September 22, 2023 • 39 mins
When it comes to the US Federal Reserve’s campaign to crush inflation by raising interest rates, Morgan Stanley Chief US Economist Ellen Zentner says this: “I have a strong view that they’re done here—but they have left the door open.”
Zentner joined the What Goes Up podcast to discuss the Fed’s decision this week to pause rate hikes, and what she expects of monetary policy and the US economy going forward. Cooling inflation should keep the central bank on hold until it’s ready to cut rates next year, she says. In the near term, a potential government shutdown by Republicans would bolster the case for maintaining the status quo at the Fed’s November meeting. A shutdown, she explains, would leave policymakers without all of the economic data they need to make a decision.
“In monetary-policy making, uncertainty tends to lead to policy paralysis,” Zentner says. “If we’re lacking data that the Fed can officially sink its teeth into, then that’s going to lead to an inability to make a decision about the path for rates.”
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:13):
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan, I'm a senior editor.
Speaker 2 (00:19):
At Bloomberg, and I'm Aldana Hayrick, Across Acid reporter with Bloomberg.
Speaker 1 (00:23):
This week on the show, Well, the Federal Reserve did
not raise interest rates at their meeting this week, but
nonetheless the markets freaked out a little bit, probably because
policymakers released projections showing that they don't expect to cut
rates as aggressively as previously expected next year. Stock sold off,
and so did the bond market, especially on the long
(00:45):
end of the curve, with the ten year treasury yield
reaching the highest level since two thousand and seven and
the thirty year yield reaching the highest since two thousand
and eleven. While the latest update from the Fed makes
it look more and more like they're expecting a soft
land for the economy, well, the markets are taking it
pretty hard. We'll get into it with the chief US
(01:05):
economist at a major Wall Street bank, but they'll dona first.
I have to say it's been a while since we
bugged our listeners to go and rate and review the
show on Apple Podcasts. I think we need a new
gimmick to entice them.
Speaker 2 (01:19):
Do you have one in mind?
Speaker 1 (01:21):
Funny you should ask I do?
Speaker 2 (01:23):
What is it? Bo?
Speaker 1 (01:24):
I'm thinking since you're a Buffalo Bills fan, you could
do like the Bills fans do at the tailgates and
like smash a card table.
Speaker 2 (01:34):
Yeah, you have to jump. You have to jump through
the table.
Speaker 1 (01:37):
Jump through the table.
Speaker 3 (01:38):
Yeah.
Speaker 1 (01:38):
How about would you think you could say we get
one hundred more reviews? You could how.
Speaker 2 (01:42):
About things one hundred more reviews and they make it
to the super Bowl?
Speaker 1 (01:48):
Both of those?
Speaker 2 (01:49):
Yeah, to those I don't know to be too much.
Speaker 1 (01:51):
Then you'll you'll jump on a card tabe.
Speaker 2 (01:53):
Yeah all right, but the one hundred.
Speaker 1 (01:54):
Reviews being the first first order of business, it'll be
a weird expense account item. Smashed the card tape? Okay,
I think I.
Speaker 2 (02:03):
Can expense it to Bloomberg. I was just I would
do it just for fun. I don't know if our
guest is a football fan at all, but we have
Ellen Zenner, chief US economist at Morgan Stanley, on this weekend. Ellen,
I'm so happy to have you on the podcast. Thank
you so much for joining us.
Speaker 3 (02:20):
Hi, guys, I love it. Thanks for asking me.
Speaker 2 (02:23):
Are you a Buffalo Bills fan. A secret Buffalo Bills
fan by any chance.
Speaker 3 (02:27):
No, not even secret. I was quite into college ball
growing up in Texas. That was really the Texas thing,
high school and college ball, and never been a big
fan of the NFL, although my dad was a big
Saints fan, New Orleans fan.
Speaker 1 (02:44):
What if I remember correctly, you went to Colorado? You
have coach Prime.
Speaker 3 (02:48):
Now, I did go to Colorado, but you know, I'm
a walking paradigm. I started at University of Texas and
never stopped being a Longhorns fan.
Speaker 2 (02:59):
Like I am loyal to the Bills. But Ellen, we
had this big week, which is why I'm so thankful
you were able to join us this week because, as
Mike mentioned, markets sort of had a little freak out
post the FED meeting. So just to start, can you
give us your big takeaways from the FED meeting.
Speaker 3 (03:17):
Yeah. Look, I think it's undeniable that the statement was
more hawkish than we expected. I think for me, you know,
in the current conditions paragraph, which is how the FED
describes sort of what's going on or what's happened since
their last meeting, they you know, it is a fact
that jobs have slowed, but remained strong, and they noted
(03:39):
that it is also a fact that inflation has come
down quite a bit but remains robust, and they did
not note that. And sometimes what they leave out can
be just as important as what they put in. I mean,
Chairpal did note it in the press conference several times
that core inflation has come down significantly. Well, why didn't
(04:00):
they just note that fact in the statement. It's because
you're far from declaring victory. God forbid that the market
thinks that you're declaring victory over inflation and you get
some easing and financial conditions you hadn't planned on when
type financial conditions is really what they need to sustain
to be sure that the economy is going to continue
(04:23):
to slow. It's been growing much too quickly this year.
Speaker 1 (04:26):
For I'd like to sort of just step back and
talk about say the last three or four years, you know,
I feel like for the art or science of economics,
however you view it, it's been a really weird few years.
Speaker 2 (04:43):
You know.
Speaker 1 (04:43):
We've had this massive shutdown of the economy like nothing
we've ever seen, then this massive stimulus to bring it
back to life, followed on by you know, a major
war in Europe, what's it been like to be a
really high level, very closely watched economists during all this?
You know, are there lessons to be learned? Because I
(05:06):
feel like it was so hard to predict and forecast
anything throughout all of this. What's it been like during
this whole last few years.
Speaker 3 (05:15):
Gosh, well, it's it's been exciting, to say the least.
I think, you know, the word humble comes to mind.
You know, it's been a humbling experience, and it's taught
me and my team to be very creative in our
approach to thinking about the outlook. And frankly, I've been
(05:37):
looking forward to, you know, sort of the period that
we're going through now and next year, where you know,
it's a period of normalization as we get COVID further
into the rear view mirror. I think, you know, what
I'm starting to realize was some of the incoming data
is that it seems like we go through these big
crises and there's a lot of never will we ever
(05:59):
and this after two thousand and eight as well, never
will we ever take on debt again, never will we
ever buy homes again? And guess what we do? We
do all those things again? But you just have to
get the crisis further into the rearview mirror. Folks were saying,
we'll never go see a movie again, We're never going
(06:20):
to the theater ever again. And you know, I'm pretty sure
that Barben Hibern brought in a billion dollars through the
box office. So I'm looking forward to more of the
datas that folds to just see a normalization of the economy.
I don't think a whole lot has changed in the
way we go about our business. I think we just
(06:42):
have to get a lot of these big distortions that
are now unwinding out of the way.
Speaker 2 (06:48):
So you say you've been very creative in your approach,
what does that entail? Because I remember during the pandemic
a lot of people were looking at these sort of
alternative data, looking at off occupancy rates, as you mentioned,
movie theater going, you know, foot different foot traffic. All
kinds of different measures had come about during the pandemic.
(07:10):
They've sort of fallen off to the wayside more recently.
But so what types of things does your team look
at now?
Speaker 3 (07:17):
Yeah, Well, I think to me, what was really lucky
is that even before the pandemic hit, you know, technology
was advancing in a way that we were getting more
and more private data sources and high frequency data forge sources,
daily data that was becoming more prevalent, so that we
were starting to find new ways to track the economy.
