Moody's Talks - Inside Economics - The Inbox Episode

Episode Date: April 18, 2025

This episode marks our four-year anniversary doing the Inside Economic podcast, and we devote the conversation to responding to listener questions.  We’ve been getting lots of great Qs, ranging from the global trade war and DOGE cuts to immigration and productivity growth.  Keep the questions coming. Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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 Zandi, the chief economist of Moody's Analytics, and this is kind of a rare treat. It's just the two co-hosts in me. Wow. Marissa Dina Talley and Chris Dorees. That's rare, isn't it, guys? Yeah, I love it. It definitely is.

Just the family. It's been a while since we've just had the floor to ourselves, so it feels good. We're taping the podcast a little bit early. This is a Thursday afternoon, and why are we doing that exactly? Why not? Is it? Well, we have a half day tomorrow. Oh, is that right?

Leading up to Easter. Is that why? I don't know. I don't know why we're doing it. That may be it. Yeah. Early Easter. We had half the day off tomorrow?

We do. Oh, cool. Did you know that, Chris? I did not know that. You did it? Chris views that as a time to get ahead of everybody else. Everybody else shuts down. That's a nice quiet time.

You can get a lot of work done. I'll be using it to write a commentary that's a week overdue. Oh, there you go. We'll all be working. And Sarah told us before we got on, this is the four-year anniversary of Inside Economics, four years at this podcast. Wow. That's pretty amazing.

Congratulations. So what do you think? Well, I haven't been on for four years. I think I've only been on for two and a half. Two and a half? I can't believe it's been that long, actually. Yeah. Right.

You know, most TV shows, they end after four seasons. What do you think? I think not anymore. Not anymore? Lots of seasons. 10. Okay, then we'll be on for a while. We're going to drag this out.

Yeah. People can't stand it anymore. Yeah, we'll drag this out. Yeah, good. Yeah, it's been a good four years. We've covered a lot of ground in four years. Yeah. A lot of things going on.

Of course, we're in the middle of a pretty serious global trade war. A lot of going on there. Really? Yeah. You've been following? A lot going on. on. The most recent thing is Chair Powell, Fed Chair Powell gave a talk at the Economic Club of Chicago. Did you guys read that? It was a really short speech. Did you guys read the speech?

I watched it live. Oh, you watched it live. And then I watched the interview afterward, yeah. Yeah. Well, why don't you paraphrase? What did he say in the talk? He thinks that given heightened uncertainty, the Fed is going to be happy. having to balance likely inflation with slower growth. And the upshot of that, his comments were, I mean, he thinks that the trade war will do damage to the economy. They're still focused on their dual mandate of full employment and bringing inflation down to the 2% bound. He said that when asked about this push and pull between slower growth and inflation and how they're going to deal with that. He said that they've decided that what they're going to do is they're just

going to have to look at the data and see which mandate they're further away from, like, which one seems more pressing at the time and deal with that. So if it looks like, you know, growth is hanging in there, but inflation is running away, then they may raise rates. And if it's the opposite, they may lower rates. And so he seems really focused on data. Those were his remarks. And then there was an interview after that where they delved into other things, such as Fed Independence. And that came to the fore overnight and today, right? Because I guess President Trump has been posting on social media, what would be the right word, his annoyance umbrage with, I mean, the bottom line of Chair Powell's statement was,

or speech was that, at least from my vantage point, was he's not going to be moving on rates anytime soon, certainly not cutting rates, right? Because inflation is going to be the initial effect of these higher tariffs, and inflation expectations are pretty elevated. Certainly consumer inflation expectations are elevated. And given that, that argues for, I don't know that it argues at this point for rate increases, but it certainly doesn't argue for rate cuts. So he's going to sit on his hands. And President Trump, I sound like he got to pretty annoyed at that and said, you're always too late and kind of intimated, I thought, correct from my wrong, that, you know, he might figure out, try to figure out a way to

replace a Powell before Powell's term is up, which I believe is May 2026, a little over a year from now. Yes, that is a termination can't come fast enough. That's what he said, right, right. What do you think of that, Chris? I mean, what you're... I don't, yeah, is that May, or Martin, 2020. 26 can't come fast enough or is it, uh, right?

Or is he going to accelerate the timeline here? Yeah. Yeah. I mean, surprised that he actually, well, I don't know if I would be surprised anymore, but that he would actually take action because that's going to be a legal fight as well. Well, there's a case before the Supreme Court right now that is, that kind of deals with this, right?

It's looking at a precedent that goes back to the 1930s that says a president can't, fire a political appointee for policy differences. And this was in response to Trump firing the head of the NLRB and another agency. I can't remember. And Powell commented on this yesterday, which I think is part of the other reason why President Trump, you know, responded. And Jay Powell said, I don't think that this applies to the Fed, you know, this law, but he's not concerned. He thinks the Federal Reserve Act and precedent give the Fed independence and it's against the law to fire him without cause. So I think partially President Trump's response was to those comments as well.

And then, of course, the European Central Bank cut rates this morning. Right. So that kind of added fuel to the fire, too, I think. Of course, the Europeans aren't raising tariffs like the U.S. is, right? No, they just have to react, right? Yeah. And, of course, the growth effects in Europe are much more significant, right? So, yeah.

Well, Chris, what do you think about what this all means for central bank Fed independence? It's at risk, certainly. Even if the direct actions aren't taken, if he doesn't terminate him or it takes a while, whatever, it's still, it's polluting the waters, right? It's certainly got to make investors nervous that maybe there won't be that independence, right? It's just not clear. So I don't think it helps the cause. Let's put it that way.

