Bernstein’s Chief Economist Eric Winograd joins Stacie to talk about why he updated his economic forecast on account of Taylor Swift, and the long-term outlook in the context of recent strikes.
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Stacie Jacobsen: [00:00:00] Thanks so much for joining us today on The Pulse by Bernstein, where we bring you insights on the economy, global markets, and all the complexities of wealth management.
I'm your host, [00:00:15] Stacie Jacobsen. So here we are at the start of the fourth quarter, and it's a great time to take stock of the economic effects of what's been grabbing headlines lately.
This has certainly been a summer of labor action in the U. S.
And while the Writers Guild of America has recently struck a deal in Hollywood, [00:00:30] there are still disputes in Los Angeles and elsewhere across the nation.
The Screen Actors Guild has yet to reach a deal. Auto workers are expanding their strikes.
60, 000 Las Vegas hospitality workers are gearing up for a strike over expired contracts. [00:00:45]
And healthcare workers are prepping to walk out as well. But picket lines aren't the only lines growing. As anyone who recently stood in one for a Taylor Swift or Beyoncé show can attest to, economists have had to revise their forecast in the wake of these massive [00:01:00] tours, which have been a smash hit for local economies and the GDP.
And of course, all of this is happening against a backdrop of dysfunction in Washington, with the government shut down just narrowly.
And perhaps only temporarily averted. Bernstein's own chief [00:01:15] economist, Eric Winograd is here with us today to analyze how these events are shaping the landscape heading into the final part of the year.
Eric recently published a blog post entitled Barbie, Beyonce, Taylor Swift, and the economic outlook, which you can find at the link in the show notes.
[00:01:30] Eric, thanks so much for being here and helping us sort through all of this. Thanks for having me. All right.
So to start off, I can't help but think of the Beyonce song with the lyrics, who run the world?
Girls. So I take it there's a little bit of truth to that?
Eric Winograd: Yeah, that's certainly a [00:01:45] big part of the economic story over the summer.
As we mentioned in the blog post that you referenced, I did update and upgrade our GDP forecast for the year in large part because of increased consumer spending and a large part of that spending went to experiences, specifically the [00:02:00] Taylor Swift concert.
The Beyoncé concert and the Barbie movie.
Households were willing to spend on events like that, and they spent enough that it warrants a GDP upgrade.
It's obviously an oversimplification to say that we upgraded our GDP just because of those events, but I think it points to [00:02:15] a fundamental truth, which is that households still have money.
And if there's one thing that economic history teaches us, it's that when American households have money, they spend it. And that's what keeps the economy moving.
Stacie Jacobsen: So how long is that runway? How much do they have to [00:02:30] spend? It's an open question.
Eric Winograd: You know, the runway has been longer this year than we would have thought.
The labor market has been stronger than we anticipated at the beginning of the year.
Uh, businesses that struggled to hire workers in the immediate aftermath of the pandemic have been very reluctant [00:02:45] to let them go, even as end demand may have slowed a little bit.
And so employment has been very strong.
Unemployment is very low. Uh, wages have kept pace with inflation, but you notice all of that is in the past tense.
When we look into the future, I think the picture is, I [00:03:00] don't want to say bleak because it isn't, but it's not quite as bright.
Some of the things that have supported the labor market and that are supporting the consumer are set to fade.
Uh, for one, there are signs that the labor market is starting to weaken a little bit. The pace of hiring has slowed, uh, the [00:03:15] number of job openings posted by employers has come down quite a bit.
Both of those are things that suggest that the rate of hiring is likely to, uh, to taper off a little bit as we move through the fourth quarter of the year.
Uh, another thing that is likely to taper off is the amount of. [00:03:30] savings that households have accumulated.
Certainly in the aftermath of the pandemic, us households accumulated what we estimate to be around a trillion and a half dollars of excess savings just held in bank accounts as a combination of government stimulus programs, [00:03:45] unemployment insurance programs.
And of course, the fact that people weren't able to spend during the pandemic because they couldn't go outside.
Uh, sort of conspired to leave households with a big pile of cash. We think they've worked down most of that. And so as we move into the fourth quarter, that [00:04:00] source of strength probably isn't there either.
Stacie Jacobsen: So you just mentioned a handful of items that are actually grabbing the headlines. Um, one of them was labor, right?
And there have been an unusual number of labor strikes over the summer.
Um, rolling into the [00:04:15] fall now. So will the results of any of the strikes have the potential for you to adjust your outlook.
Eric Winograd: So what we've seen from the labor strikes so far has not caused us to revise our GDP outlook.
It is an unusually large number of strikes to happen all at [00:04:30] once, but we have to keep it in perspective also.
The U. S. economy is not a heavily unionized one.
In the 1970s, something like 40 percent of the workforce was unionized, now it's below 10%.
