Odd Lots - Jan Hatzius on the Narrow Path to Avoid a Hard Landing

Episode Date: August 8, 2022

The multi-trillion dollar question for the US economy is “Can inflation drop to the Federal Reserve’s target without a substantial jump in the unemployment rate?” Everything is riding on this, as it informs the trajectory for the Fed and for growth in the near future. On this episode of the podcast, we pose that question to Jan Hatzius, Chief Economist at Goldman Sachs. We discuss what it will take to bring the unemployment rate down, why it's going to be difficult to avoid a hard landing and also why so many economists both inside and outside of the Federal Reserve got the inflation trajectory wrong over the last year.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, OddLots on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, I feel like the big question right now from a macro perspective is, can we get inflation down to a level that's consistent with the Fed's target around 2% or at least trending in that direction without a, a painful recession or a significant rise in the unemployment rate? I think that's exactly right. So this is the whole soft landing issue. Can the Fed hit the breaks on rising prices without pushing the U.S. into a recession, pushing up the unemployment rate? And I have to say, history is not really on their side. We do not have a lot of successful examples of the Fed being able to do exactly that. Although at the moment, if you look at market

pricing, we're recording this on August 2nd. You know, if you look at market inflation expectations, they do see inflation going down. There is obviously some concern about recession risk, but I don't think we're yet at the point where people are pricing that as inevitable. So despite the lack of successful historic examples of the Fed actually engineering a soft landing, it feels like a lot of the market thinks they're going to manage to do it this time. you mentioned history. And yes, I think history is not too kind. And I think many people would say, look, when inflation is this high historically or when inflation is significantly elevated, the only way to bring it down is with a tough recession. On the flip side, maybe there's no

reason we should be looking at history is the thing I keep coming back to. Everything. This time is different. Are you going to say it? Say it, Joe. Say this time is different. I'll say this time could be different. And the reason I say that is not because I'm naive or Pollyanna. but this has been unprecedented two years. We had a pandemic. It was a matter of policy to bring the economy more or less to a halt with massive fiscal stimulus. We still have a pandemic. We have the shift from services to goods consumption. Nothing like that we've ever really seen. At some point, we're going to see this renormalization, which is already happening. And so like, it seems very plausible to me that history as a guide is just not a useful roadmap for the situation we're in right

now, and maybe that's good news. But I wouldn't bet on that. I just think it's possible that history is not so useful here. I think that's a fair point, but you could also say that economic exceptionalism or, you know, thinking that our current economic cycle is somehow unique or exceptional in a way helped to get us in the place where we are in right now where inflation has come in, has been and stayed much hotter than expected. Right. The failure of the Fed's transitory messaging starting in summer of 2021, really. There's kind of probably a lot of people who maybe thought like me, which is like, yeah, you know, this is like there are a bunch of disruptions, their one-offs, and then the one-offs

are going to fade and all the weird price shocks are going to fade too. But anyway, the stakes have gotten high because since then inflation has gotten only higher and higher, many false hopes that it was going to turn down. And so now the question is, how much more will the Fed do and how much pain will we see? because the Fed will, you know, the Fed is determined it seems to get that inflation rate down. How much pain do we have to bear for that to happen? Yeah. It's kind of funny. I was thinking about this the other day, but it's kind of funny that in order to make things affordable in general or things more affordable in general, some people have to like lose their income altogether. But anyway.

It's perverse. Anyway, let's dive in with someone who knows way more about this than either of us. We've had them on the podcast several times over the years. I'm thrilled to have in studio. I'm in studio. Our guest is in studio. Tracy is on the line, sadly, missing this in person. Thrilled to have him in studio, Jan Hatzius, the chief economist at Goldman Sachs.

So, Jan, thank you so much for coming back on the show. It's so great to be with you, Joe and Tracy. Really wonderful to have, you know, the time to explore some of these issues. They're obviously extremely central to everything that we're thinking about. We got plenty of time. So let's try to learn something. So let me just ask you the multi-trillion dollar question, which is, can we see inflation get back to, if not 2%, something in that vicinity without incurring a painful recession in the U.S.? I think it's possible.

And I do think that there is a path towards, you know, something like 2% that doesn't involve a recession. But it's a very narrow path. And obviously we've seen a lot of. of unanticipated shocks over the last two and a half years. You have to be very humble, I think, in your ability to predict what's going to happen. I'd say the first part of the inflation slowdown, you know, several percentage points, maybe, you know, right now we're a little over 9%. If you take the headline CPI, we're a little below 5%. If you take the core PCE, you know, getting back down to the sort of 4% range or so, I think is going to be relatively easy

because I do think that we'll be lapping a significant amount of weakness or significant increases in commodity prices. I also think that if you look at the goods market, you know, supplier deliveries, indices and other measures of supply chain issues, those have improved pretty rapidly. I mean, you look at the business surveys and there's really been an impressive amount of improvement just in the last few months. So I think that part is not going to be too difficult. The harder part, I think, is to then get back down from 4% to something in the vicinity

of 2. And I think for that, we do need a labor market adjustment. the labor market continues to be very overheated. We still have, you know, close to 11 million open positions and, you know, less than 6 million unemployed workers. That's still a very large gap, basically unprecedented, both in absolute terms and relative to the size of the population in post-war history. And, you know, I think that is the imbalance that the Fed is going to have to address.

