September 11, 2024 • 29 mins
Has the labor market reached a tipping point? And, why is healthcare one of the few sectors with employment numbers still below pre-pandemic peaks? Listen in as Paul Ashworth, Chief North America Economist for Capital Economics joins Lisa McCracken on the NIC Chats podcast to answer these questions and more. As they discuss current economic trends, learn why Ashworth thinks the U.S. economy is in a Goldilocks period, but what challenges might be looming as we head into 2025. You’ll also hear Ashworth’s prediction of the size of potential rate cuts in September and beyond.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome, everyone to the Nick Chats podcast series.
I'm Lisa McCracken, the head ofresearch and analytics with
NIC. Glad you are joining ustoday, and we are very excited
to have our guest today who isPaul Ashworth. He is the chief
, uh, north America economistfor Capital Economics. Uh,
welcome Paul. We're glad tohave you with us today.
Speaker 2 (00:23):
Thank you, Lisa.
Glad to be here.
Speaker 1 (00:26):
So there's a lot that we can cover. Um , you are
very busy these days, I'm sureas an economist there's a lot
happening in the US andglobally, so we're gonna touch
on a number of those differentthings. But before we do that,
would you just mind sharingwith folks a little bit about
your background and so we havea little sense of the
perspective that you bring tothe table for today's
(00:48):
conversation?
Speaker 2 (00:50):
Uh, sure. You can probably tell by the accent
that I grew up in the uk. Uh, Idid all my schooling there,
including a PhD , uh, and thenwent to work for various think
tanks. Uh , and then finallyended up in, I guess you'd call
it private practice. I startedat Capital Economics 20
(01:12):
something years ago in August,2001. Uh , and I was employee
number six. And now we employclose to 200 people in various
offices around the world. Soit's been a privilege and an
honor to, you know, be on thatjourney of growth with the
firm. Uh , and we enjoy workingfor our clients and sharing our
(01:36):
insights for them .
Speaker 1 (01:37):
Yeah, no, we appreciate that. And I think
once we get into some of theconversation, most of our focus
will obviously be on the USeconomy and, and domestic , um,
you know, topics. However,clearly we, we live in a
a world that is veryglobal. So your perspective on
that will be helpful too. So I, as you and I talked in
(02:00):
advance of our time here today,I think I'd thrown out a
question to you . Okay. If inone sentence, which is probably
difficult, but to our credit,it's easier than one word,
In one sentence, howwould you describe the current
state of the US economy for ourlisteners?
Speaker 2 (02:18):
Uh, good. And I might even go with very good. I
mean, certainly it's performedbest among the most, a large
advanced economies since Covidstruck, and particularly in the
post covid period. Uh, theeconomy's been growing at a
very rapid pace. Theunemployment rate is unusually
(02:39):
low and inflation, while for awhile it took off, now seems to
be coming down to the pointwhere the Federal Reserve is
thinking about cutting backinterest rates. Uh , so, you
know, it's why economiessometimes call the Fable
goldlock scenario where thingsare not too hot and not too
cold, but just Right ,
Speaker 1 (02:59):
Right, right. Well, I'm happy to hear you say that
because I will tell you some ofthe day to day in our world
doesn't feel good or very good.
But I, I would probably reflectback on that. It sounds like
you're from an outlookstandpoint and where we stand
in moving forward, that, thatit's positive for some movement
with some of our, our painpoints. What , um, without
(03:21):
leaving some of that, and Iwanna go down some of these
specific topic areas, but , butas think we look to the US
economy for the rest of 2024and certainly into 2025, I
mean, that will be here beforewe know it, what do you see as
the main challenges and thenwhat are some of those
opportunities? So again, yourmacro comment is positive, very
(03:43):
positive, but in the monthsahead, and as we enter into
early 2025, are there thingsthat you see as some, some
primary hurdles or, or some ,um, again, challenges in the
coming months that we need tohave on our radar?
Speaker 2 (03:55):
Yeah, I mean, certainly the labor market has
been weakening a littleemployment growth has been
tailing off. And although theunemployment rate is low, as I
mentioned, it has been rising alittle bit over the last six
months. So that's a slightconcern. Um, but GDP growth is
still pretty good. Uh, andwhile the Federal Reserve, I
(04:20):
guess, is now thinking aboutcutting interest rates , you
know, starting from , uh, it'sSeptember meeting , uh, there
is still the impact of higherinterest rates feeding through.
So, you know , household, somehouseholds will still be
struggling with higher interestrates and finding the money to
(04:41):
cope with that. Uh , and ofcourse, higher prices are still
having an impact on many familybudgets. So, you know, there
are one or two concerns. Um,but now we've reached a point
where inflation has come downenough that the Federal Reserve
can be , think , begin cuttinginterest rates. Hopefully those
(05:03):
concerns will pass. And youknow , I think the outlook's
pretty encouraging too. Right?
Speaker 1 (05:11):
Yeah. And in a moment, I, I do wanna spend
some time on , on the laborside of things that , that's
definitely been a pain point inour industry. Uh, so I was
reading some headlines. Youknow, everyone has their
forecasts and their projectionsthat I, I don't wanna answer
this for you based on your goodor very good response earlier,
but , um, do you think arecession is coming? And I say
(05:33):
this 'cause I'm looking at aheadline right now. This was on
C-N-B-C-A week ago, A recessionis coming and few weight rate
cuts won't prevent. It says astrategist. Is that just the
attention grabbing headline or, um, do you disagree with
that?
Speaker 2 (05:47):
Well, economists are notoriously bad at forecasting
recessions, unfortunately, so Icertainly wouldn't rule one
out. But, you know, most of theindicators we look at don't
seem to suggest one is coming.
As I said, the unemploymentrate has risen very modestly.
We look at things like initialjobless claims, they're still
(06:09):
pretty low. Consumer spendingis still kicking on pretty
strongly. Uh , motor vehiclesales, you know, people still
are still making big ticketpurchases. Um, uh, businesses
are still investing. Uh , so,you know, across a wide range
(06:31):
of indicators, know things lookokay. Uh, so I certainly
wouldn't rule out entirely.