So we are still talking about a relatively small number of workers, [00:04:45] and even among the workers who are on strike, the UAW strike is not a blanket action, it is a targeted one.
And so it is not the case that all auto production has been shut down. One of the things that would force us to revise our GDP forecast, however, would be a broadening of that [00:05:00] strike activity, particularly in the auto sector.
The automotive sector has a lot of knock on effects to other parts of the economy.
There's a whole supply chain that goes into it. There's a whole service sector that thrives around automobile production.
And so, were those strikes to persist and to [00:05:15] broaden, then we would have to look at downgrading our GDP forecasts.
But for now, we're going to continue to watch and see.
Remember that we're only just now entering the beginning of the fourth quarter, and history suggests that strike activity has a short term [00:05:30] negative impact on the economy, but when the strikes end, the activity is made up.
You know, we'll give it a little bit more time before we make any changes.
Stacie Jacobsen: And then to start the fourth quarter, we narrowly avoided a government shutdown when a weekend bill was passed to delay that [00:05:45] negotiation until November.
Eric Winograd: Yeah, to the surprise of most, including me, uh, the government did not shut down in early October as had widely been anticipated, uh, the House and the Senate combined and finding a solution at least for the short term that prevented that outcome.
[00:06:00] Uh, but the emphasis here is on short term.
They have not addressed the, the longer term budgetary issues that led us to the precipice in the first place.
This is just a delay until mid November.
And while we can't know now what will happen, it remains possible that there will be a government shutdown at some [00:06:15] point as we roll into the fall.
Historically, government shutdowns tend not to be that big a deal from a GDP perspective.
Somewhat similar to strike as workers in the government sector aren't paid. But legislatively, they [00:06:30] are required to be given back pay when the shutdown ends.
So they get the money back and they tend to spend it as if they had not been out in the first place.
I would expect that to be the case in this episode, particularly if the shutdown happens as we roll into the [00:06:45] holiday season.
So, you know, again, barring a very long term shutdown, uh, this isn't unusual. It's unlikely to have a lasting economic impact.
Stacie Jacobsen: Let's move on to interest rates.
We're clearly in a high interest rate environment relative to recent history, and [00:07:00] the cycle seems to be coming to an end.
What's your forecast for interest rates?
Eric Winograd: So interest rates are higher than they have been in a long time.
It's worth noting that they're still relatively low by historical standards.
You know, a Fed funds 5 percent [00:07:15] is high only by way of recent comparison. If you go back 30 or 40 years, it's not all that unusual.
Still, it is a very big change from the environment that we have been in, and it does matter. It makes a difference to government finances.
It makes a difference to household finances. It [00:07:30] makes a difference to the housing market.
These are all things that you would expect to see as we move forward. This is what monetary policy is designed to do.
It's a big part of the reason that we expect the economy to slow in the coming quarters.
Higher interest rates do bite, and they [00:07:45] do slow economic activity. Uh, we think that the Fed is close to, if not at the end of its tightening cycle.
I'll, I'll be honest, in economic terms, whether they do one more rate hike or not really isn't that significant.
What is significant is how long they leave rates high.
It makes a [00:08:00] much bigger difference how persistent high interest rates are than whether the Fed funds pay target rate is five and a quarter or five and a half percent.
On our forecasts, the Fed is likely to keep interest rates high for a long period of time.
Inflation is still too high and it is coming [00:08:15] down only gradually, and the Fed's choice in this instance is to leave rates persistently elevated in an effort to slow growth and to bring inflation down over a medium term time horizon.
On our forecasts, They don't get inflation back to target until 2025.[00:08:30]
And that means that we don't expect interest rates, the Fed's target rate at least, to get back to its estimate of neutral, which is between two and a half and 3%, uh, through the end at least of 2024 and probably well into 2025.
Now, market [00:08:45] driven interest rates are a different animal. Right now, interest rates have risen quite significantly over the course of the last couple months.
The yield on the 10 year Treasury bond is over four and a half percent for the first time in a long time, close to the highest that we've seen in, you know, [00:09:00] 15 or 20 years.
Because we expect the economy to slow and because we expect inflation to continue to move gradually lower, we think interest rates are likely to move lower.
from here, at least market driven interest rates, even if the Fed isn't cutting rates just yet.
So we do look for [00:09:15] interest rates to end the year lower than they are today, and to move lower as we move into next year. Eric, you
Stacie Jacobsen: had said that how long rates stay high is more important than how high they go.
Can you unpack that?
Eric Winograd: Yeah, I think it's worth taking a deeper dive into that.
If you think [00:09:30] about the ways in which businesses and households finance themselves when they borrow money, usually they have a period of fixed interest rates.
So take for example, uh, an adjustable rate mortgage, you have a five or a seven year period in which your interest rate is set.
And so it doesn't matter [00:09:45] what happens with interest rates, right?