Yeah, the thing that always absolutely, I mean, this is a, it feels like a direct affront to central bank independence, right? I mean, he's saying, hey, cut rates, you know, or I'm going to terminate you. I don't know how else you articulate what's going on here. than that's a direct affront to central bank independence. I mean, to the point where Chair Powell is actually having to explain why he can't be thrown out, you know, I mean, that's pretty significant stuff. And, you know, a couple things perplex me about that. One is I would have expected a more negative reaction in markets. Like today, this all happened. Powell was yesterday on a Wednesday, and President Trump was

posting on this last night and talking about it earlier today, Thursday in the markets, they, you know, they, I don't know where they ended, but they didn't, they weren't up, but I don't think they were down that much either. So I found that a little perplexing. And the other thing I, more fundamentally,

it just feels counterproductive to me for the president to kind of hammer the Fed chief over this. I mean, then he's saying, Look, I don't want you use your best judgment about the economy and the dual mandate of low and stable inflation and full employment. I want you to lower rates because, you know, I'm more worried for me, from a political perspective, I think that's better, you know, for how this will play out. And if I were an investor, a bond investor, listening to all this, I'd get the hebie-gibis. I don't know if that's a word, but, you know, that describes what I'd get, the heibi-gibs. Is that worse than the yips?

I think it's worse than the yips in my nomenclature. The yips said, I keep thinking of golf with the yips. E.B.G.B. is a real, you're shaking all over. It's like, you know, it's like, this is really scary stuff, you know. And, but, you know, that would argue for a higher long-term rates, all else equal. So even if you got the Fed to lower rates, it would result in a higher-term interest rates. intermediate term rates, which from a macroeconomic perspective, for what it means for the real economy, is probably worse, right? Because that means mortgage rates are higher. That means auto loan

rates are higher. That means small business loans are higher, you know, all those kinds of things. So I find it really odd where you can, you know, one can think that by job-boning the Fed, by brow-beating the Fed, that that actually ends things in a way that's even, that is in your favor. It just shows, I don't know what that shows. I'm just perplexed by it. Agreed? So you should have asked for quantitative easing, I guess. Yes, right.

Yeah. Yeah, go out by bonds. Yeah, go out and buy bonds. Right. That would help. Yeah, right. Okay, well, we got to watch this carefully. You know, I do think that one of the cornerstones of a well-functioning

economy, a market economy, I think this has been well established over the decades, is a independent central bank and independent Fed. They set policy based on what's going on in the economy and achieving their goals as opposed to anything political, which always ends badly, historically. So, you know, this needs to be watched carefully. It also raises the kind of the ante on who the president appoints for the next Fed chair, right? Right? Because, I mean, that's going to be a real tell, you know. So I don't know. It doesn't feel like it's a great time to be a bond investor. You got a lot of things to worry about. Big deficits in debt, trade wars, questioning of the reserve currency status, the saving dollar. What's that? Falling dollar. Falling dollar. You know,

holy cow. What a mess. So are you surprised that the bond hasn't, Mark, hasn't even reacted more forcefully? Yeah. So, 4.3. Yeah, it got as high as four and a half. Yeah, 4.3. I did see a really interesting, and I think I sent it around to everybody, this interesting study. And I apologize to the authors.

I don't remember who they were, but that showed the relationship between the spread, between the 10-year treasury yield and the 10-year German Bund and the change in the euro-dollar exchange rate. And, you know, these things are very closely related because interest rate differentials are key to determining short-term movements and currency. And, you know, they show this nice chart where the relationship is very, very strong. And then everything breaks apart, you know, since early April, since Liberation Day, where the 10-year-year-old has gone up and the dollar, euro dollars, you know, dollars value against the euro has gone down. And it's so counter to

anything. And, you know, strongly suggests that investors are nervous about the safe haven status of the U.S. as a result of all of this. So it's not up as much as I thought, but, still, it's up, which is not what you would expect, you know, given what's going on. Yeah, I heard an interesting bond investor talking about the U.S. being or behaving much more like an emerging market than in terms of the bond relationship and the value of the dollar and it's counter to what you would expect in a developed economy, but not counter to what you might expect in an emerging market where there's some political unrest. Oh, I see.

Yeah, that's what you would expect. Change our framework. Yeah, exactly. I hadn't thought about it that way, but that's exactly right. Well, that's a sad commentary. Yeah. Yeah. Geez.

Anyway, well, this podcast might, is going to be different. We don't have a guest. That's when we've had lots of guests recently. We don't have, we're not going to play the game. We're just going to take listener questions. We've been getting a lot of questions. And I thought we just spend the rest of our time, you know, fielding. I haven't looked at the questions. Chris, I don't think you have. I think only Marissa has.

So maybe, Mercy, you can kind of lead the way here and just fire away and we'll take a crack at answering these cues as best we can. Yeah, there's a ton. And please keep sending them in. We don't do this very often because we usually have a guest on so we don't have time to take questions. But because I know what the questions are, you know, when we can, we try to work the answers in or steer the conversation to answer some of the questions. So appreciate everybody's questions and you know guys we have really smart listeners we really do we have very thought and thoughtful smart listeners that ask really really good questions so are you are you sucking up to the listeners is that what you're doing i mean we don't i i don't think

we do i think she wants fan mail chris you see that's not what i want i just want to say thank you to people people write really nice stuff to us and we don't often um they're thank you back so i'm yeah you're right you're absolutely right i'll suck up I love our listeners. You guys are great. Keep the questions. Okay, so there's lots of different topics. I mean, we can go tariff.

We can go labor market. We can go Fed. Let's see. Do you think, do you have a preference? I thought maybe we should go tariff first because all the rest kind of flows from that. Sure. Yeah. No?

Oh, I didn't mean to interrupt. Go ahead. Yeah, yeah. I think that's the way I have it organized. Oh, okay, okay, great. sick of tariffs. I don't want to micromanage. I'm good at that, but, you know. You're really not. I'm not. Okay, good. Oh, that's good to hear. You're a macro. I'm just the opposite. I'm criticizing me because I'm not. I'm a macro.

That wasn't a criticism. Okay. Here we go. So concerning tariffs, do you think that maybe one of the reasons for these tariffs could be, because we hear a lot of reasons, right? Every day, there's a new reason justifying this seemingly. be to diversify supply chains to the U.S. I don't see jobs being created in the United States, given things could change in the next term at the absolute latest, but for pushing trade to other nations that may or may not be to our favor. That might make more sense, but it comes with repercussions. What are your thoughts? I don't know. What do you think, Chris?

So I see it as a consequence, certainly, but I don't see it as the motivation, right? Certainly there are other ways you could diversify the supply chain more effectively. If that's really the objective, then just broad-based tariffs. Yeah. Is the thinking that the supply chains are not resilient enough, not, I guess they use the word diversified. Therefore, I see. Well, I definitely don't think that's a motivation.

