NerdWallet's Smart Money Podcast - Decoding Economic Health: Inflation, Growth, and Employment Trends

Episode Date: April 3, 2024

Explore the latest on inflation, employment, and growth trends, and what it means for the future of the US economy. How is the economy doing right now and what does it mean for inflation, growth, and jobs? What do recent credit card settlement news and updates on inflation rates mean for your finances? Hosts Sean Pyles and Anna Helhoski delve into the current state of the economy, dissecting the latest data on inflation, growth, and employment. Joined by NerdWallet data journalist Elizabeth Renter, they explore how the economy is faring amid ongoing challenges. From the robust labor market and its impact on wages to the intricacies of inflation and its implications for consumers, they provide insights into the broader economic landscape. They seek to give listeners a deeper understanding of key economic indicators and how they could shape your financial decisions.  Then, in this week's Money News roundup, Sean and Anna discuss a credit card settlement potentially affecting premium reward cards, updates on inflation rates, and the legacy of Daniel Kahneman, a pioneer in behavioral finance. In their conversation, the Nerds discuss: the economy, inflation, growth, employment, credit card settlement, financial decisions, consumer confidence, labor market, wage growth, Federal Reserve, interest rates, GDP, economic indicators, Daniel Kahneman, behavioral finance, money news, consumer spending, unemployment rate, inflation rates, market value, price growth, Federal Reserve interest rates, economic outlook, GDP growth, consumer sentiment, labor supply, labor demand, price levels, real GDP, swipe fees, interchange rate, rent inflation, housing prices, annual rate, economic landscape, economic data, macroeconomic phenomena, economic trends, and money headlines. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhaski. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic and then leave you with the latest money headlines. Today, we're talking about how the economy is doing. That's right. We're looking at what the data shows, which seems to be still at odds with how people feel about it. The most recent consumer sentiment surveys out of the University of Michigan show that confidence in

the economy remains higher than its historic lows in summer 2022, but still well below pre-pandemic levels. In other words, people are starting to feel a little bit better about the economy, but they're not exactly enthusiastic. Today, we're going to focus on three indicators of how the economy is doing inflation, growth and employment. To help us sort through what the data means. We're welcoming back NerdWallet data journalist and economic analyst Elizabeth Renter. Elizabeth, thanks for joining us again. Hey, guys, it's always a good time. Thanks for having me. Let's start out strong with employment data. Last year, unemployment hit its lowest level in 50 years. Since then, it's ticked up

somewhat, but it's still largely in line with pre-pandemic lows. Tell us about this labor market, Elizabeth. Sure thing, Ana. So you're right. In 2020, we saw unemployment hit a historic high, close to 15% during the initial months of the pandemic. It fell beneath 4% in 2022 and has stayed there since. So the unemployment rate is probably the most cited statistic when it comes to the labor market. And on its face, a low rate tells us that by and large, people who want jobs can find them. However, there are many other factors we can look at, and most of them right now are pointing to an increasingly healthy labor market. So what do we mean by a healthy labor market? Well, that's one where

labor supply and labor demand are in equilibrium. This creates an environment where businesses aren't struggling to find workers or laying workers off, and employees are experiencing steady but modest wage growth. Okay, so what other metrics tell us about the health of the labor market? So a few of my favorite stats for evaluating this are in a report that came out yesterday, actually, and that is the rate of job openings and the rate of quits. So openings gives us insight into whether businesses are finding the workers they need and whether they see those needs increasing in the near future. And quits gives us insight into whether workers feel confident that they can leave their current job and land in one that's better. When these are high openings and quits, they can point to a very tight labor market.

And that's one where labor demand or the jobs that employers want to fill is outpacing labor supply or workers. And incidentally, this is a labor market that can drive up inflation. They were both very high in early 2022. Remember the term, the great resignation or the great reshuffling? People were leaving their jobs in large numbers. But since then, quits especially and openings to a lesser extent now point to a labor market and better balance. And in the same period, workers also saw pretty solid raises too, right? That's right. Wage growth was also high in 2022 and into 2023. As workers, we like the sound of wage growth. We all want more money. But when the labor market is tight, workers can

demand higher and higher wages. And to satisfy that, firms need to raise prices. And so inflation continues. We all like more money, but sustainable wage growth, not too hot, is what we're looking for in a balanced labor market. And while wage growth is still high now, it has begun to moderate. Now, there is another jobs report out on Friday, and that'll show data for March. What are you expecting? Well, more than likely, Friday's jobs data will show a continued strong labor market. We're unlikely to see the unemployment rate move by much. It'll likely stay below 4%. The other big number in this report is the number of jobs added to the economy. Over the past several months, this number has been big,

but has been revised down when the data is updated. And I think we'll see the same with Friday's release. February's strong jobs number will likely be revised down, and March will post a robust number of jobs added to the economy. In other words, March's labor market data will look healthy. Okay, so employment is, at large, a bright side to the economy, but people are still very concerned about prices, especially of goods, which remain elevated compared with pre-pandemic inflation. Elizabeth, can you give us a picture of what's happening with inflation right now? Yeah, so that's a great question, Sean. You know,

it's tempting to use prices and inflation? Yeah, so that's a great question, Sean. You know, it's tempting to use prices and inflation interchangeably, but there's a really important distinction. When we talk about inflation, we're talking about the rate at which prices change. So generally speaking, in a healthy, growing economy, prices rise at an even pace. And the Fed estimates this pace at about 2% annually.

