Deep Dive
Shownotes Transcript
Welcome to Inside Economics. I'm Mark Sandy, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts. And Chris is back. Hey, Chris, how are you? I'm doing well, Mark. Good to see you. I think you missed a couple podcasts, no? I did. I did. I take at least one. You were en route to your home in Italy. Yes, I was in the UK, actually, when you were recording that one. I saw some of our team.
in london and did some touring around there saw gaurav saw don don fantastic yeah nice connect with them and that beautiful city of course so is there a vacation with family so and now you're safely somewhere in tuscany not tuscany abruzzo oh so how do i mess that up every year abruzzo i love abruzzo i like saying abruzzo more than tuscany is nice too yeah and abruzzo is kind of
Tell me, is it north or south of Tuscany? It is south. If Italy is the leg, this is the calf, if you will. So opposite coast from Rome on the Adriatic Sea. Right. Very nice. That sounds really pleasant. And is it pleasant? You look very relaxed. It's very pleasant. Yeah, it's nice. It's not too hot, not too cold. That's great. Sun is shining, a little different than the UK. So, you know, it's good.
Yeah. And here in the U.S. too, we've got a lot of cold, wet weather. This weekend, this Father's Day weekend is not going to, it's not looking so nice. Right, Matt? Oh, we got it. Oh, and Marissa, I have to introduce the other co-host, Marissa. Sorry about that, Marissa. That's okay. Chris is a star, you know. Chris has been gone for a couple of weeks. You know, thank you, Marissa. Yeah, of course. Spotlight.
Marissa kept it all together, was key, was the glue, kept it all together.
As usual. As usual. As usual. As usual. And we got Matt Collier. Hey, Matt. Hey, Mark. Hey, everybody. Yeah, we're talking about inflation. And of course, Matt's Mr. Inflation. Good to have you back on Inside Economics. Great to be here. Yeah. And where are you hailing from? Are you in the Philadelphia area? Similar to Tuscany, King of Prussia. Yeah. Yeah. Oh, I didn't realize you live in King of Prussia. I live in Malvern, but I'm...
But I came to the office because my son's daycare is closed for the day. If it's a door, like if I close my office door, like it just, he has to bet on it while I was working. So I had to come to the office. Got it. Got it. Well, good to have you on board. And I've been there. Yeah. Yes, indeed. I miss those days.
Yeah. Believe it or not, I do. I mean, at least in my mind, I miss those days. I don't know if in reality I would miss them. In retrospect. Yeah, yeah. It makes me think where things are headed. It's like, you know, when I was a kid, we'd get in a station wagon and I have four siblings, you know, Carl being one of them.
And I'm the oldest and seven years from the oldest to the youngest. And we pile into the station wagon, no seatbelts, mind you, no seatbelts. And we would drive from Philadelphia. My dad had a good friend in Minnesota, Minneapolis, and it's a two day drive, you know, pretty hard two day drive.
And, you know, no air conditioning, you know, pretty Spartan kind of living conditions. I don't know what we ate, you know, twigs and berries along the way. And I look back on those trips with enormous fondness. I just like I'm telling you guys, I may just leave this podcast right now. Get in my car.
And just drive. And just drive. I mean, I just had such great memories of those trips. Do you have those kind of childhood memories like that?
Chris, you must. Yeah, definitely. Did you have the station wagon where they had the seats in the back that faced backwards? Yes. That was the best. That was the best. And we fought over it. Who's going to sit in those seats until the exhaust starts coming into the back? I always wanted to sit back there, but then it would make me car sick driving backwards. Yeah. Oh, yeah. Those were the days, man. Those were the days. We'd stop at these...
these run down motels and it's like in the middle of nowhere i was just and i i can't i can't tell you how much i uh how much i think about that and i wish i were back in that car you know somehow uh just pretty amazing times anyway uh enough of reminiscing uh here's the here and now
I don't think I'm going to remember any of this with any fondness. No. Maybe we want to continue reminiscing. It's a complete mess out there. Oh, my goodness. And I want to talk about stagflation. This is a word we're hearing more of for good reason. And a lot of questions about what stagflation is and how you get into a stagflationary environment and so forth and so on. And, of course, this all revolves around
the tariffs, immigration policy, and now, of course, the most recent policy
uh, news is that, uh, Israel has been bombing, uh, Iranian nuclear facilities and other military installations. And of course, oil prices are up a lot on, on that news. So I thought, you know, maybe we can just, Chris, give us a kind of a primer on, on stagflation, talk a little bit about that. And then we can talk about each of these things that are going on that are adding to the stake of stagflationary stagflation scenario. And then we can, I guess, ultimately end up where, you know, uh,
How concerned are we about this? Does that sound like a good game plan? Yeah, absolutely. I think there are a lot of questions. And also, maybe put it in a little bit of context, because inflation has actually come back in. We've got the May CPI, PPI data, Consumer Price Index, Producer Price Index for the month of May, and they look pretty good. So you look at that, and you wouldn't think stagflation is an issue, but nonetheless, we'll talk about that as well. So stagflation, Chris, you want to give us a little bit of a...
storyline there? What is that all about? Yeah, yeah. So at its core, stagflation is a situation where you have stagnant economic growth, high unemployment, and high inflation. So you have the stagnant plus the inflation, so stagflation.
It was, I think that the term was coined in the 1970s, right? At least that's the period of time we typically think it was really stagflationary, where you did have very substantial unemployment, substantial inflation, and of course, very, very weak economic growth, even contracting economic growth. So that's the gist of it. It's nothing more than that. I think we get some into controversy is where are the lines? What are the specifics, right? If you are
You may be experiencing a stagflationary environment where the growth may be weak and inflation is ticking up and unemployment is also ticking up. So yeah, you could say it's stagflationary, but no one would necessarily call that stagflation until it's substantial and pronounced. So that's, I think, where we get into some of the discussions in terms of are we currently in a stagflationary environment? Certainly, I would say not. Well,
especially not given the latest inflation report, as you mentioned, it's actually coming in. So I don't see it as an immediate threat, if you will, but given the policy, certainly you can create scenarios and we do create scenarios where things could move in that direction, right? Certainly where inflation could pick up because of the tariffs, where unemployment also could rise, unemployment rate rises and the economy weakens and you get into more of that stagflationary environment.