Right. I mean, what you're doing there then is raising costs, you know, presumably, significantly. It's making the supply chains less efficient. You would think you'd want to let the market, I guess the quite the way I would think about this is what's the market failure here? You know, what are you trying to solve? I mean, don't you think the marketplace, because this is pretty complex. These supply chains are very, very, they're long and there's a lot of movement. moving parts. They're very complex. And you would think the market would be the best arbiter of what is the most efficient way of organizing around these supply chains. You know, and they learn. I mean, I think we learned a lot after the pandemic. And we learned quite a bit when the number of the supply chains have been disrupted by different Houthis in the Red Sea and the problems in the Suez Canal and the Panama Canal. So there's been a lot of, you know, stress has put on the supply chains

and they responded and, you know, reorganized. But, you know, really using tariffs to try to get supply chains to move in a certain, that's a pretty tenuous, seems almost impossible to execute on. And I don't know, I'm not even sure. I just don't see that working out well for anybody. I just really don't.

So if I haven't heard that explanation and I think with good reason, it just doesn't, it's just not at all intuitive to me that that's what's going on here. Maybe a targeted tariff, you could make that argument, right? If you thought that overly dependent, we're overly dependent on China and you want to, you know, move that that supply chain around. But the broad-based tariff, right, tariff in Canada, tariffing Mexico all around, that's, you know, that just throws everything in disarray, right? I mean, this. Well, let me say one other thing, and that is the way the tariffs are being set. That doesn't, it's not consistent with the idea that there's any, exactly, any kind of grand plan here. I have a 10% across the board tariff. That's not going to change anything. And then I have these reciprocal, so-called reciprocal tariffs that are based on nothing other than I'm making this up, you know,

which has been shown very clearly that they're, you know, the formula used here is just the trade deficit. It has nothing to do with anything. So it's certainly not with, supply chain resilience or, you know, even fair trade. It's just the deficit is large, therefore you've got to pay a higher reciprocal tariff. So I think it's being revealed to us that there's no grand plan here, you know, has nothing to do with anything other than God knows what. Okay. Yeah. Do you have anything to add there? Do we miss anything, Marissa? Well, just that, I mean, I do think there was certainly post-pandemic, there was, effort by the Biden administration to try to divert production of semiconductors, chips, batteries,

that kind of thing, bring that more to the U.S., so we were less reliant on China for that. And part of that was coming out of supply chain concerns. But to your point, that was very targeted, right? Whereas this time around, if there was a strategy to divert supply chains or diversify them, then you would think there would be carve out somewhere where they wanted. those supply chains to go or divert too. But since we're tariffing everyone, it's not clear really who has any advantage here if everyone's being hurt by it. Yeah, the other thing is, and this is a good place to talk about the difference between what President Trump is doing

with the tariff and the trade war and what Biden did with tax incentives, you know, around the Chips Act and the Inflation Reduction Act. You know, those were big pieces of legislation that provided a tax subsidy to the private sector to get the private sector to invest more in manufacturing activity, particularly things like chips and clean energy, things that are deemed to be relative to national security. And in my view, the tariff approach absolutely will not work because no one knows what the tariffs will be. You know, no, next week, let alone three, ten years from now when these investments come to fruition, whereas that we know for a fact, it's empirical, you can go take a look, the tax subsidies

worked by better than expected, in fact. If you look at investment in manufacturing facilities, that's construction put in place in manufacturing facilities, factories, I'm making this up, but you can Google it or chat GPT it. Before the Chips Act was passed in 2020, investment annually in manufacturing was about $75 billion per annum, give or take. Some years a little higher, some years a little lower. Last I looked, we were at over $200 billion annualized. That was a slam dunk success in getting chip plans to move here.

Then the other, the Inflation Reduction Act, you know, that's been oversubscribed. You know, there was no limit on how much tax subsidy could be taken down, and it was taken down by orders of magnitude. Now, you could say the tariffs generate revenue and the other is a tax subsidy, but if you look at the legislation for the IRA and for the Chips Act, those pieces of legislation were paid for. You know, they had other pay for tax increases and spending cuts to pay for, so they were deficit neutral and they were able to accomplish that. So I think the targeted nature and the very specific kind of focus and the tax subsidy, that's success to reorient, you know, manufacturing back here at home. But the tariffs, I really don't see it. I just don't see that happening.

Okay. Here's another tariff question. On the episode State of the American Consumer, which I think is when we had Scott on last, you discussed the risk to retailers of rising energy prices, and it seemed you were referring primarily to gas prices. I think we were saying that rising prices at the pump would lead to pull back in consumer spending. That's what we're saying. If that is the case, what are your thoughts on the mid-25 to late 26 impact of tariffs on Canada driving up energy, i.e. oil and gas prices at the pump here in the U.S.? How do you think this?

This further plays into the theme of over the past few years of the strong American consumer. Could this further impact corporation supply chain costs from a transportation standpoint, leading to additional price hikes and goods and services, in turn, less consuming, and then further, a broad market pullback. Talk me off a cliff. Ha, ha. Well done. Well executed.

Well, I guess I'll take the first crack at that. Well, higher energy prices, higher oil, gasoline, natural gas prices would be a hit to the consumer. You know, it saps real purchasing power and hurts confidence and sentiment. You know, if you're paying more at the pump, nothing gets people more upset and hurts more. than paying more at the gasoline pump. And it would result in higher costs for grocery stores because a big part of getting food from the farm to the store shelf is diesel

and it affect other prices as well. So that's very negative. And the tariffs don't help there all else being equal. If there's tariffs on Canadian oil and energy products coming into the U.S., then that adds to that concern. But I will say, I don't think we're going to see too large an increase in oil prices in the current context because the higher tariffs and trade

war are crushing demand. They're weakening the economy, the global economy, not just the U.S. economy. You know, the Chinese economy is a big consumer of energy and they're going to consume less. I mean, their manufacturing base must be, you know, starting to shut down, right, because these higher tariffs are killing trade. And so that's probably affecting manufacturing and therefore their consumption of energy. So oil prices are actually down. So we're at 60 bucks, I think, close on West Texas Intermediate, 65 or so on Brent. You know, the cost of a gallon of regular lead and diesel is going to come in.

