Plain English with Derek Thompson - Five Reasons Everybody Is Wrong About a U.S. Recession—Including Me

Episode Date: June 28, 2022

I feel like the theme of this podcast recently has been that everything is going off the rails: the Supreme Court, inflation, oil prices, air travel snafus. Take the economy, for example. My theory for the past few months has been that the odds of a recession are nervously high. But when I start feeling myself become a bit ideological, it’s always worth asking: What if I’m wrong? So what I want to execute in this episode is a bit of a zag. Today's guest, Conor Sen, an economic columnist for Bloomberg, explains why he thinks this economy isn't nearly as troubled as the headlines suggest. Host: Derek Thompson Guest: Conor Sen Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Every Monday, the day after the show comes out on the Prestige TV podcast feed. Wherever we get your podcast, but get them on Spotify. I feel like the theme of this podcast recently has been, that everything is going off the rails. In fact, scratch that. I know that the theme of this podcast recently has been that everything is going off the rails because I think I literally said that

in one of the last few episodes. I was like, wow, everything is really going off the rails, inflation, oil prices, air travel cancellations, the Supreme Court for God's sake. And I know it can sometimes feel like everything is bad. But the truth is, I really don't like feeling like this. I'm a genuinely optimistic person. I'm a sunny person.

I don't like people who are irrationally optimistic. I don't want to stare at bad news and say, ah, this is good for us. But I think that, like, so much of the news industry, I can be captured by my own negativity instinct, my own negativity bias. So, you know, take something like the economy. My prior, and I think the theme of many of the last few episodes on this podcast about the economy, has been that the odds of a recession are nervously high. But when I feel myself becoming a bit ideological, when I can feel a narrative calcifying around my commentary,

it's always worth asking, what if I'm wrong? What if I'm wrong? What if my predisposition to see things in a dark light is actually making it harder for me to see the truth? The fact that some real-time data, lots of real-time data, isn't nearly as pessimistic as most of the headlines. So what I want to execute in this episode is a bit of a turn, or a U-turn, a Zag, as we say. I want to take seriously the possibility that this economy is not nearly as bad as most people think, that if you look at the real-time inflation data, jobs data, corporate earnings

calls, the leisure economy, which is white-hot, there are surprisingly, compellingly optimistic green shoots everywhere. Today's guest is Conor Sen. Connor is the founder of Peach Tree Creek Investments and an economic columnist for Bloomberg. Connor is also one of the people I talk to most about the economy in the world. I have never met him, IRL. Connor lives in Atlanta. I live in D.C.

In fact, this interview might be the first time we've ever spoken to each other, which is either a weird, only in the 21st century thing, or maybe some kind of throwback 19th century pen pal situation. Anyway, this guy gets it. He is just without a doubt, one of the sharpest economic analysts that I know, and he has been for the last few weeks, even as I've been listing toward gloom and doom, pumping out economic stats and analysis

about how this economy might not be nearly as troubled as the headlines. So I decided that we should listen to him. As always, send your comments, your questions, concerns, to plain English at Spotify.com. I'm Derek Thompson. This is plain English. Connor Shen, welcome to the podcast.

Thanks for having me, Derek. It is great to talk to you. I was just saying in the open that you're among the few people who I talk to consistently online about the state of the world. I think we've probably exchanged thousands of messages on Twitter and G-chat, but we've never met in real life. We've never spoken over the phone. So this is not a replacement for that.

I'm still buying you a beer next time. I'm in the Atlanta area, but this will do for now. I think it's safe to say that you and I are generally pretty similar when it comes to our outlook on economic news and analysis. We're both data-driven, but we also aren't like full stat brain. Like we leave a remainder for vibes and narratives and feelings and ju-ju and all that. I think the main difference between us is like, I'm a little bit more of a short-term catastrophist, and you've always been a little bit more of an optimist.

Before we keep going, do you think that's a fair way to distinguish our philosophies, or have I gotten us wrong right off the bat? No, I think that's right. And we often talk about similar things, focus on similar ideas. So it's sort of, I'm always kind of curious about what you're up to and probably vice versa a little bit. Yeah, it's interesting. I think we have a lot of overlap and then our differences are meaningful and instructive. So that's exactly what we're doing in this episode.

