Inflation Reaches 'Inflection Point'; Fed Rate Hikes Could Return In 2026 Warns Economist
Summary
Market Outlook: No recession expected but growth moderating, with renewed inflation risks and a bond market signaling concern about future price pressures.
Information Technology: High-tech segments are favored, with investment in AI-related infrastructure and semiconductors expected to continue performing.
Clean Energy: Positive view on renewables as EV adoption and data-center power needs drive demand, with companies seeking to avoid reliance on fossil fuels.
Data Centers: Ongoing build-out remains a tailwind due to energy-intensive operations and AI workloads, implying continued capital deployment and infrastructure demand.
Health Care: Bullish long-term view driven by aging demographics and rising personal consumption on medical services, viewed as durable winners.
Labor & Consumer: Labor market remains balanced but softer beneath the surface; real wages still outpacing inflation, though pressures differ across income tiers.
Companies & Risks: Amazon (AMZN) layoffs cited as part of isolated tech adjustments; watch auto delinquencies, housing affordability, and tariff uncertainty as key risks.
Transcript
The bottom has not fallen out from under the labor market. Whenever that gap widens, it starts to flash warning bells for me. We certainly don't see a recession coming. Recessions can trigger that panic, right? Trigger that sell-off. I I do not think we are headed for a recession. However, I do think we're headed for a slower pace of growth. The bond market's taking a very clear view that inflation is worrisome, that we we should be concerned about future inflation coming into the mix. Um, and that's why I don't think the consumer is necessarily enjoying the benefit of each cut that the Fed makes. >> I'm pleased to welcome to the show Lauren Sidal Baker. She is the economist at ITR Economics. We'll be going over the Fed's next move, what's after the FOMC announcement this week. We'll be going over what's next for inflation, the job market, and uh, equity sectors. Welcome to the show, Lauren. Good to see you. Thank you for being here. >> Thanks. Great to be here. >> I want to start by going over some highlights from yesterday's uh, FOMC press conference. We're speaking today on the 30th of October. Uh take a listen to uh this clip to start off with. This is of a reporter asking Powell, Chair Powell, why they made the decision to cut with inflation where it is. Take a listen. We'll respond together. >> The rationale for cutting interest rates even as inflation moves away from the 2% target seems to be, you know, that there are these mounting downside risks to the labor market. But if those don't materialize and the labor market either stabilizes around current employment levels or even starts to strengthen somewhat, how would that change your perception of how much interest rates need to fall from here? Would you then be a bit more concerned about underlying inflation and the possibility of second round effects from tariffs? >> Yeah. I mean, in principle, if if you were to see data that suggested the labor market strengthening or even that it's stabilizing, you know, that would certainly play into our decisions going forward. So, and we do have, you know, we get some data. The labor market is a place where we get for example we get the state level data on initial claims which which are sending a sort of a signal of more of the same. We also get you job openings um and we'll get lots of survey data. We'll get the beige book and things like that. So we'll have a we'll have a picture of what's going on in the labor market and you know the fact that we're not seeing an uptick in claims or a down tick really in openings um suggests that you're seeing maybe maybe continued very gradual cooling but nothing more than that. So that does give you some comfort. >> Okay, let's stop there. It is it is top of mind for everybody. Why are rates coming down when inflation's at 3%? A couple years ago, uh they probably would have said this is too far from the 2% target and um and here we are. Why is this happening? >> Yes. Uh you know, and it's funny because there is a lot of u movement beneath the surface. If we just take the kind of consensus from the FOMC that is going in one direction, but we're starting to get and even in this most recent decision this week, we got one descent to the downside, one to the upside. Someone said we should have cut more and someone else said we should not have cut at all. So I think it's a very precarious balancing act really between the labor and the inflation side of things. Inflation had been making gains right our CPI peaked around 9% this cycle that is a big number that was really um you know uncomfortable and so I think it's only by way of where we are coming from the fact that we are in this general disinflationary environment. Yes, inflation's starting to rear its head again. That's something that we at ITR are concerned is coming back in greater force than I think maybe the Fed is worried about. Um, personally, I have greater concern, but it's just that pesky labor market weakness that things don't feel