And the way they want to address it, of course, is by bringing down open positions without raising unemployment too much. If you see a large wave and layoffs, I mean, that's likely to mean a recession. In fact, you could say that is a recession. And that's the goal. You know, I would say on the slightly encouraging side, so far over the last three months, we've actually seen a fairly sizable adjustment in open positions. they're down more than a million and, you know, so far without an increase in the unemployment rate. So I think the path that they're trying to, you know, stay on here is growth below trend with a decline in labor demand and therefore an unwinding of that imbalance.

That ultimately brings down wage growth and that allows us to get back to something in the vicinity of, of 2%. You know, it's a tall order for sure. But I am somewhat encouraged by what I've seen over the last several months. You know, you mentioned getting inflation back down to 4%. I wonder, is there a chance that maybe the Fed would be satisfied with 4% and maybe in a new normal of strained commodities supply and energy crises in Europe and things like that? Maybe the 2% target, I don't want to say it gets abandoned, but maybe the Fed is willing to stomach slightly higher inflation at 4% without having to tip the entire economy over into recession and really saying unemployment go up. I think 4% is more than slightly higher inflation. I don't think 4 would be remotely acceptable

from the Fed's perspective. A two-handle, I think maybe that may be okay. Two and a half percent you know, in a still fairly strong labor market environment, I think would be fine from their perspective because if you had two and a half in a strong labor market, then, you know, from an average inflation target perspective, you'd be, you know, expecting the economy to go into a recession at some point that probably would bring inflation down to less than 2%. So, you know, I think that could be consistent with a 2% average inflation target. Maybe you could push. that a little bit more to two and three quarters, you know, I think a three handle and certainly a four handle would be too high from their perspective. And I think if you listen to what Fed officials

have been saying over the last several months, I mean, it's pretty striking that they really haven't deviated from saying, you know, we want to get back to 2%. And, you know, in part, I think that's because inflation is very unpopular. I mean, one of the things we've discovered or maybe rediscovered, is that people really don't like inflation. So I think there's not much mileage in saying, oh, yeah, maybe 3% or even something more is okay, because I don't think that's how people think about it. So to think about what might cause the inflation rate to fall or how far it can fall, it might be helpful to decompose the drivers of the upward move, which is consistently caught everyone by surprise. The Fed's certainly been caught by surprise

economists, the market. In fact, we keep seeing these new highs. How do you think about the different factors between sort of disruptions related to the pandemic, monetary and fiscal expansion in response to the pandemic, and then other idiosyncratic factors, most notably probably Russia's invasion of Ukraine? How do you think about weighting some of these factors for how we got here today? Well, it depends on which inflation indicator you're looking at. If you take the headline numbers and, you know, of course, the sharp increase in commodity prices is, you know, a very important part of that, you know, the most important part in terms of the overshoot. And some of that is, you know, driven by, I think, more structural issues underinvestment in the commodity industry,

which my good colleague Jeff Curry has talked about. I know he's talked about it on your program, but then, of course, we've also had some additional shocks that also have had an impact, most notably, the Russia-Ukraine war. I think supply disruptions that are related to the pandemic and related to the fact that, you know, in the spring of 2021, we thought the pandemic was receding into the background, but then you had Delta and then you had Omicron and then you had Omicron again and then you have a sort of succession of B.A. waves. So I think that has played a role.

I do think that that is abating, at least as far as the supply disruptions are concerned, at least for now. So, and there are a number of things that are probably somewhat more temporary in nature. And, you know, I would put into the category of, you know, unfortunate and unforeseen, unforeseen shocks.

But then I think the other big issue really is the labor market imbalance. And I would say that a lot of economists, certainly I have changed my thinking about labor market balance. If you had asked me about full employment and how I would define full employment a year and a half ago, I would have given you an answer that was based in part on the unemployment rate and in part on the employment to population ratio. but open positions would have been, you know, would have had only a supporting role. And, you know, if you look at unemployment or employment to population, a year and a half ago,

we were still really far away from the sort of pre-pandemic level. I mean, it was very hard to sort of envisage that we'd be close to full employment, even a year down the road. And, you know, the truth is employment to population is still well below where it was pre-pandemic. but the job openings, I think, are playing a much more central role because they basically give you the balance between total labor demand and total labor supply, a total number of jobs and total number of workers. And so I've definitely changed my thinking about labor market balance, and we are way out of balance, and the labor market's very overheated. I'm June Grasso, inviting you to join me for the Bloomberg Law Podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world.

