Moody's Talks - Inside Economics - Be Patient and Beer Inflation

Episode Date: February 24, 2023

Bill Spriggs, Chief Economist of AFL-CIO, joins the podcast and shares his views that we need to be patient on inflation, it's not the result of an overly tight labor market but to temporary forces, and thus does not require aggressive Fed rate hikes. He also dissects President Biden's industrial policy.Full episode transcript hereFor more on Bill Spriggs, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by Chris, Chris DeRees. Hi, Chris. How are you? Doing well, Mark. How are you? Good. Of course, Chris is one of my co-host. Where's our other co-host, Chris?

Where's Marissa today? I think she's preparing for the Blizzard. Oh, that, oh, yeah. L.A. L.A. is getting hit by a blizzard, right? Yeah, but it's not downtown L.A. I understand. Oh, it's not?

What? No, it's got a more of a month or something. Yeah, yeah. Wow. But she's buckling in for that or getting under a blanket or something. I suspect. I don't know. She's just not here today.

She's a softy. She's just a softy. Yeah. And also Dante, Dante D. Antonio, we asked Dante to join regular here on Inside a Comous. Good to see you, Dante. Good to see you, too. How are you faring?

I'm doing pretty well. I'm leaving for vacation tomorrow, so it's a good day. Ooh, that sounds nice. Are you going anywhere or? Antigua. Antica. I've been. I've been. Antica's nice. Yeah. Yeah. Yeah. Have you been? Have you been? I have not, no. Looking forward to it. Yeah. When I was your age and I had young kids, we would, when we could afford it, you know, fly down to a Caribbean island and hang out for a while. And Antigua was one of those places. You know, the nice thing, though, my kids, they're not coming, so they're staying there. Oh. Oh. Well, you know, I think that's a grave error, frankly.

Well, I don't know your relationship with your wife. So that probably I probably shouldn't say that. But, you know, my fondest memories, some of my fondest memories with my kids are on those trips. You know, on those trips. But I'm sure you've got many other fond memories. So I don't mean to get into your stuff there, don't they? That's okay. I do that all the time.

And we've got Bill Sprags. Bill, good to see you. You're on you. We'll get you on there. Sorry, I thought my space bar was supposed to unmute me. Is that work? I never heard of that before, space. Yeah, so that you don't have to go up for your mouth.

Oh, that sounds convenient. But it didn't work. It didn't work, so forget about it. Well, it's good to have you on, Bill. Thanks for having me. Good to see you. And just to formally introduce you, you are a professor at Howard University, econ professor, and also the chief economist of the AFLCIOs.

Is that fair to say? Is that official title, chief economist? That's the official title. And how long have you been the chief economist for AFLCIO? 11 years now. Oh, I did not know that. Wow. Okay.

So how do you do double duty like that? How do you, you know, what's the deal? The AFLCIO gives a grant to Howard. It buys out part of my time. Oh, I see. Very interesting. And of course you were in... My check says Howard University.

Oh, the check comes from Howard. I see, but I see. Got it. Got it. And of course, you were in the Obama administration as well in the Labor Department. Correct. And... As a Secretary for Policy.

I bet that was a cool experience. It was a fascinating experience. It was sort of life comes full circle. In the Clinton administration, I hit at what was the national. Commission for Appointment Policy. And when the Republicans came in the early 90s, they got rid of that. They didn't think it was necessary for us to evaluate our job training program. Fortunately, I had left there to join the Joint Economic Committee when that happened.

But then I landed the Department of Labor, and the Obama administration wanted to make sure that there was evaluation of all federal programs and part of the legislation they put in place, then recreated an evaluation of the Department of Labor. So as Assistant Secretary, I got to recreate my old job. Oh, that's cool. So you had implemented this oversight. It got torn down, and then you had to resurrect it again. Is it still in place now in the Biden administration?

Yes, there's still a chief evaluation officer. I think the office of policy. Yeah, very cool. And you've been kind of a fixture in kind of D.C. for a long time. I was looking at your bio. You mentioned the Joint Economic Committee. You're also at the Economic Policy Institute, a very well-known. It's fair to say it's a think tank, right?

That's Larry Michelle. I know Larry. That's who I go to immediately. Larry was my office-making graduate school. Oh, good luck with that. I bet that was a real trip. Yeah. Oh, it was, we were a rocking office.

I bet. You guys are like firing each other up, I bet. Yeah. We did. Yeah. Yeah. Yeah, he's a good guy. He was research director when I was an opioid.

I came back later when he was president as sort of a senior person for a brief stint before I went to Harvard. Got it. And I follow him on Twitter. Are you on Twitter, Bill? Are you on? I used to be very active on Twitter. it gives me funny feelings. So now I don't tweet as often.

I will do it on jobs day. Yeah. And I usually go out the day like, you know, for half an hour. Yeah. Yeah. Well, I haven't done as much. Yeah, I'm on at Marks, Andy.

I advertise that any chance I get. But I am, I got a little annoyed this past week because it turns out someone had gotten at Mark Sandy with two eyes and was impersonating me and, you know, copying my tweets and tweeting them out and also talking to people I know and saying stuff and they come back to me and said, Mark, what are you saying? You know, so I go, what are you talking about? And so here's a real thing that irritated me.

I said to the Twitter, look, someone's impersonating me. And they sent back an email saying, well, they don't really violate our rules. I go, what? Are you kidding? Are you kidding? They finally relented. And so this this impersonator has been blocked, but, you know, highly irritating. Anyway.