At this pace, we hardly notice the rising prices and we make quaint comparisons about how much we paid for a loaf of bread, for instance, 20 years ago. But when prices are rising at 8% or 9% per year, it's noticeable, particularly when those price increases are spread across all sorts of goods and services. And we hit that 8% to 9% price growth or inflation in 2022. But now it's just at over 3%. So remember I said the Fed thinks that a healthy place for price growth is 2%? We're not quite there yet. Again, the distinction, as unpleasant as it is, means that we want price growth to slow, but not necessarily prices to

decline. Falling prices gets into deflation, which carries a whole separate set of challenges. Right. And as you said, a lot of the prices for goods have slowed down steadily since their peak. But the same can't be said for services, especially for things like rent. Can you explain what's going on there? Sure, Ana. So this is a tricky one because in some ways we're talking about what's happening in reality versus what the data is reflecting. So rent growth or rent inflation has slowed in reality. You can see this in some private data sources, but mainly in practice. The rent growth or rent inflation has slowed in reality. You can see this in some private data sources, but mainly in practice. The rents on new leases today aren't as big of a step

up from where they were a year prior compared with the step up of those rents a few years ago. However, the Fed and everyone else is not really looking over renter's shoulders as they sign new leases, right? They're looking at federal data. And when it comes to rent in particular, there's a serious lag between where rent inflation slows in reality, in practice, and when it shows up in that data. Further, just because rent growth is slowing, someone has to take out a new lease to actually experience that, right? And leases are generally updated on a yearly cycle, definitely not instantaneously. So while economists are sure these decreases are going to show up in the federal data, it's mainly a matter of when.

Okay, so the price of rent might be growing at a slower pace. But Elizabeth, let's talk about house prices. We hear from a lot of listeners who want to buy a house this year and are wondering if houses will become more affordable. What are you seeing in the data? Well, when we're talking about it in relation to inflation, here's the thing. The CPI or the Consumer Price Index, which is one of the more common measures of inflation, doesn't look at home sale prices. And we all know how high those are right now, right? They were growing at double digit rates for much of 2020 and through 2022

and are still rising at roughly 6% year over year as of February. So when I talk about rent, this actually includes something called owner's equivalent rent in the CPI or the amount a homeowner would pay in rent monthly in the current rental market to get the same value that they're getting out of their owned residence. So again, the trickiness with new leases and measuring market rents applies to owned homes too when we're talking about inflation data. And the shelter or rent costs actually make up well over one third

of the total measure of inflation. So until we see lower rent inflation reflected in the data, the official inflation measures will remain high. Elizabeth, people desperately want to see lower prices, but why don't we want prices to drop too fast? Yeah, Sean. So this goes back to what I was saying earlier about deflation, the distinction between price levels and price growth. A decrease in price levels is deflation. And when deflation is broad based or prices are coming down across the economy, it can spell bad news.

That's because lower prices mean businesses aren't making as much money. And if they can't make the money to pay their employees, they can't pay as many workers. And layoffs ensue. The worst kind of situation here is when we enter sort of a doom loop where deflation causes higher unemployment, which causes greater deflation and so on. Okay, next up is economic growth. Now, when I say growth, I mean real gross domestic product. Real GDP, for listeners, is the market value of goods and services produced in the U.S. over a period of time adjusted for inflation. After a steep fall in 2020 due to the pandemic, GDP has been high, largely due to consumer spending. Elizabeth, can you explain to us

what the most recent data shows and what it all means for the broader economy? Yeah, sure. So GDP is probably the most popular, though not the only measure of economic growth. And last week we learned that real GDP, which you can think of as economic output or production, grew at an annual rate of 3.4 percent in the fourth quarter of last year. This is pretty robust, particularly during a period of sustained high interest rates. We also learned that the annual level of real GDP growth for 2023 was 2.5%, which was faster than the 2022 annual rate of 1.9. So what does this mean for the economy and the other metrics that we've been discussing? Well, Sean, a fast growing or booming economy can result in inflation. I mean,