What's troublesome about it is the exit. There's a very large psychological component in that stagnationary environment makes it very difficult to actually exit from it. It makes life very difficult for the Fed. You can all think back to Volcker in the early 1980s. We needed extremely high interest rates to break that inflationary cycle.
led to a recession, and then eventually the economy recovered and we were moving back in a more normal growth environment. That's really the real risk here. It's much worse than a high level of inflation alone. We know how to deal with that or weak growth. We have tools to deal with that as well, but that combination is really very difficult to break out of.
Yeah. And does anyone know where that term came from? Maybe someone can chat GPT at it quickly. I used to know several times and I've forgotten several times, you know, who or what, where that came from, but it's a very apt description, particularly the seventies and early eighties. You know, at that time you had double digit inflation and double digit unemployment. And that's kind of the,
It used to describe what stagflation is all about. And as you point out, the only way out was a very severe recession. Paul Volcker, the Fed chair and became Fed chair in the late 70s during that period, jacked up interest rates to extraordinarily levels more than a couple of times, I think. And we had some pretty
significant downturns that kind of wrung out those inflation expectations and brought inflation back in, but it required a pretty difficult, long period of recession to get there. And I think, I don't know if you mentioned it, Chris, but I think a critical element of a stagflation scenario is inflation expectations, right? I didn't mention it, but definitely. So you want to explain that part about it? Sure. Sure.
Sure, I can start off by saying 1965. Ian McLeod from the UK came up with the term. Who did? So that's the historical. Ian McLeod.
mcleod mcleod really interesting chancellor of the exec has checker oh okay oh that's interesting 1965 wow yeah gave a speech so even all the way back in the 60s i guess in the uk they might have experienced a bout of stagflation before came to us right yeah okay and they're very clever with their uh
with their terminology. I learned that last week. Preston Pysh : The British are unique. Jeremy Allaire : The British are. But inflation expectations definitely are a critical component of the stagflation environment. This gets back to that psychological component. You have investors, households, businesses, if they expect that inflation is going to continue,
or even accelerate, they're going to modify their behaviors in ways that make fighting inflation even more difficult. If I expect that inflation is going to rise in the future, I'm going to change my consumption, change my investment patterns, and it just becomes more difficult. It actually becomes self-reinforcing. My expectation of higher inflation actually leads to more inflation because now maybe I purchased more in the short term, expecting prices to go up later on.
So that was a novelty in the economic literature, right? Back before the 1970s, that was not even considered. This concept of inflation expectations wasn't even anywhere in the models, right? And that's perhaps why the models actually failed so dramatically.
Because they didn't account for that. Now, of course, we have learned experience. We do follow inflation expectations closely. We're talking about them every week on our podcast here. And it gives the Fed a little bit more insight into what's going on. And that's really the key metric that they focus on when they are setting monetary policy. It's more that expectations element than current inflation itself.
Right, right. Yeah. I mean, expectations really broadly, not only with regard to inflation, but, you know, with regard to all aspects of economic behavior really took hold during that period. You know, the sort of rational expectations kind of theories, you know, became predominant in economic theory at that point in time. So, Matt, yeah.
Any whiff of kind of stagflation in the inflation numbers we got this week for the month of May? Anything in there that would suggest that there's a stagflation problem dead ahead? The stag part, you could get a little bit more creative and say, okay, you're seeing some weakening in demand. But on the inflation front, no. You're looking at subdued inflation in May in both the CPI, Consumer Price Index, and Producership Price Index reports.
Right. I mean, CPI came in at, what, one-tenth of 1% during the month, top line, two-tenths on core, excluding food and energy. So very, very tame. And PPI, producer price index, similarly came in below 1%.
And there's a kind of a bit of hand-wringing going on around why we haven't seen the tariffs, the tariff increases, which really took hold in April. Why haven't they shown up in the inflation statistics in the May data?
Do you have any sense of that? Well, first, Core CPI was also 0.1%. Oh, it was 0.1? Core CPI was 0.1? Yeah, so that was- Oh, it was like 0.14 or something. Yeah, 0.13. It was rounded down. In general, I think the most persuasive case, and this is hard, and there's not a ton of history to say what happens when the US erects a bunch of trade barriers overnight. How long does that take to flow through to retailers and consumer prices? Yeah.
But we aren't seeing those price pressures just yet. I think a lot of it has to do with the surge in imports and inventories that we saw at the beginning of the year, even going back to late 2024, when the expectation was that stuff is going to start costing a lot more. So let's get a lot of it as much as we can. If you're selling something that's
you're able to do that too. You can't do it with bananas, but you can do it with big durable goods. So what businesses are doing is drawing down that inventory and refusing or avoiding passing that through to
consumers the best they can. I think that's consistent in a way with our forecast. We expect tariffs not the worst, in a sense, just looking at the effective tariff rate to be behind us. So it's not as bad as it was, and it'll get a little bit better. I think if you look at equity markets, they're saying the same thing. Your S&P is back over 6,000. As of yesterday. Yeah, double check. The expectation is that these policies aren't going to be here. And I think a lot of
whether it's at the wholesale level or the retailers, they're not trying to alienate customers. They think these policies are not going to be here. We can eat these tariffs for a little bit, not pass them through to consumers.
short-term strategy we'll see how it plays out but i think that's the best explanation for why we haven't seen it through may uh oh that's interesting there's that word expectations again so so what i heard was three uh three reasons was so infl so we the terrorists got juiced in beginning in april uh here we are looking at data for may
that's not a whole lot of time, but nonetheless, I mean, it's a few weeks, but okay. We're all saying this inflation storm is coming because the tariffs will ultimately get passed through and they're not getting, haven't gotten passed through. And I heard three reasons for that. One kind of more marginal reason is demand. You know, demand is, the economy is softening, demand is softening. You could see that for example in,
air travel. People aren't traveling as much. You showed that really cool chart with a number of people going through TSA pre-check. It's down. A lot of foreign travelers are not coming for obvious reasons. And airfares are falling. At least in the last few months, they've been falling. So that's an example of demand. I got that right, Matt? Something like that? Yeah, there's a few components you can really look at and say they react quickly in price to demand. So airfares is kind of a good indicator.
