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SPEAKER_07: This is Planet Money from NPR.
SPEAKER_06: The other day I invited a fortune teller to come over to my apartment. Hello. Hi. Hi, I'm Keith. Hi, how are you? I'm Miko.
SPEAKER_08: Come on in.
SPEAKER_06: Miko Harris is a tarot card reader here in Brooklyn. I got in touch with her from her website moonlightreadings.us. Is this all right as a setup? So I figured a table is what I assumed you would need as part of how this all works. Miko got settled in on her side of the table. She took out her little pink cloth bag that she kept her tarot cards in. Sort of before we even get started, can you just sort of like walk me through what's going to happen? Usually I just clear my mind, get myself focused and centered.
SPEAKER_08: And then I ask the person exactly what it is that they're looking to find clarity on. And then I just start focusing on that in my mind, kind of repeating that question so that the universe hears it and then shuffle my deck and see what the universe has to say via my tarot cards. Has anyone ever asked you to do a tarot reading for the US economy before?
SPEAKER_06: No, this is going to be my first time, but first time for everything.
SPEAKER_06: Hello and welcome to Planet Money. I'm Keith Romer. I'm Jeff Guo. And I'm Sarah Gonzalez.
SPEAKER_09: Inflation has come way down. You may have seen the headlines. Inflation was 9% last summer. Now it's 3%, which is great. But economists are split on what's going to happen next. Right. Will the reading for the US economy be a good one, a bad one or something else entirely?
SPEAKER_05: Yeah, like an uncategorizable third option.
SPEAKER_09: Today on the show, everyone is looking at the same deck of economic cards, trying to
SPEAKER_06: read what the economy has in store for us. So we are going to talk to three very smart economists who will each offer us a very smart interpretation of what comes next. Also, Mika was just going to tell us what's going to happen. Should I be nervous that the very first card you dealt was the hanged man?
SPEAKER_08: Not really. Okay, so let's start with the hanged man.
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SPEAKER_06: Okay, so quick refresher on what is happening in the economy right now. Inflation shot way, way up. And in response, the Fed cranked up interest rates. And inflation has in fact come down. So it was 9% last summer, 3% now.
SPEAKER_09: Yeah, yeah. But now we're in this interesting spot, right? Because what the Fed really seems to want is for inflation to come down even more to its target of 2%. And getting to 2% inflation, a lot of people right now are talking about it like, like the Federal Reserve trying to land a plane like, like an inflation plane. Okay, but I have always been confused by this metaphor, right?
SPEAKER_05: Because is the plane inflation or does the plane represent the economy? Like who is landing? We can't think about it too hard, Jeff.
SPEAKER_09: The point is that the Fed wants to get this plane back on the ground. It wants inflation to come down. And there are a couple of ways that this could happen, right?
SPEAKER_05: Right. There's a scenario where the Fed could bring down inflation in a way where we don't get a big jump in unemployment or a recession. We land this inflation economy plane smoothly. Economists call this a soft landing.
SPEAKER_09: Or the Fed could bring down inflation in a way where unemployment does go up and there is a recession. This is, this is a bad landing. It's bumpy. People are scared. We do not like it. It is actually called a hard landing.
SPEAKER_06: Okay, so Sarah and Jeff, I asked each of you to take on one of these scenarios. We're going to go ahead and get the scary one out of the way first. Sarah, you're up. Take it away.
SPEAKER_09: It's really not my personality to go with the scary option. But okay, here we go. Okay, so what, let me ask you, are you are team hard landing in the hard landing, soft landing, no landing debate? Or where do you fall?
SPEAKER_04: So I fall in the camp of a recession is coming and a recession is coming is most likely to be something that's associated with the unemployment rate going up.
SPEAKER_09: Torsten Slocke is the chief economist at Apollo Global Management. But that could in this context be described as hard landing.
SPEAKER_09: And you don't, you wouldn't describe it as hard landing?
SPEAKER_04: Well, hard landing makes it sounds like this is 2020 or 2008. And this is not 2020. And this is not 2008.
SPEAKER_09: Okay, generally, if you think a recession is coming, that means you are team hard landing. But a lot of economists who think that a recession is coming like Torsten, they do not love the term hard landing, because it sounds terrible, right? It sounds like they're saying it's going to be this awful crash landing kind of recession.
SPEAKER_06: Right, like after the terrible 2008 recession, when unemployment got to 10%, or in 2020, when unemployment was 15%.