(07:41):
The need for that during COVID really escalated and so
you know, this is where we were using Google Earth
to look at ships that were parked offshore that were
not able to be unloaded, and more robust use of
things like Google Maps and Open table to figure out
a people were starting to move and shake again and
(08:02):
going out to dine and that sort of thing, and
that kind of data. Those data sets proliferated, and hey,
for a time they were free. Now those data sets
have become more and more expensive. But using those data
sets instead of just you know, the traditional or in
(08:24):
addition to the traditional government and other private sources that
were already prevailing before COVID really helped us stay more
abreast of exactly what was going on on the ground.
And I tell you what, the fact that all of
that's been introduced and used more robustly now means that
also we have an even more and even larger portfolio
(08:48):
of data to rely on during government shutdowns when the
government data is not available. We used to fly blind
during government shutdowns. And I say this because we're facing
a possible government shutdown on September thirtieth, and depending on
the breadth and the length of that, we might start
to miss data points. And luckily we've got private sources
(09:12):
and other high frequency data where we can have some
sort of idea of what the economy is doing even
if we're not getting the official government data. And so
I think even in the field of economics, we've seen
a good deal of transformation of technology and how we
use it.
Speaker 1 (09:31):
You read my mind, Allan, because I wanted to ask
you about that looming government shutdown potential government shutdown, and
reading one of your recent notes, you seem to think
that it could be a sort of catalyst for the
FED to pause again in November. But walk us through
exactly how you're thinking about it. Is it the lack
(09:52):
of available data for the FED that would cause that,
or is it the potential damage to the economy that
could be done from a shutdown? Little of both. What's
sort of the implications for us for this one more
curveball to be thrown at the economy at this point
in the cycle.
Speaker 3 (10:08):
A good economist always says it's a little bit of both,
and economists right to added economists, but it really is.
So in monetary policy making, uncertainty tends to lead to
policy paralysis. And so certainly when you have a government
(10:28):
shut down, and the breadth of it matters, right, if
it's a partial shutdown, there are some agencies that will
continue to operate, and we can continue to get things
like hey, roll data, even if we don't get Census
Bureau data and the like. If it's a full government
shut down, then you really don't get any of the
(10:50):
government data. And so if we're lacking data that the
FED can officially think its teeth into, right, then that's
going to lead to an inability to make a decision
about the path for rates, And so that's sort of
through the lens of the FED becomes foggy. The damage
(11:14):
to the economy comes from, say a full government shutdown
where all non essential workers are furloughed. And our estimate
is that for every week of shutdown, it shaves off
abouto point two percentage points from GDP growth, And so
that's where you're actually getting to the meat of it
that you have an impact on the outlook. Now, we
(11:36):
can go back and look at past government shutdowns and
see that, Okay, in hindsight, they were sort of a
blip in the economic outlook. Because the government opens back up,
you do have some permanent loss of activity. Workers that
weren't buying lunch around the agencies, you know, those restaurants,
coffee vendors, others are not going to make up for that.
(11:59):
But you know, workers go back to work. Congress has
always approved back pay for those furled workers, and so
especially for income, it ends up being a blip for
the time being. It's something that stays the Fed's hand.
Now in this case, right, they've got a lot of
time on their hands. They've got until the end of
the year to decide if they're going to hike further,
(12:21):
and they've left the door open tike further if needed.
I have a strong view that they're done here, but
they have left the door open. And so this is
just something that you know, the incoming data that we've
got over the next several weeks, say a month, tells
me that it is highly unlikely they hike in November,
(12:42):
but they still have the December meeting to consider after that.
Speaker 2 (12:52):
What potentially might make them hike in November or December.
And if they are done here, can you lay out
your views for what you expect in twenty twenty four,
because I think you are projecting cuts starting in March.
Speaker 3 (13:06):
Yeah, yeah, that's right. So I think for them to
hike in November and December, you know, two things have
to happen. One, they're pleased. Let these seem with increased
slack in the labor market and the slowdown in job gains.
They noted that in the statement three month moving averages
around one hundred and fifty thousand for payrolls. Now, let's
(13:27):
say that that starts to re accelerate again, and so
it doesn't look like that slow down in job gains
is durable. And then you pair that with, say, core services,
I'm going to strip out durable goods prices because they've
been in deflation, and that's only twenty five percent of
the core inflation bucket. And so it's services that really
(13:50):
matter here. And let's say that core services also reaccelerate,
and for that to happen, you really need core services
to pop upward to a round point six percent month
over month, which would be quite a deviation from the
current trend. But those things together you could see putting
(14:10):
a November hike back on the table, putting a hike
in December solidly on the table. And so you know,
I've got a strong conviction from the forecast that we
have for the incoming data that it's not going to
meet that criteria. But there's there's always a bar, and
we just think that the bar is higher for them
(14:31):
to do something further this year in twenty twenty four.
The cuts that we have there, you know, you mentioned
that we're expecting them to start in March. We have
a quarterly paced twenty five basis points a quarter. You know,
the FED is now expecting two cuts next year, and
it may be a little tongue in cheek to say,
(14:52):
but the difference between the Fed's expectation and our own
is a difference of opinion around the outlook. So we
have a forecast that this deceller and inflation continues. That
means that even as the FED holds rates steady at
between five and a quarter and five and a half percent,
if inflation is falling, then real rates continue to remain
(15:14):
very restrictive around that two percent level. In our forecast,
which is historically quite high. The fed's forecast has real
rates rising further from around one point nine percent at
the end of this year to two and a half
percent next year. You plug that into any macro model,
and that doesn't look like a FED that's really wanting
to achieve a soft landing. And I think therein lies
(15:36):
that the issues that can come about with internal consistency
when you're forecasting by committee. It's not quite consistent that
the median forecasts of the FED suggests that real rates
are going to need to rise six tenths further next year,
(15:56):
yet they're wanting to achieve a soft lane. There's something
off there.
Speaker 2 (16:02):
Can you talk about real rates a bit more? Why
do real rates matter? And can you talk about the
sort of through line to the real economy.
Speaker 3 (16:10):
Yeah, so real rates matter both from a company perspective
in terms of profitability, from how restrictive credit is in
the economy, banking's ability and willingness to lend. And you know,
if you think about the where the FED thinks the
neutral rate of interest should be, they think the neutral
(16:31):
rate of interest is half a percent for the real rate.
So two percent real rate is really restrictive, really far
into restrictive territory, and you know, feeding that through into
macro models would tell you that that's going to have
a pretty big downward impact on the economy, and I
(16:52):
think much larger than what the FED thinks is necessary
in order to flow inflation. I don't think individual policy
makers are really thinking that we need to have two
and a half percent real interest rates next year, that
they need to be two percentage points higher than neutral.
But that's what it looks like if you were to
(17:13):
just take their forecasts at face value. The impact to
the real economy is essentially what we've been seeing, right.
It's not that the Fed's interest rates have not had
an impact. You know, we've already gone through a recession
in housing. We saw the impact on housing first and foremost.
(17:34):
It's the very interst rate sensitive area of the economy.
We've seen higher interest rates have the effect of flowing
demand for credit and credit availability, making credit more expensive.
We are of the camp that monetary policy works with
long lags, and that is the biggest disagreement, the outstanding
(17:56):
disagreement on the FMC. Those that believe monetary policy works
pretty quickly through the economy and those that believe it
works with a lag. So while it may look like
we've escaped unscathed after such a rapid pace of tightening
and monetary policy, we think that all of the impacts
(18:17):
have not yet been felt, and that uncertainty alone means
that there's a good deal of downside risk to the
economy that we think is out there.