The theme of this episode is that I've been a bit of a catastrophist on the show recently. And I want to see the good news in the world. But I want to see that good news with clarity and with empiricism. So you and I emailed back and forth and came up with five big picture reasons to be optimistic about the state of the economy. Even though inflation came in at almost 9% last month, even though stocks have crashed, even though interest rates are rising faster than they have in a long time, even though, through all that fog, I gather that you think that conventional wisdom has turned too gloomy about

this economy. So before we get into all the details, can you give me a thesis statement, like a big, beautiful Christmas tree on which to hang all these data points? What's the big picture reason why your outlook right now is sunnier than the prevailing wisdom? I think it starts with the fact that the prevailing wisdom has gotten so negative that the bar to exceed that is so low. So last week, the stock market, the S&P 500, was down over 20% for the year.

or I guess since the highs, I guess, in November. And if you think about the two recessions that everybody's worried about, the one in 2001, which was the dot-com bust and then 2008 with the housing financial crisis, by the time the stock market was down over 20%, we were already in recession. So that was March of 2001 and the summer of 2008. And so for me, I feel like if we're just not in a recession right now, we're going into one this month, then it's better than the consensus. Right.

It's kind of like when the S&P 500 drops by 20%, that is historically a five-alarm fire. It means either your house is burning now or the burning is about to begin imminently. And therefore, we ought to direct our focus to real-time data. We should pay super close attention to the most on-time and high-frequency reports

about the U.S. economy. But when you look at the real-time data, when you look at the most on-time and high-frequency reports, you're not seeing a fire. You're not seeing the imminence of a fire. Now, look, maybe you're wrong. Maybe the market is right.

Maybe the market knows that a lot of growth tech stocks were total BS, and that's why we had a correct like this. Maybe a lot of value is never coming back. Maybe the market knows we're getting a recession in late 23 or something, 24. But again, bare markets like this are a fire alarm. And when you look around, you're not seeing those flames. Right. And I think in general, it's wise to be thinking about six-to-month risks, things like that.

But right now, again, when the market is priced in so much negativity, I think the real-time data matters more than it typically does. And if you see things like, we can go into the details, but I just don't see that imminent recession in the data right now. Right. All right. So let's go through all of the things that you're looking at. And I'm just going to allie up you for every point here. So point number one is inflation. Right now, obviously, inflation is the biggest problem facing the economy. The Federal Reserve is jacking up interest rates to destroy demand, to help bring down inflation. But the biggest driver of headline inflation isn't something the Fed has power over. It's energy prices, it's commodity prices,

it's shipping prices, supply chains. Tell me what you're seeing on shipping rates and commodities that is mildly optimistic. It's really ironic that we've had these very hot core inflation prints over the headline inflation prints over the past few months, but all over the sort of real-time data that you might want to look at for where is inflation going over the next six to 12 months, I would argue, are coming down. And so that sort of started, with use car prices, which were a big driver of inflation for last year in the beginning of this year, those are really flatlined over the past few months. And that's because production is picked up. Pricing got so high that it sort of destroyed demand on its own. So that's one area.

The second is retailers from everyone from Amazon to Walmart to Target said that there was a big shift in demand from goods to services around March or April. And as a result, they were overstocked and over-employed. And so we're going to start to see discounts show up in retailers and things like that. And then just last week in the market, we saw commodities really get crushed. And that's in part due to the recession fears that people have. But everything from oil to natural gas, to copper, to wheat, to soybeans, to corn, everything on the commodities front is now coming down. And so to me, there's just a preponderance of evidence that inflation is going low over the next several months. Why are the commodity prices dropping? I understand the target gap stuff, right?

Like, they saw demand for durable goods. They stockpiled a bunch of clothes and whatnot. Now people are shifting their spending towards services. I get the thing about used cars, and I think that microchip supplies are probably going to come back to normal in the second half of this year. Why are commodity prices falling for oil and copper and tin? That seems like a really important factor here, because if all those prices start to come down, headline inflation absolutely has to receive.