'cause often you can't quitesee these things coming and
sometimes they include anothershot , something like financial
markets. Um, but in this case,there's nothing obvious out
(06:54):
there.
Speaker 1 (06:55):
Yeah, no, I appreciate your perspective on
that. It's just one of thoseheadlines I often follow and I
think for as many people thatsay, Hey, we think one's
coming, others do not. So wewill see how the, the coming
months un unfold. I do wannaspend time on labor. So senior
housing and care or seniorliving sector here in the US
really took a big hit, as didother sectors. Obviously when
(07:17):
the pandemic struck , um,various parts of our healthcare
ecosystem have recovered todiffering degrees. Um, and many
of the operators in our spacetoday would say that while the
labor markets have maybe healeda little bit in terms of wage
escalation, growth, growth hasnot gone backwards, of course.
(07:39):
But, you know, that's the, thebig surprises month over month,
year over year are not what wewere experiencing. But it's not
great. So , um, you know, it's,it's a very intensive service
industry on that front. So, youknow, when you look at those
types of related sectors,healthcare, which is probably
the umbrella that we fall intoloosely , um, you know, in
(08:02):
senior housing that can belabor intensive. Are there any
specific observations you haveon the labor front that we need
to, to think about or justbetter understand from your
perspective?
Speaker 2 (08:13):
Yeah, I mean, obviously coming out of the
pandemic, we had a very tightlabor market , economy wide .
Uh, a lot of people were stillout of the labor force and
staying out for variousreasons. Maybe health concerns,
maybe childcare issues. Uh , alot of older workers took the
(08:33):
decision to retire and didn'tcome back. Um , but that
situation gradually turnedaround , uh, with help from
some strong immigration numberstoo . Uh , and now we are
reaching, I think what I'd callthe tipping point where the
balance is now maybe favoringemployers rather , whereas
(08:56):
certainly it was very much infavor of employees a couple of
years ago. Uh, I mean, if welook at, as I said, the
unemployment rate is nowbeginning to rise a bit. At one
point we had a massive numbersof job openings. Uh , they've
come down in the economy tolook at sort of survey
(09:19):
responses where , uh, the NFIBsmall business survey asks
small business employers , uh,whether they're finding it
difficult to, to find workers.
I mean, those responses havenormalized after looking really
out of , you know, realproblems finding workers at one
(09:41):
point. So things do appear tohave come into a much better
balance , um, across all sortsof skill sectors. But certainly
within your industry, I don'trelief now, I mean, healthcare
has been on a complete role .
So healthcare , I mean, theeconomy over the last 12 months
(10:04):
has a two and a half millionjobs. Almost 1 million of those
jobs are in healthcare alone .
So we've seen massive growth inhealthcare , uh, but nursing
and residential care facilities, uh, some strong growth over
the last year growth of 130,000. But looking back to that pre
(10:24):
covid peak, we're still 84,000below that, that that's very,
very unusual. But because if welook at the healthcare sector
as a whole, that's close to 2million higher , uh, the
economy as a whole is 6.4million more jobs. It's one of
the few sectors now whereemployment is still below its
(10:47):
pre pandemic peak.
Speaker 1 (10:49):
Yeah, and I think that's probably some of what
we're feeling day to day . AndI appreciate your comments
about sort of the, the , um,the, the flip in terms of sort
of who, I don't know if you usethe term the the who's in the,
the driver's seat in terms ofthe, the power, the employer or
the employer. 'cause I do, Iwould observe that that that
has probably shifted , um, youknow, back to a , an employer
(11:12):
sort of , um, position ofstrength with that. I i as it
relates to , um, and this is abigger long term thing, but I
think about it and I , I'd becurious to know your thoughts
too. So, 'cause I think thiswill impact, I mean , we're
gonna see the trickle down ofthis from the workforce at a
time when we have a significantaging demographic here in the
us . So you , you look at thelabor gap a little bit and also
(11:37):
the booming demographic. Sowe're , there's a conversation
in need and who's gonna bethere to provide that support.
You know , we have this agingdemographic and we also have a
dropping fertility rate here inthe us . Is that anything that,
that bothers you or concernsyou as an economist, or do you
think that that's sort ofoverblown that's, you know, far
down the road? What do you,what's your take on that?
Speaker 2 (11:57):
I mean , the aging of the population is a problem
that faces a lot of, not justadvanced economies, but
strangely, even some countrieslike China where , uh, because
of the one child policy thatwas in place for a long time
and other 10 years, they'llhave worse or more adverse
demographics than we have in inthe us Yeah, of course, as the
(12:18):
baby human generation retires ,uh, and, you know, there'll be
fewer people working and , andbasically paying for a greater
number of older people. And theUS even among advanced
countries isn't in as bad asituation as Japan or Italy or
some of the European countries.
(12:39):
But it will put stresses on,for instance, government,
finances , um, and maybe evenfinding, you know, because
demand for your facilities isgonna rise quite literally. Um,
but you've also gotta find theworkers to staff those
facilities. Uh , now the onlyalternative is you can make
(13:00):
your existing workforce moreproductive somehow.
Speaker 1 (13:04):
Right, right. Yeah, there's a lot of conversations
around business models ,approaches, what's the role of
technology and so forth. Ithink we're gonna need to have
all of those , um, cards, youknow , in our hands to try to ,
to remedy this. And it's, it'sgood to hear maybe we're not as
in such bad shape as some othercountries in this regard, but
(13:25):
it, you know, it's still apressure point. We actually
have a number of, of, you know,us senior housing folks that
are also international players.
So we, we certainly haveobserved that as well. So, you
know, I know most of the focushere and , and we'll spend most
of our time on the domestic um,economy, but we do live in a
global environment. So what doyou see as the biggest
(13:46):
influencers on the US economyhere, short term and let's say
into 2025 as it relates to someof those global dynamics? What
do we need to be thinking about?