Speaker 1 (18:29):
Obviously, the other big elephant in the room these days
is the price of oil. West Texas Intermediate is back
in the ninety dollars a barrel range, mostly a supply
issue with Russia and some of the OPAC nation in
Saudi Arabia really limiting production. You do seem out an
interesting note out on this about a week ago, and
(18:53):
you know, to summarize and correct me if I'm getting
this wrong, But basically it seems like you think a
lot of people are worried about the inflation are aspects
of oil rising like this, But you point out it
should take a while for it to feed into the
core measures of inflation that exclude energy and food, but
that perhaps that sort of tax on the consumer element
(19:17):
of oil is a bigger story here. So how big
of a risk is this oil price shock to both
sides of the equation, growth and inflation, because I think
one thing I would point out I think is different
about this than a lot of oil price shocks. A
lot of times you get this spike in oil prices
because of say a hurricane in the Gulf for some
(19:37):
geopolitical tension that really ratches up the speculation in the market,
that boosts the price, and all that turns out to
be ephemeral and short lived. Personally, I'm not sure if
that's the case this time, with the OPEC producers really
seeming very happy to keep the price higher for the
(19:58):
near future. But I'm wondering, how you thinking about it.
How long do we need to see prices elevated for
the risk to really become acute, both from an inflationary
and economic perspective.
Speaker 3 (20:10):
Yeah, so it's great points we like to point to
weather forecasters and commodity strategist to make us feel better
as economists when we're trying to get things right in
the economy. It's a really tough job because there are
a lot of people that will tell you only geopolitics
matters for oil prices, and so I have no idea
(20:30):
where oil prices will go, But I will tell you
that our commodity stratus do believe, as you noted, that
this may be more durable, but it is a mixed
bag for the US economy. When it is a supply
shock and not a demand shock. Demand shock would be
that just the strength of the US economy and global
(20:50):
economy is so great that demand is outstripping supply. That
tends to have a more muted impact on the economy
than if it's a supply stock where the amount of
barrels that were producing globally just drops, And so in
that case you do get an impact on demand on
(21:11):
top of the impact on inflation. So we've modeled these changes,
and a ten percent increase in oil prices does raise
headline inflation in the US by about thirty five basis
points on headline over a three month period if you
just modeled as a one offstock. But the transfer to
(21:32):
core prices in the US, because really you're only immediately
impacting transportation prices in core inflation, it's only about two
to three BIPs, right, two to three basis points on
core inflation, So a really really small effect. What outweighs that?
And I think you were getting at this and what
(21:54):
we addressed in the note is that it acts as
a tax on households. If you are paying more to
gas up at the pump, then you are having to
pull spending from elsewhere, and so it tends to reduce
consumer buying power and weighs on not just real income growth,
(22:14):
but real consumer spending, and that is the predominant concern
of the FED today. So it's really a blessing in disguise.
If you're the FED and you have been trying to
slow the economy and the consumer has just been frustratingly resilient.
If you can get some additional help from higher gas prices,
(22:36):
then you might welcome that. It becomes problematic only if
it is sustained over longer periods of time, and then,
as chair Pal noted at the FED meeting, it then
becomes something that could pose a risk to inflation expectations,
raising inflation expectations, but it does have to be sustained
(22:57):
for some time.
Speaker 2 (22:59):
So, Mike, rising oil prices were another elephant in the room.
But I can actually name like a bunch more, including
that consumer loan repayments are restarting. We also had a
survey that we had done at Bloomberg, where the majority
of respondents we had asked about consumer spending said that
personal consumption. They see personal consumption going down in the
(23:21):
first quarter of twenty twenty four. So how do you
see all of these factors impacting the consumer?
Speaker 3 (23:27):
Yeah, so I think the student loan, the resumption of
the student loan debt payments is a great point to note.
We have tried to use surveys to get at the
percentage of student loan borrowers that say they are going
to start paying that back right away because there is
an option to be able to delay that into the
second court, sorry, the first quarter of twenty twenty four,
(23:50):
and I like to think that, you know, as good
debt holding Americans, we will delay the payment as long
as we can. Probably does create a drag in the
fourth quarter and the first quarter. I will note that
it has been surprising the amount of payments that have
been resumed already in anticipation of that. But you can
(24:14):
imagine that that folks that have decided to start repayments
already are those that want the balance to be lower
when the interest rate is again applied, and of course
those that have paid it down already or already restarted
that are obviously not the lower income student borrowers. Really
(24:35):
those are going to be the ones that are delaying
the payments the most. But we have taken into account
not just sort of the payback from as I mentioned,
you know, Barbenheimer hitting in the third quarter, Taylor Swift
and Beyonce Tours peaking in the third quarter. You're going
to have some payback in the fourth quarter from that
plus the start of the student loan repayments. And so
(24:58):
we already have forecast that consumer spending is in decline
in the fourth quarter. Now, some of that are just
those one off impacts fading, but I think further weight
on consumer spending in the first quarter is likely as well. Now,
is the consumer falling off a cliff? No, we think
(25:19):
that in the grand scheme of things, when you smooth
through these impacts, it really shows that consumer spending is
just continuing to slow. And there is sort of a
little spoken about silver lining here, and that is in
the second quarter, wage growth among lower income households started
to turn positive on an inflation adjusted basis because inflation
(25:42):
has come down. Now higher gas prices can throw a
monkey wrench in that temporarily, but that means that we
have started to get some modicum of buying power back
for lower income household So I think there's plenty here
that tells me that the consumer should not fall off
a cliff, but the consumer spending will be slowing, and
(26:04):
I think that will You know, seventy percent of the
economy is consumer spending, and so that's critical to the
said who's looking to further depressed inflation going forward.
Speaker 1 (26:33):
Now, Ellen, one more final elephant in the room for
this economy. Maybe it's not an elephant, I don't know,
Maybe it's a baby elephant or something smaller. I don't know,
a donkey or something. But the United Auto Workers strike.
And I'm not sure if your team have done any
work on this, but it's again one of those things
where I think there's a little bit of a risk
(26:55):
to inflation and a little bit of a risk to growth.
You know. Obviously, however this has resolved, it's going to
be a significant wage increase for a very influential union
that may inspire other unions, other workers, or other labor
groups to see khier wages. Also could cause the price
(27:15):
of cars to go up again. That was a pretty
big part of the CPI numbers for certain months used cars,
and obviously if there's a lot of lost production, there's
going to be a drag on growth. But how big
of a deal is it if it lingers on if
the strike expands to other plants. You know, is it
(27:37):
a risk to the headline numbers in either CPI and
GDP or is it Does it not rise to that level?
Speaker 3 (27:44):
Yeah, I think that. You know, autos are a major
sector in the US, and right now the strike has
started off small. It's not impacting a good deal of workers,
right so it's not been as big of a drag
as we initially on say the employment report. But let's
say it extends for some time more and broadens out
(28:07):
to capture more workers. So, first and foremost, if it
extends through mid October and starts to capture the survey
week in which we survey employers for their level of payrolls,
when you could get something like a negative payroll print
in the month of October, which would be reported in
early November. So again go back to the additional fog
(28:30):
this creates on the data front for the said in
terms of GDP, you know, it's interesting there there seemed
to be some evidence that automakers were ramping up production
ahead of the planned strike, But it does interrupt production
for the time being during the strike, and then that resume,
(28:51):
so you would have further weight on fourth quarter industrial
production and GDP if the strike goes on for a while.
Average our earnings is interesting because it's not just the
fact that you know, if you count the UAW strike alone,
it's not that big of an aggregate wage bill to
really move the needle nationwide. But as you say, what
(29:15):
if there are spillovers, what if other unions take the
example of UPS and UAW and start to follow suit,
you start to get a notable impact. If say, you're
pulling in the majority of all union workers in the US.
So it does take a significant wave capturing almost all
(29:38):
union workers to really show up on average hourly earnings
in a meaningful way. But I think that I would
just take it at the at its least, it adds
to all of that data fog we've been talking about
that it will make it very difficult for the FED
to hike rates further this year.