So explain that for me. I would say there are two main arguments for why that would be. The first is that if people are worried about a recession now, then it's hard to think that commodity prices are going to keep going up because you're going to see that decline in global demand, and so commodities are going to come off. And we did see that in the middle of 2008 right before the financial crisis really got bad, where oil got up to almost $150 a barrel,

and then it really crashed in the back half of the year. So if we really are going to have a recession, high commodity prices doesn't make a lot of sense. And the second is just with the way that a lot of investors have strategies. One is sort of trend following in nature. And this year, commodities have been the only thing that have consistently gone up in price. And we finally saw them start to sell off. And so a lot of investors who were long commodities just decided to sell them all at the same time and thinking maybe this uptrend is broken and this trend following strategy isn't going to work anymore.

So if all this is true, if there are reasons why core inflation is going to come down as demand softens a little bit. And there's reason why headline inflation is going to come down if commodity prices soften a little bit. do you think the Fed is making a mistake by escalating its interest rate hikes? Because the Fed's decision-making process, at least as explained in the last meeting, made it sound like they had to try even harder to bring the pain. But you're saying, look, maybe that much pain isn't necessarily required if a lot of the inputs into headline inflation are going to come down anyway. Is that right? I think in normal times, the Fed can be focused on the nitty-gritty of details and components of inflation and why things are happening the way they are. But right now, the entire world is focused on inflation. Ordinary Americans care about gas prices and home prices and rent prices. And so just the public in general and D.C. politicians are just mad. And they're mad in part because nobody expected this inflation to happen or most people did not.

And they're looking to the Fed to fix it. And so the Fed, even though they're politically independent, they're politically influenced. And right now I think it's just too hard when headline inflation is 8, 9% for them to say to stay the course when that's what they said last year. And it turned out not be the case. If you're going to make a prediction, would you predict that inflation either has peaked or that the next one or two prints will be the peak of headline inflation? I do. And that's because, again, commodity prices have come down. So we're unlikely to see that big jump in gas prices over the next couple months. And also a big sneaky driver of

inflation over the past few months has been airfares. They've gone up around 40 to 50 percent as people have shifted their spending from goods to services. But it's unlikely that's going to continue. And so as airfares maybe flatten out, or even decline a little bit, that last sort of pandemic-related surge in inflation should taper off. Yeah. And the thing about airfares is, you know, it's June. And no matter what happens, next month will be July, the next month will be August. And then after that, you have the end of summer travel. So just like the mere passage of time is very likely to bring down airfares as we move from the hottest three months of travel to a less hot quarter of travel.

All right. So I think that's a really, really good case that as scary as this economic moment is, it's very likely that we're at the top of inflation mountain or very, very near it. And as a result, there's lots of reasons why the big hairy monster of the economy might begin to soften in the near future. I want to move on from inflation to the second thing that we want to talk about here, which is jobs. A lot of news stories about layoffs and rescinded job offers in the news. It's all over Bloomberg. It's all over the Wall Street Journal front page. But they are very concentrated in tech and specifically growth tech. companies. If you look at the overall labor market, it's still incredibly strong. So give me the meat

here. What does the labor market look like to you? So I would say the two reports that I've been focused on because they come out weekly. So it's maybe the most real-time data we can get on the state of the pulse of the economy are jobless claims. Those come out every Thursday. And initial jobless claims report the number of new filings for unemployment every week. And that has ticked up somewhat. But it was at such record low levels that a mild rise is not really cause for concern. And the more optimistic one is continuing claims, which is the number of people continuing to file for unemployment every week. And that's still basically a historic lows. And so until that we're to pick up, it's hard to say that unemployment is getting worse. And you can argue that the labor

market strength is just continuing on the way it was, really, up until the spring. And then also, indeed, the job website puts out a weekly tracker of number of job postings. And this has become something the Fed has been very focused on as they think about an imbalanced labor market. And they look at the number of total postings, and then also just the number of postings this week to sort of, you can isolate out the stale postings that maybe don't mean anything. And those have come off a little bit, but they're still very strong. And so we really just don't have any significant evidence that at the macro level, we're seeing that kind of weakness in the job market yet. So this is not pushback. It's more of just a response. You said the Fed isn't necessarily