So I'm less worried about higher energy prices in the current context just because of the hit to growth and the hit to demand. I don't expect oil prices to fall much further unless we really get into a rip-or and recession. and demand really gets crushed because we're now at break-even prices. The Dallas Fed just came out with their annual study of costs of producing in the fracking fields and the marginal cost of the kind of the marginal fracking field is about, I believe if memory serves, is about 60 bucks a barrel, 65 bucks a barrel. So we're there. So if prices go much lower, they're going to start pulling back on production and supply.

So yeah, you're right. Higher oil energy prices, higher tariffs, all else equal, not good. but I think there's all these other forces at work dynamics that suggest oil prices will remain down and not really play that much of a role in how things play out here going forward. Chris, any other perspective, or do you have a different perspective or any other perspective? I agree with all that. The weakness of the demand is likely to offset any major increase in the price.

But I guess conceptually, it runs counter to this idea that we want to actually attract more manufacturing back to the United States, right? One of the most attractive features of the U.S. is that we have a reliable, fairly low cost of energy, right? Outside of the tariffs, that's one reason why firms have been coming to the U.S. So now if we are in situating this very large tax, it seems like on the one hand we are giving, on the other hand, we're taking away in terms of how companies make their decision.

I think that just adds to the complication of a manufacturer try and decide should I really open this plant in the U.S. or not, right? The tariffs are one thing, but now I have maybe higher costs, potentially down the line due to higher energy prices. That's an interesting point. You know, and we're kind of getting into second, third, fourth, fifth order effects here. But, you know, the other. Yeah. But which is, you know, I think important, certainly the folks setting this policy should be doing that.

You know, that would be nice if they kind of thought about that more deeply. But like one thing that Dawn kind of occurs to me is, you know, one, we had our webinar this week on the trade war. And by the way, folks, that was a, I thought it was a pretty good webinar. It was long, but it was good on the trade war. And it was, I think there's a replay out there. You might want to take a look. And we had Grav Gangulyon, who's our economist in Europe, who runs that economics team.

And he was talking about the EU and, you know, what is it that they could buy more of from the U.S. to help, you know, bring down the tensions here around the EU trade with the U.S. And one thing was natural gas. You know, the natural gas prices are still relatively high in Europe. They spiked when Russia invaded Ukraine because the Europeans got a lot of their natural gas from Russia. But a lot of an LNG, liquefied natural gas is now flowing from the U.S. into Europe. And that's, you know, on one level, that's a good thing. I guess because we're exporting more, but it's raising the price of natural gas here in the United

States. So natural gas prices are up for probably lots of different reasons, including a cold winter in many parts of the country. But natural gas, last I looked, we're close to $4 for a million BTU up from like three. And that was one, the low natural gas prices was one of the calling cards of producing, to have manufacturing here in the U.S. So if you have more LNG and more natural gas flowing from here to there and that our prices go up, their prices go down, then it becomes less attractive as a destination for manufacturing. So that's just, that's, you know, that's probably a fifth order effect, but still something to consider, you know, how complicated this is and trying to disentangle what it all means, you know, for the economy.

Mercer, anything else, do you have anything to add on that on the energy question? No, we get, I mean, we do import a lot of energy from Canada. I think the, that, the, The Canadian marginal cost of producing is also quite high, particularly in some of the, what is it called? Oh, yeah, the heavy. We have to bring it out of the sands. The tar sands, that's right, right? Like, that's very expensive to produce, too. So, yeah, I think with energy prices going down, with weaker demand around the corner happening

and also potentially intensifying that probably, offsets any tariff impact. And we also, oh, go ahead. You know, we may be able to, we are producing a lot here, too. I mean, we are now the world's largest oil producer. So we have plenty of our own energy that we could cover the cost of.

I think if, for some reason, the tariffs distorted energy imports to the point where, you know, it was actually causing real economic harm. Mm-hmm. Mm-hmm. Good question. It goes to the supply chain because we think oil is just oil, but it's very specific, right? We have refineries that are very keyed into that Canadian pipeline.

They've optimized their processes around it. And now if you take that away, they have to source it from somewhere else. That can add increased costs, right? So it's... Almost certainly will. Right? On the commodities seem like they're just commodities, but there's a lot of variation within them. Yeah, because it's heavy, I'm sure, and I'm not going to get this exactly right, but Canadian oil, tar sands, heavy oil, it has to be refined in a certain way.

And the Midwest refineries are, as you said, optimized to process that kind of oil. And there's no other options here, right? So it's not like you can ship that oil somewhere else or these these refineries can take other oil from other places. So you're mucking with the system that's been optimized and making it just by definition inefficient and raising costs. Right. Good. That's a good one.

What's up next? There's so many good ones. Really? Okay, cool. Okay, here's a good one. Tariff? No, this is recession-related. Recession-related?

This is a direct response mark to something you slash Sarah posted on LinkedIn. Oh, cool. So the possibility of recession is elevated. By the way, I like being linked to Sarah like that. Mark U. slash Sarah. We know who's pulling the strings here. Everyone knows what's going on here.

All right. Okay, so the possibility of recession is elevated and trending up because quoting and abridging Mark's LinkedIn post from a couple of weeks ago. One, tariffs and possible trade war. Two, stock prices are down. Three, haphazard doge cuts. and four, government shut down and debt limit. But in that same post, Mark states that a recession occurs every six to seven years,

presumably not related to political changes. So my questions are, why are we trying to fight against what is normal and inevitable? And two, going even further, why did we want a, quote, soft landing at all seems like we would just want to keep flying to stay with the analogy? Well, the six, seven years is on average. And, you know, we've had much longer expansions. And there's no reason why we can't enjoy those longer expansions. You know, generally, recessions come to an end because there's some significant, for lack of a better term, imbalance in the economy.