Well, you know, I think that's the secret of where did all those Twitter employees go? Why is Twitter? And so it's things like that. Yeah. People use Twitter a lot would notice, but a lot of people wouldn't necessarily notice. there was a piece of the post yesterday saying oh so they really were redundant because twitter's still going well oh i saw that i saw that and so i i think that's um a lot of technology is lowering the quality i i agree with you it's more of a corrosive it's not like a cliff event it's like a corrosive on

the quality of what's being provided and you don't notice it immediately but over time stuff like that what I just described happens. And I totally agree. I think that's what's going to happen here. But, well, let's dive into the meat of the matter and a lot of ground to cover. And today, this is what, Friday, February 24th, we got some, we got a lot of economic data from the Bureau of Economic Analysis. And it's causing a little bit of Adjita, I'd say a fair amount of Adjada in markets, financial market stock, bond markets, foreign exchange. So let's just do. talk about that a little bit. I'm sure I'm feeling Chris kind of looking at him. You might be gloating at the moment. I'm not sure. No. Okay. All right. Dante, you want to. Oh, you're right. It's one data. That was

going to be what I said. But okay, thank you. Dante, you want to give us a bit of a rundown on the data? Sure. I mean, we've got big, big readings in terms of month-per-month changes in personal income and real personal spending. You know, those numbers were driven. in large part by sort of end of year changes. You got cost of living adjustments for Social Security that went into effect in January. You had a host of minimum wage increases across the country. So certainly some sort of one-off beginning of the year events that were causing some of that spike in income and spending. And then we also got the PC deflator for January, which was 0.6% both top line and core. Just to stop you for a second, the consumer expenditure deflator. So it's

the kind of favored, the core, which is excluding food and energy, is kind of the favored measure that the Fed looks at for gauging inflation. And their target, so-called target, is two percent for core CPI inflation, which means monthly 0.1.2. That's what kind of the gains you'd like to see. Yeah. And so certainly the January reading was up a little bit from prior months, although the year-over-year numbers are still coming down, you know, maybe a bit more slowly than people would like to see. But, you know, I think it'd be a similar message from what we got from CPI earlier in the month that, you know, the moderation and inflation is going to be probably a little bit of a bumpy road.

Yeah. Hey, Chris, did you look at that data at all? Was that something on your radar screen this morning? Yeah, a little bit. I haven't gone deep, deeply into it. But what's your take? Yeah. Well, I think you're right.

The market interprets it certainly as a hot number. I think they may be reading it very closely and assuming that the Fed, is going to be very aggressive. A 50 basis point rate hike is back on the table now. Oh, is it? Yeah. To some degree, I don't think it's certainly not a done deal, but that is certainly in the zeitgeist here after the number came out. So.

So your view is, well, it's hot, meaning the inflation number was hot. The spending number was hot too that Dante mentioned. So it seems putting it all together, if you believe the. the labor market report as well, that that was hot, right? So everything seems a little bit frothy at the moment. Yeah. Okay. At least at face value, right?

If you take it at face value. But as you said, never put too much weight on any one given months worth of data. That's right. One data plan, we've been talking a lot about the seasonal adjustment issues, measurement issues. Dante referenced some of the changes in the data as well. also, you need to take it with a grain of salt. Yeah.

Hey, Bill, do you watch these data, you can see we're pretty nerdy here? You know, we're like in the bowels of these data. Do you follow the statistics like that? I mean, like today's numbers, were you following them or have a view on them, on personal income and spending and inflation? Yes, I do.

And I am irritated at my, profession. I think that we've kind of should have well expected that if we blow up markets the way that we did, that you're going to have long running ripple effects and to think that the markets will calm down after an unprecedented series of shocks in two years. Unrealistic, I don't think we have been helping the American people. people understand the situation at all. And, you know, the fact that we did the labor market back, that was really a miracle policy that we decided that we would be aggressive in making sure people came back to work.

But for prices to settle when we've disrupted the markets in terms of supply, in terms of, you know, fulfilling demand, as we did during, during the pandemic when we couldn't go to certain places, couldn't buy certain things. You could not disrupt the markets and then send out these ripple effects and then think that you reach equilibrium boom like that because it's just not, that's not possible. Yeah, so just to paraphrase what you said, just to make sure I got it right, you're saying, hey, look, we got hit hard by some massive shocks. I mean, the obvious, the pandemic and the Russian invasion of Ukraine.

And this created massive dislocations in the global economy, labor markets, product markets, supply chains, you name it, everything got kind of turned on its head. And, of course, dramatic policy response from central banks, the Fed, from fiscal policymakers, the administration in Congress. And to think that this economy is going to kind of settle down, get back to, let's call it normal. is, you know, quickly, like, like, right now is like, that just doesn't make any sense. That's what you're saying. Right. And so I think people need to pay attention to direction. Our price is coming back down.

That's the key element. And for me, this is where I get more upset at the food because at least, you know, in labor, our big concern have been the lack of chips. because in the auto industry, finished product was at the level of the Great Recession. But, you know, the data was very misleading on autos because that was the finished product. They had hundreds of thousands of cars sitting in warehouses

and parking lots throughout Detroit waiting for the checks. You cannot take auto production to Great Recession levels and then think, oh, nothing else will happen. Right. And so when everybody was astonished, whatever, you know, that used car prices would go up, you know, this is Econ 1. That's a question on Econ 1. I know, lower auto-protecting to the lowest level of the 21st century,

lower than even numbers from the 20th century. And what's going to happen? And so, of course, if somebody comes to the part, you know, to the auto lot, and they see that they can't get a car, they're told, we can get you a car in eight months, then, of course, I'm going to say, well, what do you have on the lot? So, of course, use call places can go through the route. I mean, this is to be expected. So what bothers me is, like, you look at the CPI,

And the price and use bars, year over year, are down 11.6%. So the concern from the Fed had been, oh, well, no, you shouldn't look at it as this is a one-time shot. Expectations will build in. People are going to, you know, demand that these prices, status level and blah, blah, blah, blah, blah, right? But the prices are falling 11% over the year. So it's not like they're rising at a slower rate. The things that were actually impacted by some of these shots that we said were temporary. The prices are falling.

The price of smartphones, year over year, down 23.9%. That's not in the news. I don't understand why that's not in the news. You can't tell me we have a problem with huge demand over supply, and the price of smartphones is down 23.9%. But this is what we say. I mean, unlike autos, you can complete an automobile up to a point, and then you've got to put in the chip.

A telephone is nothing but smart chips. You're up the creek. You can't do anything. So secondly, production is back. The price has fallen by a lot. So this was all temporary. The other things we have, I mean, we still have the shots from it.

We still have huge disruptions to food production. And food goes into a lot of things. So it's, it just isn't possible to have the other things fall as dramatically as smart from major appliances. You've got to have chips for major appliances. You know, that's down 3.9%. Well, let me. Let me unpack. All of these prices are falling, not rising at a slow way.