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Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. I want to dig into the labor market a little bit more, but just before we do, I feel like. when it comes to inflation, we all agree that inflation has been higher than, you know, a lot of people initially expected. But it feels like there's less agreement on exactly why. So there's still a lot of focus on one-off factors like Russia's invasion of Ukraine. But could you maybe just give us a sense of, you know, why has it turned out this way? Why does inflation continue to be higher than expected? And, you know, looking back, I suppose, what in retrospect did people miss? Because we still have even people like Chairman Powell saying things like, what was that quote,

we now understand how little we understand about inflation. And yet we're all focused on it at the moment. But like everyone seems to admit that we're not entirely sure what's driving prices. I think, again, it's a combination of some, you know, unforeseen. shocks and, you know, an underestimation of how tight the labor market really was as of a year or a year and a half ago. And I mean, we certainly shared in that. I didn't think that we were anywhere close to full employment. And now I think we're significantly beyond full employment, at least in terms of the balance between, you know, total number of jobs and total number of workers. And so I

it's a it's a combination of things that were you know maybe harder to forecast just because shocks you know by definition shocks are shocks and things that you know with a better model we would have you know we would have anticipated and you know that's why we've kind of changed our model of how to think about this so you know I'm looking at these two charts now in the terminal and you have employment to population ratio, which is not only is it not back to pre-crisis levels, it's actually turned down in the last few months, which maybe is a little bit of a source of concern. And then the job openings data, which has started to turn down, but that one is sort of off

the charts and that one shot way higher. One quick question on job openings, is that high quality data? Like, it's not hard to put up a job listing these days. And I forget who it was. We did speak to someone months ago that questioned the sort of, there was some paper that questioned how long in this sort of time series this is comparable given the, you know, the proliferation of job boards and the ease with which one can post. But how do you think about like the quality of that data? I think there's also a theory out there that some of this was driven by PPP and that if you say that you're still struggling to hire workers, you still get some support from the government. So there's also like a question over whether those pandemic policies actually have an impact too and encourage people to keep job openings out there.

No economic indicator is perfect. And that's certainly true for the job opening series. I mean, the official, you know, Joel's series, which is published by the Labor Department, I think is higher quality than a lot of the other job boards, which I would use as maybe kind of confirmation of. of what I see in the labor department numbers. The labor department numbers are verified openings. We have not really found a lot of evidence that the meaning of a job opening is dramatically different relative to 10 or 20 years ago. And if you look at the official series, as of a year and a half ago,

I mean, it wasn't out of line with history. It's only, you know, and technological, Obviously, a year and a half ago wasn't that different from where we are now. It only really moved out of line with history in the summer of 2021. So to me, that is somewhat encouraging in terms of the quality of the data. But I do think you want to verify tightness of the labor market via other indicators. Another indicator you can look at that I think is pretty useful is the quit rate. and, you know, broadly speaking, the quit rate confirms that we're in a very tight labor market,

though one that is loosening at the margin. So we had literally an all-time high in the quit rate, you know, several months ago, and we've come off of that slightly. Haven't seen as much of a downturn as in the job openings numbers, but I would say broadly speaking confirms what you see in the job openings data. It's just a, you know, very, very tight labor market. So going back to the employment population ratio or some of these other measures, they have topped out. They never even got back to pre-crisis levels and they may be flatlining or even turning down.

What do you attribute that to? What's like the big change in the composition or the size of the labor market that seems to be at least one factor contributing to this big supply to demand mismatch in labor? So I'd say looking at the household survey of employment in general, you know, it's been significantly weaker than the establishment survey over the last several months. So I would probably take the downturn that we've seen in the employment to population ratio, which of course is based on household employment, I would take that with a little bit of a grain of salt. I don't know that we really have, you know, a lot of evidence that it's turned down. I take more of an average between the establishment survey and the household survey, which would say definitely slower employment growth, but probably not an outright decline. With that out of the way, I do think that the employment to population ratio probably will be lower

at whatever the peak of this cycle is than it was in the previous cycle, because I think aging of the population, of course, is continued. So that is a kind of structural dry. of declines in employment to population. And then in addition, we've seen, you know, some people withdraw from the workforce. We've seen, you know, significant amounts of

early retirement. And I don't think that that's really going to reverse either. I mean, over, you know, over the very long term, the impact should decline, but it's not going to reverse quickly, I suspect. Then I think a last point, and this

is related to it, I don't think it's, you know, visible, of course, in the employment of population ratio is that we had very few immigrants for a year or two. And unless we see kind of catch up immigration, immigration flows that are actually larger than the pre-pandemic rate to make up for that, you know, essentially whole, we're also going to have a permanently smaller workforce than we would have otherwise had. Again, that's not for employment to population, but it's important for the overall number of workers. So how much can unemployment actually rise without tipping the U.S. into a full-blown recession? And then, you know, secondly, when you look at something like jolts falling, and we just had the jolt numbers come out today. We're recording this on August 2nd. You know, we saw a higher than expected drop in job openings. Like how concerning is something like that to you, given your new framework?

