The US economy is experiencing a significant shift from a previously optimistic outlook to one of increasing uncertainty and a heightened risk of recession, driven by policy changes and their impact on consumer and business confidence.
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The talk of the town are the markets. I will press you on the markets, but
tell us about the economic numbers underlying this, because there are
indications of a slowing economy. David, I think we've seen a sea change
in perception in the just almost two months since President Trump was
inaugurated. At that time, the prevailing view was
very strong economy, possibly inflation, risk, United States exceptionalism
relative to the rest of the world, likely to manifest itself in continued
U.S. out performance.
But the combination of substantial immigration restrictions, substantial
layoffs in possible prospect from the federal
government, the. Damage to US competitiveness and to US
production done by Tariffication. And above all, a big increase in risk
premiums have led to a sharp reductions in spending on the part of both
consumers and on the part of businesses and even more sharp reductions in
intended future spending. You saw that, for example, when Delta
Airlines reported a soft first quarter and a very
soft set of reservation requests going forward last night.
So you take all that together, you take the fact that markets were starting at a
very high level in terms of valuation. And I think you have to say that there's
in the range of, I'd say still slightly below a 50% chance of a recession
starting this year. You know, I've watched economic
forecasts for a long time, and one thing I've observed is when they start being
revised in a direction, there tends to be momentum and all the revisions are
going one way at this point, which is towards less growth.
So I think we've got a real uncertainty problem.
I think it's going to be hard to fix that.
And we're looking at a slowdown relative to what was forecast almost for sure and
a serious near 50% prospect of recession.
So taking you very literally about that, close to 50% chance for our audience,
what numbers should they be looking at to determine what side of that 50% we
end up on? They should be looking at what the slope
of the yield curve is and what people are expecting.
The Federal Reserve to do. The more people are looking for sharp
cuts by the Fed. The more they're judging that a
recession is likely. They should be looking at what's
happening to stocks, and particularly stocks in
traditionally cyclical industries. They should be looking at data that
points a little bit over the horizon. Data on order books
of businesses, data on consumer intentions to buy a car or to buy a
house in the next several months as an indicator for judging what is going to
happen. All those things taken together, I
think, will tell a story. There's also information in what is
happening to commodity prices, and I pay a lot of
attention to the various compilations that come from
investment analysts who are very close to firms who are reporting which way the
firms are revising their own forecasts of future revenue and future earnings.
All of that are the sort of indicators of what's happening in the economy.
I think at a different level, the thing to be looking at is are we getting more
policy certainty or are we getting more policy uncertainty?
Every time there's a major vacillation, every time there's a question about
commitment to law and to commitment to following the law, in any sphere, you're
going to be getting more uncertainty. That is ultimately a prospect for
chilling investment. So President Trump has addressed this
and said we're going through what he called a transition period on the way to
what he called something very big here. To try to argue his side of it.
Is this a necessary sort of transition to rebalance the economy, get the
government out of the economy to the extent that it was, and really go
forward to a better future for the economy?
No. Look, David, transition period doesn't
sound like a lot like the word transitory.
The idea of transitory inflation, when it was put forward by the Biden
administration and the Fed when things weren't going well, didn't work out very
well. And I don't think the idea that this is
some kind of transition period is going to work out very well at all.
And why do we think that it is going to help the U.S.
economy to not be able to use Mexico and Canada as a production
partner, given that we are competing with Asia and Europe?
I don't see what that logic is. Why is scaring people about whether
they're going to get their Social Security benefits?
Scaring people about whether the United States is going to continue to develop
new medicines at the NIH.
Why are those things thought likely to increase confidence If this was going to
increase confidence and people saw it? You'd expect to see surveys of consumer
confidence showing an improvement in conditions, and you don't see that at
all. If this was going to increase, it was
just a temporary dip that was going to increase the prospects of businesses.
You see their stock market values going upwards, not downwards.
I think by far the more likely thing is that we are in the shallow end
and we're walking towards the deep end and the problems are only going to
increase with the passage of time. You know, this is not the first time
that a country got a new leader who gave a lot of orders and imposed a lot of
tariffs. That populist policy mix is a standard
around the world, particularly common in Latin America.