They're falling, totally consistent with that shock is over. So these other shots, which we are still suffering from, I think we should similarly feel that because the overall price trend is coming down, that in fact, we don't have this, you know, inflation is out of control situation. we have, these disruptions are slowly easy. But we're going to have to continue to deal with them because there's like this weird weather. I mean, you know, who knew it would snow in L.A. in March. Yeah.

And 80 degrees in D.C., as you were pointing out before the call. Hey, you said a lot. Let me unpack a little bit of that. First off, Econ 1. Yes. I thought it was Econ 1. And my day it was Econ 101. What, has that changed to Econ 1?

So at Howard, it's Econ 001. Oh, zero, zero one. Okay. It depends upon the college. Yes. At my undergrad, it was Econ 101. One-on-one. Chris, was your 101 or were you one?

101. 101. And Dante, well, Dante was probably, well, Dante skipped 101. He didn't even need to do 101. No, more than I think the Penn State it was Econ 2 and 4, which was micro and macro, which made no sense to me. That's why I agree. I don't know. Right.

All right. Okay, well, now that we got that settled. Yeah. Yeah. Let me push back. First of all, Bill, let me say I'm very sympathetic to your perspective, but I'm going to push back. And then I'm going to let the other two guys weigh in as well.

But I think the concern is not at this point. When we were talking about inflation and monetary policy and, you know, what the Fed should be doing or not doing, which is obviously critical to the economic outlook, whether we go in a recession or not, because that depends on how aggressive the Fed needs to be here to quell the inflation. It's not so much goods prices anymore. I mean, I think most people would say, yeah, you're right, Bill. Good prices are falling. That was disrupted by the supply shocks created by the pandemic and perhaps the Russian invasion. Chips is the poster child, right, of the COVID disruptions. And the vehicle industry is, you know, the prime example of, you know,

the disruptions. So no argument there, but I think the concern at this point is that the increase in inflation due to these supply shocks has affected inflation expectations, you know, particularly among workers and consumers. So if you go look at the University of Michigan survey of consumer expectations, they're coming down, but they're still pretty elevated. Or look at the New York Federal Reserve survey of consumer expectations. They're coming down, but they're still pretty elevated. And that's gotten into wages. And then once it gets into wages, it feels like inflation potentially gets into the service side of the economy, becomes metastasizes in the sense. And that's much more difficult to kind of ring out. And right now, that's the concern.

So if you look at today's inflation numbers, the consumer expenditure for a core PCE, and you look at the so-called super core, this is now Jay Powell, the Fed of the chair, has pointed this, as the statistic he's most focused on. That's services X housing, that that actually remains stubbornly high and actually jumped again in the month of January. And yeah, you know, could be warm weather,

which juiced up demand. And of course, we've got all this income flowing into the economy because of big hike in Social Security payments. That juiced up demand, which could result in higher prices. And yeah, we've got seasonal adjustment issues,

both in terms of the warm weather and just so-called residual seasonality, because the pandemic messed with all the statistical techniques to tease out the seasonality. So, but nonetheless, that's where the problem was. What do you think? Is that you're saying we shouldn't be worried about that, nervous about it, hair on fire? That's just the wrong kind of perspective to have on that? It gets a yawn for a move.

Oh, it's a yawn. Okay. Oh, interesting. Okay. I find it poorly. Okay. So explain. Dante went over this, and it's very key to understand, right?

We are in a process of raising our minimum wage, and the states were the majority of Americans are. And that started pre-pandemic when we were, you know, in the final stages of recovery, but wages at the bottom have not responded. it's very hard to understand how we had several years of lower unemployment, you know, from 2019 and 2020, and wages weren't responding. And most states then stepped in and raised their minimum wage because we hadn't raised it in over a decade. It was at its lowest real level almost ever. And so, and it is in the states that haven't raised it. So now, if you go from 725 to 15, you would have to bake in huge increases, right?

Because you go 725, the next step in some states was 9. Well, that's a huge percentage increase. And so even the states that didn't go to 15, like Missouri, that only went to 12, they went from 725 to 10. These are huge increases. All of the wage increase when you look at the day. is coming in those industries that are dominated by low-wage workers. So the biggest industry where that's true is food services. So if you look at their increases, yeah, they were getting 10-12-per-cent increases

because the minimum wage is growing up 10-12%. And as a result, those wages made the distribution look pretty potent because our wage distribution is so skewed towards low wage workers, and it did need a correction. But it wasn't the rest of the labor market. I mean, if you looked at other workers, it was 3%, 4%. Excuse me, very modest wage increases that were taking place. And when you look at what unions were able to negotiate, it's not like employers were

they're going, oh, yes, we want to give, you know, big raises. We see the incident now with the train wreck involving Norfolk Southern. We have to remember how the rail industry responded. They didn't respond in this moment with big wage increases with what ended up being negotiated through Congress and the White House to reach that resolution. It had nothing to do with inflation. Their wage was way below the inflation rate with that. And the companies refused, even with that little tiny wage increase that they gave, they still refuse to give workers time off.

So, you know, you cannot point to a single labor contract that's been negotiator where workers have been saying, oh, wow, you know, we've got to get a 10% increase or 8% increase or a 7% increase. that's not where it's going, where workers actually get to bargain, and the companies are not responding with the sense that we have to give them. You know, this is a really terrible labor type. That's not how they've been responding. So what has been happening is as we slowly get to the $15 or $12 or whatever the state set, those wage increases at the bottom of monetary. rate rate rate. And so we're seeing the bottom slowly pull down what are the wage increases

that we see reported. And wages are coming back in. There is no market. There is no labor market of America where this gets baked up. It's impossible to bake in inflation. It's impossible. It's not on the map. It's impossible. Okay. So you're saying the the strong wage growth we've observed over the last couple, three years or so, is largely by the result of state minimum wage increases across the country. And they're being phased in over time, obviously. And so that's stepping up wages, particularly for, and obviously this would affect low wage workers, that beyond that, you don't see significant wage pressures, at least not pressures that would result in feigning higher rates of inflation.