So a decline in job openings is not concerning. In fact, in my view, it's a good thing because we need a rebalancing of the labor market. And it's much, much better to have that rebalancing of the labor market occur via declines and job openings rather than increases in unemployment. And if firms get rid of job openings, that does not have negative second round effects. you're not cutting anybody's income by, you know, removing job openings. You know, increases in unemployment and layoffs are a very different story. Then you do cut people's income. You, you know, impose hardship at the individual level,

and you're also taking income out of the economy. So you're weakening the cycle. History would say that you can only see, you know, a small increase in the unemployment rate. without going into recession. At least in U.S. history, we've never seen an increase in the three-month average of the unemployment rate of more than 35 basis points without a recession. If you look outside the U.S., you know, that looks a little bit different. So I certainly wouldn't view it as a law of nature.

But I think it does drive home that sizable increases in the unemployment rate have historically been associated with recession. and probably in part, you know, through kind of causal forces that you've seen, you know, declines in disposable income on the back of layoffs, which have then fed into weakness in spending. You know, historically, I think that's often been a factor. You know, now I think we might be in a somewhat different situation because weakness in disposable income, at least in 2022, you know, it's driven by inflation. and fiscal tightening as opposed to labor market forces. So, you know, it may not be quite the same situation as over the, you know,

entire stretch of post-war history. But it's definitely something to watch. If the labor market is so tight, why have we seen negative real wage growth? I think because, you know, wage decisions are really more around nominal wages than than around real wages. And there is a sufficient amount of inertia in the process that if you try to explain the ups and downs of wages with labor market tightness variables, generally you do a much better job if you focus on nominal wages than if you focus on real wages.

It's also a little bit hard to know what real wage expectations that might be set via the labor market process to, you know, bargaining at the individual level or even the collective level, what that really is, you know, backward looking inflation is 9%. But if you look at expected inflation, depending on the horizon, you know, it's much, much lower. So, yeah, I do think what we've seen in wages has been quite consistent with an overheated labor market. I mean, I'd focus on the fact that, you know, most wage indicators are showing something like 5.5% year-on-year growth. And that is, you know, that's very high. That's way higher than what's consistent with a, you know, 2% inflation rate. Let me ask you. You know, Tracy mentioned, like,

okay, at what point does an increase in the unemployment rate constitute a recession? And basically, if it starts ticking up, there's a good chance we're going to get a recession. At what point does the Fed seriously have a problem on its hands about the correct course of policy? If unemployment were to start ticking up, but inflation falls much slower than hoped. And so, you know, you start to say, like, this is a real recession, but we still have, we still have a long way to go to 2%. Walk us through how you're thinking about that risk. Like the real stagnation risk, I guess, is what's out there. Yeah, I think it depends on what you see in other indicators. I mean, you wouldn't just want to focus on the realized inflation numbers because that is, you know,

going to be pretty backward looking. I think you want to look at overall measures of supply versus demand in the labor market. You want to look at the wage numbers. But yeah, I mean, it certainly could be that you'd be in a difficult situation because, you know, while you do want to focus on forecasts, forecasting is always difficult, and it's probably more difficult in the current environment than it has been in previous cycles. So I think there is a real risk that if you did, see a sharper downturn that it would be difficult to know exactly at what point you should,

you know, reverse course on monetary policy. You know, with that said, if I focus on the last FOMC meeting, I think there was some reassurance from Chair Powell as far as markets were concerned that, you know, he said, we are going to look at both sides of this. I mean, I don't think it was a, you know, particularly doveish meeting, you know, to the degree that perhaps you might gauge from where market pricing has gone. But it was reassuring in the sense that, you know, he certainly didn't say we're only focused on inflation. Joe asked you that question about if the job market is so tight, why haven't wages gone up more? And this is, I guess, maybe one of the few good things that we have going at the moment, which is the,

that inflation expectations so far seem to be reasonably well anchored. Unfortunately, a lot of people don't think they're going to get massive pay increases, and a lot of people, at least according to the survey measures, still think of inflation as transitory. How much does that help the Fed? And is there a risk that at some point those expectations become unmoored or more unmoored? I think it's hugely helpful. Certainly if you compare it with the alternative, I mean, if inflation expectations were, you know, anywhere close to current actual inflation headline and even core, I think it would be much

harder to have any realistic scenario of bringing inflation down without a very significant amount of economic pain. I mean, if I look at the kind of economic history of the late. 1970s, early 1980s, inflation expectations, based on the indicators we have, have become, you know, very significantly unmoored on the back of repeated increases and ongoing trend increases in inflation over the previous 15 years. And it turned out to be, you know, extremely painful to bring inflation back down to the kind of, you know, two, three percent range in the, in the subsequent decade. So I do think that we, with the, with the, you know, most of the long-term