So if interest rates go up and then back down, all that matters to you is where they are at the beginning and at the end. of that adjustment period, but if they go up and stay up, when you get to the end of that period, you will be forced to refinance into a higher [00:10:00] mortgage rate.
The same is true only more so from a corporate perspective.
Most businesses borrow on a fairly short term basis, so three years or five years or something like that.
And again, For a lot of them, that rate is fixed for that period. So, [00:10:15] if rates go up and down during the five years, they don't matter, but if they are still up at the end of that period, then it matters a lot, because rolling over that debt becomes much more costly.
And when we think about that from a, a business perspective, from a corporate perspective, profitability [00:10:30] depends in a large part on expenses.
And so, if you're a business making a profit when you are borrowing at 4%, the amount of profit you're gonna make is a lot lower if you have to borrow at 7.
And the longer that interest rates stay higher, the more businesses and the more [00:10:45] households are going to get caught up in facing those higher interest rates.
So I really do think it is the persistence as much as if not more than the magnitude that really has the bigger economic impact.
Stacie Jacobsen: All right. That's helpful. Thank you, Eric.
Investors are worried about the [00:11:00] persistent U. S. budget deficit and what that means for the debt burden going forward. Do you share that concern?
Eric Winograd: So one of the things you're right, one of the things that many have used to explain the recent rise in interest rates in the U. S., particularly in longer dated treasury bonds [00:11:15] Is deterioration on the fiscal accounts.
Uh, this sort of is related to the, the shutdown that didn't happen and the one that might happen again in November.
The perception is there that the US government doesn't have its fiscal house in order.
And indeed, if you look at congressional budget office forecasts, which are [00:11:30] non-partisan forecasts based on current legislation, the government is likely to run a deficit, uh, of roughly five or 6% per year. Every year through 2033.
That's a lot of money to be borrowing and with the debt to GDP ratio [00:11:45] already At 100 percent and headed higher it raises some concern and you know, we do share some of that concern I do think that the budget position is unsustainable in the long term and Based on the debate around the shutdown.
It doesn't appear that there [00:12:00] are plans underway to really address this in a in a long term way.
You know, there's a willingness to kick the can down the road a little bit It's sort of continue doing things the way that they have been done without either addressing the long term spending or the long term revenue [00:12:15] concerns and you know, it is both right.
This isn't just a spending problem.
It's a revenue problem, the government budget works the same as anyone else's.
You have money that you spend and then you also have income. Most of what the government spends on is entitlement spending. There doesn't appear to be political appetite to address [00:12:30] that.
Most of the government's revenue is taxes, and there doesn't appear to be political appetite to address that side of the equation either.
And that leaves you with no choice but to borrow if you're not willing to cut spending or raise taxes. I don't worry that, and I don't think investors should worry that we are on the cusp of a [00:12:45] debt crisis where all of a sudden no one is interested in buying U.S. debt.
Certainly the more debt that's out there, the greater the risk of that outcome is, but there isn't a lot of evidence.
Treasury securities are still very much in demand and the dollar is still the reserve currency of the world, [00:13:00] which gives the U. S. a special privilege when it comes to issuing debt.
But you do have to keep in mind that one of the government's other expenses is paying interest on its debt.
And with interest rates higher, the cost of paying interest on our debt is only going to go up in the coming years [00:13:15] as interest rates stay high and as the amount of debt outstanding grows.
And every dollar that is spent to pay interest on debt is a dollar that isn't being spent on something more productive.
Uh, so, so, you know, I think of. The debt burden and the persistence of the [00:13:30] debt burden as a significant headwind to future growth, and that's something investors should take into account even if it doesn't cause a debt crisis.
Stacie Jacobsen: So far, we've focused on the U. S. I'd now like to take it overseas to Europe and China, two economies that did [00:13:45] not experience the third quarter consumer surge that the U.S. benefited from.
Eric Winograd: The European economy looks a little bit weaker than the U. S. economy does.
Uh, while our economy appears to have accelerated over the summer, theirs did not, and forward looking indicators look [00:14:00] relatively weak.
The outlook there isn't quite as bright, although I would want to jump in here and observe that Taylor Swift will be touring Europe next year, so, you know, there is some upside possibility associated with that.
But on a more serious note, um, the European economy [00:14:15] does look a little bit sluggish here.
We think that the European Central Bank is done raising interest rates, and it's likely that they will need to lower interest rates sooner than the Fed will.
The truth is that the cost of living adjustment, the cost of living crisis, as it is called in Europe, hit harder there than it did [00:14:30] here.
There wasn't as much fiscal stimulus, households didn't accumulate as much savings, and it's naturally sort of a lower growth economy anyway.
The demographics suggest slower growth over any given time horizon, so things don't look quite as bright in Europe as [00:14:45] they have in the U. S.