Speaker 2 (13:56):
Well, obviously I think the biggest issue is
possibly , uh, US and Chinatrade relations. Obviously the
US became very dependent onChina for imports of all sorts
of goods , uh, over the lastcouple of decades has now
started to shift away fromthat. Uh, Donald Trump has
(14:19):
president obviously introduceda number of tariffs on Chinese
imports. Um, the Bidenadministration's added to those
a little bit. And if DonaldTrump is reelected this
November, he's been talkingabout , uh, increasing tariffs,
not just on China but alsoother countries. You know ,
(14:41):
that sort of isolationist shift, uh, could have pretty
dramatic impact on the USeconomy. Uh , we've got used to
a supply of very cheap goodscoming from overseas. Uh ,
obviously we'll throw things upin the air if those to be made
more expensive. Uh , of coursethat could introduce
(15:02):
opportunities for more domesticproduction. But of course, you
know, if you've gotmanufacturers competing to
produce domestically, that foryour industry just creates a
competitor looking for the sametype of labor.
Speaker 1 (15:17):
Right, right. Yeah.
And you know, and our sectordefinitely felt some of those
supply chain issues , um,without a doubt. I mean, the
healthcare space, seniorhousing is during the pandemic
and um, you know, receivingsome of the different things
from, you know, the, obviouslythe global economy. I do wanna
spend a few minutes , um,during our time here talking
(15:37):
about capital. So, you know, weare , you know, our sector, if
you break it down, we've got acombination of you've got
government, you know , um, runproperties. You've got
not-for-profits, you've got ,um, private capital that's in
our space . We've got someREITs, you know, that certainly
, um, own the , the seniorhousing properties. But we're
(15:58):
very heavily dependent on debtcapital and the bank market's
been a challenge in recentyears. You know, obviously a
lot of that's spawned by thetrickle down of the, some of
the bank failures and so forth.
So how would you, how do yousee the current environment
from the, the bank marketplace?
Are there going to be somepotential future failures? Are
(16:19):
you seeing some healing onthat? What does the sort of the
next several months and into2025 look like on that front?
I'd be curious to know yourthoughts.
Speaker 2 (16:27):
I mean, obviously a year ago back in March we had a
couple of very notable bankfailures, small regional banks,
but most of those failures werebecause principally , um, the
banks in question had madeerrors in terms of holding
treasury securities, which haddropped in value as interest
(16:51):
rates and treasury bond yieldswent up very, very
significantly. Of course, whatwe're seeing now is those
yields come down. So a lot ofthat pressure has eased.
There's still some pressurebecause smaller regional banks
are very big lenders tocommercial property and
commercial property valuations,particularly in the office
(17:12):
sector of .
Speaker 1 (17:15):
Right, which are grabbing the headlines. They're
sort of defining the commercialreal estate sort of space in
many respects.
Speaker 2 (17:22):
That's certainly, that's a dog that hasn't
necessarily barked there . Alot of lenders and borrowers
have managed to work out, youknow , stick a bandaid over it
and keep going. Extendedpretend is the , uh, but we
haven't seen an awful lot ofbank losses . Uh , and
certainly there was atightening in credit conditions
(17:42):
post the sort of initial SVBcollapse. But since then things
have turned around. Uh , and Ithink banks stand willing to
lend again. I mean it alsohelps that at one point the
yield curve, so the differencebetween short rates and long
rates in the market wasactually inverted, where short
rates were higher than longrates, which is more good for
(18:03):
bank profitability. 'causetheir biggest model is
basically borrowing short andlending long . But now that
seems to have shifted aroundagain, and the yield curve is
at least flat. So that'spositive for bank
profitability. And of coursethat's happening because all of
the yield curve is coming downnow quite considerably. 'cause
the Federal Reserve seems tohave seen enough to begin a
(18:27):
potentially quite significantrate loosening cycle reduction
cycle. Uh , so I thinkhopefully over the next few
years, you know, capitalmarkets, debt markets should
benefit from lower rates. Uh ,and with that, an increased
willingness among banks to lend. Now that doesn't mean we are
going back to the near zerorate environment that we had in
(18:50):
the 2010s. I think that'sprobably longer at this stage.
That's certainly, I think, youknow, where we've been over the
last 18 months, even two years, uh, conditions should begin
to ease.
Speaker 1 (19:05):
Yeah, that's good to hear. And and I would say
that's probably similar togenerally anecdotally what
we're hearing from some of thelenders. I mean, we, we've
still got a ways to go and ,and I appreciate also you
mentioning the near zero rates.
I think that it was just so lowfor so long that people got
used to that being a, anormal and , and um,
environment where it , youknow, if you look back, you
(19:28):
know, you know , 20 years, 30or 1520 whatever , um, longer
term it , it wasn't , uh, andprobably it's a , you know, not
something that can be assumedto be, you know , a normal
course , um, or level movingforward. And um, so , uh, we
appreciate that. 'cause again,I , as I mentioned, the , the
debt markets are incrediblyimportant to the senior housing
(19:51):
and and care space for sure. So, um, we'll continue to watch
that and watch the bankperformance, which we too have
been seeing those , um, youknow, positive reports. So you
mentioned the Fed, so obviouslywe're gonna go there. Um, and
we're just a few weeks awayfrom the September meeting and
at the end of 2023, you know ,the headlines were looking at
(20:12):
March and then at , no, notgonna be March, it's gonna be
June, it's not gonna be June.
Now we're looking at September,and I think this is probably
the most consistent dataforecast we've been seeing that
the , and the Fed even isaffirming that there, there's
probably gonna be some actionhere at, at the September
meeting in terms of some ratecuts. The big question is, you
(20:34):
know , if they do, which Ithink most agree that they
will, what's gonna be thedegree of the rate cut. So what
, what do you, what do you seehappening in September and ,
and uh, what's gonna come outof the Fed from comments and
and actions?
Speaker 2 (20:48):
Yeah , I mean obviously from comments we've
had, we've had a pretty strongsteer from the fed's chair
during Powell that they'reabout to begin cutting interest
rates , um, the , you know, thebalance of risk of shift.