good right now, right? We see this in every sentiment survey. Um, we see this in some of those softer data points uh with regards to like how long someone is out of work if they do lose their job. We don't see a full movement in things like the unemployment rate. Um, the big ones here are just things like the jobs reports, right? There were such severe revisions that Trump even fired the head of your Bureau of Labor Statistics. These were big, big numbers, but I was reading uh just this last week there was a new report that came out from the Dallas Fed um about if the monthly break even requirement they estimated that the peak break even requirement had been 250,000 jobs in 2023. They said now it's about 30,000 jobs just due to immigration. So, I'm not sure if the Fed is really accounting for a lot of these other offsetting forces, the fact that we will have negative net migration this year and what that means to certainly the monthly jobs break even. So, how I'm trying to cut through that noise is I don't look at the jobs report. Well, I do, but I don't hang my hat on those numbers. Um, I'm looking at the balance uh between unemployed workers and job seekers. We have that ratio between um like how many people are there out there for these available jobs. Back in 2022 3 time frame that was a 2:1 ratio. There were two jobs out there posted for every single unemployed worker. Today it's about a 1:1 ratio which sounds like balance but if you look back historically a normal labor market where we spend much more time is with that ratio above one. That is multiple job seekers out there for every available position. So I still think our labor market is in balance. It's just that we're coming from such an incredibly tight starting point that it's easy to see the momentum, to see the direction and lose the levels. >> Jerome Powell did say that unemployment at 4.3% is his, in his words, historically low, very low. And he does kind of have a point there. If you ignore the anomaly that was the pandemic, uh it is far below what the average was between 2008 and 2019. Now uh it is rising this trend but how would you describe the labor market to let's say a layman uh who maybe not a professional economist or investor. I know that you said we feel that there are soft spots appearing in the labor market. Um but definitively what would you look at to make the conclusion that the labor market is weakening especially since you said earlier we don't have the data right now. The government's in shutdown. That's the hard part, right? Without government data, which is our gold standard. Uh that's what we're looking for to get this evidence. But as Powell mentioned, we do have private data sources. We do have other even just proxy indicators. So we can tell maybe not exactly pinpoint where we are with full precision, but we have a general sense. The bottom has not fallen out from under the labor market. Now, with regard to jobs, that's a really hard thing to take out of the data and bring it into the real world just because I mean jobs are emotional, right? If you lose your job, you feel terrible even if that's not the aggregate. Um, as an economist, all I can do is point to the median worker, right? The average consumer out there. Um, so what's happening within our labor market right now, it's just movement beneath that surface. Yes. Overall unemployment is still relatively low, right? Overall, that work seekers to job openings ratio is about imbalance. But if you are maybe a laid-off federal worker who there are very limited roles to go into, so maybe you will be out of work for longer. That feels terrible. But on the other hand, we also have a lot of very niche um skill sets that are in such high demand and we do not have the population here um to to fill. So, every time I do a lot of one-on-one consulting work with uh frequently manufacturers, every single time they tell me if I could just hire a CNC machine operator, I would be the happiest person you can imagine because that is a specific skill set. Maybe there needs to be some reskilling into these high demand needs. And I really worry, I'm going to come back to immigration again because that is something that I'm concerned about for key sectors like agriculture, like construction that have a a disproportionate reliance on those undocumented workers. When we do see net outflows this year, um people choosing not to be in this country anymore, those sectors could be very hard hit on just labor availability. >> Okay, Lauren, let's go back to uh what you said earlier about uh inflation. Now with inflation at 3%. Uh I think the assumption that the Fed is making here is that this cut, this 25 basis point cut that we see this week is not going to significantly add to liquidity such that inflation will start going out of control. Is that a fair assumption to make? >> Yes, I completely agree. Um this 25 basis points, this is a drop in the bucket. Um again, that bucket is full for other reasons. I I'm not just talking tariffs here. I don't think we've seen the full impact of tariffs on inflation quite yet, but we have a lot of very fundamental drivers for inflation in terms of just money supply, liquidity