Speaker 2 (29:59):
Ellen, I have them millien more questions for you, So
I'll just I'm going to combine two of them very quickly,
because I think this is important to bring up. One
is about your track record, which you've been spot on
about the soft landing narrative. I think you've been calling
for a soft landing for quite a while, so I
wanted to ask you about that. But I also want
to ask you about I don't know if ironic is
(30:20):
the right word or word we can use, but is
it around ironic that recession odds have gone up just
as people have priced out a recession.
Speaker 1 (30:32):
Yes.
Speaker 3 (30:32):
I think those are great questions, and it gives me
a chance to pat myself on the back, which economists
to have a rare opportunity to do. And we have
been calling for a soft landing since February of last year,
and we could do a whole other podcast on just
why that is. But you know, I think what I
(30:53):
would like to impart is that even as I've had
that long soft landing narrative and others have finally grabbed
onto that, I have not reduced my recession probability. First
of all, let me just say any economist that says
they're accurate more than two quarters out is just lying.
You can get the narrative right. You almost always get
(31:14):
the numbers wrong. And so with that being said, I'm
very confident that we have enough momentum in the economy
to get us through the next six months, and so
I think for the next six months the odds of
recession should be lower. I think when you go out
of full twelve months, which when we talk about recession probabilities,
(31:36):
it's always over a twelve month horizon. The six months
beyond that I am not so certain about. I think
there's been so much monetary policy tightening that I do
believe has not all come through. I think a lot
can go wrong with the economy the further you go
out on the horizon, and so I have not reduced
my recession probability that within the next twelve months there's
(31:58):
a forty percent chance we have a downturn. I'm confident
it will be mild, but I do think that we
have to be realistic and not reduce the probability of
recession too much, just because today growth remains very resilient.
Speaker 1 (32:16):
Well Ellen Zendner, chief US economist at Morgan Stanley, thank
you so much for joining us today and sharing your thoughts.
A lot to think about. Can't let you go quite
yet though, however, we do have attrition on the show,
where we must share the craziest things we saw in
markets this week. I'm going to go first. Mine's a
little stale. It's almost two weeks old, so forgive me
(32:38):
wil Donna. All Right, Wall Street Journal story about California
real estate, particularly the Brady Bunch House. Did you watch
The Brady Bunch as a kid, fil Dona, I did not.
Speaker 3 (32:51):
You know, she might be a little bit younger than us.
Speaker 1 (32:55):
I'm dating myself here, Ellen to some degree. But the
famous house you see the picture of it at the
beginning of every show and every commercial break. It recently
went on sale, and so it's time to play the
prices precise and you guys have to guess what the
sale price was for the Brady Bunch House. I'll give
you a little more details. It was previously bought by
(33:18):
HGTV and they did a whole show about remodeling the
inside of it to make it look like the house
on the show, which I'm not sure boosted its value
because it's all dated seventies appliances and furniture, and I'm
not sure that's what your average La house hunter is
looking for. But it did sell. So the question is
(33:40):
what do you think the Brady Bunch House just sold for?
Speaker 2 (33:44):
So it's in LA, it's in Los Angeles. How many rooms?
Speaker 1 (33:49):
It's huge? Actually five bedrooms. Total square footage approximately five
thousand wow. With they added bedrooms and a second floor
when they did this whole remodel to I guess recreate
the kids rooms and everything. So five bedroom, five thousand
square foot house in LA not cheap. They don't tell
(34:12):
you this straight doesn't tell you what neighborhood in LA, which.
Speaker 2 (34:14):
Might Oh, that was gonna be my next question. Okay,
I'm gonna go with three point five million dollars.
Speaker 1 (34:19):
Three point five million dollars, Ellen, what's your bid for
the Brady Bunch House, completely remodeled to match interior and experts?
Speaker 3 (34:29):
Can I prices right?
Speaker 1 (34:32):
Say?
Speaker 3 (34:33):
Three three and a half and one dollar? No, I'll
say I don't know. If I think about the square footage,
the cost for square footage in LA, even though we
don't know the neighborhood, I think I would say closer
to nine million.
Speaker 2 (34:48):
Wow.
Speaker 1 (34:49):
I would have guessed somewhere in that vicinity. I'll be honest.
A five thousand square foot house in LA five bedrooms,
but as the buyer points out, it actually sold for
less than what HDTV bought it for because the buyer
thinks no one wants to live in a house with
these seventies of liots is a shy carpet, and so
(35:10):
three point two million.
Speaker 3 (35:12):
Dollars, Oh my gosh, wow, we all overget.
Speaker 1 (35:15):
Even if you told me a five thousand square foot
house in LA with five bedrooms, I would have gone
over three point two.
Speaker 3 (35:22):
I mean buy it and got it, although that might
not be allowed now if there's a historical landmark designation
on it, as you know, that's going to reduce the value.
Speaker 1 (35:33):
That's right, that's right.
Speaker 3 (35:34):
Yeah.
Speaker 1 (35:34):
I don't know if a recreation of the historical interior accounts,
but maybe I don't know.
Speaker 2 (35:41):
That's all I got. I have a good one. It's
also a Wall Street Journal story. The headline is A
Mother's Love a bargain at four hundred and fifty dollars
a year plus applicable fees. It's about parents hiring concierge
services for their college students. So you send your you
send your kid off to college, then you hire somebody
(36:02):
to be their mom. The mom can hug bring you
soup when you're sick, pick up your medicines. Furniture assembly
is one of the things for some reason they give you.
They give students rides to and from the airport.
Speaker 1 (36:19):
Just a furniture assembly.
Speaker 2 (36:20):
I know. They go to doctor's appointments with people. It's just, yeah, you.
Speaker 1 (36:27):
Can I hire one of these for myself.
Speaker 2 (36:29):
Surely is a stressor?
Speaker 3 (36:33):
Yes it is. It really is a real stressor.
Speaker 1 (36:36):
That alone is worth the four hundred and fifty bucks.
That's pretty good. Don't let my daughter at the University
of Maryland find out about this. I've got enough expenses
for lated education. That's pretty good. How about you, Ellen,
Have you seen anything crazy lately?
Speaker 3 (36:52):
I'm going to still go back to, you know, sort
of all the wrap up reports after the said meeting,
where it just seemed, you know, why, why does the
market take the FED at face value and suddenly all
of a sudden decide that the Fed are perfect forecasters
and know exactly what's going to happen even out to
(37:13):
twenty twenty six. Why and so that always astounds me.
Speaker 1 (37:19):
Yeah, yeah, that dot plot was a blessing and a curse.
I guess I wonder I sometimes wonder if they regret
introducing that, that maybe it causes more confusion than it
than clarity that they hope it would cause.
Speaker 3 (37:30):
Yeah, there are definitely those on the SAED that regret it.
But you know, once the Fed introduces something, it's near
impossible to take it away. So so chair pal, even
with chair Pal saying basically ignore the dot plot, it's
just sort of a fun exercise for nineteen participants to
air their dirty laundry about what they think about the outlook. Nevertheless,
(37:52):
markets take it at face value as though that is
exactly the path that the Fed will follows.
Speaker 1 (37:59):
That's etched in stone, not in you know, light colored pensil.
That could be a raise at the next meeting, right,
Alan Zendner, Chief US Economists at Morgan Stanley, thank you
so much for joining us.
Speaker 3 (38:09):
Good bet, Thank you Ellen.
Speaker 1 (38:18):
What goes up. We'll be back next week. Until then,
you can find us on the Bloomberg Terminal website and
app or wherever you get your podcast. We'd love it
if you took the time to rate and review the
show on Apple Podcasts so more listeners can find us.