politically motivated, but they're politically inspired or politically affected. The Fed's going to keep raising rates. They say that their next increase is going to be 0.5 or 0.75. demand is going to be destroyed. We know that destroyed demand destroys jobs. And the Fed itself is predicting not one year of rising joblessness, not two years of rising joblessness, but three years of rising unemployment. And that is something that has never happened outside of a recession. Do you think the Fed just isn't reading the real-time economic data accurately? Or do you think that they really are going to continue to raise rates even as we enter a period that is basically the equivalent of a labor market-driven recession? I think what they needed to do, and one of the Fed governors spoke about

this a few weeks ago, is that they think the unemployment rate needs to rise somewhat to get inflation back to where it needs to be. And they're hopeful that it can get there with people coming back into the labor force and maybe getting jobs. And then maybe some people who are currently employed losing their jobs, and it nets out to net job growth, but more unemployed people at the same time. And that's sort of a miraculous soft landing. And that's what's reflected in their forecast. But the truth is, they have a model, I have a model. No one really knows what's going to happen. And I think so much of it is going to be driven by what's the course of inflation over the next three to six months, which will then dictate their interest rate increases and policy,

which will influence everything else. A huge input into inflation is obviously housing, so that takes us to number three. When I do housing research, I try to include all the veggies in the omelette. I'm looking at housing starts. I'm looking at mortgage rates, originations, inventory. What I'm not very good at looking at is comments by chief executives on earning calls within the housing industry. Or to be more accurate, I'm only good at following your tweets about what home builders are saying. And you've been following this very closely. I think this is a really interesting sort of real-time data source to look at. What are home builders saying about their own outlooks about the housing market? What are you seeing in the home-building industry? Why do

they seem weirdly bullish right now? So we saw two homebuilders report earnings last week, and that's Lanar and KV Home, and they are two of the largest in the country. And heading into that report, homebuilding stocks had sold off around 20% over the prior few weeks as that inflation report got the Fed much more likely to increase rates more than the market thought. So people were really braced for the worst. And what they said was that basically because they were so production constrained and

inventory constrained heading into this rise in rates, maybe demand, sort of was in fifth year, but supply, the production response was in second or third year. And so now that demand has come down somewhat, production and demand are actually more imbalanced than people think. And so they still think that they can sell the homes that they can produce. And that might not be the case months from now if unemployment picks up or as production picks up and they have more to sell. But at least for the summer, it seems like we're in a weird spot where 6% mortgage rates are kind of crushing the existing home market. But the new home market is doing okay just because we were so production and supply constraint heading into this.

Right. As I've talked about on this show in previous episodes, we've done about the housing market, the really key thing to look at is inventory. Because when inventory is low, then the market is going to be hot, hot, hot, hot. And right now there's actually three different kinds of inventory that are really important to look at. So you can look at the inventory of completed homes. That's new homes for sale.

And that is just off a record low, just off the record low of 32,000. in 2001. But what's really, really weird about this housing market is that you have a large number of homes that are under construction but not finished. And that's because the construction process started,

but it was really, really difficult to get these materials. They were either scarce or just way too expensive or both. And as a result, you have like all these homes that have been started but aren't finished and therefore can't be sold. And right now, if you go back to the first

that you said, about commodity prices coming down, if those prices come down, then it's more affordable to finish all these homes that they've started but haven't been able to finish. So is that a huge part of this picture as well, that all these homes that were started, but they couldn't finish, those homes will be completed.

As those homes come online, inventory will increase, and that will naturally either allow home prices to flatten or even come down a little bit. Yeah, and Lenar spoke to that on their call last week, where people were asking them about their cost inflation, if they were worried about home prices flattening out, but costs continuing to rise and what that would need for profit margins. And they said that all the cost increases that happened this quarter were on the labor side.