think about it. We're producing more. So firms are hiring more. More people are getting paid. So they're spending more. We're demanding more goods and services. And with that, prices rise. You know, the main purpose of the Fed raising rates right now is to slow the economy to to tamp down this fire a little bit. So demand doesn't drive high inflation, but not to tamp down this fire a little bit so demand doesn't drive high inflation, but not to tamp it down so far that the economy seizes up. And as it stands, this growth is expected to continue slowing slowly. The Fed anticipates 2024 real GDP will land at around 2.1%. And paired with what the Fed sees happening with inflation in the coming months and years, this growth rate is on par with that often talked about soft landing or slowing inflation without tipping us into recession. Thanks for talking us through all that, Elizabeth. I want to get

your perspective on one last thing. Consumer confidence, which we talked about at the top, what do you make of it, particularly in an election year? That's a great question. And it's really important to call out when we talk about these macroeconomic phenomenon that individual experiences can differ widely. It can simultaneously be true that layoffs are widespread, which is great news. And some people were laid off last week, which is not great news. We're talking about big aggregates and national averages, and that conceals some nuance of personal experiences. So how people feel and how the economy is doing is not always perfectly aligned. And, you know, when we're talking about consumer confidence in an election year specifically, if you ask economists now what

could derail their forecast, political turmoil is on their list. And in an election year, the chance of political turmoil can be higher than other years. And it's also good to note, there is evidence that people's economic outlook and consumer sentiment, as you mentioned, have a lot to do with whether the political party they align themselves with is in power. Just knowing this can go a long way in explaining some of the disconnect we often see between what the economy is actually doing and how people feel about it. You know, depending on the strength of that relationship, it means that no matter who wins an election and how the economy is doing, there's always going to be some people who aren't happy with it. Thanks for joining us today, Elizabeth. Yeah, absolutely. Thanks for having

me on. Up next, a few money headlines from the last few days. So, Anna, have you ever waited 20 years for something? The wisdom of age? That must be hard. I've always been told that I'm wise for my age, but 20 years is almost how long retailers have been waiting for the conclusion of a lawsuit over the fees they pay when customers use credit cards. So this antitrust lawsuit was filed by retailers who said they were paying too much for something called the interchange rate. That's basically the swipe fee that retailers pay the credit card companies every time a customer uses one of their cards. And that fee, which is paid to the cards issuing bank, kept rising and rising. And merchants said enough. They said that back in 2005.

Last week, they announced a proposed class action settlement where they'll lower the fees and not raise them for five years. But this could also have an impact on some of the fancier premium reward credit cards. A lot of rewards programs are funded by those swipe fees. And part of the settlement allows retailers to charge more if you're using a higher fee card. Not that they necessarily would, but they could. There is a group that might ultimately be concerned about this. If you've got an exclusive luxury credit card, say one with an annual fee of several hundred dollars, you probably aren't going to sweat a higher fee at Bergdorf's. Anna, all eyes are still on the Federal Reserve to see

if and when it starts to lower interest rates. The most recent data shows that price increases are still above where the Fed wants it to be. Yeah, this is the Personal Consumption Expenditure Index figure, and it looks at the changing prices of goods and services purchased by U.S. consumers. The index is often used to calculate inflation in the economy. The PCE index rose 2.5% year over year in February, which was in line with what experts anticipated. Like we mentioned earlier, the Fed's target for inflation is 2%, but the central bank has indicated several times before that it would begin cutting interest rates before it hits that target. Last week, after the data came out, Fed Chair Jerome Powell said that it was, quote, good to see something coming in line with expectations, end quote. But it still remains

unclear when exactly the Fed will start to reduce interest rates. And finally, Ana, we don't normally do obituaries, and this really isn't an obituary, but it's definitely worth nodding to a noteworthy passing last week. Daniel Kahneman, one of the fathers of behavioral finance, passed away at age 90. Yeah, some listeners might be familiar with his best-selling book, Thinking Fast and Slow. But his economic research flipped over some longstanding assumptions about why consumers do the things they do, why we make the money decisions that we make. One of those assumptions used to be that people make rational decisions about money

and that our self-interest guides that rational thinking. But behavioral finance said, nope, we are not rational and we rely on a lot of rules of thumb that may or may not be accurate. If you're interested in more, definitely read the book. But one example that's often cited and a reason to mention this at all is that his research was one of the reasons behind the advice not to check your retirement account balances that often. And it's because behavioral finance finds that losing money in our accounts hurts twice as much as gaining it. So we don't appreciate the gains nearly as much as we fear and loathe the losses. I hear that. So rest in peace, Daniel Kahneman, and I will try to

not look at my balances more than once a quarter. That's what we saw and heard over the past week in Money News. Let us know what we missed and send us the headlines you've seen and want to hear more about. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD or send us a voice memo at podcast at nerdwallet.com.

And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Figlan and edited by Amanda Darrenkowski. Sarah Brink, Mixer Audio. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.