And you can find us on Twitter. Follow me at
freak Anonymous Wildna Hirich is at Goildona hira. You can
(38:38):
also follow Bloomberg Podcasts at Podcasts. What Goes Up is
produced by Stacy Wong. Thanks for listening, See you next time.
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan, I'm a senior editor.
Speaker 2 (00:19):
At Bloomberg, and I'm Aldana Hayrick, Across Acid reporter with Bloomberg.
Speaker 1 (00:23):
This week on the show, Well, the Federal Reserve did
not raise interest rates at their meeting this week, but
nonetheless the markets freaked out a little bit, probably because
policymakers released projections showing that they don't expect to cut
rates as aggressively as previously expected next year. Stock sold off,
and so did the bond market, especially on the long
(00:45):
end of the curve, with the ten year treasury yield
reaching the highest level since two thousand and seven and
the thirty year yield reaching the highest since two thousand
and eleven. While the latest update from the Fed makes
it look more and more like they're expecting a soft
land for the economy, well, the markets are taking it
pretty hard. We'll get into it with the chief US
(01:05):
economist at a major Wall Street bank, but they'll dona first.
I have to say it's been a while since we
bugged our listeners to go and rate and review the
show on Apple Podcasts. I think we need a new
gimmick to entice them.
Speaker 2 (01:19):
Do you have one in mind?
Speaker 1 (01:21):
Funny you should ask I do?
Speaker 2 (01:23):
What is it? Bo?
Speaker 1 (01:24):
I'm thinking since you're a Buffalo Bills fan, you could
do like the Bills fans do at the tailgates and
like smash a card table.
Speaker 2 (01:34):
Yeah, you have to jump. You have to jump through
the table.
Speaker 1 (01:37):
Jump through the table.
Speaker 3 (01:38):
Yeah.
Speaker 1 (01:38):
How about would you think you could say we get
one hundred more reviews? You could how.
Speaker 2 (01:42):
About things one hundred more reviews and they make it
to the super Bowl?
Speaker 1 (01:48):
Both of those?
Speaker 2 (01:49):
Yeah, to those I don't know to be too much.
Speaker 1 (01:51):
Then you'll you'll jump on a card tabe.
Speaker 2 (01:53):
Yeah all right, but the one hundred.
Speaker 1 (01:54):
Reviews being the first first order of business, it'll be
a weird expense account item. Smashed the card tape? Okay,
I think I.
Speaker 2 (02:03):
Can expense it to Bloomberg. I was just I would
do it just for fun. I don't know if our
guest is a football fan at all, but we have
Ellen Zenner, chief US economist at Morgan Stanley, on this weekend. Ellen,
I'm so happy to have you on the podcast. Thank
you so much for joining us.
Speaker 3 (02:20):
Hi, guys, I love it. Thanks for asking me.
Speaker 2 (02:23):
Are you a Buffalo Bills fan. A secret Buffalo Bills
fan by any chance.
Speaker 3 (02:27):
No, not even secret. I was quite into college ball
growing up in Texas. That was really the Texas thing,
high school and college ball, and never been a big
fan of the NFL, although my dad was a big
Saints fan, New Orleans fan.
Speaker 1 (02:44):
What if I remember correctly, you went to Colorado? You
have coach Prime.
Speaker 3 (02:48):
Now, I did go to Colorado, but you know, I'm
a walking paradigm. I started at University of Texas and
never stopped being a Longhorns fan.
Speaker 2 (02:59):
Like I am loyal to the Bills. But Ellen, we
had this big week, which is why I'm so thankful
you were able to join us this week because, as
Mike mentioned, markets sort of had a little freak out
post the FED meeting. So just to start, can you
give us your big takeaways from the FED meeting.
Speaker 3 (03:17):
Yeah. Look, I think it's undeniable that the statement was
more hawkish than we expected. I think for me, you know,
in the current conditions paragraph, which is how the FED
describes sort of what's going on or what's happened since
their last meeting, they you know, it is a fact
that jobs have slowed, but remained strong, and they noted
(03:39):
that it is also a fact that inflation has come
down quite a bit but remains robust, and they did
not note that. And sometimes what they leave out can
be just as important as what they put in. I mean,
Chairpal did note it in the press conference several times
that core inflation has come down significantly. Well, why didn't
(04:00):
they just note that fact in the statement. It's because
you're far from declaring victory. God forbid that the market
thinks that you're declaring victory over inflation and you get
some easing and financial conditions you hadn't planned on when
type financial conditions is really what they need to sustain
to be sure that the economy is going to continue
(04:23):
to slow. It's been growing much too quickly this year.
Speaker 1 (04:26):
For I'd like to sort of just step back and
talk about say the last three or four years, you know,
I feel like for the art or science of economics,
however you view it, it's been a really weird few years.
Speaker 2 (04:43):
You know.
Speaker 1 (04:43):
We've had this massive shutdown of the economy like nothing
we've ever seen, then this massive stimulus to bring it
back to life, followed on by you know, a major
war in Europe, what's it been like to be a
really high level, very closely watched economists during all this?
You know, are there lessons to be learned? Because I
(05:06):
feel like it was so hard to predict and forecast
anything throughout all of this. What's it been like during
this whole last few years.
Speaker 3 (05:15):
Gosh, well, it's it's been exciting, to say the least.
I think, you know, the word humble comes to mind.
You know, it's been a humbling experience, and it's taught
me and my team to be very creative in our
approach to thinking about the outlook. And frankly, I've been
(05:37):
looking forward to, you know, sort of the period that
we're going through now and next year, where you know,
it's a period of normalization as we get COVID further
into the rear view mirror. I think, you know, what
I'm starting to realize was some of the incoming data
is that it seems like we go through these big
crises and there's a lot of never will we ever
(05:59):
and this after two thousand and eight as well, never
will we ever take on debt again, never will we
ever buy homes again? And guess what we do? We
do all those things again? But you just have to
get the crisis further into the rearview mirror. Folks were saying,
we'll never go see a movie again, We're never going
(06:20):
to the theater ever again. And you know, I'm pretty sure
that Barben Hibern brought in a billion dollars through the
box office. So I'm looking forward to more of the
datas that folds to just see a normalization of the economy.
I don't think a whole lot has changed in the
way we go about our business. I think we just
(06:42):
have to get a lot of these big distortions that
are now unwinding out of the way.
Speaker 2 (06:48):
So you say you've been very creative in your approach,
what does that entail? Because I remember during the pandemic
a lot of people were looking at these sort of
alternative data, looking at off occupancy rates, as you mentioned,
movie theater going, you know, foot different foot traffic. All
kinds of different measures had come about during the pandemic.
(07:10):
They've sort of fallen off to the wayside more recently.
But so what types of things does your team look
at now?
Speaker 3 (07:17):
Yeah, Well, I think to me, what was really lucky
is that even before the pandemic hit, you know, technology
was advancing in a way that we were getting more
and more private data sources and high frequency data forge sources,
daily data that was becoming more prevalent, so that we
were starting to find new ways to track the economy.
(07:41):
The need for that during COVID really escalated and so
you know, this is where we were using Google Earth
to look at ships that were parked offshore that were
not able to be unloaded, and more robust use of
things like Google Maps and Open table to figure out
a people were starting to move and shake again and
(08:02):
going out to dine and that sort of thing, and
that kind of data. Those data sets proliferated, and hey,
for a time they were free. Now those data sets
have become more and more expensive. But using those data
sets instead of just you know, the traditional or in
(08:24):
addition to the traditional government and other private sources that
were already prevailing before COVID really helped us stay more
abreast of exactly what was going on on the ground.