That's correct. That's correct. Because what you have to remember is we have star wages at the bottom. And only when you have a good tight labor market and the minimum wage, do you get anything happening at the bottom? We've mandated wage increases. But when the labor market is tight, You get one more boost, which is because firms are hiring at the same time, we're raising the minimum wage. And if I'm a worker, any job I get is going to be a wage increase, right? Because I have to get the minimum wage increase. But those employers that are slightly above the minimum wage, those employers who are doing more to protect their wage structure, right because there's the issue of wage compression so if i'm currently making 20 cents more than the

minimum is my company only going to say okay well you just get the minimum wage we're just going to have wage compression you will you will now make as much as anybody i hire off the street or will my company say i got to pay you 20 cents more than the minimum and because any other employer is doing the same thing it's easy for me to switch and get a higher wage job and you saw this in a recent report from the Fed, the large number of workers were switching jobs and getting significant wage increases. And that's because no matter what, I'm going to, you know, if the minimum was going to 10, I'm going to get $10 an hour. But because I was already above the minimum, they're going to be employers out there who are going to respect that wage gap.

And I'm going to preserve it. it getting even bigger wage increase. So that is what has been going on. So that's to your optimism, this is temporary because we're coming to the end of these minimum wage hikes. And as that comes to an end, we'll see wage growth, let's say normalize, get back to something that's more consistent with the Fed's target. That's your optimism. Because many people overestimate the power of a low unemployment. employment rate on wages.

This is why the- Overestimate, you said, Bill? Overestimate? Overestimate. Because the current interpretation is, these wage increases are from a low unemployment rate. They're not from a low unemployment rate. They're from,

we raise the minimum wage and we have a low-un-appoint. Okay. So let me, and I'm sorry, guys, I'm going to turn it back to you in one second, but I just want to ask one other follow-on question. that seems to be a natural result of what you're saying, or maybe you've already said it and I missed it, the 3.4% unemployment rate,

which is at a, I don't know, you've got to go back to 1969 to find that unemployment rate, is not consistent with an economy that's operating beyond full employment. That's pretty consistent with, well, you characterize it. Is it full employment? Are we not at full employment? or would you disregard that concept altogether? No, we have a whole lot of space left.

Whole lot of space left, okay. Yeah, because labor force participation is endogenous to the labor market. Yeah. And so we cheat if we only look at the unemployment rate and don't consider where we are in labor force participation. Black and brown workers are used to lower wages. They disproportionately work in lower wage industry. and the labor force response so far has been among those marginalized workers.

So the labor force participation of blacks and Hispanic workers has been growing much faster than for whites. It continues to grow. There's a lot of room left to grow. If we finally get broader wage growth, then we're gonna see white labor force participation start to,

to respond as well. So far, white labor force participation is still been unimpressed by these wages, which, again, for me, is another indication that the wage growth really isn't all that. That it's not pulling in white work. Hey, Chris, let me turn to you. What do you think of this argument?

I mean, usually I'm kind of sort of over where Bill is, But Bill's even further over than I am. So what do you think of what Bill is saying? I guess I'm trying to connect the dots to the overall inflation picture here, right? So Dante started off saying, oh, the PC is up, right? And now we're going through trying to understand what the components are. So clearly the overall wage component is still high, right? But wages are rising 5%.

And I see that as a driver, certainly, of the overall inflation picture. Are you suggesting that's not the case or that it's not important? I guess I'm trying to square the circle here in terms of. Well, I think you're saying it's temporary. It's temporary. The wage growth is not the result of an overly tight labor market. That's not it. You got that wrong.

What it's about is... Just the minimum wage. Yeah. When I say temporary, it's over a period of several years because most states phase the these increases in over a period of time. But we're getting close to the end of that. Wage growth is actually moderating now. I mean, it went from five to closer to four most recently.

And that would be consistent with that observation. And therefore, you know, yeah, maybe it helped to support inflation, but, you know, that's temporary. It's going to come back in. Did I get that right, Bill? Sorry, I didn't mean to. That is exactly my. Yeah, okay.

Yeah. We totally underasked me and how many people make less of $15 an hour. I mean, when we were arguing for this, and this was one of President Biden's initial things. And so back in 21, you know, we wanted this 15. It was astounding the share of American workers under $15 an hour. It's a huge number of people. And because their wages are so low and we're raising them so much,

it's going to show up in the average, even if people at the top and in the middle aren't getting very many gains. So if it was the case that it was really being driven by labor shortages, right, you would think it should really show like a manufacturer where manufacturing employment was totally recovered from the dip that took place during the pandemic. And it's rising and it's back on track to continue its recovery from the great research. session, and in construction, we're at record levels in terms of construction. These are skilled workers. So you would think, if you're talking about a tight labor market, it ought to really show up with these skilled workers where we're suddenly seeing this demand go up, and their wages

are not going up 6 and 7 percent. They're not going up 5 percent. Dante, what do you think? Dante actually does he's a good rate he came from BLS does he's a great labor market economist and unlike me you know he actually runs a lot of regressions I've kind of gotten out of that I kind of just say stuff and then I go Dante did I get this right let's go prove it and Dante is in the business of proving it so so what do you think and I know you've done all our work around the minimum wage too I think so let me throw it back to you and participation let me throw it back to you

Yeah, I would say, you know, I buy the argument. I think the big question in my mind is, you know, if we believe that the labor market today isn't really fundamentally tighter than it was in 2019, which by most measures, it's not. It's about at the same place that we were pre-pandemic. You wage growth pre-pandemic, we struggled to get to 3%. Right. So if the labor market's just as tight today as it was then, how do we have wage growth that's significantly higher? And, you know, the minimum wage story is a piece that would add to that, you know, sort of help. help figure that puzzle out, right? That's the new thing that's happened. So we've got a labor

market that's roughly as tight as it was in 2019, but we've got, you know, all of these, you know, 25, 30 states that are still in the process of hiking minimum wages. And so I certainly think that contributes to sort of the elevated rate of wage growth that we're seeing today relative to, you know, the 3% we were seeing at the end of last cycle. You know, whether it accounts for the entire gap between, you know, sort of 3% and where we are right now, I, think that may be up for debate, but I certainly think that as you see those wage increases start to slow, right, as the pace of those increases and the number of states increasing minimum wages, I think you would see, you know, sort of assuming everything else stayed the same,

you'd see wage growth start to come in as a result of that, right? So I certainly think it is a component of that gap in wage growth that we're seeing today versus a few years ago. Let me say two things. One, my working hypothesis bill wasn't around the minimum wage, as to why wage growth jumped and why it's starting to come back in. It goes to inflation. My point about inflation expectations,

they jumped when Russia invaded and oil prices, gas prices, which is so key to people's thinking about future inflation jumped. And now that oil and gas prices are back in, inflation expectations are coming back in. Again, you can see it in the surveys in wage growth is monitoring. I didn't consider what you're pointing out here

around the minimum wage. And the second thing I'd say is, Dante, we should be able to figure this out, right? I mean, we've got controlled experiments. We've got different states raising minimum wages at different times and different amounts. So that's a perfect set of data for regression analysis to kind of tease this out. So Bill, you just made me assign a project for Dante. I gave him some work to do.