On the material side, they saw no cost increases. And so even though home prices aren't really going up anymore, because their costs aren't going up as much either, they can maintain the profitability they had when everything was going nuts. And so this, to me, actually seems like a good thing overall. Right. I mean, it's a good thing because, I guess, to make it simple, like, what we had in housing is what we've been having in like every other industry, whether it's air travel,

or the oil markets, you have, we had demand for houses, dramatically outrunning supply, like especially in places like Los Angeles or, you know, Washington, D.C., Boise, Denver. But I'm trying to like perfectly understand the sort of connor's sentence scenario. So I'm putting together all these dominoes and tell me where you think I get this picture wrong. You're saying that material costs are coming down, which means that home completions will increase. And as that happens while mortgage rates rise, there'll be more supply but weakened

short-term demand. That means rising inventory. That means that prices will stabilize or even start falling in some markets. That means the housing component, by the way, of inflation will start to come down. And then maybe as core inflation returns to normal, the Fed will stop having to suffocate aggregate demand with interest rate hikes. And all of that means, hooray, hooray, no recession, or at least a very teeny tiny micro-recession. Did I get those dominoes right? I think so. And right now, where everyone spooked about 6% mortgage rates, but to the extent that inflation comes down and the Fed can back off a little bit, maybe by the beginning of next year, we're back closer to five. And so you can start to pick things up again. And not as crazy as it's been the first half of this

year, but a more sustainable growth pace. And it's important to say that like 5%, 6% mortgage interest rates, that sucks from the perspective of like, you know, someone who bought a house in 2019. But historically, it's a pretty normal rate, right? Like we've had prolonged expansions, including, I believe, the 1990s, when mortgage interest, rates were basically there even a little bit higher. Right. And obviously the concern is that we've seen now surging mortgage rates and surging home prices, which is negative impacted affordability.

But if incomes continue to rise and then rates back off a little bit, you can start to rebalance things from, we've gone from blazing hot to sort of ice cold and maybe we get to Goldilocks by the end of this year. So just to review everything that you've said, reasons to be optimistic include the fact that commodity prices are likely to come down, which is going to pull down hopefully headline inflation. That's number one. Number two, despite everything that's happening in the economy, the labor market is still really, really hot. You have near record lows and jobless claims, near record lows in unemployment and job postings on sites like Indeed. And that's affecting

the housing market, at least number one, the inflation component. Houses are easier to finish. That means you have more supply of houses coming online. More supply, slightly we can demand, means the housing component of inflation might also decline. On number four, what I want to talk about here is like a little bit more complicated. It's what I've referred to in previous episodes as the everything is terrible, but I'm fine phenomenon. And I first noticed the everything is terrible, but I'm fine phenomenon in a survey that the Federal Reserve did of consumers, where they basically found that consumers were totally miserably gloomy about the state of the economy, just record low rates about the entire economy. But when you ask people about their own personal finances,

they were more optimistic than ever. The survey was done in 2021 just before the worst part of this current inflationary bout. It's also the case that company leaders, CEOs have this exact, seem to have this exact same. Everything is terrible. But personally, I'm fine attitude. There was a J.P. Morgan survey that just came out on Monday today when we're talking. CEO economic optimism falls to record low. That was the headline. Just 19% of CEOs say they're optimistic about the economy. But if you ask them about their own company and their own industry,

73% of CEOs anticipate rising sales. 71% of CEOs are optimistic about their own firm. More than half of CEOs feel upbeat about their entire industry. This is again more, everything is terrible, but I'm fine vibes. And I think this is just so interesting. I'm not exactly sure how it cashes out at an economic wide level, but it's a really interesting thing to look at. Are there other companies, Connor, you're looking at that are doing surprisingly well, given the total economic conditions that we're seeing? I mean, I think you can look at the banks, which they came out with their annual stress test last week, and the banks all passed.

So they can survive a 10% unemployment, sort of, you know, significant inflation or recession type environment. And they're probably going to announce today that they'll be tens of billions of dollars in buybacks and dividends again. So there's really no risk in the banking system like we've had before. FedEx is a giant shipper, and they came out last week and gave earnings guidance that was better than consensus. And they said, we see the same thing in the stock market that you do, but we still see the volume and we think we're going to grow and we're just going to keep watching it. And I think everyone's so stock market-centric and they see, well, if the market says this, this is what's going to happen, yet they don't see it in their own numbers. And that's really the big disconnect everyone's

wrestling with right. Yeah, I think that's exactly right. I mean, again, to your first point, A stock market fall like this, a 20% decline, has historically meant that we are in or nearly in a recession, which means we need to be looking really, really hard at the real-time data. And once again, over and over and over again, the most fine-tuned real-time data seems to indicate that things are not nearly as bad as they would have to be if we were in or very close to a recession. Last thing I want to ask you about is the leisure economy. The leisure consumer is just on fire right now. I mean, TSA pass-throughs, which basically just means the number of total air travelers in America,