And I tell you what, the fact that all of
that's been introduced and used more robustly now means that
also we have an even more and even larger portfolio
(08:48):
of data to rely on during government shutdowns when the
government data is not available. We used to fly blind
during government shutdowns. And I say this because we're facing
a possible government shutdown on September thirtieth, and depending on
the breadth and the length of that, we might start
to miss data points. And luckily we've got private sources
(09:12):
and other high frequency data where we can have some
sort of idea of what the economy is doing even
if we're not getting the official government data. And so
I think even in the field of economics, we've seen
a good deal of transformation of technology and how we
use it.
Speaker 1 (09:31):
You read my mind, Allan, because I wanted to ask
you about that looming government shutdown potential government shutdown, and
reading one of your recent notes, you seem to think
that it could be a sort of catalyst for the
FED to pause again in November. But walk us through
exactly how you're thinking about it. Is it the lack
(09:52):
of available data for the FED that would cause that,
or is it the potential damage to the economy that
could be done from a shutdown? Little of both. What's
sort of the implications for us for this one more
curveball to be thrown at the economy at this point
in the cycle.
Speaker 3 (10:08):
A good economist always says it's a little bit of both,
and economists right to added economists, but it really is.
So in monetary policy making, uncertainty tends to lead to
policy paralysis. And so certainly when you have a government
(10:28):
shut down, and the breadth of it matters, right, if
it's a partial shutdown, there are some agencies that will
continue to operate, and we can continue to get things
like hey, roll data, even if we don't get Census
Bureau data and the like. If it's a full government
shut down, then you really don't get any of the
(10:50):
government data. And so if we're lacking data that the
FED can officially think its teeth into, right, then that's
going to lead to an inability to make a decision
about the path for rates, And so that's sort of
through the lens of the FED becomes foggy. The damage
(11:14):
to the economy comes from, say a full government shutdown
where all non essential workers are furloughed. And our estimate
is that for every week of shutdown, it shaves off
abouto point two percentage points from GDP growth, And so
that's where you're actually getting to the meat of it
that you have an impact on the outlook. Now, we
(11:36):
can go back and look at past government shutdowns and
see that, Okay, in hindsight, they were sort of a
blip in the economic outlook. Because the government opens back up,
you do have some permanent loss of activity. Workers that
weren't buying lunch around the agencies, you know, those restaurants,
coffee vendors, others are not going to make up for that.
(11:59):
But you know, workers go back to work. Congress has
always approved back pay for those furled workers, and so
especially for income, it ends up being a blip for
the time being. It's something that stays the Fed's hand.
Now in this case, right, they've got a lot of
time on their hands. They've got until the end of
the year to decide if they're going to hike further,
(12:21):
and they've left the door open tike further if needed.
I have a strong view that they're done here, but
they have left the door open. And so this is
just something that you know, the incoming data that we've
got over the next several weeks, say a month, tells
me that it is highly unlikely they hike in November,
(12:42):
but they still have the December meeting to consider after that.
Speaker 2 (12:52):
What potentially might make them hike in November or December.
And if they are done here, can you lay out
your views for what you expect in twenty twenty four,
because I think you are projecting cuts starting in March.
Speaker 3 (13:06):
Yeah, yeah, that's right. So I think for them to
hike in November and December, you know, two things have
to happen. One, they're pleased. Let these seem with increased
slack in the labor market and the slowdown in job gains.
They noted that in the statement three month moving averages
around one hundred and fifty thousand for payrolls. Now, let's
(13:27):
say that that starts to re accelerate again, and so
it doesn't look like that slow down in job gains
is durable. And then you pair that with, say, core services,
I'm going to strip out durable goods prices because they've
been in deflation, and that's only twenty five percent of
the core inflation bucket. And so it's services that really
(13:50):
matter here. And let's say that core services also reaccelerate,
and for that to happen, you really need core services
to pop upward to a round point six percent month
over month, which would be quite a deviation from the
current trend. But those things together you could see putting
(14:10):
a November hike back on the table, putting a hike
in December solidly on the table. And so you know,
I've got a strong conviction from the forecast that we
have for the incoming data that it's not going to
meet that criteria. But there's there's always a bar, and
we just think that the bar is higher for them
(14:31):
to do something further this year in twenty twenty four.
The cuts that we have there, you know, you mentioned
that we're expecting them to start in March. We have
a quarterly paced twenty five basis points a quarter. You know,
the FED is now expecting two cuts next year, and
it may be a little tongue in cheek to say,
(14:52):
but the difference between the Fed's expectation and our own
is a difference of opinion around the outlook. So we
have a forecast that this deceller and inflation continues. That
means that even as the FED holds rates steady at
between five and a quarter and five and a half percent,
if inflation is falling, then real rates continue to remain
(15:14):
very restrictive around that two percent level. In our forecast,
which is historically quite high. The fed's forecast has real
rates rising further from around one point nine percent at
the end of this year to two and a half
percent next year. You plug that into any macro model,
and that doesn't look like a FED that's really wanting
to achieve a soft landing. And I think therein lies
(15:36):
that the issues that can come about with internal consistency
when you're forecasting by committee. It's not quite consistent that
the median forecasts of the FED suggests that real rates
are going to need to rise six tenths further next year,
(15:56):
yet they're wanting to achieve a soft lane. There's something
off there.
Speaker 2 (16:02):
Can you talk about real rates a bit more? Why
do real rates matter? And can you talk about the
sort of through line to the real economy.
Speaker 3 (16:10):
Yeah, so real rates matter both from a company perspective
in terms of profitability, from how restrictive credit is in
the economy, banking's ability and willingness to lend. And you know,
if you think about the where the FED thinks the
neutral rate of interest should be, they think the neutral
(16:31):
rate of interest is half a percent for the real rate.
So two percent real rate is really restrictive, really far
into restrictive territory, and you know, feeding that through into
macro models would tell you that that's going to have
a pretty big downward impact on the economy, and I
(16:52):
think much larger than what the FED thinks is necessary
in order to flow inflation. I don't think individual policy
makers are really thinking that we need to have two
and a half percent real interest rates next year, that
they need to be two percentage points higher than neutral.
But that's what it looks like if you were to
(17:13):
just take their forecasts at face value. The impact to
the real economy is essentially what we've been seeing, right.
It's not that the Fed's interest rates have not had
an impact. You know, we've already gone through a recession
in housing. We saw the impact on housing first and foremost.
(17:34):
It's the very interst rate sensitive area of the economy.
We've seen higher interest rates have the effect of flowing
demand for credit and credit availability, making credit more expensive.
We are of the camp that monetary policy works with
long lags, and that is the biggest disagreement, the outstanding
(17:56):
disagreement on the FMC. Those that believe monetary policy works
pretty quickly through the economy and those that believe it
works with a lag. So while it may look like
we've escaped unscathed after such a rapid pace of tightening
and monetary policy, we think that all of the impacts
(18:17):
have not yet been felt, and that uncertainty alone means
that there's a good deal of downside risk to the
economy that we think is out there.
Speaker 1 (18:29):
Obviously, the other big elephant in the room these days
is the price of oil. West Texas Intermediate is back
in the ninety dollars a barrel range, mostly a supply
issue with Russia and some of the OPAC nation in
Saudi Arabia really limiting production. You do seem out an
interesting note out on this about a week ago, and
(18:53):
you know, to summarize and correct me if I'm getting
this wrong, But basically it seems like you think a
lot of people are worried about the inflation are aspects
of oil rising like this, But you point out it
should take a while for it to feed into the
core measures of inflation that exclude energy and food, but
that perhaps that sort of tax on the consumer element
(19:17):
of oil is a bigger story here. So how big
of a risk is this oil price shock to both
sides of the equation, growth and inflation, because I think
one thing I would point out I think is different
about this than a lot of oil price shocks. A
lot of times you get this spike in oil prices
because of say a hurricane in the Gulf for some
(19:37):
geopolitical tension that really ratches up the speculation in the market,
that boosts the price, and all that turns out to
be ephemeral and short lived. Personally, I'm not sure if
that's the case this time, with the OPEC producers really
seeming very happy to keep the price higher for the
(19:58):
near future. But I'm wondering, how you thinking about it.