They're worried a bit about thedownside risks with the leg
market. Obviously less worriedwith the upside risk to
(21:08):
inflation. So it's not aquestion of whether they'll cut
rates. Now it's a question ofhow big those rate cuts will
be. Uh, I think they'd probablystart with a 25 basis point
reduction in September. Butobviously a lot of that depends
on the incoming data as well,because, you know, we've still
got another inflation CPIinflation report, we've still
(21:32):
got another importantemployment report , um, for
August to come before thatSeptember meeting. So either of
those, if they were , uh,particularly surprising, could
shift the balance of risks onwhat size rate up we're gonna
get. But I , I think the oddsprobably at this stage still
(21:53):
favor a 25 basis point up forSeptember. But then the
question is what we get afterthat , uh, I think we get a
very controlled series of 25basis point cuts, taking the
federal funds rate down fromabout five and a half down to
somewhere in the low three,something like that, which is
(22:14):
roughly what is already pricedinto financial markets. And
that's why you've seen, youknow, the 10 year treasury
yield was as high as 4.7% inApril and has now come down to
3.8%. If we're looking at twoyear yields, they were 5% now
down to 3.9%. Uh , so we'vealready seen a lot of this
(22:38):
reflected in longer term yieldscoming down over the last three
or four months as that economicdata has come out and set the
stage really for this rate cut,this series of rate cuts
coming, rate cuts from the Fed.
Speaker 1 (22:54):
Right, right. Yeah, it's, it'll be interesting to
see within a lot of ourconstituent groups, you know,
where we start to see somebehavior change as those rates
come down. So obviously againthen that frees up capital or
capital that's maybe much more, um, affordable, less costly,
then how does that translateinto some of the new
development activity andgrowth? So the growth has
(23:16):
really been stifled because ofthat capital being locked up
in, in our sector. So at thesame time, when the
demographics are booming, wehave very minimal new inventory
coming on the market. So it's avery interesting dynamic, which
is very different than thegreat financial crisis, which
again, you know , there wasn'ta whole lot of new development
back then as well, but wedidn't have the demographic
(23:38):
growth and, and that demanddynamic that we do now. So it's
gonna be interesting to watchthat. So you mentioned already
some, some comments aboutNovember in the presidential
election. Um, any key economicheadlines you see coming out of
November based on the, thecandidate , um, that , that
walks away with our, ourpresidential candidacy or, or
(23:59):
election win?
Speaker 2 (24:01):
Uh, well, obviously we think that Kamala Harris is
probably, you know, bestthought of as the continuity
candidate represents the statusquo , um, is looking for a
series of potentiallyproblematic increases in
business taxes and, and taxeson high income earn. But I
(24:23):
think it'll be quite hard topush those through Congress,
even if the Democrats end up inthe unlikely event. Really,
they end up with smallmajorities in both the House
and the Senate , uh, DonaldTrump's policies , uh,
obviously a bit more , uh,other departure from what we've
had over the last four years.
Tariffs have the potential tobe inflationary, which could
(24:46):
force the Federal Reserve tolimit its rate cuts over the
last next couple of years. Andthe other risk I suspect for
your business is Donald Trump'splans to cut down, crack down
very hard on immigration , notjust, not just unauthorized
immigration, but you know , uh,immigration through official
channels too. 'cause that wouldrisk, I mean obviously it's the
(25:10):
immigration that's helped solvethe problems we've had with
labor markets over the lastcouple of years. So that could
throw a lot of us businesses, Ithink back into the fire there.
Uh , and you know, we've talkedabout who's holding the winning
hand. It would very much goback to the employees again, I
think risk , uh, laborshortages, wage increases,
(25:34):
those sorts of things. Butagain, it doesn't mean
necessarily if he's elected, hewould follow through on all
those promises. Um, but I thinkthat would be the risk of a
Trump presidency. It might becrackdown on immigration, not
just unauthorized, but throughofficial channels too , uh,
which could have obviously aknock on adverse impact on the
(25:57):
leg market.
Speaker 1 (25:59):
So I want to wrap up with , uh, we'll give a
two-sided question here, Paul.
So , uh, as an economist, I'dbe curious to know what keeps
you up at night, if anything,maybe you are gifted with a
good night's sleep ,um, and don't stress about
things that related to work andthen the economic conditions.
So, you know, what keeps you upat night? Maybe what, what's
(26:21):
the stressor and what are youmost optimistic about as we sit
here in the summer of 2024? Andlook ahead to the sort of the,
the end or the next severalmonths here, and as we wrap up
2024. So both sides of the coinhere is a final question for
you.
Speaker 2 (26:36):
Uh, I think obviously we haven't really
touched on geopoliticalconcerns, but obviously there's
the war in Ukraine, there's thewar in , uh, Gaza, which
obviously risks spiraling, youknow, at the moment they're
quite contained, but couldspiral out of control , uh,
pulling other countries. Uh ,certainly those will be
(26:59):
concerned. The long termChina's threat to Taiwan would
be a risk and the globaleconomy. So probably
geopolitical concerns would bethe biggest single worry on
optimism. I mean, certainly Ithink AI we haven't touched on
is a potentially transformativetechnology can have a whole
(27:21):
host of benefits automating allsorts of tasks and knowledge
based tasks. Uh , and we'vealready seen, although it might
not be linked to that , uh, avery strong productivity
performance for the economy inthe last couple of years. So
productivity growth wasparticularly strong during the
mid 1990s, nearly two thousandsin response to the introduction
(27:43):
of desktop computers and theinternet. But since then it
tailed off and we'd had aperiod of weak productivity
growth for a decade or two. Itlooks like it could be bouncing
back. And I think that if it'ssustained would be very
important because that's reallythe ultimate source of gains in
per capital wealth within theeconomy.
Speaker 1 (28:05):
Well, fantastic.
Yeah, I was a keep a couplethings that we didn't have time
to touch on here today. It's,it's all related to the
economic conditions, sort ofwhat, what lies ahead for us.
So I, I appreciate your timewith us today. I know you have
a busy schedule, so thank youfor that. And for those
listening, we have our NickFall conference coming up in
September and that will be theweek following the, the Federal
(28:28):
Reserve meetings. So it'll beinteresting to see the , the
chatter there. And we'll bediving into some of these
economic conversations. We haveDiane Sw , who's the chief
economist for KPMG, who will beon stage talking through some
of these similar topics. And Ithink a few weeks from now
we'll have some greaterinsights into some of these.