Too much leverage, overvalued asset prices. I'm thinking of the housing market. in the financial crisis, a pandemic. I think this would, this would, if we have a recession here, this would be the first, I'm trying to think, but maybe we had, I was going to say this is maybe the first recession that's entirely self-induced. It's not like, the weeks could have, there's no reason why we're experiencing this recession other than policy, other than the trade war and Doge and those other policies that you mentioned. And so it's not inevitable. And certainly this was nowhere close to inevitable. In fact, we came into the year, the economy was in a really good place, strong growth,

lots of job creation, unemployment was low. Stock market was at record high. Housing values were at record highs. You know, inflation was a bit elevated, but it's coming in. And as we can see with the more subsequent data through March, it was going to come right into target, thus the soft landing. So there's nothing in an event. inevitable about a recession, certainly not this recession, completely, you know, our own doing,

but based on the policy steps that are being taken. So, you know, I don't, I don't think we need to be here, you know, talking about this. What was the other part of that question? There was a corollary to that. Inevitable. Oh, why did we want a soft landing? Like, instead of just keep going at the pace we were going. Oh, I see. Yeah, a definition of a soft landing in kind of my nomenclature is that the economy grows at its potential, if it's at full employment. So once you get back to full employment, and I think we've been there, 4% unemployment rate would be, that's where we've been, we had, you know, for the past three plus years, that would be very consistent with the full employment economy. So when you're there, what you want and the best you can, you know, do is have an economy that grows at its, at its potential, meaning that it's consistent with the growth in the labor force and the productivity

growth of that labor force. If you have growth that's stronger than that for any extended period, unemployment continues to fall, that'll engender inflationary pressures, higher interest rates, and ultimately, you may in fact suffer a recession. That would be a recession that's more typical kind of the way the past business cycles come to an end. So the, you know, you, the idea deal world is one where your economy is operating at full employment. It's growing at its potential and inflation is at target. And, you know, we were pretty close to doing that at the beginning of the year. Now we've blown that all apart with the policy decisions that have been made. Chris, anything to add there? Yeah, all good. I guess, you know, if you wanted to fly higher,

you would increase the potential growth on the supply side. So certainly, you know, soft landing is the objective, but that doesn't mean we stopped there. We still would like to increase the supply side, whether that's increasing immigration, so we have the labor force we need or other supply constraints, right? So that's the, you know, I wouldn't say that potential growth where it is should be our ultimate target. We would like to continue to grow that as well. Yeah, actually a lot of that potential depends in part on policy, like, for example, immigration policy, right? Right. I mean, one reason why the economy was able to grow so fast in 2024 was the large number

of immigrants that were coming into the country, adding to the labor force, they went right to work. You know, the immigration had other costs, but one of the benefits was the fact that it allowed for more job creation and more economic growth. We grew 2.8 percent in 2024 calendar year, and that, you know, in more typical times, We think that's well above the economy's potential, but no, the unemployment rate actually, you know, was stayed low and actually, I think it moved up a little bit. We could have grown even a little bit more in 2024. So, and the other thing is technological change, things that are much more difficult to know

and predict, certainly the timing of, you know, we saw some very strong productivity gains in 2024. before. We've had podcasts in the past discussing what that's all about. There's, you know, a lot of theories. But there's also things like artificial intelligence that are coming down the pike here that might look the underlying potential growth. But, you know, in the kind of the near-term, you know, what's going to happen in the next year, the goal would be you want to have an economy that's growing very close to its potential if you're at a full employment economy. If you're below full employment, then have at it. We want more growth. But if- threatful employment, then you just, if you grow much above that, you'll get inflation,

and that's not what you want. Have you revised your potential growth? For a test. These policies? I think all else equal, these policies will diminish the economy's potential growth, yes. I mean, one thing we've learned about tariffs, and there was, I think I've mentioned this before in other podcasts, there was a, there's a study out from the Fed showing that, the productivity of the steel and aluminum industry has fallen very sharply since the tariffs

that were put in place back under President Trump's first term. And the kind of the explanation or intuition is that with tariffs, these industries are protected. The markets are less competitive and there's less incentive for them to innovate and adopt new technology. And actually they do the opposite. And we get a reduction in productivity. So yeah, I think if these tariffs remain in place, or anything close to them, they will diminish, you know, long-term productivity growth and therefore the potential rate of growth rate of the economy. Yeah. There's other things going on that could over, you know, more than offset that effect. You know, I mentioned AI. It does, you know, the more we use artificial intelligence, the more we understand it, the more innovation that's

occurring there, the faster changes are occurring, and they're now occurring very quickly. it's hard not to become more of a convert to the idea that this is going to generate a lot of productivity growth at some point. There's a lot of productivity gains to be had here from AI. And I don't know that that hasn't kicked in yet, but it feels like that at some point down the road here and not due to some future that it will. Agreed? Yeah.

You sound a little like President Reagan there. Yeah. On the protectionist tariffs. Yeah. The whole speech about protection assistance in the 80s, remember? Yeah, yeah, I think you passed that around. He mentioned the same things about the lack of innovation from a protected industry. Right, right, exactly.

Great. Merced, do you want to take a, do you want to do another question? Oh, yeah. Okay. Keep going. Keep going. Okay, this one is actually about productivity, so it's a good segue. Okay.

So my question is related to an idea that Vice President J.D. Vance brought up in a recent speech where he said, quote, cheap labor cannot be used as a substitute for the productivity games that come with innovation. And then I watched part of this speech where he says it. He linked a YouTube to it. And he was talking about the context of the speech was about illegal immigration and cracking down on illegal immigration. So that's the context of the comment. Our listener says, if I understood him correctly in the speech, VP Vance was essentially arguing U.S. businesses have become addicted to cheap labor over the last several decades, and that was a main cause of the stagnation in productivity and innovation experienced in the U.S. I was just curious, politics aside, if the team thinks there's

any merit to this idea, I'm not sure it's one I've heard before. I'm also not sure how one measures innovation, so I have no idea how to validate that part of the claim. But I do know prior to the recent uptick productivity had stagnated to some effect, although isn't the U.S. productivity generally higher than any other advanced economy. Yeah, Chris, you're a lot there. A lot there, yeah. So I guess, well, my initial reaction is if we're thinking about things over a longer period of time, right, the, I think the timing doesn't match here.