Sorry, Dante. All right. We had to get it a little while back, but I think it's worth dusting. Yeah, and I thought we had. I thought we had. We should resurrect that. Right. I'll share with you, Dante, one of the best.

dissertations I supervised, which was last year, one of my students did the whole job search model with the minimum wage. Before, it has been so long since we raised the minimum wage that the ability we have to look at job-to-job switches versus unemployment flows into employment. That data was over a horizon where the bit of a wage hadn't done anything. So her, to benefited from the fact that because she finished the dissertation last year, she had a couple of years where there are minimum wage increases going on across the states. And it is so telling that the wage pressure doesn't, wage pressure does not come from unemployment to employment.

We already kind of knew that. Before we knew it came from job to job. But when you throw in the minimum wage, even the job to job becomes less important. It is so important, particularly at the bottom 60% of the wage distribution. It's not very important. It's not significant above that. And it's not, you know, when you get to that middle quintile, it's not so big. It's really huge for the bottom of 40%.

And that's where the wage growth is the biggest, then wage growth at the top. Again, for these skilled workers who, I mean, because we're at construction levels that are historic. So this isn't like, oh, all the construction workers have come back home from pre-pandemic. These are new construction workers. So construction firms are desperate for people, skills. So you would think, if it happens, it has to do these manufacturing and these construction workers who would drive wages, not these workers at the bottom, but it's the workers at the bottom. Well, I have one question, and then we're going to go play the game, the statistics game,

and then we're going to come back and talk about a couple of other issues that I'd like to tackle with you, Bill. With regard to wage growth, you've mentioned, this a few times, that it's mostly at the bottom part of the distribution of wages. And you certainly can see that at least it seems intuitive if you look at wage growth by industry. So we've got leisure hospitality, low paying, you can see the wage growth. Retailing, low wage, you can see the growth. But are you looking at something else? Are you looking at other data when you say, you know, skilled workers are not getting big pay increases? I mean, I, I mean, I I tend to go right to the Atlanta Fed's wage tracker, you know, as a measure.

Are you, is that what you focus on? Or is there something else you're focusing on when you say that? No, I look at industry and then I look at this distribution analysis that has been done. Up John does a great job of this as well. And the growth has really created a wage compression, mostly because for the first time, if you put the bottom of a really gaining relative to everyone else. And at very large, and again, at very large amounts, this is not typical.

We did see it pre-pandemic, because pre-pandemic, some of the states had started to raise their minimum wages. So even pre-pandemic, we were seeing the wage growth of the bottom faster, in the middle and the top. And again, as Dante pointed out, at similar levels of unemployment, but higher levels of employment to population ratio. So the labor market was a little tighter than now.

And you didn't have the wage growth. And then, you know, what people still have to explain is, why is the labor force participation for black and Latino workers rising at such a fast rate relative to whites. And again, that's, it's just those wage, those wages are much more for them. So you're getting a bigger labor force participation response than you are among whites. You make significant more. Yeah, it's interesting.

I hadn't noticed that about the, you know, the racial differences, between participation. I need to go look at that. Well, let's play the game, the statistics game. And just to remind the listener, the game is we each put forward a number, a statistic. The rest of the group tries to figure that out through questions, clues, deductive reasoning. The best statistic is one that's not so easy that we all get it immediately and not so hard

that we never get it. And if it's apropos to the topic at hand, bonus. So Dante, I'm going to begin with you. I think I warned you I was going to come to you first, didn't I? You do. I believe I did. Yeah, okay. So this better be a good statistic, Dante.

Yeah, fire away. I'm going to go with 0.16%. 0.16. Yeah. Is it in today's data dump from the Bureau of Economic Analysis on spending income and inflation? It is. Okay. It's a month-to-month change.

percent change? Yes. Yes. Is it related to income? No. Is it related to spending? Yes. You see how you do this bill?

I'm going to wear him down, baby. Is it a category of spending? It is not a category of spending, no. Oh, okay. Now I'm stumped. I'm glad you clearly, you were not a careful reader of your email right before the podcast. So I was hoping it didn't give this one. way. Oh, because I was firing all kinds of questions at these guys.

In the spending number, it's not a category of spending. Gee, whiz, if it's in the spending data and it's not a category of spending, then what the heck is it? It's a- Is it a dry measure or something? It has to do with the top-line spending number, right? It was 1.1%. Right. That was the top-line month-over-month change. Yeah, right. 0.16 is related to that number.

Oh. Okay, but it's not like, I think both goods and services spending were up. Oh, is it real? Is it the real spending? Up point no. Yeah, it could be real spending was up. No, no, because the real spending was up 1.1.

So I don't know. I'm foundering here. Chris, what do you think? That's a tough one. Yeah. It was reported. It was as reported. It's not a derived number.

It's an average, so it's not directly reported, I don't think. Oh, you averaged it. And I should know this because I wrote about this in my email to you. No, somebody emailed it to you this morning. Oh, Bernard. Bernard Eros, our other colleague. I don't know. Is it an average over more than one month?

It is an average over more than one month. Oh, it's past three months. Correct. Because it's a big of real. Bill, Bill deserves credit for that. Yeah, Bill deserves credit for that. Yeah. So because real spend, go explain, explain.

Yeah, so real spending was up 1.1% in January, which was, you know, artificially inflated by the changes that happened with Social Security, with minimum wages. But spending had been down in November and December. So the average increase in spending over the last three months is only 0.16%. That's actually less than half the rate of growth compared to the three months prior, right? So spending is not as strong as this number today signals. It certainly seems to be weakening from the end of 2022. I think it just sort of adds to that same storyline that the economy is likely headed for, you know, slower times ahead.