inflation indicators, inflation expectations indicators still consistent with something like 2%. We're in a much, much better position. And I'd say it's one of the real significant upside surprises that we've seen over the last, you know, a year or a year and a half. I mean, if you had given me all of the inflation-related indicators other than the expectations measures a year ago and had asked me to predict where the expectations measures are, I would have given me a much higher number. And that also, I think, is important

for the second part of your question because, you know, while, of course, we need to watch whether this anchored, you know, environment changes, you know, I guess I'd be surprised if we had a, you know, a major change having watched what these, you know, what these indicators have shown. You know, obviously, you don't want to over, you know, overstress your luck in this. You do need to watch it, but I would expect inflation expectations to stay anchored.

So here's a question that I can pose to because you're a Goldman's chief economist for the globe. You know, inflation isn't just high in the U.S. Throw a dart at the map and there's a good chance you're going to hit a country where inflation is at like 40-year highs. And there are different factors. You know, in Germany, obviously headline inflation, very exposed to electricity prices and the increase in the cost of gas. But it's not just Germany and it's not just headline. And core in Europe, in the euro area, continues to march higher. We haven't seen that turn down either. And you know you can't in Europe blame the extra $1,400 checks or anything like that. Does looking at inflation on a global basis

inform, can it be used to inform anything about root causes and the drivers of it? I think so. I think it does show that common shocks, as opposed to country-specific policy choices, you know, played a very important role in this. But I also think that you see some evidence of country-specific developments. So if you take the euro area versus the U.S., you know, know, certainly both headline and core inflation, you know, have converged to some degree. But on the labor market side, you know, I think we still have a pretty significant difference. Yes, wage growth is accelerating in Europe, but, you know, it's moving to 3%, whereas in the U.S. it's moved to 5.5%.

And, you know, 3% is still, that's still relatively well behaved. I think it's much harder to argue that the European labor market in aggregate is overheated. So I think there still are some differences. With that said, I think those differences don't look quite as stark as they did maybe six months ago or 12 months ago. And not only because of additional shocks, also because I think we've probably learned a little more about what's happened to core inflation, not just, you know, oil and natural gas prices and electricity prices. So Joe asked the global question on inflation, and I'm going to go right back to asking a very granular U.S. inflation question. But can you talk to us about rental inflation in the States?

There has been some concern about rents going up, and people are sort of wondering when and where that might stop and also people asking questions about how higher rents interact with the housing market as well. So, you know, at what point does it maybe make more sense to buy a house versus renting if everything is going up? So I'm just wondering how you're sort of thinking about that. Rental inflation certainly has been, you know, an ongoing upside surprise. I would say in the last few months, actually the most important upside surprise, I mean, more important, I think, than the commodity numbers, because we sort of know where those are coming from. You know, both rent and owner's equivalent rent have, you know, continue to accelerate and last couple of numbers,

you know, in the sort of 8% annualized range. You know, I think there is good reason to believe that we'll see lower rent inflation as we go kind of into 2000 and 23. If we look at some of the more bottom-up indicators on, you know, rents on new leases, those have decelerated. The housing market more broadly, you know, clearly is decelerating. The labor market is decelerating. I mean, statistically, that is an important driver of, of rent inflation. So I think by 2023, I would be reasonably confident that we'll see a deceleration. But over the next few months, I think it's a major upside risk to the inflation numbers. And we actually just, you know, pushed up our core PCE forecast, you know,

somewhat further because rent has continued to come in higher. Where do you have Core PCE going to We have it at 4.5% by the end of the year. And we're at, oh, we're at 4.8% right now. So a very, so not much progress from year to year. Not much progress through the end of 2000 and 22. And there are a number of factors going into that, but an important factor is the rent situation. Can you describe just sort of what you're, your current short and medium term outlook for both, I guess for both inflation, but also for the Fed's policy. How many more hikes through this year and then what beyond after this year?

So for inflation, you know, we have core inflation come down, you know, very modestly through the end of the year. And then more significantly in 2023, that's also partly related to rent. So we have, you know, core PC a two and a half by the end of 2023. That's a pretty significant deceleration, obviously still, you know, somewhat above the 2%, but probably more consistent with where they would be comfortable, at least in a continued expansion. And then on Fed policy, we're expecting a 50 basis point move at the September meeting, so ratcheting down the pace.

