Planet Money - Predictions!

Episode Date: June 18, 2021

Two forecasters predict the future of the U.S. economy — and promise to come back on the show to see who was right, and who was wrong. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Hello and welcome to Predictions, the show where economic forecasters make economic forecasts and then come back later to gloat about what they got right and to own what they got wrong. I'm Mary Childs. And I'm Jacob Goldstein. Today, our contestants will be making three predictions about the most pressing economic questions facing us today. Will inflation spiral out of control? Will the home price boom continue?

How fast will the job market bounce back? Now, Mary, let's meet our two contestants. Diane Swonk is chief economist at Grant Thornton, a global tax and advisory firm. A forecasting veteran, she combines rigorous quantitative analysis with real-world stories and a little bit of gut instinct. I don't sit in an ivory tower. I go out and I ask people what they're going through. Our second contestant is Alfredo Romero. He's an economist at North Carolina A&T University. New to the forecasting game, Alfredo built his first economic forecast last year for the Wall Street Journal. With a robust toolkit of statistical and economic tricks, he is all about the numbers. You know, human behavior is a little bit unpredictable and

unreliable, so I'm going to trust the math. Alfredo and Diane will make their high-stakes predictions and help us understand this wild economic moment we're living through after this message. Okay, so here's what's going to happen on today's show. We're going to have two economic forecasters, Diane and Alfredo, who are going to make specific predictions about what is going to happen with jobs, with inflation, and with housing in the United States for the rest of the year. Also, unlike some economic forecasters who make their predictions and then sort of disappear if they get things wrong, Alfredo and Diane have courageously agreed to come back on the show in January and talk about both what they got right and what they got wrong. And when they

come back, we'll see whose forecasts were closer to reality. And we're doing this show because it's a good way to think about these very high stakes economic questions that we're facing right now. And also, we actually want the answers. We want to know. We'll hear from contestant number two, Alfredo Romero, in just a minute. But first, contestant number one, Diane Swonk. How many jobs will the U.S. economy add every month for the rest of the year? And just for context here, the U.S. has been adding around 500,000 jobs per month in the past few months. I think the economy will add 450,000 payroll jobs a month on average through the end of the year. We asked Diane how she got to this number, and she said she started with what the economy is doing right now, today. We're sizzling. Very hot.

Sizzling hot, yes. Yes, hot. Hot. Hot. Great. The U.S. economy is so buoyant that it just passed its previous peak, but we're still 7.6 million jobs in the hole. Let's just stop and say that again.

The U.S. economy is bigger than it was before the pandemic, but we have 7.6 million fewer jobs than before. And there are a few things going on here. One is the extraordinary amount of borrowing and spending that the federal government has been doing, which has done a lot to get the economy growing again. Another factor, according to Diane, may be that businesses figured out during the pandemic

how to sell more stuff with fewer workers. Take restaurants. Diane pointed out to us that Americans are now spending more on restaurant food right now than we were before the pandemic, despite the fact that the number of restaurant jobs has fallen by more than a million. The shift in the way we used existing technologies to suddenly figure out how to have everything delivered and, you know, have things show up at our door, that it didn't keep a lot of people employed because it eliminated a lot of people, but it kept the spending going.

And that's where you see this sort of dissonance between overall spending versus jobs. Now, that said, there are a lot of job openings right now. In fact, in May, there was the highest number of job openings on record. But despite that, the rate of job growth, this, you know, 500,000 jobs a month we've seen, is like, okay, but not great. So people aren't filling those job openings that fast. For one thing, workers may be using expanded unemployment insurance to spend longer on their job search. Also, child care is a really big one. People are still staying home with their kids either because they don't have child care or they don't feel safe using it. So Diane puts

all of that together and she lands at that jobs forecast. I think the economy will add 450,000 payroll jobs a month on average through the end of the year. And how is that number? Is it good? Is it bad? It's not spectacular. And, you know, after what we've been through, we kind of like to see spectacular. Next up, contestant number two, Alfredo Romero. Jobs forecast, go. Average monthly change in payrolls July to December 2021 is $226,000. Alfredo's estimate is half of Diane's. At his rate, it would take us more than two years to get back the jobs that we lost in the pandemic. So you think the economy is going to add

226,000 jobs a month for the second half of this year? Yes. That, given the fact that we're, what, 7 million jobs down from before the pandemic, that seems like not that much. Yes. I asked Alfredo, what is the story behind your number, behind your prediction? But he is not a story guy. He is a numbers guy. So he was like, what's behind my number is,

you know, other numbers. He says he studied historical relationships between things like economic growth and jobs, built a mathematical model based on those relationships, and this number is what it spit out. Yeah, you know, essentially, you have to come up with an estimate of one variable and then use that as an estimate, as an input for the estimates of all the other variables. You know, that's where it becomes some kind of an alchemy, some kind of a fortune-telling exercise. Yeah, fortune-telling, right. You seem skeptical of this enterprise.

You seem wary. You seem like the wary forecaster. I mean, we know that individually, none of us is going to be correct. But if we average our forecasts, the average should be close to the actual value. Now, I would venture to say that, you know, whatever her estimates are and my estimates are, if we average them out, should be closer to the actual value, at least in theory. So your guess is that your estimates averaged with the other contestants' estimates will be a better estimate than either yours or hers alone. Yes. We can test that.

I'm excited to test that. That's fun. Yes. All'm excited to test that. That's fun. Yes. All this entire enterprise is fun. It is fun. So this is kind of a meta prediction that we can check back in on in January when we do the follow-up show. Was the average better than either forecast by itself? Are we better together?

