just isn't there. Like that seems kind of unusual. There's so many that you could actually go through. The change in like survey responses would be an interesting one. So obviously the stuff we've seen on the supply side, I mean there dozens.
It really is different this time you said it.
It makes me so nervous whenever anyone says that, I feel like we're just a teching shade. Yeah really, but okay, on that note, shall we leave it there?
Let's leave it there.
Okay.
This has been another episode of the Odd Thoughts podcast. I'm tre you can follow me at Tracy Alloway.
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