If you're talking about the immigration surge since 2020, right, that actually coincides with the period of heightened productivity growth. the period before that, the 10 years before that, was lower productivity growth, but I don't see any evidence of massive use or increase in undocumented workers or lower skilled or less productive workers. So that doesn't really, that part of the argument doesn't really fit for me. And then the other thought I have is, you know, it's a global economy, right? It's not just in the U.S.

So, of course, capital is going to look around and find where the most productive labor is for a given activity, right? So I don't know that that's an addiction of businesses to cheaper labor, but they're certainly looking for opportunities to, you know, increase their margins or produce more cheaply around the world. And in some cases, right, for very manual labor, right, they're going to go to those. those parts of the world that have that resource. So, yeah, it doesn't really hold water for me, if I'm understanding the point correctly. Yeah, you know, I didn't see the speech, so I don't want to be, I don't want to stay too strongly.

I think I need to take a close look. But it feels almost backwards to me. I mean, the one thing I do know is that immigrants tend to be more productive than native-born. That there's strong evidence of this. and more innovative, too. Because, yeah, they start companies at a higher rate. Yeah.

By definition, they're risk takers. You know, you don't pick up and leave one country, go to another with your family unless you've got something. You've got some kind of oxy because that's not easy to do. It's a pretty scary thing to do for many people, language issues and cultural issues and everything else. So strong evidence, and I would proffer, and here it might be a bit of a stretch, But I would proffer that one of the reasons we've seen such high business formation rate since the pandemic is it correlates very highly with the strong amount of immigration that come, immigrants that have come into the country.

So, and we've actually done some work relating where the immigrants are settling and, you know, are different estimates of productivity and they, you know, line up in a way that's consistent with this, this thought, that this view that immigrants tend to be more innovative, start companies at a higher rate, are more risk-taking. and therefore are good for productivity growth. So my sense of it is just the opposite. You know, immigration is not weighing on the nation's productivity. It's not a pall over productivity. It's a supercharger for productivity. We want more immigrants. Now, you know, obviously, I do think it makes a difference of what kind of immigrants you have.

And we do want immigrants with the right kinds of skills. Although, having said that, we need immigrants of all skill levels. I mean, high skill for sure, people that run our companies, go take a look at, you know, the folks that are running these big tech companies. And they're all, you know, first or second generation immigrants. I think most of them are. And but we need low skilled, you know, too, because, you know, to be in, uh, in the agricultural and construction and manufacturing industries, because we, the domestic population, uh, working age population is declining. You know, we're now, we're getting older and it's declining. So I, I, my instinct is just to take the opposite side. But I, you know, again, I didn't read the speech. I don't want to be overly combative here because, you know, I'm not sure what I don't know. Makes sense. Yeah. I mean, that was my. Your take two.

Reaction was that immigration is actually strongly correlated with higher rates of productivity and business form. and patent filings and those kinds of things. But those are probably higher skilled immigrants than what we're talking about here. But I'm still with Chris. I'm not sure that the dots connect on these two things. And yes, the U.S. does have higher productivity than a lot of other developed countries.

Certainly higher productivity than Europe. And a lot of that is due to the fact that we have higher business formation rates more entrepreneurship here, laws that are more favorable to business formation and that sort of thing. Yeah, I'll tell you, the one thing, and this may be a corollary to the discussion, but, you know, in the same ballpark, I do worry about all of the pressure being put on foreign students. You know, we're, lots of stories of visas being revoked and students being forced back and students leaving because they're scared.

other countries like China saying providing guidance not to go to the to the U.S. as students. And I will, I think it's pretty clear that the secret sauce, one of the key ingredients of the nation's secret sauce, the thing that makes us tick as a nation is that we attract and keep the best and the brightest on the planet. And if we lose that, you know, that ingredient is gone and I just don't see us performing at all while. So just that will undermine productivity growth and long-term potential.

So the more I think about this question, the more I'm getting irritated, you know. It's just the opposite, just the opposite. Yeah, I was thinking about the industrial mix component of it, right? If the tariffs are distortionary and we end up, you know, attracting a lot of business, lower, less productive type of industries, right? then the overall composition of the productivity is going to look a lot worse, right, than it potentially could be. We're not optimizing, right? We're building, I don't know, textiles here, manufacturing textiles in a way that's far and less efficient than other parts of the world.

Yeah, good point. That's my concern here, that the tariffs, again, provide this distortionary effect. There's a great Dave Chappelle clip. Did you see it? Oh, what's that? Oh, you should, my wife plays these Instagram reels for me after dinner. You know, just a bit of lovety. Late night TV like Colbert or whatever.

And there was this one clip of, and I think that's the right word clip, of Dave Chappelle. And he goes, you know, I don't want to make a Nike shoe. I want to wear a Nike shoe. So I thought that was pretty funny. To your point, do we really want to have? you know, shoe manufacturing back in the United States. You know, that's a low value-added kind of activity. Do we really, the answer is no.

That's not what we want. Anyway. Okay. Here's a Doge question. I want to know at what point do we consider all of the funding cuts, a form of austerity. I mean, maybe it is. What sort of effects do you foresee with the cuts? For instance, I heard of a study that says for every $1 spent on IRS enforcement,

$6 in revenue are collected. If the inverse is true or similar, could we come quite short on revenue collection? I understand conservatives desire to cut spending. However, is seemingly random firing of federal employees a good way to go about it? Do you think that they'll just end up replacing many of them with private sector contract workers?

Isn't that even more costly? Yeah. I mean, I'm not a fan of the Doge cuts, job cuts or funding cuts, just because it's seemingly and I think actually just haphazard. It is a headwind to growth. You know, I think not a large one because, you know, the actual dollars that are being saved here. I mean, if you look at even the Doge website of cost saving, and obviously that's been exaggerated, but if you look at it, it's not, we're close to $2 trillion or $1 trillion.

billion or 500 billion dollars. You know, we're talking maybe tens of billions of dollars. And even then, I'm not sure. So I don't know that that is really saving a lot. The job cuts may save, you know, maybe more, may save more and be more contractionary. And actually from an accounting GDP perspective, it may show up in, you know, some weaker GDP numbers. I think, and I, this is from recollection, so I may not have exactly right.