How long do we need to see prices elevated for
the risk to really become acute, both from an inflationary
and economic perspective.
Speaker 3 (20:10):
Yeah, so it's great points we like to point to
weather forecasters and commodity strategist to make us feel better
as economists when we're trying to get things right in
the economy. It's a really tough job because there are
a lot of people that will tell you only geopolitics
matters for oil prices, and so I have no idea
(20:30):
where oil prices will go, But I will tell you
that our commodity stratus do believe, as you noted, that
this may be more durable, but it is a mixed
bag for the US economy. When it is a supply
shock and not a demand shock. Demand shock would be
that just the strength of the US economy and global
(20:50):
economy is so great that demand is outstripping supply. That
tends to have a more muted impact on the economy
than if it's a supply stock where the amount of
barrels that were producing globally just drops, And so in
that case you do get an impact on demand on
(21:11):
top of the impact on inflation. So we've modeled these changes,
and a ten percent increase in oil prices does raise
headline inflation in the US by about thirty five basis
points on headline over a three month period if you
just modeled as a one offstock. But the transfer to
(21:32):
core prices in the US, because really you're only immediately
impacting transportation prices in core inflation, it's only about two
to three BIPs, right, two to three basis points on
core inflation, So a really really small effect. What outweighs that?
And I think you were getting at this and what
(21:54):
we addressed in the note is that it acts as
a tax on households. If you are paying more to
gas up at the pump, then you are having to
pull spending from elsewhere, and so it tends to reduce
consumer buying power and weighs on not just real income growth,
(22:14):
but real consumer spending, and that is the predominant concern
of the FED today. So it's really a blessing in disguise.
If you're the FED and you have been trying to
slow the economy and the consumer has just been frustratingly resilient.
If you can get some additional help from higher gas prices,
(22:36):
then you might welcome that. It becomes problematic only if
it is sustained over longer periods of time, and then,
as chair Pal noted at the FED meeting, it then
becomes something that could pose a risk to inflation expectations,
raising inflation expectations, but it does have to be sustained
(22:57):
for some time.
Speaker 2 (22:59):
So, Mike, rising oil prices were another elephant in the room.
But I can actually name like a bunch more, including
that consumer loan repayments are restarting. We also had a
survey that we had done at Bloomberg, where the majority
of respondents we had asked about consumer spending said that
personal consumption. They see personal consumption going down in the
(23:21):
first quarter of twenty twenty four. So how do you
see all of these factors impacting the consumer?
Speaker 3 (23:27):
Yeah, so I think the student loan, the resumption of
the student loan debt payments is a great point to note.
We have tried to use surveys to get at the
percentage of student loan borrowers that say they are going
to start paying that back right away because there is
an option to be able to delay that into the
second court, sorry, the first quarter of twenty twenty four,
(23:50):
and I like to think that, you know, as good
debt holding Americans, we will delay the payment as long
as we can. Probably does create a drag in the
fourth quarter and the first quarter. I will note that
it has been surprising the amount of payments that have
been resumed already in anticipation of that. But you can
(24:14):
imagine that that folks that have decided to start repayments
already are those that want the balance to be lower
when the interest rate is again applied, and of course
those that have paid it down already or already restarted
that are obviously not the lower income student borrowers. Really
(24:35):
those are going to be the ones that are delaying
the payments the most. But we have taken into account
not just sort of the payback from as I mentioned,
you know, Barbenheimer hitting in the third quarter, Taylor Swift
and Beyonce Tours peaking in the third quarter. You're going
to have some payback in the fourth quarter from that
plus the start of the student loan repayments. And so
(24:58):
we already have forecast that consumer spending is in decline
in the fourth quarter. Now, some of that are just
those one off impacts fading, but I think further weight
on consumer spending in the first quarter is likely as well. Now,
is the consumer falling off a cliff? No, we think
(25:19):
that in the grand scheme of things, when you smooth
through these impacts, it really shows that consumer spending is
just continuing to slow. And there is sort of a
little spoken about silver lining here, and that is in
the second quarter, wage growth among lower income households started
to turn positive on an inflation adjusted basis because inflation
(25:42):
has come down. Now higher gas prices can throw a
monkey wrench in that temporarily, but that means that we
have started to get some modicum of buying power back
for lower income household So I think there's plenty here
that tells me that the consumer should not fall off
a cliff, but the consumer spending will be slowing, and
(26:04):
I think that will You know, seventy percent of the
economy is consumer spending, and so that's critical to the
said who's looking to further depressed inflation going forward.
Speaker 1 (26:33):
Now, Ellen, one more final elephant in the room for
this economy. Maybe it's not an elephant, I don't know,
Maybe it's a baby elephant or something smaller. I don't know,
a donkey or something. But the United Auto Workers strike.
And I'm not sure if your team have done any
work on this, but it's again one of those things
where I think there's a little bit of a risk
(26:55):
to inflation and a little bit of a risk to growth.
You know. Obviously, however this has resolved, it's going to
be a significant wage increase for a very influential union
that may inspire other unions, other workers, or other labor
groups to see khier wages. Also could cause the price
(27:15):
of cars to go up again. That was a pretty
big part of the CPI numbers for certain months used cars,
and obviously if there's a lot of lost production, there's
going to be a drag on growth. But how big
of a deal is it if it lingers on if
the strike expands to other plants. You know, is it
(27:37):
a risk to the headline numbers in either CPI and
GDP or is it Does it not rise to that level?
Speaker 3 (27:44):
Yeah, I think that. You know, autos are a major
sector in the US, and right now the strike has
started off small. It's not impacting a good deal of workers,
right so it's not been as big of a drag
as we initially on say the employment report. But let's
say it extends for some time more and broadens out
(28:07):
to capture more workers. So, first and foremost, if it
extends through mid October and starts to capture the survey
week in which we survey employers for their level of payrolls,
when you could get something like a negative payroll print
in the month of October, which would be reported in
early November. So again go back to the additional fog
(28:30):
this creates on the data front for the said in
terms of GDP, you know, it's interesting there there seemed
to be some evidence that automakers were ramping up production
ahead of the planned strike, But it does interrupt production
for the time being during the strike, and then that resume,
(28:51):
so you would have further weight on fourth quarter industrial
production and GDP if the strike goes on for a while.
Average our earnings is interesting because it's not just the
fact that you know, if you count the UAW strike alone,
it's not that big of an aggregate wage bill to
really move the needle nationwide. But as you say, what
(29:15):
if there are spillovers, what if other unions take the
example of UPS and UAW and start to follow suit,
you start to get a notable impact. If say, you're
pulling in the majority of all union workers in the US.
So it does take a significant wave capturing almost all
(29:38):
union workers to really show up on average hourly earnings
in a meaningful way. But I think that I would
just take it at the at its least, it adds
to all of that data fog we've been talking about
that it will make it very difficult for the FED
to hike rates further this year.
Speaker 2 (29:59):
Ellen, I have them millien more questions for you, So
I'll just I'm going to combine two of them very quickly,
because I think this is important to bring up. One
is about your track record, which you've been spot on
about the soft landing narrative. I think you've been calling
for a soft landing for quite a while, so I
wanted to ask you about that. But I also want
to ask you about I don't know if ironic is
(30:20):
the right word or word we can use, but is
it around ironic that recession odds have gone up just
as people have priced out a recession.
Speaker 1 (30:32):
Yes.