You know, spending is not nearly as strong as that 1.1% suggests. Here's the thing that really strikes me about the real consumer spending. This is after inflation consumer spending. It's incredibly the growth in that real consumer spending is incredibly stable. I mean, if you look year over a year, because that, you know, cuts through the ups and downs and all arounds in the monthly data, we're a little over 2% real. Last month, we were a little bit below 2%. And if you, you know, take a step back, it's been hovering around 2%, which, by the way, is exactly the spending growth you want to see. It's not too hot, not too cold.

That it's kind of like right down the fairway kind of spending for more than a year. It's just, what seems to be happening is consumers, households are calibrating their spending. spending, you know, drawing down their excess saving, calibrating their spend, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, you know, typical spending. Nothing out of bounds. You know, people aren't spending with a band, and they're just doing what they typically do. Is that, is that, Dante, is that a fair characterization? I mean, it certainly seems what's what's happening in the data. I mean, yes, it seems like people are trying to keep their spending levels relatively Yeah, and I think that's a good way to look at it. We don't, what bothered me when we had that disruption, and all of us knew, well, you know, doing year over year is going to be a big problem because it was, you know, consumption had been down so much. Is, is, again, figuring out what do you consider to be demand? What's, you know, people were speaking about the demand for autos is what was driving up prices, not the fact that we couldn't make auto.

goes faster than we could and break recession. And it's like, but, you know, the auto is you have to think of as a flow, like is it, is it a year or is it poor two years? Or what do you really want to have as a measure? This longer term view that the growth is pretty consistent, I think is what we're supposed to be paying attention to.

It's the way of smoothing over and unprecedented period that has no, you know, that has, I think, challenged us on these notions about what's the proper measure for domain. When you don't have these kind of disruptions, then you can get used to it. That's 2%. It's always 2%. Right? But what happens when, when it drops 4%, or, then what do you do? Right, right. Very good. Well, that was a good one, Dante. I mean, I'm a little ashamed.

We should have gotten that more quickly. That was a really good one. And you're right. Bernard Yaros, our other colleague in an email exchange, made actually said 0.16, right? You're right. You're right.

Chris, let me go to you next. What's your statistic? Okay. Down, so negative 25.9%. And up 7.2%. So. Down. Somewhat related.

Somewhat related. Well, they're not from the same release, but they are related conceptually. Okay. Well, standard set of questions, are they from today's BEA data dump? No. They're not. Okay. No.

So I'm not keeping with the, they're not labor market related either. Is it housing? Housing. It's housing. Housing related. Bill, you got to know, Chris. He's a houser. You know, he just loves the housing data.

And with good reason, he's a really good housing economist. Is it related to house prices? No. Oh. Is it related to housing starts? Nope. Home sales. One of them is new home sales.

New home sales of just today. So it's the 7.2% is the increase in new home sales released today? Oh, I missed that. You over here. You could see that. Okay. What's the level? Do you know offhand, Chris?

670. Okay. That's not that. actually. 67. No, it's stronger than we anticipated. And we were on the high end of consensus. Existing home sales are down 25.9%.

No. No. They're down a lot, though, because year over year, they're down a lot. They are. Yeah. It might be close, but that's not the number in mind. It's not a number you had in mind. No.

The rent offers is dramatically since summer. That would be a, that would be a, that would be a big decline, 25%. That price is. Yeah. Came out yesterday. It came out yesterday. Oh.

Part of a bigger report. Oh. Care of incomes spent on housing? No. No. That would... Came from the B.A. Came from the B.A.

What came out yesterday? GDP came out yesterday. Oh, residential investment was down. 25.9% in the... Single family, I would assume. Or is it total? Residential investment. All in residential was down 25%.

Oh, okay. On an annualized basis in the fourth quarter. Oh, in the fourth. Oh, okay. Right. So the idea was that's the backward looking number, right? Yep. Q4 was weak, but forward looking perhaps.

Oh, you see how he does this now? He's trying to make sense out of these numbers. Crazy numbers he picks. You know, the month increase in new home sales versus the quarterly annualized decline in residential. Okay. We're going to connect those dots. Okay, the way I connected is backward looking, forward looking.

There you go. There you go. All right. Well, what's the, there's a lot of messages there, but what's the one, what do you want to point out with the statistics? Oh, that, just that, consistent with some of the other hot statistics, housing also seems to be perhaps turning the corner, at least based on this new home sales number. Do you believe that?

I think, I think, bottoming. I don't see, I don't see another leg down unless something. else major happens. In sales, you don't expect. In sales, correct. Yeah. Right. Do you think that the drag from housing, and this is really single-family housing, that

minus 25% annualized decline is probably bulk of that, vast majority of that's probably single-family? Do you think we're finished with that drag, or are we pretty close? Are we going to see more declines in construction, a single-family construction here? or are we pretty close to the end of the drag? I expect that we're close to the end. I mean, completions will continue throughout the year, right? So permits and starts, we know, are down,

and they're going to take a while to pick back up, although you're seeing some signs of life there too, but the completions, the construction home building continues because there's such a pipeline on both the single family and multifamily side. So I expect that to continue to contribute. And you're not worried about the mortgage. rate changing away that?

Certainly possibly. But our forecast calls for mortgage rate to be relatively flat because we have such a large spread right now between the 30 year and the 10 year, right, as the Fed has gone. 30-year fixed and the 10-year treasury. Yeah, sorry. Yeah. Right. As the Fed has gone from equine quantitative easing the tightening.

But I do expect to see investors coming back in. and narrowing that spread. So even though the 10-year treasury might be rising here, the mortgage rate may not go up by a similar degree. But it's definitely a risk, right? So if mortgage rates do rise appreciably, then that would put cold water on the market. You know, one thing I learned at the Joint Center for Housing Studies Conference,

we had Chris Herbert, who was the executive, I think the managing director of the Harvard Center for Housing, and he asked me to speak at the conference. I think we had them on a couple weeks ago. One thing I learned at the conference is that new home builders have effectively cut price dramatically. They're saying, and these are CEOs of, you know, major home builders, down 10% from the peak.