And then we have two more 25 basis point moves in November and December, which takes us to 3.5% to 3.5% for the funds rate, consistent with the latest dot plot. consistent with the Fed's latest thinking based on what Chair Powell said in the latest press conference. And then in 2020, we actually have nothing, a continued to three in a quarter to three and a half percent funds rate. As the economy cools off, inflation comes down and the growth is below the long-term trend. Yeah, I think in that environment, they probably would keep the funds rate somewhere. above where they think it's going to settle in the longer term because, you know, after all,

inflation is still too high. So I think the hurdle for cuts in 2003 is high. If I look at market pricing, the market is obviously pricing some pretty significant cuts, but I think that probably would require an even weaker growth environment than we have no forecast. So one of the unusual things about the current economic situation, and there are a bunch of unusual things about it, but one of the bigger ones I would say is the difference between soft versus hard data. So the survey-based measures versus the actual numbers that are coming in. So even though you look at things like consumer sentiment, you know, that survey is now at its lowest and I can't remember exactly, but like very, very low. But, you know, if you look at the actual consumer spending figure, that's been relatively resilient. How do you explain that discrepancy? Well, I think even among the soft data, there are some important discrepancies because the University of Michigan Consumer Sentiment number is close to an all-time low.

It goes back to the late 1960s. I mean, just came off an all-time low, but it's still very close. But then the conference board survey, which is the other long-stander, you know, consumer confidence survey is actually not particularly low. And that's a much bigger gap than normal. And it reflects the fact that the conference board indicator puts more weight on the labor market situation. And, you know, people recognize that the labor market is still very strong. But, you know, confidence has taken a large hit in particular from the inflation increase and the increase in gas prices. You see a somewhat similar gap in the, you see a somewhat similar gap in the

business surveys, a number of the business surveys have fallen kind of below the, you know, zero or 50 line, depending on which of the surveys you take. So basically into contractionary territory, but harder indicators of activity are still somewhat, somewhat firmer. You know, industrial production generally has looked somewhat better. So, yeah, There are a lot of different indicators out there. I think you generally want to put some weight on a range of indicators. I generally take averages of different indicators. And consumer confidence, I think, is probably a bit of an outlier to the low side or consumer sentiment, rather.

Most of the indicators, in my view, are still consistent with positive growth, though very slow growth. You can get the news whenever you want it with Bloomberg. News Now, I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now.

And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. I want to ask a question, and it's sort of long term. and maybe it even is about the entirety of this coming decade.

But when I think of the last decade, you know, the dominant economic phenomenon to some extent was slack. And there was always ample workers ready to be hired. We had loose commodity markets. Oil was not only cheap. It was plentiful. It was the shale era. There was not, you know, shortages and elsewhere. And of course, that's tight commodity markets.

And we've had multiple conversations with their colleague, Jeff Curry, is expected to be a persistent feature of the economy, at least for the foreseeable future. It doesn't seem like there's going to be some major change in the supply dynamic of copper or lithium or oil or anything like that. Does that change what this next decade is going to be like? And does it impose to some extent a lower speed limit on what growth can be in the years ahead? Yeah, I think it potentially does. I do think it's important from a speed limit. perspective, you know, over time, of course, there will be, you know, substitution and there

will be innovation and, you know, whatever constraint exists in the short term can be relieved via investment and, you know, ingenuity. But I do think it's a, you know, a significant, a significant issue, at least relative to the sort of post-2014 period when you had a, you know, much kind of looser supply environment, especially in the commodity industry, which then kind of begat the underinvestment for which we're now paying the price. You know, I think another issue, though,

was on the macroeconomic side, that in the aftermath of the 2008 crisis, monetary and fiscal policy, were very reluctant to provide stimulus, even in an environment where we are still, you know, very far away from full employment. And it took a long time for that to end. I do think that it was, you know, the low inflation environment. In part it was plentiful supply of commodities, but in part it probably also was overly tight policy. Do you find yourself, I'm just curious, you know, professional question,

but obviously, like we've been doing the podcast over for years and years now. And, you know, the last year, our conversations have become much more micro and we want to learn about the ports and we want to learn about copper production. And now when you're thinking about, well, where our electricity price is going to go in the U.S., it's like you have to know, like, how soon are they going to get that export terminal in Louisiana back open that would presumably put upward pressure on natural gas prices? Do you find yourself in your conversations feeling the impulse to get more micro to understand some of these things as how they're going to form the broader economy?

Yeah, in more of a crisis situation, I think you always have to learn more, you know, about details of the economy or the financial system or, you know, healthcare than you really perhaps anticipated. And that was true, of course, in the run-up to 2008 and, you know, the immediate aftermath in terms of the financial system and the mortgage market and, you know, securitization. and in the early days of the pandemic, it was around health care. And I think in the aftermath of the pandemic,

a lot is around supply chain and commodity industries. So I do think it's a hallmark in some ways of being in more of a crisis situation. The other thing I'd say on this is that different parts of the economy are having very different experiences, and that's probably going to continue to make it harder to figure out the macro because, you know, you've got good spending still at pretty high levels. And even in a decent macro environment, good spending is probably not going to develop very well over the next year or so,