I think just hit an all-time record last weekend. Is that right? Did I see you tweet about that? I think a pandemic-era record. Pandemic-era record. Okay. So are we at 2019-2018 levels, or we're just like almost there? We're very close within a few percent. And as Scott Kies explained on the podcast that we put out last Friday, what's a little bit janky about that is that leisure travelers are probably at an all-time high, but business travel is down 30 percent. Some, international travel is still a little bit down. So if you're just looking at the number of Americans that want to travel within the U.S. for vacation, that's probably an all-time record. You also have seen, and I've seen from your own Twitter feed, that hotels are doing very well

in terms of both occupancy rates and pricing. Talk to me a little bit about how you see the leisure economy, what you're most bullish on there, and why it matters for the bigger picture that the leisure economy is doing so hot. So I think there are two parts of it. The first is that shift from goods to services spending that we saw in the spring that we talked about already. And it's only been a few months. And so that good spending boom lasted for almost two years. And so I think this leisure boom could last for quite a while. And it'll probably cool off in the fall season wise, but I think people still have pent up demand to go to Europe, to have weddings, to do all this travel that they didn't get to do for a few years. And then I think structurally, you know,

you've had an episode to know about remote work and work from home. Because people now have the ability to do three-day weekends and work remotely, I think there's just going to be a structural increase in leisure travel demand as people can work from anywhere. And so I think just even after this maybe goods to services rebalancing, pandemic error rebalancing shakes out, I think you'll see more leisure travel and say 2024 than you had in 2019. You said so much there that I find so interesting. It reminds me, I had a conversation with the CEO of Airbnb, Brian Chesky, for the Atlantic. And he basically told me that he's seeing ways in which people are totally revolutionizing their use of Airbnb because this

Once very stark line between work in leisure has now been utterly obliterated. So 28% or 20% of the nights booked on Airbnb now are for 28 days or longer. Half the stays are for a week or longer. The fastest growing days of the week for travel are now Mondays and Tuesdays. I think that's a sign of the fact that more people are using Airbnb to create sort of working weekends, these kind of weird workcations. He also said that people are now searching more. for Wi-Fi in their searches in Airbnb.

It's just obvious to me, and as you just said, that work and leisure now are insinuated together, that work is leaking into leisure and leisure is leaking into work. And I'm just so fascinated by that phenomenon. I want you to go one cut deeper on the effect of remote work on downtown areas. You've pointed out, lots of people have pointed out, that there's been this trade in value where downtown commercial real estate is losing value, and it's giving that value up to suburban, especially near suburban, but also exurban, residential real estate. And that is reflecting the fact that people are moving out of offices and staying in their homes. How do you think

this is going to change downtown economies in the future? I think we're going to see downtown struggle for a few years. And there's a developer friend of mine who is looking to do redevelopments, and I asked him about various properties in Metro Atlanta. And with a few of them, he said, it's not dead enough yet. And it's hard to do a redevelopment when something's kind of limping around, but still paying the bills, still paying the rents. And you really need things to bottom out where someone can just wipe the slate clean, get it at a bargain, and sort of start anew. And so I think in downtowns, you need to see they're not dead enough yet to really redevelop them. Maybe there's an apartment, an office building here or there, you can make an apartment,

but to really reimagine what maybe Midtown Manhattan or Market Street in San Francisco looks like, I think it's going to take a while. Whereas suburbs just have all this momentum right now. cost pressures are a huge issue, and land bill is a huge issue, but I just think if I'm a developer, I want to focus on where the momentum is, and for the next two years, that's where it's going to be. Yeah, I think there's a lot of zombies in downtown commercial business districts, for sure. So let me try to play the, I mean, this whole episode has been basically a, what if I'm wrong exercise. I, Derek, am wrong about my slightly gloomy take on the near future the economy. But let me just quickly flip it around and try to imagine if like Jason Furman were