Appreciate your time, Paul.
Thank you very much. Thank youto our listeners for the Nick
(28:48):
Chats podcast. And you canaccess this podcast and others
on the Nickwebsite@www.nick.org. Thank you
so much.
Welcome, everyone to the Nick Chats podcast series.
I'm Lisa McCracken, the head ofresearch and analytics with
NIC. Glad you are joining ustoday, and we are very excited
to have our guest today who isPaul Ashworth. He is the chief
, uh, north America economistfor Capital Economics. Uh,
welcome Paul. We're glad tohave you with us today.
Speaker 2 (00:23):
Thank you, Lisa.
Glad to be here.
Speaker 1 (00:26):
So there's a lot that we can cover. Um , you are
very busy these days, I'm sureas an economist there's a lot
happening in the US andglobally, so we're gonna touch
on a number of those differentthings. But before we do that,
would you just mind sharingwith folks a little bit about
your background and so we havea little sense of the
perspective that you bring tothe table for today's
(00:48):
conversation?
Speaker 2 (00:50):
Uh, sure. You can probably tell by the accent
that I grew up in the uk. Uh, Idid all my schooling there,
including a PhD , uh, and thenwent to work for various think
tanks. Uh , and then finallyended up in, I guess you'd call
it private practice. I startedat Capital Economics 20
(01:12):
something years ago in August,2001. Uh , and I was employee
number six. And now we employclose to 200 people in various
offices around the world. Soit's been a privilege and an
honor to, you know, be on thatjourney of growth with the
firm. Uh , and we enjoy workingfor our clients and sharing our
(01:36):
insights for them .
Speaker 1 (01:37):
Yeah, no, we appreciate that. And I think
once we get into some of theconversation, most of our focus
will obviously be on the USeconomy and, and domestic , um,
you know, topics. However,clearly we, we live in a
that will be helpful too. So I, as you and I talked in
(02:00):
advance of our time here today,I think I'd thrown out a
question to you . Okay. If inone sentence, which is probably
difficult, but to our credit,it's easier than one word,
state of the US economy for ourlisteners?
Speaker 2 (02:18):
Uh, good. And I might even go with very good. I
mean, certainly it's performedbest among the most, a large
advanced economies since Covidstruck, and particularly in the
post covid period. Uh, theeconomy's been growing at a
very rapid pace. Theunemployment rate is unusually
(02:39):
low and inflation, while for awhile it took off, now seems to
be coming down to the pointwhere the Federal Reserve is
thinking about cutting backinterest rates. Uh , so, you
know, it's why economiessometimes call the Fable
goldlock scenario where thingsare not too hot and not too
cold, but just Right ,
Speaker 1 (02:59):
Right, right. Well, I'm happy to hear you say that
because I will tell you some ofthe day to day in our world
doesn't feel good or very good.
But I, I would probably reflectback on that. It sounds like
you're from an outlookstandpoint and where we stand
in moving forward, that, thatit's positive for some movement
with some of our, our painpoints. What , um, without
(03:21):
leaving some of that, and Iwanna go down some of these
specific topic areas, but , butas think we look to the US
economy for the rest of 2024and certainly into 2025, I
mean, that will be here beforewe know it, what do you see as
the main challenges and thenwhat are some of those
opportunities? So again, yourmacro comment is positive, very
(03:43):
positive, but in the monthsahead, and as we enter into
early 2025, are there thingsthat you see as some, some
primary hurdles or, or some ,um, again, challenges in the
coming months that we need tohave on our radar?
Speaker 2 (03:55):
Yeah, I mean, certainly the labor market has
been weakening a littleemployment growth has been
tailing off. And although theunemployment rate is low, as I
mentioned, it has been rising alittle bit over the last six
months. So that's a slightconcern. Um, but GDP growth is
still pretty good. Uh, andwhile the Federal Reserve, I
(04:20):
guess, is now thinking aboutcutting interest rates , you
know, starting from , uh, it'sSeptember meeting , uh, there
is still the impact of higherinterest rates feeding through.
So, you know , household, somehouseholds will still be
struggling with higher interestrates and finding the money to
(04:41):
cope with that. Uh , and ofcourse, higher prices are still
having an impact on many familybudgets. So, you know, there
are one or two concerns. Um,but now we've reached a point
where inflation has come downenough that the Federal Reserve
can be , think , begin cuttinginterest rates. Hopefully those
(05:03):
concerns will pass. And youknow , I think the outlook's
pretty encouraging too. Right?
Speaker 1 (05:11):
Yeah. And in a moment, I, I do wanna spend
some time on , on the laborside of things that , that's
definitely been a pain point inour industry. Uh, so I was
reading some headlines. Youknow, everyone has their
forecasts and their projectionsthat I, I don't wanna answer
this for you based on your goodor very good response earlier,
but , um, do you think arecession is coming? And I say
(05:33):
this 'cause I'm looking at aheadline right now. This was on
C-N-B-C-A week ago, A recessionis coming and few weight rate
cuts won't prevent. It says astrategist. Is that just the
attention grabbing headline or, um, do you disagree with
that?
Speaker 2 (05:47):
Well, economists are notoriously bad at forecasting
recessions, unfortunately, so Icertainly wouldn't rule one
out. But, you know, most of theindicators we look at don't
seem to suggest one is coming.
As I said, the unemploymentrate has risen very modestly.
We look at things like initialjobless claims, they're still
(06:09):
pretty low. Consumer spendingis still kicking on pretty
strongly. Uh , motor vehiclesales, you know, people still
are still making big ticketpurchases. Um, uh, businesses
are still investing. Uh , so,you know, across a wide range
(06:31):
of indicators, know things lookokay. Uh, so I certainly
wouldn't rule out entirely.
'cause often you can't quitesee these things coming and
sometimes they include anothershot , something like financial
markets. Um, but in this case,there's nothing obvious out
(06:54):
there.