measures out there, the wage pressures that are cycling through on on producer prices. There are very very clear fundamental drivers that will cause inflation. I think this is our inflection point, the the resurgence of inflation yet to come. So, will this 25 basis points make or break us? No, not at all. But when you add them to, you know, another 100 plus basis points of cuts that have already occurred and going forward, what that path looks like from here, if some of the more doubbish voices do have their say in the Fed and we we see continued cuts this year and into 2026, that's when we could start to be adding a little bit more fuel to the fire. But nope, I I do completely agree this is not the point that will make or break us. And so many of those other factors, they are pervasive. they are already in the pipeline of what's coming down into pricing pressures going forward. >> Should the average consumer be more worried about rising inflation right now or rising unemployment or neither? Perhaps the economy is just fine. [laughter] >> I hope the average consumer isn't staying up worrying about these things. Um but you know at at this point if we talk about interest rates to the consumer I I know cuts sound good, right? That means my consumer debt, my mortgage rate, right? those things get cheaper, the cost to borrow gets cheaper. We're not seeing necessarily a onetoone pass through at the moment on those measures. That is the cuts in the target rate, those are not necessarily mirrored by things like bank lending, right? Mortgage rates are not coming down to the same degree. Even our government long-term government bond yields are not moving in lock step with the target rate. So right now the bond market's taking a very clear view that inflation is worrisome that we we should be concerned about future inflation coming into the mix. Um and that's why I don't think the consumer is necessarily enjoying the benefit right of each step down each cut that the Fed makes. Overall um I every consumer is different right everyone has their own individual inflation rate. with inflation being just so top of mind for so many people, I think that is to my mind the more pressing concern for most. But if you're in that group that you know has been facing layoffs, right, or or has been um having trouble finding a new job after a job loss, obviously that's going to feel weighted to you. >> I'd like to ask you about wages. Now, we brought up wages earlier. This is the Orlando Fed's wage growth tracker. It's a measure of the nominal wage growth, not real wage growth. It's been coming down ever since its highs in the in in in mid 2022. And I think people are just wondering when this number will get back, if it ever will, and what's been driving this decline. >> Yeah. So, it is declining, but you'll note it's also higher than that, you know, precoid uh kind of norm. So, wages really, this just speaks to me to labor availability. We had that pinch postcoid when everything was spooling back up. There was so much demand. our producers, right? Our our service providers, no one could keep pace with demand. It was a very fraught growth cycle. And that's when you remember everywhere I looked, every time I drove down the road, there are big banners outside of buildings. Now, hiring this amount of hourly wage, right? This amount of signon bonus. That was the tightest competition for workers. And the easy way if you're competing for workers is just to do it with dollars, right? everyone can have a good work culture and healthy work life balance but at the end of the day we are looking out for that salary for that wage number. So that's why we saw this this rise so quickly going forward wage um excuse me labor availability it it's not plentiful quite yet. There are some long-term demographic reasons for that in addition to the immigration that I was talking about. So I think that's keeping the pressure up on wage growth. Um folks are still uh you know in demand. Maybe you don't have your pick of jobs as you did a couple years ago. But these companies, they still want to retain their top performers. They know it costs money to do that. Especially when prices are up across the board. So these same employees, they're also consumers going out there, going to the grocery store, seeing what a dozen eggs cost these days. They know those cost of living adjustments have to be a little bit higher today maybe than they were 5 10 years ago. So at I know you're showing uh nominal wage growth here, but if we offset this with inflation, wages are still rising at a faster pace than inflation. That means net net our consumer is actually better off today than they ever have been. They're still moving in that positive direction. I'm personally not going to get worried about the US consumer until that balance switches, right? That we are uh not more than making up this inflation. >> Well, you see headlines like this and you start getting worried. Amazon laying off 14,000 jobs. This is on top of the other jobs they've already laid off previously in the month. So I think 30,000 in total in last month. They're just one of the big companies announcing layoffs this month, Lauren. And