SPEAKER_09: You're saying it won't be as bad as 2008 or 2020? No, but it can certainly still be bad.
SPEAKER_04: Yeah, Torsten is saying it can still be pretty bumpy.
SPEAKER_09: So like a hard-ish landing, he's saying, I guess. He thinks that this time around, unemployment will go up to maybe even close to 6%. He says, this is what it will take to get inflation down. He says you create unemployment.
SPEAKER_06: Right. And this is not just Torsten, this is a pretty mainstream economic view.
SPEAKER_09: Yeah, like the textbook basically says, to fight inflation, the Fed raises interest rates, which makes it more expensive to borrow money. And the thinking goes like this, consumers spend less and businesses stop expanding, because they don't want to take out expensive loans. That means fewer jobs, less job growth. And eventually it all leads to layoffs. Unemployment goes up, a bunch of people without a job, without enough money to buy things. All of this would mean prices stop going up so fast, inflation comes down. But it could also mean we're in a recession. It could be a not very fun ride. And Torsten says we are already seeing signs that a recession could be coming. We're beginning to see people fall behind on their credit card payments.
SPEAKER_04: We're beginning to see people fall behind on their auto loan payments. We're beginning to see companies begin to default. So the negative effects of the Fed hiking rates are already beginning to have some negative consequences for households that have more debt, for companies that have more debt. And the risk is when that process has started and has been set in motion, can we stop it in time? Or is there a risk that this has set in motion a development where we will end up with a recession? Okay, so on the consumer side, more missed credit card payments.
SPEAKER_06: On the corporation side, more bankruptcies. So for Torsten, these are like the economic tarot cards he's reading that are telling him that something bad is coming. Yeah, these are the cards.
SPEAKER_09: And the main thing actually that he's eyeing right now is jobs and specifically slow job growth. So the labor market is doing pretty well right now, but we are not adding as many jobs as we used to. So like the month before the Fed started raising interest rates, we added like 600,000 jobs. Then it went down to 400,000 jobs added every month. And now we're around 200,000 jobs. So we're stepping down the staircase with job growth.
SPEAKER_04: Growth is gradually slowing. We should expect to see job growth ultimately come down closer to zero. And ultimately later this year even be negative. I mean, some economists I think would see this as a good thing, like job growth coming down
SPEAKER_06: little by little like that could prove that the Fed could bring down inflation without causing a ton of unemployment. But it sounds like Torsten is reading things a little differently. Yeah, for Torsten it seems like it's a little like first comes slow job growth.
SPEAKER_09: Next comes high unemployment. The key question in this discussion is what are the delayed effects of having raised interest rates so much?
SPEAKER_09: The delayed effects. A lot of academic papers try to look at this question. When the Fed raises interest rates, they say it doesn't immediately bring inflation down. There's a lag, a delay. And the delay is unpredictable. It can take 12 months to see the full effects of the interest rate hike. It could take 18 months.
SPEAKER_04: And if those academic papers, including papers written by the Federal Reserve themselves, they say that it takes time. My view is simply that, well, then we should respect this time lag and this delay that might be coming. And I do still think that the risk of a recession and a harder landing is more significant and more elevated.
SPEAKER_09: To Torsten, the fact that people are falling behind on payments now is a delayed effect of the early interest rate hikes from a year ago. And, you know, the Fed is still raising interest rates. They just did it again last week. So Torsten is like, just imagine what the effects will be a year from now. And because of these lagged effects, the delay, if you believe in it, Torsten thinks recession in 12 months. He puts it at like 60 percent chance of a recession. It might just be too late to stop it. Maybe the recession was set in motion months ago. Plus, Torsten thinks there is a chance that the Federal Reserve will continue to raise interest rates more and more because one of their mandates from Congress is to keep inflation down and it is not as low as we like it to be. So when people say like, you know, I don't think the Federal Reserve will be willing to raise interest rates more to bring inflation down, you're sort of like, they don't have an option. They have to because if they stop when inflation is at 4, that will then be associated with a new risk
SPEAKER_04: that the market will no longer believe that the Fed has inflation under control. So they have to, they have to do whatever they need to do.
SPEAKER_09: They have to. It's not an option, in my view, to stop when inflation is at 3, 4, 5 percent.
SPEAKER_04: They have to do what Congress has asked the Fed to do. So Torsten, unemployment is coming, a recession is coming. That is your prediction.