And what the studies show is that it can go either way in terms of its impacts in
the short run, but it's almost always bad over the medium to long run.
So I'd expect unless there's a reversal in policy, I would expect this situation
to get more serious. And every time the president uses
rhetoric that conveys steadfastness on this policy, cause of tariffication, of
economic nationalism, of greatly expanded concept of government action.
And that's why the interpretation of government power, every time he
recommends pessimism increases. And so I think those explanations of
downturn being temporary are actually quite counterproductive.
Larry, to play devil's advocate, I think that if somebody were to hear from the
Trump administration, they say the transition is to a world where we have a
bigger manufacturing base. We had Shawn Fain from the UAW just
recently say he thinks what you're doing is exactly right because we've lost so
many jobs. Is there an argument that, in fact, we
could be rebuilding the manufacturing base that could help the economy in the
long term? Manufacturing has trended downwards for
60 years. It has trended downwards in Germany as a
share of the economy. It is even trended downwards in China as
a share of the economy. There's a reason, which is that there's
just lots that used to be done by people on assembly lines that can now be done
by machines. And there may be blips from one year to
the next. But the idea that we were going to have
some kind of durable manufacturing renaissance was a shimmer when Joe Biden
said it. And it's an illusion when Donald Trump
says it. And the much more likely thing is that
the particular kinds of protection that the Trump administration is stressing
are actually going to hurt manufacturing.
Think, for example, of those promised aluminum and steel tariffs, 60 times as
many people use aluminum. Businesses use aluminum and steel in
their production as are in the aluminum and steel industries.
So we're raising costs. So what this administration can't
understand or seems not to be able to understand is that today we live in a
world of supply chains. And in that world of supply chains, when
you tariff things, you're increasing the price of inputs that would have gone
into exports or would have gone into competition with totally imported goods
from further abroad. So I think the idea that we're going to
have some manufacturing renaissance of employment is misguided.
And I think in terms of strategy for getting there, it would be if you wanted
to have that as an objective, your chances would be much better.
Subsidizing their outputs, then raising the price of manufacturers inputs.
So I think this is protectionist policy, which as an economist I don't like, but
entirely separate from that. It's misguided and confused.
Protectionist policy, even if one accepted the protectionist philosophy.
Larry, one last one here we are going into the FOMC, Federal Open Market
Committee meetings. We're supposed to have statement
economic projections coming out. How on earth does the Federal Reserve
issue a statement of economic projections, given the uncertainties?
I think they should follow the consensus and the consensus is moving downwards.
I hope they don't set them in stone too far in advance of the meeting because I
think we've got a rapidly evolving situation and I think the Fed's in a
delicate situation. On the one hand, Trump people no doubt
will think that as the economy weakens, you should be moving more toward
signaling strong interest rate cuts. On the other hand, for the Fed to send
that kind of signal would be alarming to people, would have a material effect on
sentiment. And I'm not sure just how much it
matters if a car is a lemon or you're worried that a car might be a lemon,
you're not going to buy it because somebody gives you a discount or cuts
the loan rate in the same way. When there's so much swirling
uncertainty and the props from under your investment might be removed by some
new policy coming out of some decree. You're going to wait before you invest
in the exact level of the interest rate isn't going to matter very much.
So I think the Fed needs to express its concerns about the economy in the
context of the current moment. It wouldn't be the first time that
central banks have expressed concern about rigidities.
They've expressed concern about budget deficits before.
I think they need to highlight just the very substantial toll that uncertainty
is taking on the economy and note that they've only got very limited capacity
to respond to that uncertainty. And I think they need to remind us all
of something. They need to remind us that the test of
policy is economic performance. Sometimes this administration seems to
be saying that as long as the ten year interest rate is coming down, things are
going well. Well, the ten year interest rate fell
the fastest during the financial crisis. It fell the fastest after that as the
2001 recession was starting. So it fell the fastest at the beginning
of COVID. So the idea that somehow trying to get
the ten year rate down fast is some measure of how well you're doing policy,
which is another thing we've heard from the administration, I think isn't right.
And I hope as he answers questions and talks about things, Chairman Powell can
emphasize this central travesty of simply trying to have stable
economic performance.
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