And that goes to, you know, various concessions, including interest rate buy downs, so-called interest rate buy downs, where the builder will effectively lower the rate for the buyer to get them into that home. And so we've already seen a pretty significant adjustment in new home prices, if you believe that. Not yet an existing price, right?

Chris, you want to just mention quickly our own house price index that we construct. We just published the January number for HPI House Price Index yesterday. That's right. So Moody's Analyx House Price Index was down 1% in the month of January from December. That's significant, right? had been pretty flat for the last few months, right? We had basically we had a decline in the second quarter of last year. We plateaued for a bit in the fall, and now we're seeing another leg down.

So we're down about about 2%, I would say. So we are seeing those price adjustments occurring in the existing family side, but it's going to be a bit of a tug-in-war zig-zag across here. So it's a, you noticed the Bay Area California prices are down over 10. Did you see that, though? Yeah. Yeah. Yeah.

So you're definitely seeing some markets that are. Yeah. My home in Philly is fine, just saying. And, you know, I'm okay in Philly. Of course, the prices never rose. So that, you know, that helps. That helps. They don't go up.

They don't go down. Hey, Bill, do you want to play this game? And that was the fascinating thing. You know, this was so uneven with the house prices. And because, you know, the national level, or it averaged out to this higher number that I always felt that was a misleading you know sort of part of the story

and ironically for those of us who worry about gentrification it tended to slow gentrification what was going on so yeah yeah hey do you want to play the game bill I will play the game, but I have two numbers, but in fairness so that it doesn't, you know, you warn me, it can't be too obscure. So I will.

It's okay. It's okay. You can do whatever you're comfortable with. Okay, well, it comes from the CPI. So my two numbers are 1.3 and 9. All positive, 1.3 and 9. It comes from the consumer price. Yes. Are they categories?

Yes, categories. And is it month to month or year over year? Year over year. So it's two different categories of CPI. One's up one, you said, 1.3, the other is nine. Boy, that's interesting because he's picked two categories that there's some meaning to them, some deep meaning. some deep, deep meaning.

Nine percent feels like food prices. Yeah, that's what I'm like. Is that right, Bill? It's, uh, it is, it is, uh, something people consume, yes. Oh. Are both things people consume? 1.3 and, oh is not, nine can't be egg, egg prices, can they? Can they? No, because it would be higher than that. I think you're over here.

1.3. 1.3 is like chicken wings. No. Like, the only reason I know. that is because in the Super Bowl, you know, Philly was all into the Super Bowl. So all we were doing is eating wings. And they actually, we've got a lot of wings. The avian flu has really hurt chickens that lay eggs, but apparently I'm learning all this stuff about chickens.

It left them with wings. Yes. Exactly. Oh, that sounds really morbid somehow, but yeah, okay. I did give you a little bit of warning because I hesitated on the, you consume it, but food. Oh, you. Oh, no, that is really perplexing what he just said.

It's food, but you consume it, but not really. Some people wouldn't say it's food. It is something you consume, but I don't, I mean, you know, food. It's a broad sense food. Is it a beverage? A beverage, exactly. Oh, I see. Alcoholic beverage?

It's in the alcoholic beverage category, yes. Oh, beer? Beer? Beer is nine. Okay. Beer is nine. Beer at home. Beer bought.

Okay. Okay. Interesting. And hard liquor is 1.3. Whiskey. And hard liquor is 1.3. Oh. This I posit as the true, what's the counterfactual to understand price movement.

Okay. Right? Because the supply of whiskey is, you know, practically vertical, unless you're cheating and you're labeling. And you hope that no one, you know, attention but it's perfectly vertical so why would whiskey be up 1.3 but beer up 9 9 because you have to have brains all of that time and um and the price of grains have been up and so whiskey is it depends on the whiskey but doesn't it depend on like well i mean yeah but you you you could get one-year-aged whiskey. Oh, I see.

I see. One year. I mean, you... Oh, I see. It's not old whiskey. Yeah, you're saying in the here and now, the beer relies on the here and now grain supply, and that's problematic, you know, grains prices because of the Russian invasion and everything else. But for

the whiskey and other hard liquors that, you know, mature over time, the supply here and now isn't as big a deal, therefore the price isn't up as much. No, but if demand, if you're telling a demand story, right? Yeah. And alcohol is very much a normal good.

Contrary to what people think. Yeah. Higher income, you spend more money. Oh, I see. I see. And so, so why isn't, why isn't, why isn't whiskey being bid up? It, it, it, it, it has this vertical supply per. The price of whiskey should be moving, but it's not doing very much. And beer is doing about what I would expect given that they have to get barley and hops and hops is hurt greatly by the heat wave in Europe. So I bet you're a great professor. I bet kids love you. This whole, this whole beer whiskey thing. They're all over that. Yeah. Mark, right? Dante, wouldn't you, Penn State when you want Bill to be there teaching you that, you know, about the beer and the whiskey? I would.

Yes, it's a better way to frame it. Yeah. Anyway. All right. I over to beer, Mark, are you? Maybe that's I, you know, that's too personal a question, Chris. Dante's travel plans are fine. That is over the line. The only dishes out the tough questions, Chris. Right, exactly. No, wait, that's not fair. People listen to this podcast know way more about me than they know about you guys.

Because that's over the line. But anyway, we've got to move on because we're running out of time. And I promise Bill, we only take an hour. I want to come back to another quick topic around policy. And it goes almost all the way back to the discussion we had around chips. And the Biden administration's really interesting kind of focus on, let's call it, industrial policy, you know, policies that are implemented to help support some aspect of the U.S. economy. It's not, you know, broadly, it's not focused on broadly helping the economy, but certain sectors of the economy.

economy. Like the Chips Act that was passed last year, that's obviously for the chip industry, which is not just being rolled out. The Inflation Reduction Act, which was passed in the last year, was really focused on, you know, incenting green energy of production and investment. Even the infrastructure bill to some degree, you know, it's kind of, you know, designed to help, you know, U.S. industry, transportation, distribution, manufacturing. And the interesting thing to me is when I first was coming up as a professional economist and going in graduate school. Industrial policy was kind of a, was a verboten, right? No one liked the idea of industrial policy. You can't pick winners and losers. But here we are. It feels like the administration's kind of sort of

going down that path. And everyone seems to be on board. You know, there seems some bipartisan in support because the president got bipartisan, got Republican votes for, certainly for the infrastructure legislation and the Chips Act, not the IRA, the inflation reduction act, but nonetheless, is that, what do you think of that? Did I characterize that bill correctly? And what do you think of that policy, kind of initiative and change that the administration's engaged in? No, I think that's a very accurate characterization. I think. as typical economists, you know, put their blinders on, it is impossible to have a neutral set of policies that it's just not possible. There is a reality we had an industrial policy.