like sitting next to me what he would say. Why isn't a plausible scenario here that the downturn that we're seeing in commodities prices is actually really short-lived that a lot of commodities investors are very quickly going to realize that the thesis of our episode is correct that we're not actually in or nearly in a recession. So commodity prices go back up. Headline inflation stays really high, maybe not 8 to 9%, but 7, 6%, for a while. The Fed keeps having to jack up interest rates, and enough aggregate demand is destroyed that we are pushed ever so slightly into not a 2008 recession, not a 1980-1981 recession, but, you know, like a 2000-2001 recession, a brief downturn that's the result of weak global markets, weak trade, weakened aggregate

demand and persistently high inflation that just requires high interest rates to resolve. Why isn't that still the most probable outcome here? I would say because the reason that I was focused on inflation last year was just income growth for households was so strong. And that was just not just stimulus checks, but also just job growth was booming. And sort of personal income growth for workers was 10 to 12 percent per year, whereas pre-pandemic, it was more like 5 percent. It was just way, way, way too hot to be consistent with 2 percent inflation.

And we've seen that particularly over the past few months really come in. And now we're at more like a 7% pace. So, you know, 7 versus 5 pre-pendemic. We're getting closer. And just because of 7% pace and what? In personal income growth. Okay. Yeah.

So workers, you know, if you get, say, 3% job growth and 4% wage growth, that adds up to seven. And so to the extent that we see further slowing in the labor market, which I think we should assume we'll see some slowing because in part the Fed wants it to slow, we get back to 5, 6%. and all of a sudden, income growth, this was workable pre-pendemic, so why wouldn't it be workable now? And even though you still have a lot of pass-through issues to work through with all these rent increases going through the system and oil increases going through the system, over time, I think that gets you back to a pretty reasonable inflation pace, even if it's not quite 2%. This is a question that I've asked lots of guests, and none of them have had a great answer because I'm not sure there's a great answer.

So the expectations here, Connor, are very low. But, you know, the Biden administration calls you tomorrow. Janet Yellen calls you and says, what should our strategy be for the final leg of midterm campaigning here? What can we possibly say or do, say or do about this economy that will at least stem the projected losses in November or possibly allow us to eke out some sort of tie with Republicans in the midterms? I would say it's all about gas prices. And even though I would say in the aggregate for the U.S. gas prices aren't that big a deal for the political economy. And right now, when the Fed is focused on headline inflation and not core inflation, it's become the whole ballgame. So I was thinking of a

scenario where if oil were to go back to 80 bucks, then headline inflation backs off. The Fed backs off. And it's almost like a stock market boom on steroids because you can wipe away all of these concerns simultaneously. So having it whatever it takes mentality about oil production refining gas prices, that's what I would do. I totally agree. And obviously, listeners to this podcast will know that I agree because we just did an episode with Skanda about his everything the above strategy to increase oil capacity. What are you looking for in the next week? Make us smarter about reading the news for the next week. What are some key statistics and data points that you think are going to tell us quite a bit about the state or future, near

future of the economy? So while everyone's focused on the headline and CPI report that we got earlier this month, in theory, the report that the Fed really cares about. That, by the way, is the, That, by the way, is the inflation report. Yeah, CPI. Go ahead. The Fed's preferred measure of inflation is the core PCE report, which really rolls off the tongue. And that comes out later this week. And there's been a gap between the CPI report and the PCE report, which is really wonky. And the reasons don't really matter. But in theory, the PC report we get this week should be lower. So the Fed's preferred measure inflation should be much better than the one that everyone's worried about right now. And in that report, we also get personal income and personal spending data for May.

And that'll be a good test to see if income growth continues to slow, spending growth continues to slow, and these sort of macro stats that lead us to a belief that inflation should slow are bearing out or not. All right. We will look for the PCE very, very soon. Conner Sen, thank you so very much. Thanks for having me, Derek. Thank you very much for listening. Plain English is produced by Devin Manzi. If you have a comment, a concern, a question, an idea for a future show, please email us at Plain English.

at Spotify.com. That's plain, no space, English at Spotify.com.