Speaker 1 (06:55):
Yeah, no, I appreciate your perspective on
that. It's just one of thoseheadlines I often follow and I
think for as many people thatsay, Hey, we think one's
coming, others do not. So wewill see how the, the coming
months un unfold. I do wannaspend time on labor. So senior
housing and care or seniorliving sector here in the US
really took a big hit, as didother sectors. Obviously when
(07:17):
the pandemic struck , um,various parts of our healthcare
ecosystem have recovered todiffering degrees. Um, and many
of the operators in our spacetoday would say that while the
labor markets have maybe healeda little bit in terms of wage
escalation, growth, growth hasnot gone backwards, of course.
(07:39):
But, you know, that's the, thebig surprises month over month,
year over year are not what wewere experiencing. But it's not
great. So , um, you know, it's,it's a very intensive service
industry on that front. So, youknow, when you look at those
types of related sectors,healthcare, which is probably
the umbrella that we fall intoloosely , um, you know, in
(08:02):
senior housing that can belabor intensive. Are there any
specific observations you haveon the labor front that we need
to, to think about or justbetter understand from your
perspective?
Speaker 2 (08:13):
Yeah, I mean, obviously coming out of the
pandemic, we had a very tightlabor market , economy wide .
Uh, a lot of people were stillout of the labor force and
staying out for variousreasons. Maybe health concerns,
maybe childcare issues. Uh , alot of older workers took the
(08:33):
decision to retire and didn'tcome back. Um , but that
situation gradually turnedaround , uh, with help from
some strong immigration numberstoo . Uh , and now we are
reaching, I think what I'd callthe tipping point where the
balance is now maybe favoringemployers rather , whereas
(08:56):
certainly it was very much infavor of employees a couple of
years ago. Uh, I mean, if welook at, as I said, the
unemployment rate is nowbeginning to rise a bit. At one
point we had a massive numbersof job openings. Uh , they've
come down in the economy tolook at sort of survey
(09:19):
responses where , uh, the NFIBsmall business survey asks
small business employers , uh,whether they're finding it
difficult to, to find workers.
I mean, those responses havenormalized after looking really
out of , you know, realproblems finding workers at one
(09:41):
point. So things do appear tohave come into a much better
balance , um, across all sortsof skill sectors. But certainly
within your industry, I don'trelief now, I mean, healthcare
has been on a complete role .
So healthcare , I mean, theeconomy over the last 12 months
(10:04):
has a two and a half millionjobs. Almost 1 million of those
jobs are in healthcare alone .
So we've seen massive growth inhealthcare , uh, but nursing
and residential care facilities, uh, some strong growth over
the last year growth of 130,000. But looking back to that pre
(10:24):
covid peak, we're still 84,000below that, that that's very,
very unusual. But because if welook at the healthcare sector
as a whole, that's close to 2million higher , uh, the
economy as a whole is 6.4million more jobs. It's one of
the few sectors now whereemployment is still below its
(10:47):
pre pandemic peak.
Speaker 1 (10:49):
Yeah, and I think that's probably some of what
we're feeling day to day . AndI appreciate your comments
about sort of the, the , um,the, the flip in terms of sort
of who, I don't know if you usethe term the the who's in the,
the driver's seat in terms ofthe, the power, the employer or
the employer. 'cause I do, Iwould observe that that that
has probably shifted , um, youknow, back to a , an employer
(11:12):
sort of , um, position ofstrength with that. I i as it
relates to , um, and this is abigger long term thing, but I
think about it and I , I'd becurious to know your thoughts
too. So, 'cause I think thiswill impact, I mean , we're
gonna see the trickle down ofthis from the workforce at a
time when we have a significantaging demographic here in the
us . So you , you look at thelabor gap a little bit and also
(11:37):
the booming demographic. Sowe're , there's a conversation
in need and who's gonna bethere to provide that support.
You know , we have this agingdemographic and we also have a
dropping fertility rate here inthe us . Is that anything that,
that bothers you or concernsyou as an economist, or do you
think that that's sort ofoverblown that's, you know, far
down the road? What do you,what's your take on that?
Speaker 2 (11:57):
I mean , the aging of the population is a problem
that faces a lot of, not justadvanced economies, but
strangely, even some countrieslike China where , uh, because
of the one child policy thatwas in place for a long time
and other 10 years, they'llhave worse or more adverse
demographics than we have in inthe us Yeah, of course, as the
(12:18):
baby human generation retires ,uh, and, you know, there'll be
fewer people working and , andbasically paying for a greater
number of older people. And theUS even among advanced
countries isn't in as bad asituation as Japan or Italy or
some of the European countries.
(12:39):
But it will put stresses on,for instance, government,
finances , um, and maybe evenfinding, you know, because
demand for your facilities isgonna rise quite literally. Um,
but you've also gotta find theworkers to staff those
facilities. Uh , now the onlyalternative is you can make
(13:00):
your existing workforce moreproductive somehow.
Speaker 1 (13:04):
Right, right. Yeah, there's a lot of conversations
around business models ,approaches, what's the role of
technology and so forth. Ithink we're gonna need to have
all of those , um, cards, youknow , in our hands to try to ,
to remedy this. And it's, it'sgood to hear maybe we're not as
in such bad shape as some othercountries in this regard, but
(13:25):
it, you know, it's still apressure point. We actually
have a number of, of, you know,us senior housing folks that
are also international players.
So we, we certainly haveobserved that as well. So, you
know, I know most of the focushere and , and we'll spend most
of our time on the domestic um,economy, but we do live in a
global environment. So what doyou see as the biggest
(13:46):
influencers on the US economyhere, short term and let's say
into 2025 as it relates to someof those global dynamics? What
do we need to be thinking about?
Speaker 2 (13:56):
Well, obviously I think the biggest issue is
possibly , uh, US and Chinatrade relations. Obviously the
US became very dependent onChina for imports of all sorts
of goods , uh, over the lastcouple of decades has now
started to shift away fromthat. Uh, Donald Trump has
(14:19):
president obviously introduceda number of tariffs on Chinese
imports. Um, the Bidenadministration's added to those
a little bit. And if DonaldTrump is reelected this
November, he's been talkingabout , uh, increasing tariffs,
not just on China but alsoother countries. You know ,
(14:41):
that sort of isolationist shift, uh, could have pretty
dramatic impact on the USeconomy. Uh , we've got used to
a supply of very cheap goodscoming from overseas. Uh ,
obviously we'll throw things upin the air if those to be made
more expensive. Uh , of coursethat could introduce
(15:02):
opportunities for more domesticproduction. But of course, you
know, if you've gotmanufacturers competing to
produce domestically, that foryour industry just creates a
competitor looking for the sametype of labor.