whereas service spending is, you know, service consumption is still well below the pre-pandemic level. And even in a not-so-good economic environment, we probably, we will still see increases in, you know, say, office adjacent consumption or, you know, high touch, you know, recreation services and travel and spectator events and things like that. And I think that's also going to make it harder to extrapolate from kind of partial indicators about, you know, one sector of the economy to say that, you know, this is what's telling us that we're in a recession or that we're not in a recession. really do have to look at the whole picture. And the, you know, macroeconomy is made, made up of a lot of different sectors and separate micro indicators. Just on this note, how has the pandemic changed the

economy? I mean, you mentioned tweaking your labor market model, but I can imagine, you know, in the early days of the pandemic, when all this new fiscal stimulus was unleashed, there was some talk that, oh, this is a new paradigm that from now on, whenever there's a recession, we're going to get, you know, the government writing checks and things like that. But now that we have higher than expected inflation, it seems like that might be in doubt. So I'm wondering if you think that something permanent has changed because of our pandemic experience. I think that's still an open question. On the labor market, you know, kind of rethinking of our labor market model, I don't think that's necessarily directly related to the pandemic.

I think it's just thinking through how labor demand and labor supply interact in a more careful way, I think. I mean, I think it could have occurred in a very different kind of health care and pandemic environment. It just so happened that because we've seen these massive changes and job openings, that's what really made the whole job openings issue very salient. How the economy is going to look from a structural perspective, what the average level of, say, service consumption versus goods consumption is going to be and how many people, how much time people spend in offices versus working remotely, I think a lot of those things are still somewhat up in the air.

My own view is probably more towards the, the side that a lot of these things are going to continue to normalize relative to pre-pandemic levels. I think we've already seen a sizable amount of normalization. I think that probably will continue, although it's taking in a lot of areas, it's taking longer than anticipated. I think on economic policy, the economic policy kind of goes in waves. and you know there's there's always a risk of kind of fighting the last war for central banks and fiscal policy makers and you know in the kind of 1990s and 2000s and much of the 2000s and tens I think central banks were very focused on high inflation and the risk of inflation recurring and so they tended to run too tight

a monetary policy. Then in the course of the post-O-8 recovery, they learned basically that they probably should be setting their sights on full employment

somewhat higher, should be more aggressive. When the pandemic struck, they were very determined, we're not going to make this mistake again, we're going to be very aggressive. And, you know, in 2020, that was actually extremely fortuitary.

because they were very aggressive in forestalling what could have been a significantly worse crisis. But then in 2021, this thinking led them to, you know, overdo it. And, you know, it took too long to sort of bring about a change in policy. And so in 2022, they've been catching up. I mean, yeah, it was late 2020. It was Jackson Hole 2020. that's when they unveiled the flexible average inflation targeting, which in retrospect seems like it might have been the ideal policy for the post-GFC recession. That might have led to better outcomes

than what we got, I guess still to be determined whether they can pull off the soft landing here or not. What's the buzz going to be like at Jackson Hole, you think, this year? Well, you know, what do you, I guess just, you know, high inflation, but I'm curious like what you're going to be listening for and what the most important central bankers in the world what's on their minds? I think the question of how do you think about, you know, demand and supply in the economy and labor market balance and, you know, what will it take to bring the parts of the economy that central banks and the Fed can, you know, have some control over it back into balance and, you know, how much of the inflation is, you know, perhaps driven by factors that they really can't control.

I think that's going to be important. The question you asked earlier about, you know, how do you trade off inflation still above the target against an economy that is maybe at risk of falling into a recession or has fallen into a recession? I think that's going to be an important one. you know, how do you interpret the dual mandate? To what extent do you, you know, put significant weight on both sides of the mandate? And to what extent do you really focus primarily on inflation and at what time horizon? You know, I think these are really the bread and butter are really central questions of macroeconomic policy that are going to be very much in focus. You know, at times in Jackson Hall in the past, you know, they've talked about issues that are maybe a little

bit further away from the, you know, from these kind of bread and butter questions. But right now, it's really blocking and tackling central banking. Pretty core stuff part of the job. I just want to go back again to this question of like, you know, you mentioned fighting the last war. And, you know, that's a natural human phenomenon and sort of anchoring to old conditions or old paradigms or thinking that, you know, we can't really see high sustained inflation. And you mentioned in your own models, say with, you know, what were the signs that things were more out of kilter than maybe people appreciated and you point to job openings. Is there anything else deeper that over the course of the last year that you might have learned or have incorporated it into your

thinking, or is it not much more than we should have picked a different input? I mean, I think in general, the inflation indicators that I think also have been important important and were flashing, you know, amber or orange or red in 2021. The supply delivery indices, I mean, were, you know, pretty extreme and a lot of the supply chain issues, you know, quite extreme. And, you know, they, while they have improved in recent months, it took a long time for them for them to improve. Again, some of that was because of recurring shocks, Delta, Omicron, Ukraine, and, you know, and Omicron again. But I do think these are indicators that are very useful and it's important to take them very seriously. Just a final question.