Second is all the forward, the front, so-called front loading, where we knew the expectations again. Everyone expected the tariffs were going to come. So importers brought in a lot of stuff beginning in January, but really in February and March, just a lot of stuff came in pre-tariff, before the April tariffs. And that inventory was
They brought it in, they put it in an inventory, and that inventory is now being worked down, but that won't reflect the tariffs because that was before the tariffs were put into place. So that delays when we actually get into the inventories that are actually tariffed, and that's going to take a little bit of time. So that's the second reason. Did I get that right?
Exactly. And I think the vehicle market is illustrative there. You have a 0.3% decline in new vehicle prices in May. There's a 25% tariff on imported cars into the US. There's no way that those two things can be consistent over a longer period of time. So it really is a matter of timing right now. And it's a lot of the imports we saw at the beginning of the year, they're being sold. As inventory lots become more and more composed of
tariffed cars, that's going to pass through to consumers. There isn't that magic space on balance sheets to absorb that kind of cost for car manufacturers. And then the third reason you gave, which is kind of a novel, at least for me, kind of a novel reason, kind of interesting, going back to expectations, you're saying there's a widespread expectation among businesses and you can see it in the stock and investors, you can see it in stock prices coming back to where they were before the tariffs really got going.
And that is that people think those tariffs are going to come back down. Right now, it's 40% on China. I think we're calculating the effective tariff rate across all products and countries at 15%. It was 2% before this whole thing began. But if you think that 15% is going to go down to
10 or five or back to two at some reasonable amount of time, you're going to be less likely to pass through the higher tariffs that you're experiencing at this particular point in time because you don't want to lose market share. You don't want to make your customers angry. You're going to eat it, meaning you're going to shoulder the burden of that tariff in the form of a lower profit margin. And that's a third reason that you're giving.
Yeah. Right. And yes. And in that context, April was just a buying opportunity. Again, I don't share that mentality, but the expectation that, you know, earnings really won't be hit in any kind of substantive way for a long period of time means that markets are going to go back to where they were at the beginning of the year. That's my opinion.
what I find to be the most persuasive case for why equities in the US have come calling back, despite really no good positive news that, okay, we're going to walk this back entirely. It's more just what I think would be a growing expectation that it will. Right. I had not heard that explained. Marissa, how did those three reasons resonate for you? Matt, just to clarify on that third reason. So you're basing that on the equity market?
Just to explain why the equity market is doing what it's doing. Yeah, I don't think that- Well, it also explains why prices haven't risen. Yeah, exactly. Right, right. And it's, I don't think, totally different than our forecast. I mean, it is. It's more optimistic than our forecast, but we expect a walking back. I think the difference is, I think that even if tariffs disappeared tomorrow-
there's already pain in tow and there will be a pass-through effect. I mean, this is rippling through supply chains now and you will see it in earnings. But that's, I don't think that's being totally accounted for, but that's
financial advice and nobody asked for it. Well, just to be clear, we have terrorists peaking at their current 15%, but we don't really have them coming in for a while, not until next year, right? So that's a pretty lengthy period of time. So do you buy that argument, Marissa, or do you have anything to add to that? Well, I mean, I just think it's so new. And I think there was such a buildup in inventory that...
We're just not seeing it yet, but I think it's coming. I think within the next few months, we are going to start seeing it in the price data because you're going to blow through the inventory that was, you know, not the non-tariffed inventory, if you will, for big durable goods. I mean, we saw that surge in auto sales right at the beginning of the year. So I think it's coming.
I think that there are some large companies that have the margin to absorb tariffs for a little bit. But if it continues throughout this year, if we don't see some major turnaround, which we're not expecting a total reversal, then it's only going to be a few months before they can eat it. I'll say last week I was talking to a client and they,
He was saying, at a bank, and he was talking to a business who was saying that the Chinese importer essentially reimbursed for the tariff.
So there was a, you know, a US, I'm sorry, Chinese exporter. There was a US importer who was bringing Chinese goods into the country, right? He has to pay a tariff on that. And that the Chinese producer essentially, to get this guy to buy, keep buying from him, reimbursed him for the price of the tariff, which I thought was interesting.
I wonder how prevalent or widespread or how- Right. I mean, but there's going to be some of that, I think, going on, right? At least temporarily. Temporarily until- If you believe this is going to go away. Yeah. If you think you can manage that for a couple months and then this all reverses, you'll try to do that before passing it on to consumers. So I would expect it would take a few months before it would show up in the inflation data. It's not surprising to me that we're not seeing it yet.
What about you, Chris? Yeah, I'd agree with that. I think the initial conditions as well matter here too. You had businesses and higher income households that are pretty in good shape coming into this. So they had some resilience built in. So they may have some ability to eat the margin there.
for a while here, waiting to see how things play out rather than having to pass it through immediately. And they'll get a bit of a buy from their investors because their balance sheets look pretty good or they've been profitable over the last couple of years. I think that's a different situation than perhaps in previous episodes where maybe coming into an episode like this, businesses may not have been as strong, but
So I think that theory holds water here. But again, like everyone else, I think it's coming. Presuming there is no deal or the tariffs remain high, this can only go on for so long. That exporter can only eat the tariff for so long before it just becomes not feasible or profitable for them to do so. Right, right. I mean, that's interesting. An interesting point. I guess the other...
The point, sorry, the point being that coming into this profit margins were very wide. You know, they had increased very significantly during the pandemic. Businesses were able to push up prices for their goods and services well beyond the increase in their costs. So margins coming into this were extraordinary. And so they're just taking some of that back here, at least temporarily. Right.