people are wondering if this is the beginning of a bigger trend. Are you seeing any signs of that? >> At least thus far, most of these trends seem to be isolated. Right. We we can talk about tech sector layoffs, but sure, man, did the tech sector really overhire at the peak, right? Was there some overhead that just wasn't fundamentally justified? So then we move on to well we've also seen huge layoffs from the federal government that is for very political reasons not economic fundamentals there. Um so I I I think it it's hard when things are coming from so many different directions to keep in mind I I don't see this as like a major recessionary trend um in terms of job layoffs. We don't see any of our um you know kind of crisis-like spikes happening this time around. But it's also not humming along so merrily as we were in say uh 2022 or three. the uh let's talk about government shutdown itself. Any long-term impact on either the labor market or consumer demand overall? How how mean how significant is uh the shutdown on the economy itself? I'm not just talking about lack of data which economists [laughter] like yourself use, you know, I'm talking about for the for the average person, does it affect them? >> Yeah, you know, we get frustrated as economists. I'm only as good as the data I can get. But no, put taking myself out of the mix for a minute. Um, this has been one of the longer government shutdowns that we've seen. So, I I am not I would say I'm not worried. Right. At first, it's just political noise. Maybe some demand is delayed, but it will still happen once things start back up again. The longer the shutdown goes on, the more we could really see these effects um multiply on top of each other. I think we're getting to that territory right now. So, again, government spending is a major portion of GDP. It's a a significant wedge of that pie. Consumer demand is about 2/3. So it's not the overwhelming majority, but it is contributing something here to just growth for our our economy in general. If these do become more permanent cuts, right? Again, even like the Doge cuts earlier this year, that wasn't enough to change the course to change the direction that things were happening. But something like a government shutdown, we push out, we push out, and those effects, I think, do multiply over time. At the moment, um, this is not enough to send us into a recession, but depending on how long this goes on, that's when I'm going to have to start to scale up the impact to our forecast. >> Interesting. Let's follow up on that later. Uh, Trump and Xi Jinping from China are meeting uh or have met this week in South Korea. Trump rated this meeting 12 out of 10. Uh, some uh some concessions have been made on both sides. Importantly on the US side, Trump has uh agreed to lower what's called the fentanel tariff on Chinese goods entering the US from 20 to 10%. Uh China has agreed to lift a few blockades on road uh sorry rare earth minads. Uh so rare earth minerals as you know have been um banned certain certain rare earths have been banned for export and now I think they're uh making some concessions there. overall does this uh you know did we make any significant progress here or is this just back to square one um you know the the the 100% tariff on China was supposed to be placed 2 days later on November 1st I guess that's not happening anymore so I guess that's good news but you know then again are we just treading water here or is this progress from earlier in the year as well >> sure well it's certainly progress from the I forget the exact number but how high tariffs had been on China Um again there was more of a delaying impact. So we saw that 100 plus% tariff on China there were no containers ships at one point one day this spring zero container ships flowing from China to the US. That is huge right when is the last time that has been the case. However once the tariff went back down to I think it was 30% immediately in the wake of that. Um that's when the floodgates opened everything we had just been waiting to ship in. We then started to see it move. So, a lot of this tariff negotiations, it's been like two steps forward, one step back. Eventually, wherever these levels level out, um, sorry to be repetitive, but but whatever percent tariff we have on Chinese goods, that will add cost, I don't think that's going to be enough to completely change trade relationships, given that these trade relationships have already been occurring. Europe is now by far our top trading partner. Really, so much more than China. even um Mexico and Canada, we import more from each of those nations than we do from China. So there has been a shift in the past several years on that USChina trade. It's not just tariffs that started this trend. There are other very fundamental reasons to be either buying from other countries or just doing it here, right? We see a lot of near sourcing reonshoring happening in the US. That is a trend that was pre-existing tariffs. So, wherever the exact number falls out, you know, maybe this keeps things competitive. It doesn't have that immediate um, you know, take China completely off the table effect. Uh, but again, as