Right. We favorit certain activities over others. Nobody ever complained about the huge amount of the United States spends on military. that created a kind of sick economy going all the way back to Bill Clinton. One of his top advisors, remember, noted that like almost 90% of the, it's some huge number. I don't remember who was 90, but it was some improbable huge number of American manufacturing and electronics was defense. that American manufacturers had given up consumer electronics because the margins were so high on defense.

They had all sorts of protections from competition and some new ways. So they gave up consumer electronics, even though we're the ones who practically invented so much of it. You know, whether we invented the stereo system, like, because we invented the gramophone. the record player, we invented the television, and we played a very hard and huge role in radio. So consumer electronics, and we invented the telethon. So, you know, in terms of consumer electronics, we had this natural advantage, but we had given it up because hidden in all the policies was do it for defense, but we're in about a 1% or 2% margin.

we're not going to worry about a 1 or 2% margin. We won't do it. We let other countries get away with all sorts of subsidies because other countries have industrial policy. They understood, for instance, you want to control flat screens. We gave up televisions. And yet, flat screen technology is really important.

So the reality is that there never was this level playing field and it was just, you know, people just compete and, you know, we're not favoring anything either by not responding to what other countries were doing on labor standards, on wages, on forced labor, you name it, if you're going to let the Wild Wild West, go on outside the U.S. in terms of all of that, the WTO, it turns out, is not really an uninfluenced. force resolution to making all of that neutral, then you have a default industrial policy, which did not favor American manufacturing. And so this, I think, was a final sort of response that we've grown up. We've taken the blinders off and we realize that our policies got us what we

got because implicitly, I would say explicitly, right, we favored certain activities on a relative sense. And this is a simple recalibration. And we saw that it hurt us because we have built supply chains that were way too firm that did not incorporate the real risks involved. and that going forward, that wouldn't be a good position. So absent what the president was doing, there are a number of companies that were reshoring some activities with that realization, but what the president is doing is simply making those decisions

even easier in a way, if you will. And it is in our interest. We should not have totally given up a lot. the new technology that's going on in manufacturing, which is going to increase productivity even more, is all process technology. And one thing that I think is a realization in American manufacturing is when you do give up production,

when you think all I do is just design the product, you give up on the process technology. Because your engineers aren't on the floor every day trying to figure out, you know, how can I make television? Because you don't make them. So all of that process technology, that's the smart technology that's being put in place, has also signaled to many companies.

You've got to onshore because if you're not actively making the product, there are huge elements of new technological advances that are taking place. You don't get to participate in it because you, taking yourself out of their time. So I think part of this is a realization from companies partly because of smart technology and manufacturing, partly because they saw how exposed they were, that these supply chains were way too thin and didn't have nearly enough redundancies built in and then this incentive by the president. And all of this gets back to why I'm, you know, so upset with Fed because while these companies are trying their best to make adoption to the risks

the world will face going forward, disruptings are going to increase. Global warming is going to continue to wreck havoc on food production and because of floods and severe storms on the production on the production of goods. And as we saw from the pandemic, even if it's not a global pandemic, the risk of a country having a severe health disruption can make us vulnerable. And as we found out from the chips, it turns out there's like three companies that are doing it. So I think all of this requires us to think anew about ensuring that companies can respond. if I'm trying to respond to a chip shortage as the auto industry was and we have all your buyers out beating every door they can to get chips.

The last thing I want is for the Fed to say, oh, no, we don't want to sell cars. Like, how can I solve this problem? And you're trying to destroy my market. This is not complementary of what needs to take place. And going forward, we, we need. need that flexibility. We need companies to know there's still going to be demand on the other side of myself in the supply shop, and they're going to be more supply shots.

We just have to get used to that. Yeah. Well, so, yeah, it's an interesting point. You're saying, look, we've always had an industrial policy. But before now, it was really, you know, not by design. It was de facto. It just happened. And not with no deliberation, no thought, it just, you know, we did it because there's winners

and losers with any tax policy or spending policy. So if that's the case, then we've always had industrial policy, let's just be more deliberate about it and think about it and design it so that we, you know, at least we have a fighting chance of making it more effective. There will always be cases where we pick the wrong winners and failed to help the, you know, fail to help the winners and, and, you know what I'm trying to say. You know, we didn't get the winners and the losers, the losers, right. But, you know, that's better than just kind of thrown up your hands and just letting

industrial policy run amok. That makes, that makes a lot of sense to me. And I, you keep coming back to the Fed. You know, you're saying there that, you know, look, the, the reason why inflation is high is, is, just give it time. You know, it'll settle in. No reason to slam this economy into the ground. And by the way, by slamming the economy into the ground,

you're making it more difficult for these companies to execute on taking advantage of the, you know, what the administration is doing here with regard to industrial policy. So very interesting. Okay. Well, we've covered a lot of ground and taken a lot of your time and you really appreciate it. And I want to thank you for spending over an hour with us. any last words guys anything else you want to say or should we call this a podcast you know it's bill we were we were joking last uh podcast that are they always end up being an hour in 10 minutes

and and and uh i think this is going to be an hour in 10 minutes and and the lot thinking was that that's when we run out of juice so i think that's right right out of juice I think we've all run out of juice we know we need to go get some lunch so uh with that any any last words hearing none okay we're going to call this a podcast me. Pardon me? Thanks for including me. Oh, absolutely. Anytime. You come back anytime. Okay. Yeah. And you got to come back with a better, another example, beer, whiskey example. That, you know, when you got that, we'll have you back on. But with that, we're going to call it a podcast. Thank you, everyone. Take care now.