Yeah, that's an interesting point. What about also just fear, corporate fear? I mean, you know, there's a bright, shiny light on everybody, especially large retailers like a Walmart, you know, and everyone knows what I'm talking about. You know, when I say that, that's got it, that, I don't know that that forestall, if tariffs are up and stay up, I don't think that
forestalls higher prices, but it may take a while for that to show up because you don't want to be the first to actually raise prices in a meaningful way. What do you think of that argument, Chris? I think there's a lot of credence to that as well. Are you going to do it more gradually perhaps? I think some of the issue was that there were announcements made on earnings calls where companies said, given the situation, it's likely that our price is going to have to go up. That's kind of a
a shining beacon, right? So I think that'll be more, maybe more subtle in the future here. Right, right. Okay. Yeah, that makes a lot of sense to me. You know, our rule of thumb has been for every percentage point increase in the effective tariff rate, and the effective tariff rate across all products and countries is simply divide up all the tariff revenue, divide by the value of imports that are subject to tariff.
For every percentage point that that rises, it adds 10 basis points to inflation as measured by the growth in the consumer expenditure deflator, the PCE deflator that the Fed uses for setting policy. That's the 2% target. So if you do the arithmetic, our estimate is we're at 15. And of course, that could go up or down all around. But my sense is that that's kind of where it's going to settle here. You'll see some of the so-called reciprocal tariffs come up, but we'll see some sectoral tariffs on
perhaps chips or pharmaceuticals. So the net of all that is we're expecting to be about 15%. That's up, I'm doing, I'm going to round for sake of the arithmetic, 2% before all this started, that's a 13 percentage point increase in
multiply by 10 basis points, that's 1.3%. So the inflation rate goes from, correct me if I'm wrong, but I think the core PCE deflator is at 2.5% now year over year. I would suggest about a year from now, it's going to be 3.5% to 4%. That's kind of sort of what we're thinking. That's in our forecast, basically. And that's just the tariff effects. That doesn't include
you know, anything related to immigration policy or this most recent surge in oil prices that has been caused by the Israeli bombing of Iranian nuclear facilities. Does that, are we still sticking to that? Everyone feels pretty comfortable with that? Anyone not comfortable with that kind of forecast? No? That doesn't account or, well, that's just sort of a static forecast.
Is that a static rule of thumb? In other words, if demand weakens, right, if we go near a recession, then that puts downward pressure on prices. So some of that would be offset, right?
Yeah. If we go into recession, there is a dynamic element to that, meaning we accounted for that in our calculations. Okay. That's coming from the model. Yeah. From the model. But you make a good point. The other rule of thumb is every percentage point increase in the effective tariff rate reduces GDP by seven, eight basis points per
In the subsequent year. So you do the arithmetic, it's going to lower GDP growth by a point. So we go from two to one. I'm making this up, but roughly speaking, that's weaker demand, which will weigh on prices and we account for that. But it's obviously not a recession, which would be a different ballgame. But okay. All right. Okay. And Matt, do you think we're on sound ground in our assumptions around the tariffs? I mean, that's an impossible question to answer, but do you feel pretty comfortable with
The 15% or, or is it, do you have any sense of that? I just looking for validation, Matt. Yeah. I think the longer term, I think. Say yes, Matt. I can't just ramble on about something. 10% longer run settling, at least for the next couple of years. That's how I think about it. I think that's very reasonable. Say that again. What was that? Yeah.
10 being kind of the new effective tariff rate f we're talking like 2026. yeah well it's 15 it goes down to 10 and kind of hangs at 10. yeah it's right i think that's very reasonable i think the uk deal is uh informative that even our closest allies get 10 that seems like a full work uh on u.s trade moving forward okay okay so you know that those rules of thumb i just gave you uh to the
to the listener, that's pushing the economy towards stagflation, right? I mean, that means the higher tariff means higher inflation and weaker growth. Now, it's not, I wouldn't characterize it as stagflation, right? But it's stagflation-esque, or maybe someone could come up with a better way of describing it. We're moving in that direction, you know, but it doesn't feel like the stagflation, certainly not
nowhere anything close to what we were experiencing in the 70s and 80s, but moving in that direction. But having said that, there's immigration policy, right? You know, what's going on on the immigration front. And Marisa, do you want to describe kind of, you know, what we're thinking there and how you're thinking about that, particularly in the context of stagflation? Yeah, so we know that in the labor market over the past few years,
Much of the labor supply has come from immigration, right? We've seen this, we've managed to see this very strong job growth month after month with a relatively low unemployment rate and kind of wage growth that was
Okay, I mean, nothing that was concerning on the wage front. And all of that, if we dig into the data from BLS and we look at population data, data from the Census Bureau, we know that much of that was fueled by international immigration. And a lot of it was from undocumented people coming over the southern border. We now know the southern border is essentially closed at this point, right?
And we know that international immigration has fallen off quite a bit. We're expecting levels of net international immigration to be lower over the next four years than they were even under President Trump's first term, which was very low in kind of the historical context of things. So you take all of that labor supply out of the market. And I'm just talking about people coming over the border
Now we're seeing deportation step up. We know that there's going to be a lot more focus on that, although the numbers on deportation are still fairly low, actually, in the grand historical scheme of things. But obviously, there's a plan to step that up. And then there's a lot of people self-deporting or people that plan to come and just won't come, right, because they see what's happening. So when you're taking out a huge chunk of labor supply, right,
then that's going to put upward pressure on wages, right? So you're not going to have the supply of people to do a lot of the jobs that a lot of these immigrants did
companies are going to find themselves in a position where in order to attract labor, they're going to have to raise wages for a lot of these jobs. And we're talking about industries like leisure hospitality, construction and agriculture, the three, and healthcare too, are the three that I would call out specifically where you have a very, very high share of immigrant labor. I mean, we've seen, you know, we've seen
Estimates like in the construction industry in California, Texas of maybe up to 40% of the workforce being immigrant labor and a lot of that probably undocumented as well. So you're talking about taking a chunk of labor supply out that is going to put upward pressure on wages in these industries.