SPEAKER_09: Don't shoot the messenger here. We're just trying all of us to understand what will happen over the next several quarters.
SPEAKER_09: Yeah, yeah. You don't want this. This is just what you think will happen. Absolutely. That's the wonderful part of the economics profession.
SPEAKER_04: We all look at the same information and we come to, in this case, actually quite different conclusions.
SPEAKER_06: We're all reading the same tarot cards, Sarah. We're just reading them differently.
SPEAKER_09: It's all about how you interpret them. Yep.
SPEAKER_06: Thank you, Sarah.
SPEAKER_09: All right. Thanks, Keith.
SPEAKER_06: Okay. So the reason we started with hard landing was because historically, that has been how these wars between the Fed and inflation have ended. But maybe this time will be different. Hi, Jeff. Hey, Keith. Jeff, you are here to explain the this time could be different scenario to us, the soft landing scenario.
SPEAKER_05: Yep. So I talked to Louise Shainer. She's an economist at Brookings. Can I ask you just like a personal question? Yeah. Do you find yourself to be just generally like an optimist or a pessimist?
SPEAKER_07: Probably an optimist. Yeah, probably an optimist. Just to be clear, when it comes to the economy, Louise says, she is a realistic optimist. She spent
SPEAKER_05: most of her career in the government at the Federal Reserve, where she was knee deep in all kinds of economic data. And back in 2022, when the Fed started raising interest rates, being an optimist wasn't easy.
SPEAKER_07: There are a lot of people who are saying, you know, certainly in the media and stuff, it's like, oh, recession's coming, recession's coming. Right. This is the hard landing scenario we were just talking about.
SPEAKER_06: Exactly. But Louise always interpreted the signs from the economic universe a little bit
SPEAKER_05: differently. She saw the possibility of something else, a soft landing where the Fed brings down inflation without causing high unemployment or a recession.
SPEAKER_07: So growth slows, never goes negative. The unemployment rate either doesn't increase or increases just a little. That's like what we want. That would be fantastic. The ideal. That's the perfect ideal.
SPEAKER_05: This is like the holy grail of monetary policy. And a lot of people are now thinking this might be possible. Louise is one of them. She says, just look at what's been happening this past year.
SPEAKER_07: Inflation has been coming down. All the conditions seem better. Less inflation, more resilient economy and continued low unemployment rate, even while prices are coming down. So all those things look pretty good.
SPEAKER_05: It seems like we almost got this inflation reduction kind of for free.
SPEAKER_07: That's right. Some people call it the immaculate disinflation.
SPEAKER_06: Yeah, I mean, inflation came way down and it came down really quickly.
SPEAKER_05: Louise says this immaculate disinflation looks like the result of a lot of one off things just working their way out of the system. Things like, you know, those supply chain disruptions or the government stimulus checks. And because inflation went down so quickly, Louise thinks the Fed can finish the job without triggering a recession or high unemployment. And one major reason why she thinks this soft landing is possible has to do with this really important economic idea that a large part of what drives inflation is people's expectations.
SPEAKER_07: Exactly. And when people all expect inflation to be higher, it is higher. That's the story. Inflation expectations in the end determine inflation.
SPEAKER_06: Right. This is why economists will talk about inflation as a kind of self-fulfilling prophecy. Right. If if people start expecting prices to go up, prices will in fact go up. But Louise says in this case, inflation was mostly transitory and came down really quickly, which was great news for the Fed, because one of the biggest obstacles to a soft landing is when people start to expect inflation to remain high.
SPEAKER_07: Because the longer inflation stays elevated, the more you worry that it's going to become part of expectations. It's going to stick around. And it's going to stick around. And so if prices start to come down, that's just easier to believe that inflation expectations are not going to get stuck at a higher level.
SPEAKER_06: OK. So as long as we all still believe as hard as we can that inflation is going to come down, then inflation will actually come down.
SPEAKER_05: That's the idea. And Louise wants to be clear. She doesn't think a soft landing is inevitable. It's still a pretty tricky thing to pull off. But so far, according to data from the New York Fed, people's long term expectations for inflation, they're back down to where they were before all this inflation started. And so Louise thinks more likely than not, we are headed for this soft landing.
SPEAKER_06: It's a pretty good scenario. Like the pilot does a nice job landing the plane.
SPEAKER_05: OK. But Keith, in this analogy, is the pilot the Fed or is it all of us because of our beliefs or expectations? You're overthinking. You're overthinking.