They don't look terrible.
We're not forecasting an imminent recession there either, but the outlook there looks more sluggish.
The other economy that has had a disappointing performance over the course of this year is China, where hopes that an [00:15:00] initial surge after recovering and reopening from the pandemic would last have been dashed.
There was a quick surge, but it faded very quickly.
And the economy has fallen short of most market expectations in terms of growth, although it has been fairly consistent with what [00:15:15] we expected.
Our view is that China is in the midst of and probably in the early stages of a long term secular slowdown.
You know, investors became used to China growing at eight, nine, even 10 percent year after year.
And that's just not possible when you have a much bigger [00:15:30] economy as they have today.
China's economy is much larger. growing at a high rate off of a large base is simply mathematically more difficult than it is when you have a lower starting point.
Even beyond that, China is in the middle of a very important transition [00:15:45] away from a heavy industry, infrastructure, investment, and export driven model to one that's more domestic facing, that is more consumption oriented.
That is probably a better model in the long term. It will leave their economy more self sustaining.
Sustaining, less dependent [00:16:00] on the global economy, less dependent on the property sector, for example, where there are clear signs of excess.
But transitions don't come without friction and part of that friction means slower growth.
And so we think that the slowdown that has set in this year is [00:16:15] likely to continue.
Policymakers will ease conditions. They'll take measures to stabilize things. But investors should be aware that their intent is to manage the downside risks.
It's not that they're trying to boost growth back to a more rapid trajectory.
Stacie Jacobsen: So how does the negative [00:16:30] economic situation in China impact the U.S.
Eric Winograd: economy? So we don't expect significant implications for the U. S. economy from a slower China.
The U. S. is not a very trade sensitive economy. Economists measure trade through what we would call openness, and it's a very [00:16:45] simple, you add exports as a percentage of GDP plus imports as a percentage of GDP, and that gives you a rough metric.
The U. S. is at about 30, which by international standards, isn't really that high.
Uh, so a slower China doesn't help us, but it [00:17:00] doesn't have a large direct implication in terms of growth where we would want to be a little more wary is if there are indirect effects.
So for example, if China's policymakers prove unable to manage some of the bad debt in that economy, [00:17:15] if there is a financial market event or a financial sector event that could have a negative spillover effect, even if only through sentiment that could weigh on activity in the U. S.
But our base case is that a slower China should not have an untoward effect on the U. S. [00:17:30] economy.
Stacie Jacobsen: We did a quick hit on the strikes on the government shutdown on the interest rate movement and a little global tour of Europe and China.
When you tie all of that together, what may the impact be on the financial markets?
Eric Winograd: We look at the period ahead from a [00:17:45] financial market perspective and think that there are some challenges that have to be overcome.
A sustained period of elevated policy rates and tighter financial conditions is going to slow growth.
And growth sensitive assets in particular may struggle as a result.
Uh, the good news is that [00:18:00] we aren't forecasting a sudden stop. We aren't forecasting a hard landing.
And so concerns about a recession are fading, we think, and that has supported equity markets in particular.
But that doesn't mean that there's a whole lot of upside to growth.
I think we've seen the best period of growth that we're likely to [00:18:15] see for the next few quarters already.
To me, that's a recipe for sort of a choppy, volatile environment, maybe directionless trading rather than a clear trend one way or the other.
From a bond market perspective, the absence of a recession suggests that credit [00:18:30] sensitive assets can continue to perform.
If you don't have a recession, you're not likely to get a significant wave of defaults. And so credit risk premium looks attractive, you know, again, it depends on specific issuers and specific sectors, but in a general sense, absent a [00:18:45] hard landing.
Credit risk premium looks attractive from an investment perspective, you know, again, You're not talking about a dramatic move one way or the other but an environment where I think investors can be cautiously Optimistic is probably the best way to put it.
This isn't [00:19:00] an off to the races sort of market call But neither is it a one in which we're concerned about a large scale drawdown in the near term.
All right, cautiously optimistic.
Stacie Jacobsen: And like any good economist, you reserve the right to change your estimates as events [00:19:15] unfold.
Eric Winograd: Cautiously optimistic is the best that an economist can be expected to do.
And look, the point of our predictions and our forecasts is not to promise that they will be correct, because it's a very big, very complicated world.
Things change. And you know, our job is to [00:19:30] try to update our expectations based on incoming information. You know, there are a lot of things that could go right and a lot of things that could go wrong in the coming months, and we'll be keeping our eye on all of them.
Stacie Jacobsen: All right, Eric, thanks so much
Eric Winograd: for being with us today.
My pleasure. Thank you for having me.
Stacie Jacobsen: [00:19:45] That's all for this week on The Pulse.
Thanks again for listening, and please remember to like, share, and subscribe. We'll be back in two weeks with another episode, so don't forget to tune in.