Industries in which I'll point out some of which already had an undersupply of labor. So even with this immigrant labor, if you think about, you know, an industry like construction where you already had a lot of wage pressure because
A lot of people in the past decade who were working in this industry left, never came back or went into other industries. And on top of that, you had other price pressures in these industries, just raw, if you think of raw materials and construction, right, putting upward pressure on the cost of building a home and that sort of thing. So you're talking about another, you know, upward sort of
inflationary pressure coming from immigration policy here. And that's part of the stagflation story, too, that Chris was mentioning, is that as prices are moving higher in the overall economy, people will be asking for a raise to keep up with
the prices that they're facing, right? And so you have that going on because of tariff policy, and then you have this upward wage pressure because of the labor supply issue. And, you know, for example, we talked about this last week on the podcast, when we got the jobs report for the month of May, we saw this enormous decline
in the labor force. I mean, a bigger decline than we've seen, you have to go back to a recession to see a decline that big. Now, that's one month. I'm not saying that we're going to see that every single month, but certainly we've seen labor force growth drop off pretty rapidly just since the start of the year.
Yeah, I did an X in the blue sky. You saw that? I was pretty surprised. I mean, the Bureau of Labor Statistics puts out labor force employment statistics on native born and foreign born. And you got to be careful because of population controls and everything else. And I did my best to control for it. And of course, looked at growth year over year to get around seasonality as best I could. And I thought it was eye popping. If you go back a little over a year ago,
the foreign-born labor force was growing 4% to 5%. And it had been for several years. That goes back to that surge that came across the southern border. Then, of course, this time last year, Biden passed that executive order around asylum seekers that really...
stopped a lot of the flow. And then President Trump's come in and completely shut it off. And labor force growth for foreign-born is actually negative. I took a three-month moving average of the data, too, just to smooth it out a little bit. And it's declining. It's declining. You've seen a little bit of a pickup in native-born, but the net of all that is
Labor force growth is very weak and in recent months has come to a virtual standstill. You talked about last month. Yeah. That may overstate the case, but there's definitely a case. And so it's not, you kind of focused on the price, the cost and price effects, the inflationary effects, but that's growth, right? Because if you don't have labor supply, your growth rates are going to be a lot slower. I mean, the break-even employment gain, that's the
the gain consistent with stable unemployment, you know, it used to, if you go back a year or two ago, it was probably close to 200,000 per month. Now it feels like at best it's a hundred K in the way these, this is all going, it's going to be well below a hundred K, you know, six, 12 months from now. So that means the economy just can't grow. Therefore, stagflation, right? I mean, again, you know,
Not in the classic sense, but that's moving in that direction, higher inflation, higher costs, and weaker economic growth. Yeah, if the potential growth of the economy is the growth rate in the labor force plus the growth rate in productivity, and you have much weaker growth,
labor force growth, and you're looking at just a diminished overall economy, unless you can make up for it with, you know, AI. Yeah, right. Well, the other thing, and I'm not sure if I'm conflating things, this goes back to the price effects, the higher costs related to the weaker immigration. It's not only about the wage costs, the labor costs, it's also reducing supply of whatever is being produced, and it's going to have
I mean, the most obvious is in construction and housing, right? If, you know, 50%, 40, 50% of your workforce is gone, or, you know, even 20 or 30% of your workforce is gone, right?
then you can't build homes. You can't buy, you can't build multifamily units, rental units. And that means higher rents. That means higher prices. That means higher inflation, right? So it's more than just the labor costs. I literally can't build. I literally can't build the units that I need. And particularly in the South and the West where that's where the demand is. I mean, you know, that's where, you know, you need homes. So-
There is the one argument that the immigration deportations reduces demand, right? Going back to something that could constrain inflation. So it's not only about the costs, which we've been focused on, but-
You have fewer people here consuming things and living in homes. There are fewer households, all else being equal, that would weigh on inflation. And in fact, I think if you look at the academic literature on the effects of immigration on inflation, it's kind of a wash. It's not like it's screamingly adds to inflation. I think part of that may simply be your horizon, what horizon you're looking at. I think the initial effects are inflationary, but
But any commentary on that? Anything you want to add about that? Chris, do you have anything to add about that? Just ask. Yeah. I always have something to add. I knew you did. Certainly there's something to that, right? The demand is there. Immigrants do demand and consume things, but the distribution of demand is quite different, right? Right. Immigrants tend to be lower income. They're working in lower income jobs. The amount of consumption they have is a fraction of what, say, higher income or even median income.
income native-born people consume. So the relative impact, I would suggest, is stronger in the supply side than on the demand side in terms of inflationary effects.
Got it. Got it. Hey, Matt, one thing we might want to do, and I hate giving you an assignment on air, but we might want to take a look at a scatterplot of inflation by city on one axis in kind of immigration policy.
where people are settling in, you know, we can see where they, the immigrants are going on, on the, on the X, on the Y axis and see if there's some kind of relationship there. I mean, I think it might be too early to pick that up, but it might be interesting to take a look at. And of course it might all get screwed up because BLS can't measure inflation anymore, you know, because,
of the imputation. They're having problems with getting accurate reads on inflation below the top line. So, but maybe you can take a look at that. It'd be interesting to see. Okay. Okay. So we got,
Trade tariffs, that's a so-called negative supply shock. It's stagflation-esque. It raises inflation. It lowers growth. We've got immigration policy, very restrictive immigration policy, lots of deportations, it looks like, in train. That feels stagflation-esque. That means higher costs, higher inflation, and it means weaker economic growth. And now we throw into the mix what's happening in the Middle East and this bombing in Iran. Right.
the Israeli bombing of Iranian nuclear facilities, that feels like that could be a real problem, right, Matt? What's the fallout there so far? I think, just as Chris was saying earlier, yes, businesses have come into this year with solid margins and the ability to absorb some of these higher tariff costs that we're seeing, and maybe that's why it's not passing through to consumers. But
That means they can't take on another heightened cost. Energy prices, like we see today, are up 8% if that's sustained or continues to rise. That makes it that much harder to kind of eat the tariff increases. And now diesel fuel and any other energy product you're using costs more. It'll just accelerate that timeline of moving the past through these costs or to let people go. Much more vulnerable to this type of shock.