long as these tariffs are going back and forth, up and down, we're not fully settled. The hindrance is that means businesses can't plan for exactly what the cost will be. And I think the other side of that is whenever things go back and forth, if I am a producer, right, looking to bring my production back to the US from China, am I necessarily going to make that move knowing that today's tariff level might not be in place for even a couple of months? Certainly, we don't have visibility beyond the end of this presidency. And if I was looking to reonshore, right, to build a new manufacturing facility here, that probably takes more than the three years left in Trump's term. So I think the overall impacts um it makes good headlines. Does it actually change the underlying trends? Maybe a little bit less. So >> the um other thing that China announced is that they would resume buying US soybeans. Previously they said they would buy it from Brazil uh to bypass US trade tariffs. Um Brazil is now shrugging off the US China deal is something called seasonal trade according to what they're saying. So I I I wonder if this the trade deals that have been made so far up until today or this week have done permanent damage to US industry. In other words, have Chinese companies in Chinese industries looked at other sources for their supply and permanently shifted their supply source? In other words, is this concession this week from Trump a little bit too late? again uh that shift had already been taking place um before recent months and quarters. So China uh in terms of an importer of US goods that has never been such a major piece of the puzzle for us. Again here Europe is far and away the leader in destinations for US exports. Um Canada, Mexico, uh many others do surpass China. So the soybeans that's going to be a nice boost for US farmers. They've been facing some trouble for other reasons. If you look at, you know, farm incomes and um just crop prices right now, it's really adding insult to injury of the past couple of years of very severe weather swings which have caused some crop uh shortages and and some growing season issues. So, I think that's a nice little boost for them to get the the soybeans back out to China. But overall, there are I think much more um pervasive fundamental issues for our trade relationships. So overall then I know it's unpredictable uh Trump would announce 100% tariff one day and then couple weeks later uh be best friends with Xi Jinping. So we don't know what's going to happen. But I think the overall trend from earlier in the year is that every time we've had an escalation seem it seems to have deescalated shortly after in most cases not all. Would you agree with this trend? And so as an investor, let's say making a longer term play, is this something that we need to take account, take into account or maybe just ignore because clearly the markets have ignored noise recently. >> Absolutely. I mean, Trump is a negotiator. He says that himself, right? He will push too far so that he has somewhere to come back. And I think that has proven true time and time again in these especially trade negotiations, but in many other policy issues. Now, for a business, I'm not saying you should completely ignore it, right? Maybe there are some timing quirks that you can do. Delay the shipments till we're at the better trade uh environment. We saw this in the first quarter of this year. There was a major dip in GDP just because so many companies front ran all of those tariffs. They knew they were coming. They got their goods through the US border before the tariffs hit. Uh we can quantify that impact in terms of uh what the first half GDP did. So at the end of the day for a business um it's important to know it's important to be a little bit tactical for but if you're really making your plans I think a much more important trend is going to be just looking at what are my key leading indicators. That's what we do here with our consulting work at ITR. We're finding what correlates to your business. Maybe it's some of these overall production or trade indicators but more likely there are other things happening. we can get that hard data and find some kind of leading relationship. Um, and and that will give you better planning ability because you'll have the foresight. >> Okay. Uh, let's talk about the markets itself. I'm going to pull up a chart of the S&P 500 versus the Fed funds rate. Uh, the relationship between when the Fed cuts and where the S&P was. When it cut is kind of inconsistent. So, here we are now. um in 2019 uh when uh when the Fed cut rates uh the S&P was at a then high and then a year later it went higher. So So there's one example of uh when the Fed cuts at an all-time high. It tends to have gone higher a year later. That was not the case in 2007 and 2008 as you know uh for different reasons. In 2000 they cut uh during the tech bubble burst that also did not apply. So, it seems to be that unless there was some sort of economic crisis or major market uh correction or reversion to the mean, um if the Fed does cut during a market high, the market tends to go higher a year later, can we apply the same pattern to