But I believe that the way the Bureau of Economic Analysis calculates government expenditures is by looking at the number of people working in the federal government and their compensation. So if you're doing big cuts to federal government jobs and comp, that's going to push down measure GDP and will be a weight on economic growth. So, yeah, it's a these cuts are a near-term headwind to growth. But I think in the grand scheme of things, from a macro, U.S. perspective, small. I mean, obviously it has big regional implications for D.C., which is probably now in recession, and the broader metropolitan, Washington metropolitan area and some other areas that are heavily reliant

on federal government and employment. But for the nation as a whole, I don't know that it's, you know, that big a deal. I do worry. And so therefore, you know, I don't know it's going to go anywhere to help address our long-term fiscal situation to any meaningful degree. I do worry that it has the potential for creating significant problems down the road. There's something might break. I mean, these folks that are losing their jobs, you know, they're doing real stuff, you know, stuff that matters, you know, NOAA and FDA, SEC, FTC, CFPB, you know, these guys are, these guys are

are critical to making sure that a lot of what goes on in our world functions well and properly, answering social questions from Social Security recipients and people at the VA and, you know, so forth and so on. And if, you don't, we're cutting these jobs and it goes well beyond anything related to improving efficiency. You're actually cutting, you know, services, then something may break. Something might go badly wrong. We may have a, you know, a, you know, a, you know, a, you outbreak of measles in broader parts of the country. We may have, you know, a problem with the quality of our food and, you know, people might get ill. You know, the inspections for pharmaceuticals may be impaired. We might not get good weather reports that are critical to evacuating people

that are going to be hit by a hurricane or may even affect the ability to clean up after the hurricane. So I do worry about those things, and I think, but those play out over a long period of time, and it's hard to connect the dots back, but I think we should expect some of that as a result of all this. What do you think, Chris? Yeah, I'd be concerned about those longer term effects as well, like, and even on research, right? Research. That's the hardest one, I think, to quantify, because in the short term, you know, you don't see the result. You know, it's easy.

You cut the grant, and it looks like you have big savings. and, you know, nothing really changed. But then later down the line, you realize, you know, what that research was supporting, right? Maybe there's greater outbreak of disease. Maybe we're not prepared the next time. Or maybe there's, we miss out on some great innovation and that's going to our adversaries overseas, right? So, you know, really there should be some more of a cost-benefit analysis with these types of cuts. Undoubtedly, there's things we could cut, but it's not.

It hasn't been done in a way that's very thoughtful. You know, I'm listening to our answers and we're in agreement. Is it a problem that, should we in the coming year add someone who's going to disagree with us? It feels like we're more, you know, very consistent in our thinking. Does that mean that we're right or does that mean something else? Just asking, well, we can ponder it. Yeah. Yeah.

I think we're in agreement, though, that it's. It's not so much the cutting. It's the manner of cutting, right? Yeah, I mean, I don't think anybody, when you say, when you say, like, let's find waste in government and cut it, everybody would say, yeah, that's a great idea, right? Yeah. I think the problem here is this is done, well, for me, the problem is it's done under the guise of cleaning up the fiscal situation. This comes nowhere near that. I mean, none of this cutting of discretionary spending is anywhere.

near addressing the longer run fiscal problem, which has to do with entitlements and increasingly interests that we're paying on the national debt. This doesn't get there. And I would have no problem with getting rid of jobs or waste in government, but it just doesn't seem, I haven't seen any sort of like evidence that what they're actually doing is getting rid of waste that's there or fraud, right? It's just kind of like, let's get rid of this entire agency and let's cut 10,000 people from this agency. I don't know how those decisions are being arrived at. It doesn't seem like there's a lot of pre-planning that's gone into it. Yeah, I think we're confusing cuts and efficiency, right? The idea of efficiency is great. Let's find a better way to collect taxes,

you know, more efficient, fewer people. Let's use modernized computers, what have you. AI. But that's not what's being done here. It's just slash and then I guess hope that we figure it out later on or it's not clear. You want to take one more? Yeah. How many more can we take? Let's take two more. Let's take two more. Because that would take us to an hour, and 10 minutes, which is exactly how long every podcast, no matter how we try. Okay. Here's one. This is also related to the fiscal situation. Okay. How much true? is there to the idea that U.S. federal budget deficits are the cause of the U.S. massive trade imbalance and trade deficit. And if somehow the trade deficit is cut, that it would also lower federal borrowing.

And this came up on our podcast last week when we had John Carney and Jim Parrott on. And there were several questions slash comments related to that podcast. Yeah. Questioning Mr. Carney's cause and effect there on. the trade deficit and the fiscal deficit. Right, right, right. Okay, well, I've got an answer. Marissa, do you want to take that or Chris or do you want me to do it? Who wants to take that one?

Why don't you take it? Yeah, okay. There's a response to the other podcast. Yeah, I think there is a relationship between the budget deficits and the trade deficit. You know, a trade deficit means that you're consuming more than you're producing. And if you run a budget deficit, that's more likely to be the case, right? You're borrowing money to consume, you know, government services. So now I'm simplifying to a significant degree because I'm assuming that household saving is adequate and it is, I think.

And corporate saving, I mean, retained earnings used for investment is adequate and I think it is. But our deficits are large. you know, as a share of GDP, the deficit is 6%, you know, even excluding interest payments. So looking at the so-called primary deficit, we're 3% of GDP. That's a large deficit in a world in full employment. You should be, we should be at zero. We should even have a positive, something of a surplus, at least on the primary deficit, and we don't.

So because we're running these large deficits, the government is, we're consuming more than we're producing, therefore you have large trade deficits. So the question is, what do you do about, is this a problem? What should you do about it? And I say, yeah, what's a problem is the large deficits? Because, again, these are being done in the context of a full employment economy. And I wouldn't be as worried, except that our debt load is already pretty high. And our interest payments on that debt is rising now very rapidly as well. You know, we're going to spend, I think, more on interest payments this year than on federal defense. And that just doesn't make sense to me or anybody else. So the solution to that is to address those deficits. And that's a whole other

3,000 podcasts. You know, what do I do about revenue, what I do about spending? How do I get more growth, you know, to address these deficits? And by so doing, you'll get the trade deficit down. So the causality is the budget deficit, consumer spending more than we are producing, and by addressing that issue, you will address the trade deficit. Now, trying to go at the trade deficit to address the budget deficit is working backwards and will be very counterproductive because the only way you're going to get the trade deficit down through a trade war is by pushing the economy into recession. That's the only way. So you're going to tariff everybody, put a tax on, you go into recession, and I think at the end of that process, you end up with a larger, but a smaller deficit, trade deficit, but you're going to have a smaller economy and bigger budget deficits because all your other revenues are going to be hit by the weaker economy. You're going to have less in personal income tax, corporate tax income revenue, and you're going to have more spending because of income support, you know, unemployment insurance, rental assistance, so forth and so on. So it's really backwards thinking.