SPEAKER_06: Here's the thing, though, Jeff. There is a scenario where there is no bad, scary hard landing and no nice, gentle landing where everybody claps. There is also this scenario where the inflation plane does not land at all.
SPEAKER_05: Oh, no, no, no, no, Keith, I don't like this one at all. Like the plane doesn't land. It just flies forever.
SPEAKER_06: I mean, it doesn't fly on forever. It's sort of one of those scenarios where the pilot comes into land and it's too foggy and they're like, just go. Like keep going to Denver and fly there. So it's going to land. But somewhere else and in the future. OK, so that no landing scenario. In economic terms, it basically means the Fed doesn't get inflation to come down at all for a while, or at least not all the way down to the 2 percent target.
SPEAKER_05: So, Keith, I assume that this is the part where you bring on an economic expert who thinks that this no landing thing is where we're all headed. Jeff, your prediction is correct.
SPEAKER_03: Yeah, I think there's more than a 50 percent chance that we're in the no landing scenario.
SPEAKER_06: This is Jason Furman, current Econ professor at Harvard, former chair of the Council of Economic Advisors during Obama's second term, which, by the way, he says was not super helpful in training him to think about the current economic moment.
SPEAKER_03: Frankly, I learn more about inflation in grad school than I did in government because we didn't deal with any inflation when I was in government.
SPEAKER_06: So if a hard landing scenario happens because the Fed is too aggressive raising rates, the no landing scenario happens because the Fed isn't aggressive enough. And Jason thinks all the rate hikes up till now still will not be enough to get inflation down to 2 percent, at least not right away. At some point, I agree, there will either be a hard landing or a soft landing, but if that happens four years from now, I don't think the people who currently are talking about either of those scenarios will be particularly vindicated.
SPEAKER_05: Okay, so Jason still thinks there will be a landing, just not anytime soon.
SPEAKER_06: Yeah, Jason thinks we're like two, three years out from that kind of real landing for the economy. And he's got a few reasons for this. For one thing, unlike the hard landing delayed effects camp, Jason thinks the economy has already adjusted as much as it's going to to the big hikes the Fed has already made to interest rates.
SPEAKER_03: How does the Fed affect the economy? It raises mortgage rates. Well, most of those were increased a year ago. How it lowers the stock market. Most of that happened a year ago. In fact, it's been rising since then. The Fed strengthens the dollar, which makes it harder for exporters. Well, guess what? The dollar strengthening was a year ago. Since then, if anything, it's weakened. So if you look at the different channels by which monetary policy affects the economy, almost all of them maxed out in maybe even June of 2022.
SPEAKER_06: And for anyone who is too ready to predict a soft landing, Jason says you might want to be careful. The whole argument that this inflation was mostly transitory, that can work in both directions. It's not just bad news that can be transitory.
SPEAKER_03: Some of the inflation news we're seeing is transitory good news. Oil prices aren't going to always fall as much as oil prices have fallen over the last year. And so, yeah, we're getting some good news right now, but don't expect that good news each and every month forever. But the biggest reason why Jason thinks inflation will stay high is just that in his view, the Fed seems to have underestimated the power of inertia.
SPEAKER_06: Inertia.
SPEAKER_05: Okay, like Isaac Newton, an object in motion tends to stay in motion. In this case, it's the next bit, like the object at rest tending to stay at rest.
SPEAKER_06: But yes. So part of it is that historically, you can look at inflation as an autoregressive process.
SPEAKER_03: You know, today's inflation is a function of yesterday's inflation and the day before is inflation. And that process has a very high degree of persistence. There's a lot of carryover, whatever the inflation rate was yesterday, to what the inflation rate is today. And even if you snapped your fingers and changed everyone's expectations about what's going to happen to inflation,
SPEAKER_06: Jason says there would still be all these drags on inflation that would keep it from coming down right away. Maybe a company sets its prices at the beginning of the year, and it isn't going to change them again until next year. Or maybe workers negotiated a new contract with their employer and they're not going to have a chance to renegotiate it until way in the future. Jason says you can see this inertia, this drag, by not just looking at one measure of inflation, but by looking at a whole bunch of them at the same time. I've come up with something that I call the ecumenical underlying inflation.