Speaker 3 (30:32):
I think those are great questions, and it gives me
a chance to pat myself on the back, which economists
to have a rare opportunity to do. And we have
been calling for a soft landing since February of last year,
and we could do a whole other podcast on just
why that is. But you know, I think what I
(30:53):
would like to impart is that even as I've had
that long soft landing narrative and others have finally grabbed
onto that, I have not reduced my recession probability. First
of all, let me just say any economist that says
they're accurate more than two quarters out is just lying.
You can get the narrative right. You almost always get
(31:14):
the numbers wrong. And so with that being said, I'm
very confident that we have enough momentum in the economy
to get us through the next six months, and so
I think for the next six months the odds of
recession should be lower. I think when you go out
of full twelve months, which when we talk about recession probabilities,
(31:36):
it's always over a twelve month horizon. The six months
beyond that I am not so certain about. I think
there's been so much monetary policy tightening that I do
believe has not all come through. I think a lot
can go wrong with the economy the further you go
out on the horizon, and so I have not reduced
my recession probability that within the next twelve months there's
(31:58):
a forty percent chance we have a downturn. I'm confident
it will be mild, but I do think that we
have to be realistic and not reduce the probability of
recession too much, just because today growth remains very resilient.
Speaker 1 (32:16):
Well Ellen Zendner, chief US economist at Morgan Stanley, thank
you so much for joining us today and sharing your thoughts.
A lot to think about. Can't let you go quite
yet though, however, we do have attrition on the show,
where we must share the craziest things we saw in
markets this week. I'm going to go first. Mine's a
little stale. It's almost two weeks old, so forgive me
(32:38):
wil Donna. All Right, Wall Street Journal story about California
real estate, particularly the Brady Bunch House. Did you watch
The Brady Bunch as a kid, fil Dona, I did not.
Speaker 3 (32:51):
You know, she might be a little bit younger than us.
Speaker 1 (32:55):
I'm dating myself here, Ellen to some degree. But the
famous house you see the picture of it at the
beginning of every show and every commercial break. It recently
went on sale, and so it's time to play the
prices precise and you guys have to guess what the
sale price was for the Brady Bunch House. I'll give
you a little more details. It was previously bought by
(33:18):
HGTV and they did a whole show about remodeling the
inside of it to make it look like the house
on the show, which I'm not sure boosted its value
because it's all dated seventies appliances and furniture, and I'm
not sure that's what your average La house hunter is
looking for. But it did sell. So the question is
(33:40):
what do you think the Brady Bunch House just sold for?
Speaker 2 (33:44):
So it's in LA, it's in Los Angeles. How many rooms?
Speaker 1 (33:49):
It's huge? Actually five bedrooms. Total square footage approximately five
thousand wow. With they added bedrooms and a second floor
when they did this whole remodel to I guess recreate
the kids rooms and everything. So five bedroom, five thousand
square foot house in LA not cheap. They don't tell
(34:12):
you this straight doesn't tell you what neighborhood in LA, which.
Speaker 2 (34:14):
Might Oh, that was gonna be my next question. Okay,
I'm gonna go with three point five million dollars.
Speaker 1 (34:19):
Three point five million dollars, Ellen, what's your bid for
the Brady Bunch House, completely remodeled to match interior and experts?
Speaker 3 (34:29):
Can I prices right?
Speaker 1 (34:32):
Say?
Speaker 3 (34:33):
Three three and a half and one dollar? No, I'll
say I don't know. If I think about the square footage,
the cost for square footage in LA, even though we
don't know the neighborhood, I think I would say closer
to nine million.
Speaker 2 (34:48):
Wow.
Speaker 1 (34:49):
I would have guessed somewhere in that vicinity. I'll be honest.
A five thousand square foot house in LA five bedrooms,
but as the buyer points out, it actually sold for
less than what HDTV bought it for because the buyer
thinks no one wants to live in a house with
these seventies of liots is a shy carpet, and so
(35:10):
three point two million.
Speaker 3 (35:12):
Dollars, Oh my gosh, wow, we all overget.
Speaker 1 (35:15):
Even if you told me a five thousand square foot
house in LA with five bedrooms, I would have gone
over three point two.
Speaker 3 (35:22):
I mean buy it and got it, although that might
not be allowed now if there's a historical landmark designation
on it, as you know, that's going to reduce the value.
Speaker 1 (35:33):
That's right, that's right.
Speaker 3 (35:34):
Yeah.
Speaker 1 (35:34):
I don't know if a recreation of the historical interior accounts,
but maybe I don't know.
Speaker 2 (35:41):
That's all I got. I have a good one. It's
also a Wall Street Journal story. The headline is A
Mother's Love a bargain at four hundred and fifty dollars
a year plus applicable fees. It's about parents hiring concierge
services for their college students. So you send your you
send your kid off to college, then you hire somebody
(36:02):
to be their mom. The mom can hug bring you
soup when you're sick, pick up your medicines. Furniture assembly
is one of the things for some reason they give you.
They give students rides to and from the airport.
Speaker 1 (36:19):
Just a furniture assembly.
Speaker 2 (36:20):
I know. They go to doctor's appointments with people. It's just, yeah, you.
Speaker 1 (36:27):
Can I hire one of these for myself.
Speaker 2 (36:29):
Surely is a stressor?
Speaker 3 (36:33):
Yes it is. It really is a real stressor.
Speaker 1 (36:36):
That alone is worth the four hundred and fifty bucks.
That's pretty good. Don't let my daughter at the University
of Maryland find out about this. I've got enough expenses
for lated education. That's pretty good. How about you, Ellen,
Have you seen anything crazy lately?
Speaker 3 (36:52):
I'm going to still go back to, you know, sort
of all the wrap up reports after the said meeting,
where it just seemed, you know, why, why does the
market take the FED at face value and suddenly all
of a sudden decide that the Fed are perfect forecasters
and know exactly what's going to happen even out to
(37:13):
twenty twenty six. Why and so that always astounds me.
Speaker 1 (37:19):
Yeah, yeah, that dot plot was a blessing and a curse.
I guess I wonder I sometimes wonder if they regret
introducing that, that maybe it causes more confusion than it
than clarity that they hope it would cause.
Speaker 3 (37:30):
Yeah, there are definitely those on the SAED that regret it.
But you know, once the Fed introduces something, it's near
impossible to take it away. So so chair pal, even
with chair Pal saying basically ignore the dot plot, it's
just sort of a fun exercise for nineteen participants to
air their dirty laundry about what they think about the outlook. Nevertheless,
(37:52):
markets take it at face value as though that is
exactly the path that the Fed will follows.
Speaker 1 (37:59):
That's etched in stone, not in you know, light colored pensil.
That could be a raise at the next meeting, right,
Alan Zendner, Chief US Economists at Morgan Stanley, thank you
so much for joining us.
Speaker 3 (38:09):
Good bet, Thank you Ellen.
Speaker 1 (38:18):
What goes up. We'll be back next week. Until then,
you can find us on the Bloomberg Terminal website and
app or wherever you get your podcast. We'd love it
if you took the time to rate and review the
show on Apple Podcasts so more listeners can find us.
And you can find us on Twitter. Follow me at
freak Anonymous Wildna Hirich is at Goildona hira. You can
(38:38):
also follow Bloomberg Podcasts at Podcasts. What Goes Up is
produced by Stacy Wong. Thanks for listening, See you next time.
Popular Podcasts
Fudd Around And Find Out
UConn basketball star Azzi Fudd brings her championship swag to iHeart Women’s Sports with Fudd Around and Find Out, a weekly podcast that takes fans along for the ride as Azzi spends her final year of college trying to reclaim the National Championship and prepare to be a first round WNBA draft pick. Ever wonder what it’s like to be a world-class athlete in the public spotlight while still managing schoolwork, friendships and family time? It’s time to Fudd Around and Find Out!
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!