What else are you sort of looking out for right now? Like, okay, obviously unemployment, the inflation data, anything else big that will sort of inform your thinking, especially like, you know, going into the end of the year and thinking about whether the pace of hikes could even be faster than what we're expecting right now? The pace of hikes could be faster, of course, if the, you know, inflation adjustment is, you know, takes longer and the labor market adjustment takes, takes longer. So I think that's very closely related to the, you know, to these core issues that we've been discussing. I am focused on. I am focused on. Of course, on what happens globally.

I mean, we're looking at at least a mild recession in the euro area. And if there is no Russian gas at all that will end up flowing, then, you know, potentially a significantly deeper recession. There is a question about the spillovers from that into the U.S. I would say if it's a supply-side-driven recession because German and Italian industrial companies don't get gas and therefore have to shut down production that may not have, you know, large spillovers, but there's also the question, you know,

what happens more broadly in Europe? There's an election in Italy on September 25th. Probably will be some nervousness around in the run-up to that election because if you have a more Eurosceptic government in Italy and you have increases in rates in the euro area, upward pressure on Italian spreads, you know, I think the risk is that you revisit at least some of the European crisis kind of experiences, because, you know, there'd be a question of at what point can the ECB, you know, really step in if the Italian government is less willing

to cooperate. So that's definitely something I'm focused on, you know, the latest developments in China, I think a very important question. Obviously, we've seen some very strong, very strong rebound from the Shanghai lockdown. But the latest data again show that the renewed kind of virus spread is starting to have a negative impact again. So, I mean, our China forecast has been, you know, on the more cautious side for a while. We're currently at 3.3% for the year as a whole for GDP growth, government target officially is still five and a half. And frankly, I think the risks to our forecast are, you know, probably still pretty clearly on the downside. So there's a lot going on globally, you know, a lot of downside risks to activity, despite the fact that, you know,

we're still, we've still mostly discussed inflation today. Jan Hotsis, chief economist at Goldman Sachs, always a treat to chat with you and with so much going on right now. Really appreciate you coming back on the show. Thank you so much, Joe. Thank you so much, Tracy. Great to be with you. Thanks, Jan. That was a lot of fun. Thanks, Jan. That was great. Tracy, I always obviously enjoy speaking to Jan. I guess it's, you know, there's still a chance of a soft landing. You know, it's not, it doesn't seem that high, especially getting inflation down from, say, like 4% to 2%. Seems like it's going to take a lot of pain. But I guess it's not outside of realm of possibility when you look at the unemployment rate staying low despite the drop in job

opening. So I don't know, a few causes for hope, maybe. I was about to say I thought Jan's point about the difference between job openings going down versus the unemployment rate going up is a really important one. But the other thing I would say is I keep coming back to historic parallels. And I know everyone tends to reach for the 1970s or the 1980s. But really it feels like, and we've talked about this before, I'm sure, but the post-1918 Spanish flu situation, like that feels just really relevant to me at the moment because you did have a period of high inflation there. You did have the Fed start raising rates in order to bring prices down. And they did underestimate the impact that rising rates would have on the job

market. So you saw a big contraction in job openings, actually, and eventually that fed into unemployment. And it basically tipped the U.S. back into recession a couple years later. So I'm thinking like, oh, yeah, well, that too. Yeah. Obviously, yes, there was a very large pandemic. But it does seem like the big worry to my mind would be if we got some unexpected jump of a meaningful unexpected jump in the unemployment rate over the. course of a few meetings while realized inflation remains very high. Because again, you could look at the math and say inflation should come down and inflation expectations are anchored. But we know that there's sort of this very heavy emphasis on like, we want to see it, right? We want to see

evidence that inflation is coming down, that's coming down sustained, that it's month over month of a month, that it's heading back towards target. And so I do, you know, like, we do know that initial claims have been picking up. Corporate layoff announcements have been picking up, not massively. There hasn't been some, like, massive weakness in the labor market, but it feels like that would be the one worry. And then the Fed's in a really tricky problem of having to decide which is the, which is the fire it wants to put out, inflation or recession. The other thing that struck me or that jumped out, and we probably should have talked about this a little bit more. But just what a terrible position Europe seems to be in at the moment.

Like, as bad as things are in the U.S. in terms of inflation, it just feels like in Europe there's the potential for things to get even worse. Right. So it's the combination of very high inflation, particularly headline, but also core rising. And then it has not seen the wage growth that we've seen in the U.S. And then, you know, there's all of the issues that are like never getting never seemed to be solved about fragmentation of the bond market and so the question is do you need intervention to hold down italian debt and then the different politics we need to do another uh europe episode soon that's for sure yeah and just can you actually bring down inflation while also trying to um narrow the difference in bond spreads like that seems like a really

big challenge but yeah we should do a europe episode that would be fun flashbacks to uh 2012 all right Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart.

Follow our producer, Carmen Rodriguez, on Twitter at Kerman Armin. And check out all of our podcasts, Bloomberg, under the handle at podcasts. Thanks for listening.