Speaker 1 (15:17):
Right, right. Yeah.
And you know, and our sectordefinitely felt some of those
supply chain issues , um,without a doubt. I mean, the
healthcare space, seniorhousing is during the pandemic
and um, you know, receivingsome of the different things
from, you know, the, obviouslythe global economy. I do wanna
spend a few minutes , um,during our time here talking
(15:37):
about capital. So, you know, weare , you know, our sector, if
you break it down, we've got acombination of you've got
government, you know , um, runproperties. You've got
not-for-profits, you've got ,um, private capital that's in
our space . We've got someREITs, you know, that certainly
, um, own the , the seniorhousing properties. But we're
(15:58):
very heavily dependent on debtcapital and the bank market's
been a challenge in recentyears. You know, obviously a
lot of that's spawned by thetrickle down of the, some of
the bank failures and so forth.
So how would you, how do yousee the current environment
from the, the bank marketplace?
Are there going to be somepotential future failures? Are
(16:19):
you seeing some healing onthat? What does the sort of the
next several months and into2025 look like on that front?
I'd be curious to know yourthoughts.
Speaker 2 (16:27):
I mean, obviously a year ago back in March we had a
couple of very notable bankfailures, small regional banks,
but most of those failures werebecause principally , um, the
banks in question had madeerrors in terms of holding
treasury securities, which haddropped in value as interest
(16:51):
rates and treasury bond yieldswent up very, very
significantly. Of course, whatwe're seeing now is those
yields come down. So a lot ofthat pressure has eased.
There's still some pressurebecause smaller regional banks
are very big lenders tocommercial property and
commercial property valuations,particularly in the office
(17:12):
sector of
Speaker 1 (17:15):
Right, which are grabbing the headlines. They're
sort of defining the commercialreal estate sort of space in
many respects.
Speaker 2 (17:22):
That's certainly, that's a dog that hasn't
necessarily barked there . Alot of lenders and borrowers
have managed to work out, youknow , stick a bandaid over it
and keep going. Extendedpretend is the , uh, but we
haven't seen an awful lot ofbank losses . Uh , and
certainly there was atightening in credit conditions
(17:42):
post the sort of initial SVBcollapse. But since then things
have turned around. Uh , and Ithink banks stand willing to
lend again. I mean it alsohelps that at one point the
yield curve, so the differencebetween short rates and long
rates in the market wasactually inverted, where short
rates were higher than longrates, which is more good for
(18:03):
bank profitability. 'causetheir biggest model is
basically borrowing short andlending long . But now that
seems to have shifted aroundagain, and the yield curve is
at least flat. So that'spositive for bank
profitability. And of coursethat's happening because all of
the yield curve is coming downnow quite considerably. 'cause
the Federal Reserve seems tohave seen enough to begin a
(18:27):
potentially quite significantrate loosening cycle reduction
cycle. Uh , so I thinkhopefully over the next few
years, you know, capitalmarkets, debt markets should
benefit from lower rates. Uh ,and with that, an increased
willingness among banks to lend. Now that doesn't mean we are
going back to the near zerorate environment that we had in
(18:50):
the 2010s. I think that'sprobably longer at this stage.
That's certainly, I think, youknow, where we've been over the
last 18 months, even two years, uh, conditions should begin
to ease.
Speaker 1 (19:05):
Yeah, that's good to hear. And and I would say
that's probably similar togenerally anecdotally what
we're hearing from some of thelenders. I mean, we, we've
still got a ways to go and ,and I appreciate also you
mentioning the near zero rates.
I think that it was just so lowfor so long that people got
used to that
environment where it , youknow, if you look back, you
(19:28):
know, you know , 20 years, 30or 1520 whatever , um, longer
term it , it wasn't , uh, andprobably it's a , you know, not
something that can be assumedto be, you know , a normal
course , um, or level movingforward. And um, so , uh, we
appreciate that. 'cause again,I , as I mentioned, the , the
debt markets are incrediblyimportant to the senior housing
(19:51):
and and care space for sure. So, um, we'll continue to watch
that and watch the bankperformance, which we too have
been seeing those , um, youknow, positive reports. So you
mentioned the Fed, so obviouslywe're gonna go there. Um, and
we're just a few weeks awayfrom the September meeting and
at the end of 2023, you know ,the headlines were looking at
(20:12):
March and then at , no, notgonna be March, it's gonna be
June, it's not gonna be June.
Now we're looking at September,and I think this is probably
the most consistent dataforecast we've been seeing that
the , and the Fed even isaffirming that there, there's
probably gonna be some actionhere at, at the September
meeting in terms of some ratecuts. The big question is, you
(20:34):
know , if they do, which Ithink most agree that they
will, what's gonna be thedegree of the rate cut. So what
, what do you, what do you seehappening in September and ,
and uh, what's gonna come outof the Fed from comments and
and actions?
Speaker 2 (20:48):
Yeah , I mean obviously from comments we've
had, we've had a pretty strongsteer from the fed's chair
during Powell that they'reabout to begin cutting interest
rates , um, the , you know, thebalance of risk of shift.