now? [laughter] >> Um, as an economist, I don't enjoy being wrong. So, that's why I do not forecast stock prices. I will not give you an outlook for the S&P. But you know I can say these cases uh clearly there were different fundamental drivers for sure 2000208 right we had the real um kind of fundamental d driver versus co that came in at us from left field that was a non-economic event so I think that's why there's a big difference in the trend >> what uh macro trends have been most consistent I would say in in >> correlating with the markets >> uh so we're looking here at things like profitability um I just want to know how much dry powder those businesses have. Now, unfortunately, that's becoming a little bit less correlated. That does worry me when we don't have that fundamental backing, the reason that equities prices are as high as they are. Um, I want to see it backed up by something like corporate profits. Um, at this point, you know, it's it seems like there's still some fire left in the market in this rally. I this is not investment advice. It just seems like um we are not seeing the bottom fallout from any of those indicators that would be supportive. But again, I I don't like to see that divergence. Whenever that gap widens, it starts to flash warning bells for me. >> How about actual economic growth like GDP? Does that have any correlation whatsoever with the markets? It's a debated term in academia, I'm sure. Uh I'll just pull up the Atlanta Fed GDP now tracker. I'll leave it here. So, they're estimating um high threes for the next quarter. So, uh, you know, anyway, what's your take on GDP versus the markets? >> Sure. Well, it should be, right? That would make sense. That would make us happy as economists. Um, our personal view here at ITR economics for, uh, GDP, we're looking for 2.5% growth this year, um, and about 2.1% for each of the next two years. So, we certainly don't see a recession coming. Recessions can trigger that panic, right? Trigger that selloff. I I do not think we are headed for a recession. However, I do think we're headed for a slower pace of growth. This is not the bounceback postcoid that we all enjoy. That's the last real accelerating growth trend that most of us have in our short-term memory. So, I'm looking for something a little bit more subdued, kind of taking momentum, more time to build up this time around. I think businesses are going to feel that and I'm already feeling them contend with it where it's tough to say, you know, growth is pretty moderate and and just nothing to write home about. That's not a comfortable place to be when our problem has been. There's so much demand out there and we just can't keep up with it. Is consumer sentiment a leading indicator for profitability? Here we have, for example, uh released this week, US consumer confidence slipped a six-month low according to the conference board survey on Tuesday. Uh economists describe a K-shaped recovery, confidence declining among consumers making an annual income of less than 75,000, but consumers earning more than 200,000 or more are more upbeat. Um tell us about consumer sentiment and confidence right now. >> Sure. I'm I'm going to take that two different ways. First of all, sentiment overall is a notoriously terrible leading indicator. It does not correlate with retail sales. Actually, the um only things it tends to correlate with more are those big ticket purchases like autos for example. Um but it it is not giving us uh any real evidence. We are not basing say our retail sales or GDP forecast on how consumers say they feel. However, I do think there's some truth here to the K-shaped movement um at the upper end. I mean, these higher income earners, those who still have jobs, who have probably own their home, they bought it for a lower price and locked in that low interest rate, they're sitting on a, you know, capital appreciation there. Um, they've probably more often than not been invested in this equity rally. So, they're, I'm sure, enjoying where their portfolio has been moving. On the other hand, lower income earners, they naturally get hit by higher inflation, right? They have a larger share of their income going to those non-discretionary items. They also tend to buy more imported goods. You know, that makes sense to me. We import things that are cheaper and so those if you're trying to make the budget stretch further, maybe you are buying just the cheapest good. So tariffs will hit them harder just due to the fact that there's a tax on imported goods now. So it doesn't surprise me that things are moving in opposite directions. Um, again, I'm only as good as that median data point that we can point out, but we do have several uh between delinquency rates and uh other indicators showing that the there is increasing divergence between the the bottom and the upper end of the income spectrum. >> It says here in the article, lower inome households are struggling to make ends meet amid higher prices, including from Donald Trump's broad tariffs on imports. Can you just evaluate the validity of that statement? And if that's true, why aren't we seeing that being reflected in the broad CPI? Shouldn't it be much higher