Yeah, it feels like this could be a deal because I think, and we should have Crystal Fakas on, but I believe Iran exports two to three million barrels of oil a day, I believe. And just for context, the world consumes, I'm rounding, 100 million barrels a day. So that's two, three percent. That feels like that.
pretty at significant risk here, at least for a while. Now, you know, maybe the Saudis can fill the void. They've got some excess capacity, but nonetheless, two to three million barrels is a lot of oil and we could be in store for higher prices for, you know, than otherwise would have been the case for quite some time. I think everyone was counting on low oil prices, you know, but this may make that much more difficult.
Higher oil prices are pretty pernicious in that, again, they raise prices and costs. You mentioned diesel, which goes into food and everything else. And it lowers growth because it cuts into purchasing power, particularly for lower middle-income households who devote a much higher share of their budget to filling their gasoline tank and heating their home. The other thing that it does is
Going back to expectations. Yeah. Right, Chris? You want to – I know – go ahead. Complete the sentence. Oh, I didn't want to take the – No, go ahead. Go ahead. I was just – I was speaking too much. You fill in the blank.
All good. In terms of expectations, particularly for households, we've mentioned in the past that the oil price is front and center. It's a price that everyone sees on a regular basis. If you're driving, certainly, you're filling your tank up regularly. You're passing signs with the price of a gallon of gas. It's a very...
notable price. So if you see that price starting to tick up, you're passing blah, blah every day and seeing your gas prices rising, that certainly feeds into inflation expectations. And that, again, can
can have these negative downstream effects. So it's not only the direct impact, you mentioned the budget, you have to fill your car with gas regularly. Gas prices also affect food prices dramatically. So not only will you see that the pump, but you'll also start to see it in the supermarket as well, because there's a very direct correlation between diesel prices and food prices as well. So this is definitely something to keep an eye on if oil prices were to remain this high or continue to accelerate.
Yeah, the other weird thing on expectations is bond market expectations are also tied to oil prices. You know, it's weird. You would think that the bond investor would be sophisticated enough to like the Fed to look through because prices go up, they go down, they go all around. But that doesn't look like what happens when oil prices are up that you see bond market inflation expectations go up and conversely. So it's not only about household expectations, it goes to interest rates as well.
Yeah, you're right.
Marissa, you want to walk through the kind of the thinking there? Yeah. I mean, actually, Jay Powell gave a speech a couple of months ago where he was asked this question specifically and acknowledged that all of this policy is stagflationary and was asked how they were going to handle it. And, you know, as he basically said that back then, a month ago, they thought that the labor market and inflation risks were kind of balanced, that they were going by the data and
that they would react to kind of whichever started getting away from them first, right? So if they started seeing the labor market really start tanking rapidly and inflation was still kind of okay, then that would probably call for lower rates. If the opposite was happening, the labor market was still hanging in there and they saw inflation rising, you know, then they're, I don't know if they're going to raise rates, but they're certainly not going to be in any rush to lower them, right?
I don't know, maybe they will raise rates if the labor market can hang in there and we really do start seeing inflation rapidly getting out of control. I think they're very sensitive to inflation. I think they're probably leaning to be more sensitive to inflation than they are to the labor market data. They really don't want... They've been through it the last couple of years and they don't want that getting out of hand. And...
We just talked about all of these things. And while all of them are a negative for growth and a positive for inflation, I feel like all of these things tip more on the inflation balance, right? Particularly the latter one, the geopolitical stuff that has the potential for really spiking costs, both of energy that consumers consume as well as food. So they're not in an envious position at all. And I think-
the upshot of all of it is they're going to wait and see what the data looks like, but I don't think they're in any rush to lower rates. Yeah. And by the way, it's what you just expressed about the Fed in their,
deep hatred of inflation, why economists like me and I think the rest of the group think that an actual stagflation scenario is unlikely because the Fed will kill that before it actually gets going. I mean, if it felt like inflation expectations were rising, getting into wages and you get into that kind of wage price spiral that's critical to a stagflation scenario, I
they'd stab that right in the heart, meaning they'll jack up interest rates and push us into recession to bring that out because they know if they don't do that and we get into an actual stagflation scenario, then the kind of recession we're going to have to suffer through is much more serious, kind of like what we experienced in the 70s and 80s. So it's built into their DNA at the Fed. I just don't see them allowing that to happen.
Chris, do you have a comment on that? Well, that's true for the current FOMC. We've talked about that independence in the future, and certainly there's a risk that you could end up with an FOMC that sees things differently. It adds to the stagflation scenario. It adds to the uncertainty and stagflation scenario. I can't even think the stagflation thing is a real thing. Yeah. Wow. Okay.
Okay. I want to play the game, the stats game, and then I want to end by probability of recession. We haven't done that in a few weeks. Now that we have a quorum, I want to get everyone's final perspectives on that. Maybe I should also ask about what you think the inflation rate is going to be a year from now. But I think I might do that. But before we go to the stats game, anything else on all this? Anything we're missing that the stagflation scenario? No? No? Matt, anything?
It's terrible for interest rates and due to a recession. And it's a whole different rant that I find is like at the core of this inflationary argument. What's that? You're going to need more government spending if growth slows and we do tip into a recession and you're going to be at a time when interest rates are higher and keep interest rate policy restrictive to take care of inflation. It just makes the government's borrowing that much more expensive. Yeah.
It's painful in every direction and particularly that one. Yeah. You're saying in addition to all the other bad stuff, the other bad thing that happens in the stagflation scenario is it makes our dire fiscal situation even more dire. Much worse. Yeah. Yeah. Interesting. Yeah. Good point. Okay. The stats game, we each put forward a stat. The rest of the group tries to figure that out with clues, deductive reasoning, questions. The best stat is one.
that it's not so easy. We get it immediately, although that's getting harder and harder to do. This group's pretty good, particularly Marissa. She's ruining the game for me. That's not true, Mark. I know. I'm making that up. It's war at this point. And one that's not so hard and we never get it, if it's apropos to the topic at hand, all the better. Marissa, we begin with you. What's your stat? My stat is 31%.