SPEAKER_03: And what I do is I take seven different ways of measuring inflation over three different time periods. So that's 21 numbers in total. And then I report what the median of those 21 numbers is. So I just I'm going to repeat back what I'm hearing, which is that the former chief economist to the president of the United States
SPEAKER_06: takes all the inflation numbers, lines them up, and chooses the one in the middle as the best prognosticating tool. Is that that's the gist? I try to, yes.
SPEAKER_03: If I have to pick one number, that's the one number I pick.
SPEAKER_06: At the moment, that median measure of ecumenical underlying inflation, 3.4 percent, which to Ferman indicates that there is not going to be a landing anytime soon. He thinks inflation is going to stay high. So this plane, this economy plane, we're just staying in the air, heading on to Denver.
SPEAKER_06: The economy is going to Denver, according to Jason Ferman. Yeah. So all right. So three very smart economists, three very different answers about what is going to happen with the economy. OK. But Keith, I seem to remember that we have one more person to consult.
SPEAKER_05: We do. Miko, the tarot card reader. She's after the break.
SPEAKER_05: The universe will finally speak.
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SPEAKER_00: Hi, this is Daniel Alarcon, host of NPR Spanish language podcast Radio Ambulante. Our new season features surprising stories from Latin America. In Mexico, a sculptor confounds archaeologists with brand new antiquities. In Costa Rica, gentrification sparks a war in defense of endangered turtles. In Colombia, a journalist's military I.D. is issued inexplicably with the photo of Cristiano Ronaldo. New stories every Tuesday, wherever you get your podcasts.
SPEAKER_06: OK, Sarah, Jeff, welcome back. Hey, Keith. I actually never left. Been here the whole time.
SPEAKER_09: So we asked each of our economists to come up with their own tarot card that kind of symbolizes what they think is going to happen with the economy.
SPEAKER_06: And our plan was to add them to Miko, the tarot card reader's deck. So I drew these myself. So apologies for the art. But so these three economists each came up with their own tarot card for sort of what they looked at to help them predict the economy. We have one card that will, for this purpose, represent hard landing. It's a bunch of unemployed workers lined up outside a factory. We have one for soft landing. We drew it up as a seesaw with everything perfectly in balance. And we have a card for no landing, which is all these inflation measures arranged in a circle.
SPEAKER_08: When I look at these cards, which is really, really cool, they actually remind me of some of the tarot cards.
SPEAKER_06: How so?
SPEAKER_08: So I would say your seesaw reminds me of the Two of Pentacles.
SPEAKER_06: Two circles with stars inside, held in balance by a woman dancing.
SPEAKER_08: Your job growth reminds me of the Nine of Wands.
SPEAKER_09: Oh, so she basically already had cards that we asked economists to design, like she basically already had a version of them in her deck before we even gave them to her.
SPEAKER_06: That is why you hire a professional. And when she dealt out her cards for our reading, the Nine of Wands, the job one, that was in there, in the midst of this whole bunch of scary cards.
SPEAKER_08: Um, so the beginning part of the year is going to look like a hot mess.
SPEAKER_06: So the reading wasn't great.
SPEAKER_08: Um, I would say, look for more unemployment. Sorry, guys, there's some of you that will probably not be working the same job that you're working last year.
SPEAKER_06: Wow.
SPEAKER_08: But I think towards the end of the year, you're going to see more growth and more opportunities, more jobs, more different things opening up.
SPEAKER_06: It sounds kind of like to me, or how I understand what you're saying that things are gonna get kind of bad for a little bit. But then eventually, like turn around, which is in some ways like that's a hard landing. Yeah, that's kind of like where I see it.
SPEAKER_08: It's gonna be a little bit of a hard landing because things are changing a great deal. But sometimes when you're stuck in a rut, and you've been doing things for a very long time, you're scared to make a move. And that's usually when the universe gives you a hard landing and makes you do it anyway.
SPEAKER_06: So four people looked at what the cards hold for the economic future. One person saw a soft landing, one person saw no landing, and two people saw a hard landing.
SPEAKER_09: Emerson put it out into the universe. Soft landing. We just have to believe hard enough, right?
SPEAKER_05: It's already been written in the cards.
SPEAKER_06: This episode was produced by Sam Yellow Horse Kessler and edited by Jess Zhang. It was fact-checked by Sierra Juarez and engineered by Quazie Lee with help from Maggie Luthar. Alex Goldmark is our executive producer. I'm Keith Romer.
SPEAKER_09: I'm Sarah Gonzalez.
SPEAKER_05: And I'm Jeff Guo. This is NPR. Thanks for listening.
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