And the backwards thinking, I wouldn't really worry about it too much, except that if you're thinking backwards about what's going on, you're going to get the wrong policy. And that's what we're getting here. We're getting the wrong. So they got it all wrong in terms of how things are working. Therefore, they got the policy all wrong. And that's what's so scary about this. You know, what makes it such a, you know, a very disconcerting kind of process. And the things here that are unfolding are very disconcerting.

Chris, what do you think? Makes perfect sense to me. Okay. Sounds like we- You went to Johns Hopkins, right? I did. PhD Johns Hopkins. Yeah.

Okay. Have you say so? Great school. Yeah. Marissa, what do you think? I also went to Johns Hopkins. Okay. There we go.

Maybe that's the problem, though. Maybe that's why we're all in agreement. Yeah. You know, Chris was my professor, so. Yeah. What's that? Marissa? Chris was my professor.

So maybe that's why we don't have different thinking. I keep forgetting that. I keep forgetting that. Although it was econometrics. It wasn't. Oh. Yeah. I keep forgetting that you had that relationship.

Wow. Yeah. So cool. And I get, I get so. I think it's so cool every time I hear it because I just forget it. It's like that movie. Remember that movie with... Memento?

No, that's a good movie too. This is with Barrymore. Drew Barrymore. The Deeper States. Yeah, that was not a great movie. I love that movie. You know, I don't think I've seen that movie. You've got to go watch it.

No, does she have amnesia or something and forgets that she's going on a date with... Every 24 hours, she goes to sleep and she forgets who she is and she needs to be reminded. Okay. Yeah. You like this setup because Groundhog, it says very, I know. I know. It's your favorite genre of movie. It is.

It is. You know what it is because it's a matter of every day is about trying to make it better than the previous day. Right. And you have an opportunity to make it. You have another crack at it. And if you do that every day, it feels like that's the, I'm waxing philosophical here, but in my view,

and this could be the foundation for a new faith. That is the secret of happiness. You know, every day trying to make that a better day than the one that preceded it. What do you think? Do you like that philosophy? A church of the groundhog. Oh, I love that.

That is really good. That's really good. I'm going to keep that in mind. I like that. A religion based on early 2000s rom-coms. Yes. Oh, that's the common denominator. Maybe that's what it is.

Yeah, early, right, you got me pegged. Let's do one more. Okay, one more. There's actually two questions that are very similar. so I'm going to kind of weave them together. This is a question about data, economic data. So I'll read the first question in its entirety because it's short. So hope you're all well.

I love the podcast. I work in portfolio management for high net worth individuals at one of the largest U.S. banks. The bank collects and aggregates credit and debit card spending data from all our customers. And I believe our economics team relies heavily on it. Do you all think relying on a source like this instead of typical government data is reasonable

or does it have its pitfall? So that's, then there's another question very close to that, asking about other sort of more real time up to the minute potential data sources, one from credit card companies, this other person cites the Atlanta Fed having something like a close to real time GDP tracking method. We also do something like that too. And what are the benefits and the tradeoffs of these kinds of data versus, you know, your standard data collected by government statistical agencies that also get revised. and have their own issues, right?

Well, why don't you take that, Mercia? Yeah. Yeah. So we use data like that, too. You know, we use data that comes from private sector sources. We look at data that are aggregated by credit card companies. I think, you know, all of it, it's kind of regardless of the data source, it just comes down to you have to know the data really well. You have to know it's where is it coming from?

How is it collected? what is the sample, what are its pitfalls? And if you know that, then you know how you can and cannot use it in the caveats that go along with that. So, for example, data aggregated from credit card files, obviously that's not a fully representative sample of the U.S. population, right? It might be like this listener is saying he works for a bank that caters to high net worth individuals. That's not going to be representative of your average American. So you have have to know that, not that it's not useful in what it's showing us, but you have to understand that it's not showing you a representative sample of the whole country. And that's kind of true of a lot

of these private sector data, you know, sources that we see, whereas something like a government data source like, say, the BLS and its sources on consumer prices or employment, that is a designed sample that is specifically designed by scientists who have degrees in sample design, that attempt to put together a sample that is representative and properly weighted of the entire U.S. population so that you're getting a more unbiased view of it. So on the one hand, that makes that data better. On the other hand, like the reader or the listener is saying, some of that data is more lagged and backward looking. It can get revised because there is this tradeoff between getting data out in a timely manner versus, you know, getting all the responses in before you release it.

That's why GDP gets revised three times. That's why employment gets revised three times, right? We get all these revisions because of that. So they're all, I think they're all good sources. You just have to know what their fallbacks are. Chris, anything to add there? I think she covered it very well. I think the other thing I'd add is just, you have to know which question to ask, right? Which question can this data answer, right, versus assuming that any piece of data could apply? So I think it's important, as you said, to really understand the nuances of the data, and you need it all of the above. You need all the private, you need the public

sources to kind of fill in the gaps and paint a complete picture of what's going on. Great. Well, it sounds like we have even more questions. Maybe. Maybe we'll do this again soon. They were all excellent questions, all great questions. Yeah, really good questions. And just to restate what you said already, keep them coming, right? Keep them coming. They're very, very helpful, very useful.

Okay. Anything else, guys, before we call it a podcast? No? No. Okay, well, I hope you have a great weekend. I did notice here in Philly. It's going to be in the 80s on Saturday. Can you believe that?

Yeah. Yeah. Happy Easter to. Happy Easter. Yeah, for everyone. everyone and Passover to everybody. So yeah. Well, with that, we're going to call this a podcast.

Take care, everyone. Talk to you next week.