31%. Is inflation related? Yes, it is. Is it based on a survey, consumer survey? It's based on a survey. Not a consumer. Is it a government survey? No. Trade group survey? Yes. Okay. Is it NFIB? Yes. National Federation of Independent Business. The percent of businesses that say they're going to raise their prices in the next three months. That's right.
See that? Well done. Well done. Man, like I nailed that baby. That's very Sherlock Holmes. I was like a dog with a bone.
That's right. So you asked Matt if there was any data that came out over the last week that showed any signs of inflation. And he said no, but I would argue that this actually goes in the opposite direction. So this is a survey of small businesses and they're asked how many of them are planned to raise prices today.
You said three months. I think it's six. Is it six? I was going to say six. Yeah. And this rose to 31 from 28. And this is the highest it's been in over a year. It's the highest it's been in about 15, 16 months. So...
While all these surveys that came out over this past week, and I'm not going to take anybody's other statistic, but kind of show that people are feeling better on the inflation front since all of the, you know, tariff heat has kind of waned a bit. This is one that shows businesses are still thinking that they're going to have to raise prices regardless of all of this tariff back and forth. So, yeah.
i think it goes to that's a great discussion yeah i'm definitely gonna go take a look at that that's a good one uh and yeah usually the nfib survey is a bit more republican-esque right matt i mean you've done some work here yeah on that the swings in november and december on election years are uh wild right yeah
That's interesting. So despite that political prism, it's showing that small businesses are saying, hey, I'm going to raise prices here. And I guess that makes sense because we were talking about profit margins. Small businesses just don't have those margins. They can't delay. If their cost goes up because of a tariff or having to pay the workers more, they got to pass it through. They have no choice.
And just one other thing I'll note, I mean, this has been high since the pandemic, obviously, right? Because just we've had all these supply chain issues and inflation and pass through. If you go back and you look at the whole series back to 1980, this is really high. Like this 31% is quite high from a historical perspective. It was higher back in the teeth of the pandemic, you know, for obvious reasons. But go back years and years and years, you have to go back
Like, 08, because of housing costs, it was a bit high, but it's higher than it's been historically. Wow. That is interesting. Great statistic. Matt, you want to go next? Yeah. 30%. Is it from the CPI? Yes. Year over year growth in something? No. Component of the CPI? Oh, I know what it is. It's the percent of the components that are imputed.
I sent you guys too many emails. Oh yeah. Yeah. I'm just saying. That's good. Yeah.
Let's keep going. Yeah, Matt and I are going back and forth on email all the time. And I'm on the email. I knew he was going to. I said to myself the other day, I bet this is going to be a statistic. I know. Really? Yeah. Mark like flirted with the topic about 10 minutes ago. And I hope you don't say it. Yeah, that's right. I did. Yeah. As soon as a half-baked thought comes into my head, I fire up and leave out to you guys. So.
And by the way, keep them coming. Those are three quarters of a baked, you know, not half baked, maybe even 80% baked, you know, so much better than I get from Chris. Chris is like 30% baked. I'm not sure. Yeah.
You can finish the baking yourself. Sorry. All right. Go ahead, Matt. So tell us that stat. Different cell incutations is the share of price components we're referring to. 30% of stuff that the BLS looks at to gather prices, the public consumer pricing index, 30% of them require an assumption that is
more or less a guess. So if we don't have specific data on a price in a specific city, they say, okay, let's look at a similar city or a close by city and see what prices are in May. Typically, it's about 10 to 12% of things require that assumption. And in April, that jumped up to 29%. And then in May, it stayed a little bit higher at 30%. So much higher. And the expectation is relatively intuitive.
The BLS has had a higher, across the board, a higher increase. There's not the, these are physical people that are actually going out to different cities and observing prices and reporting that back to the BLS as they aggregate up the CPI. Without as many people doing that, they're forced to make more assumptions. So the sample size, the underlying data of the CPI is a little bit more sparse. And that means with any statistical analysis,
survey like this that just means higher volatility both directions guesses could be high this could be your estimates be high and low uh but right now we are seeing a kind of material change in in what they need to do to put this index together again doesn't say anything about direction of the last couple meetings uh but it's certainly not working hey matt and there's a lot to dig in there you know we're starting a research uh stream on this issue of measurement
at survey response rates, but now the fact that the government doesn't have workers, job holders to actually collect the data in a timely way. Do you know of any other private maybe source of price information that we can use?
to try to gauge what's going on, or anything we should be, maybe there's like a representative product or service or products and services or some subset of the components that we can start looking at to gauge whether it's running on a different dynamic than the dynamic for those series that are imputed. You see what I'm saying? I do. And I know, you know, that that means that
You're making an analog, but it's a diminished quality because of how good the government's and how comprehensive government data is. But to do that, to kind of track, nothing jumps the mind. I think this is a big deal. This is a big deal. We really need to start thinking about this more deeply and thinking about tracking it, trying to understand what it means for the data that we're watching. Because if you can't track CPI in a time when we're all focused on inflation, that's a
A massive problem. So something we need to think about. Anyway. Can I ask a quick follow-up to that? Yeah.
Do we know what particular products are being affected by this more than others? The BLS has described this change over the past two months in geographic terms because it's a lot easier that way. So I reached out earlier this week and said, if we can get anything like, is it just a goods or service story would be really helpful. But these are geographic holes. We don't have a numerator to go to.
Harrisburg or Philadelphia or whatever it is and go collect this data. So in that city, there's these holes. - Okay, oh, interesting. So it's widespread just by geography.
Yeah. I mean, there's just more cities that aren't getting a statistician there, but it would be really nice to know products because we saw goods prices remain subdued and it was like, well, is it all these holes coming from durable goods at a time when we focused on tariff faster? That would be certainly relevant, but I see why that's not easily available. Yeah. Okay. All right. Let's do one more for sake of time. Chris, what's your stat? All right. This one's hard. 19.1%.