After the break, inflation and home prices. People who get excited about economic forecasts are very excited right now about one thing and one thing only, inflation. And for good reason, right? Inflation was very, very low for a long time in the United States. It was under 2 percent a year, year after year. And that low inflation was like a superpower for the U.S. economy. It meant the Fed, the Federal Reserve, the central bank could keep interest rates really low for years and years before the pandemic to keep pushing unemployment down. It also meant that when the pandemic hit, the government could borrow trillions of dollars at very low interest rates to keep the economy going. But with the economy reopening, inflation has spiked to 5%. And it's super unclear what's going to happen.

Are we shifting into a high inflation world for the long run? Or is this just a passing spike? So we asked Diane and Alfredo to forecast what the inflation rate will be for the full year, for all of 2021. Specifically, we asked him to predict the change in the Consumer Price Index, the CPI, which is one of the main measures of inflation. I think we're going to end December 2021 with the overall CPI about 3.1%. Pretty high.

Yeah. Yes. Thank you, Diane. Okay, Alfredo? At the end of 2021, inflation year over year would be around 2.4%. Okay, 2.4%. So that's really pretty moderate, certainly relative to where we are now. Yes. So Diane is saying inflation will be significantly higher than usual. Alfredo is saying it will be a little higher than usual. But neither of these numbers alone answers the

bigger question. Is this higher inflation for the year going to be a temporary thing associated with reopening? Or are we headed into this new era where prices are going to rise faster and faster? Diane says it's temporary. I don't think that we're going to see the fundamental shift that all of a sudden have this become a systemic vicious cycle of inflation. So you think inflation will be high through this year, but then we'll go back down? Yes. Yes. Yes. Alfredo actually agreed. He thinks the spike in inflation is going to be a passing thing. Okay. Two predictions down, last one to go.

Home prices. Home prices. The housing market is going bananas right now. Home prices were up 13% year-over-year in March, fastest rate in years, et cetera, et cetera. Let's go to the forecasters. By the way, for home prices, we are using the Case-Shiller Index, which has a lag of a few months,

so when we do the follow-up show early next year, we'll use October numbers. Year-over-year change in home prices for October 2021, I calculated as 12.29%. Over 12% a year in home price growth. That's a lot. That is home prices going up a lot. Like, what is the basis of your prediction? In my model, I had household income. I have previous values of the homes.

And I also have the interest rate. And, you know, we think that the interest rates are going to continue to be low, at least until October. Home prices rising, plus incomes rising, plus low interest rates making mortgages more affordable equals more banana home prices. Full disclosure, I am in contract to buy a house. And I just bought one. Anything else we should say about home prices? Um, if you can be on the sidelines

and wait for the market to stabilize, I would do that. I've made a huge mistake. Here is our final forecast. Diane on housing. The housing story Diane tells is this. Right now, both high demand and low supply are driving prices higher and higher. But those higher prices are going to slow the rise in demand

because who would buy a house right now? The market is cooling right now. And that's because people just can't afford. And she says those high prices should also increase supply as builders rush to sell new houses in this hot market. Diane added those things all together, and this is what she got. I think home prices will slow to an 8% year-over-year pace by October 21. So it's not that housing prices are going to fall. Prices will still be rising, just not as rapidly.

Two forecasters, three predictions each. Mary, we've done it. We did it. So where does this put us? What does all of this tell us about the high-stakes questions we're trying to answer about this, you know, I don't want to say unprecedented, but unprecedented moment. You know, I liked that idea that Alfredo mentioned, that idea that the average of his forecast and Diane's forecast is likely to be more reliable than either one of their forecasts alone. So let's take their forecasts, average them together, and see what that gets us for the rest of the year. Inflation coming down to between 2 and 3 percent for the year.

That would be good. Home prices that are still rising pretty quickly. Seems like a lot of rising. And an economy that is adding 3 or 400,000 jobs per month. Solid, but not spectacular. It's kind of a cliche to end a story with, you know, time will tell. In this case, we will tell you what time will have told. Will have told us.

Will have told everybody because everybody will know the answers by the next time we do the show in January 2022. A huge thanks to our contestants. Diane, you have courageously, honorably agreed not only to make Forecast Now, but to come back on our show. No, it's great that you're doing it. I really think it's great. It's the way the world should be. And Alfredo,

you're game to come back in January and talk about sort of what you got right and what you got wrong and what went like your model suggested it would and what didn't? Yes, I'll be there. So I hope the next time we talk, I'll be receiving my award. What other economic predictions do you want to hear?

Maybe we'll do them in January. Email us at planetmoney at npr.org or find us on the various social media. We're at Planet Money. Most recently on TikTok, we have been bringing concepts like selection bias to the youngs. Check it out and let us know what you think. Today's show was produced by Nick Fountain, mastered by Gilly Moon, and edited by Casey Miner. Our supervising producer is Alex Goldmark. I'm Mary Childs. And I'm Jacob Goldstein. This is NPR.

Thanks for listening. Are there any just random predictions you want to make? I actually, you know, I'll know, you know, one of the things that I watch the most, I watch The Isle in the drugstore you go to with all the travel sizes. Oh, like the tiny little toothpaste tube. Wow, I love it. It's completely, it has nothing in it right now. It's been sold out.

And every time they restock, it's sold out again. And when that is sort of reasonable, you know, you can get what you want, things are a little more normal again. So let's get a prediction here. When we talk to you in January, will the travel aisle be, like, normally stocked? It will start, yes. By January, it will be normally stocked. Yes. Alfredo, is there anything you want to predict, whether it's, you know, who's going to win the World Series or if there's any weird economic indicator that you love?

Any other just sort of wildcard prediction you want to make? No, not at this time. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.