They're worried a bit about thedownside risks with the leg
market. Obviously less worriedwith the upside risk to
(21:08):
inflation. So it's not aquestion of whether they'll cut
rates. Now it's a question ofhow big those rate cuts will
be. Uh, I think they'd probablystart with a 25 basis point
reduction in September. Butobviously a lot of that depends
on the incoming data as well,because, you know, we've still
got another inflation CPIinflation report, we've still
(21:32):
got another importantemployment report , um, for
August to come before thatSeptember meeting. So either of
those, if they were , uh,particularly surprising, could
shift the balance of risks onwhat size rate up we're gonna
get. But I , I think the oddsprobably at this stage still
(21:53):
favor a 25 basis point up forSeptember. But then the
question is what we get afterthat , uh, I think we get a
very controlled series of 25basis point cuts, taking the
federal funds rate down fromabout five and a half down to
somewhere in the low three,something like that, which is
(22:14):
roughly what is already pricedinto financial markets. And
that's why you've seen, youknow, the 10 year treasury
yield was as high as 4.7% inApril and has now come down to
3.8%. If we're looking at twoyear yields, they were 5% now
down to 3.9%. Uh , so we'vealready seen a lot of this
(22:38):
reflected in longer term yieldscoming down over the last three
or four months as that economicdata has come out and set the
stage really for this rate cut,this series of rate cuts
coming, rate cuts from the Fed.
Speaker 1 (22:54):
Right, right. Yeah, it's, it'll be interesting to
see within a lot of ourconstituent groups, you know,
where we start to see somebehavior change as those rates
come down. So obviously againthen that frees up capital or
capital that's maybe much more, um, affordable, less costly,
then how does that translateinto some of the new
development activity andgrowth? So the growth has
(23:16):
really been stifled because ofthat capital being locked up
in, in our sector. So at thesame time, when the
demographics are booming, wehave very minimal new inventory
coming on the market. So it's avery interesting dynamic, which
is very different than thegreat financial crisis, which
again, you know , there wasn'ta whole lot of new development
back then as well, but wedidn't have the demographic
(23:38):
growth and, and that demanddynamic that we do now. So it's
gonna be interesting to watchthat. So you mentioned already
some, some comments aboutNovember in the presidential
election. Um, any key economicheadlines you see coming out of
November based on the, thecandidate , um, that , that
walks away with our, ourpresidential candidacy or, or
(23:59):
election win?
Speaker 2 (24:01):
Uh, well, obviously we think that Kamala Harris is
probably, you know, bestthought of as the continuity
candidate represents the statusquo , um, is looking for a
series of potentiallyproblematic increases in
business taxes and, and taxeson high income earn. But I
(24:23):
think it'll be quite hard topush those through Congress,
even if the Democrats end up inthe unlikely event. Really,
they end up with smallmajorities in both the House
and the Senate , uh, DonaldTrump's policies , uh,
obviously a bit more , uh,other departure from what we've
had over the last four years.
Tariffs have the potential tobe inflationary, which could
(24:46):
force the Federal Reserve tolimit its rate cuts over the
last next couple of years. Andthe other risk I suspect for
your business is Donald Trump'splans to cut down, crack down
very hard on immigration , notjust, not just unauthorized
immigration, but you know , uh,immigration through official
channels too. 'cause that wouldrisk, I mean obviously it's the
(25:10):
immigration that's helped solvethe problems we've had with
labor markets over the lastcouple of years. So that could
throw a lot of us businesses, Ithink back into the fire there.
Uh , and you know, we've talkedabout who's holding the winning
hand. It would very much goback to the employees again, I
think risk , uh, laborshortages, wage increases,
(25:34):
those sorts of things. Butagain, it doesn't mean
necessarily if he's elected, hewould follow through on all
those promises. Um, but I thinkthat would be the risk of a
Trump presidency. It might becrackdown on immigration, not
just unauthorized, but throughofficial channels too , uh,
which could have obviously aknock on adverse impact on the
(25:57):
leg market.
Speaker 1 (25:59):
So I want to wrap up with , uh, we'll give a
two-sided question here, Paul.
So , uh, as an economist, I'dbe curious to know what keeps
you up at night, if anything,maybe you are gifted with a
good night's sleep
things that related to work andthen the economic conditions.
So, you know, what keeps you upat night? Maybe what, what's
(26:21):
the stressor and what are youmost optimistic about as we sit
here in the summer of 2024? Andlook ahead to the sort of the,
the end or the next severalmonths here, and as we wrap up
2024. So both sides of the coinhere is a final question for
you.
Speaker 2 (26:36):
Uh, I think obviously we haven't really
touched on geopoliticalconcerns, but obviously there's
the war in Ukraine, there's thewar in , uh, Gaza, which
obviously risks spiraling, youknow, at the moment they're
quite contained, but couldspiral out of control , uh,
pulling other countries. Uh ,certainly those will be
(26:59):
concerned. The long termChina's threat to Taiwan would
be a risk and the globaleconomy. So probably
geopolitical concerns would bethe biggest single worry on
optimism. I mean, certainly Ithink AI we haven't touched on
is a potentially transformativetechnology can have a whole
(27:21):
host of benefits automating allsorts of tasks and knowledge
based tasks. Uh , and we'vealready seen, although it might
not be linked to that , uh, avery strong productivity
performance for the economy inthe last couple of years. So
productivity growth wasparticularly strong during the
mid 1990s, nearly two thousandsin response to the introduction
(27:43):
of desktop computers and theinternet. But since then it
tailed off and we'd had aperiod of weak productivity
growth for a decade or two. Itlooks like it could be bouncing
back. And I think that if it'ssustained would be very
important because that's reallythe ultimate source of gains in
per capital wealth within theeconomy.
Speaker 1 (28:05):
Well, fantastic.
Yeah, I was a keep a couplethings that we didn't have time
to touch on here today. It's,it's all related to the
economic conditions, sort ofwhat, what lies ahead for us.
So I, I appreciate your timewith us today. I know you have
a busy schedule, so thank youfor that. And for those
listening, we have our NickFall conference coming up in
September and that will be theweek following the, the Federal
(28:28):
Reserve meetings. So it'll beinteresting to see the , the
chatter there. And we'll bediving into some of these
economic conversations. We haveDiane Sw , who's the chief
economist for KPMG, who will beon stage talking through some
of these similar topics. And Ithink a few weeks from now
we'll have some greaterinsights into some of these.
Appreciate your time, Paul.
Thank you very much. Thank youto our listeners for the Nick
(28:48):
Chats podcast. And you canaccess this podcast and others
on the Nickwebsite@www.nick.org. Thank you
so much.
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