Inflation related? Not directly. Labor market related? No. Housing related? Is it something that came out this week? No. It did. It came out from the European Central Bank. Oh. Oh. That's what makes it difficult. ECB. ECB. And it's not inflation related? No, not directly. Is that something in the mortgage market, housing market? No. No. Okay. 19.1%. Oh.
Is it tariff related? No. Again, it refers to central banks. Okay. 19.1%. Not an interest rate. It's not a demographic variable. Is something to do with the financial system? It has something to do with their balance sheets.
That's a share. That's a share. Is there a balance sheet? U.S. Treasuries on their balance sheets? No. Oh, that would be a lot. Boy, I think. Gold? Yes. Gold. Oh, no. You got it. Wow. There you go. Whoa, baby. Wow. How'd you pull that out? Come on. Did I get all three of them this week? You did. Where's the competition? Where's the competition? It's hard to get in there.
Once you start going down your Sherlock Holmes line. I know. That's true. That's a good point. That's a good point. That's unfair, actually. It's unfair. Oh, that's so cool. Really? 19.1% of their assets are gold? Yes. The share of global foreign assets are 19.1% are gold. It's relevant because it now is second place. It used to be euros.
But now gold is right after the dollar. Dollar is 47%. So dollar is still dominant, but it's been losing share. And gold is outpacing euros now.
So that goes to, yeah, there's some inflationary aspects. Yeah, it's got to go to price to some degree, right? Yeah, there's also geopolitics and sanctions, right? So this is also including Russia moving more towards gold or other countries moving more towards gold. But I found it interesting. We had a discussion not too long ago about dollar dominance and what could come next. Mm-hmm.
Euro is not leading the way here. It's actually gold that's picking up some steam here. So who knows? I wonder, the Swiss are not on the Euro. So if the Swiss, because the Swiss were shipping a lot of gold to New York because of the tariff arbitrage. I wonder if the Swiss were shipping into other European capitals as well. Why would they do that? I don't know. Yeah.
Well, this is end of 2024. Oh, okay. It was reported this week, but the first. That is a cool statistic, and I'm so proud of the guy who figured that out. Good job. You're on the game still. Pat him right here. Pat him right here. Very good. All right. We're running out of time. Very quickly, probability of recession.
in the next 12 months. And if you want to throw in your inflation forecast, year over year, core PCE, core consumer expenditure deflator, which is now 2.5%, what will it be a year from now? That would be, I'm all for it. Matt, you want to go first? Sure. I'll go to the magic two-thirds threshold for recession. I
i i think that what hold on wow you said two-thirds i could have said 60 but that was playing it too too yeah i think so i think there's more going on you think we're going into recession in the next 12 months and it's not a severe restriction but yeah i think there's pain i think consumer spending data there's nothing that should give you confidence even if we have you know hoarding data that says people have been spending more of the past few months uh i think that falls off considerably and i think the giving the energy shock on top of what businesses are already stomaching with tariff increases uh
You mentioned that nobody wants to be the first one that announced the price hikes. I don't think they want to be the first one to announce mass layoffs either, but once that happens, I think there's a cascading effect. And I think we start to see a rise in joblessness. I like the guts. Yeah.
Yeah, if I'm wrong, I'll just say some other exogenous shock. What about inflation? I don't think inflation rises as high. I would go a little bit more baseline. I think the demand aspects that I'm talking about are more de-inflationary or disinflationary than the tariff and the labor supply constraints, which are real, but I think what we're written by is a due demand. Got it. Cool. That was a good one. Marissa, what do you say?
I'm going to stick with 45% still. 45? Okay. Yeah. Okay. All right. With an up arrow next to it. Really? And why the up arrow? Well, the Israel- Iraq thing worries me. I mean, I just think the geopolitical part of all of this could really do damage to the global economy. Yeah. Right. And on inflation, a year from now, maybe it could be
3% year over year, up from 2.5%. But like Matt, I think if we go into recession in the next year, I don't think it's going to be that high. But even with your 45%, that means a weakened economy, and that's going to take out of demand. Okay. Interesting. Chris? Similar. I'm at 50%.
You went up? I went up. So my arrow is not just an arrow. It's actually up. Wow. Why? Why? Why? Well, look at the newspaper, man. Okay. Okay. Okay. And when you say that, you mean all those tariffs? Yeah, absolutely. Everything. Everything we were talking about. Everything we're talking about, the news today, of course, the Israeli bombings is concerning. Yeah.
Interesting. So the group has turned decidedly darker. Darker.
Well, you know what? I'm going model-based. I love this new model, this machine learning random force classifier model. It says 48%. And if you guys want five significant digits, I will give that to you. Five significant digits. No one wants that. Okay. Sorry. Okay. 48%. I believe in that model. Shandor, this better be right. Shandor is the...
economists who put this together, Shandor Witcher. Isn't that the coolest name you ever heard? Other than Matt Collier, now that I can pronounce it. Shandor Witcher. It's like, Oh, you can't make that name up. It's like fantastic. And he's a cool guy too. And he's a cool guy too. And he's smart as hell. And he's, he built this model and it's a really cool model, 48%. And so I'm sticking with that. And I,
I hear you on inflation, but I'm going to say three and a half. It's going to be up a point. Shave off three tenths because of the demand effects. Yeah, I'm so surprised you guys turned so dark on me. I'm the only one that hasn't gone up.
You have the up arrow, but I haven't changed my probability. You've actually changed your probability because you were also at 45. Well, the model. It wasn't really a change in my view. It was a change in my methodology. So you're following the model.
I'm model-based. I'm model-based, baby. I'm model-based. Yeah. We'll use that to forecast accuracy. Yeah. We'll see. We'll see. Matt's 66% would argue that we change our baseline to a depression. Yeah, he has influence over me too. Oh, really? Yeah, yeah. I think about what you say all the time. Wow. All right. So you got to be careful what you say. Now I'm going to go away depressed all weekend. 66%. I love depression. Yeah. Yeah.
All right. We got a long weekend ahead of us. Father's Day and all that, you know, so everyone have a great holiday weekend and we'll talk to you. Well, we got a podcast early next week, so we'll talk to you next week. And with that, we're going to call this a podcast. Take care, dear listener.