than 3%. [laughter] >> Uh so again, the biggest individual contributor to CPI is shelter cost. Um so we certainly it's tough again to to pull out, right? We have that owner's equivalent um bucket for those who own their home. Rent is a pretty big driver, right? And even today, if you are trying to buy a home for the first time, you're facing higher home costs. you're facing higher mortgage rates um in some cases very significantly higher than where you know those the existing [clears throat] homeowners have already locked in. So yes, if you're at that lower income, right, if you're a wouldbe first-time home buyer or a continued renter, you're going to feel that pinch a lot more. If you are just again um trying I I won't say to make ends meet, right? That's a very arbitrary term. Um we find that even upper income earners can live right at their means, right? If you just have a jumbo mortgage and a very expensive car payment, we'd still consider those necessary expenditures. You need a home, you need a car, but it gets a little bit murkier somewhere in the middle. But right now, one thing that I'm uh watching closely is the difference in consumer credit cards accounts who are only making the minimum payment monthtomonth on their card versus those paying the entire balance outstanding. What's really interesting is both of those shares are increasing. So at the upper end, more folks are paying off their whole credit card bill every month and more folks are only making the minimum payment, not some it's the partial payment in the middle that's kind of getting more and more narrow. So I think that's the best example I can give you of the ends expanding at the expense of that middle group. >> And do you see that gap narrowing if let's say the Fed cuts rates or continues to cut rates into 2026? Powell did say at the press conference when he was asked if the uh rate cuts affect people on the lower end of the distribution more than others and he said well the the rate cuts don't target their policies don't target any specific demographic of people but he's observed in the past that potentially rate cuts do affect those at the lower income distribution more than the higher ones and so if that's the case wouldn't you expect people to be better off next year Lauren Yeah. So it it will affect those who hold debt more, right? If you owe any amount um then interest rates will affect you more than if you are say more paid off, right? Or have more money. >> Sorry. Just on that note, do credit card rates follow the Fed funds rate? >> Not perfectly. Uh they generally move right in the same direction, but right now we are not seeing a onetoone pass through. We're also though not seeing a onetoone pass through on mortgage rates. So I I think this is a unique position where the bond market is taking a stance. Okay, let's talk about some sectors that you follow then given trade activity and um the seemingly deescalating situation of tariffs with China and the and the US now are you are you are you more bullish on the manufacturing sector or the um or uh or uh are there other sectors that you're following right now that you're semi more bullish on? >> Sure. So manufacturing overall um expect growth not outstanding growth right no nothing stellar for the sector overall within that though it's the legacy manufacturing that's kind of a lagard right now it is high-tech sectors that are doing a lot better that will continue to be the case our investment in AI and data centers um all of those you know high-tech semiconductor etc those segments are due to continue performing otherwise I I still like the you know kind of clean energy space electric vehicles still so much in demand and and we do not have the necessary energy capacity to keep pace with all of that green energy going into those green vehicles. Same thing with data centers. Um they are incredibly energy intensive and these companies don't want to be relying on fossil fuels. So I think there is still more movement in that space. Otherwise I really like medical that's a more of a longer term um theory with our aging population. We see even today personal consumption expenditures on medical services and medical care is at an all-time high and really only increasing from this point. So good long-term winners um even something less discretionary like food is is not a bad place to be. >> So consumer durables but maybe not very discretionary items you're looking at. >> Yes. Yep. I'm I'm a little bit less enthused about the auto space for example, >> right? Um even with rates coming down, Lauren. even with rates coming down um starting to get a little bit nervous about auto delinquencies. >> Has ITR looked at the housing sector and housing demand in light of slightly lower lower mortgage rates? >> Yeah. Uh we have and I think we need more housing. So the housing stock has not kept pace with new household formations. We've absolutely been underbuilding. We need more inventory right uh out there. But rates are still very high. If you talk about, you know, someone, well, when I bought my house, a 3% mortgage was quite normal. Now to look at five, six, six and a half% mortgage rates. Um, that makes a world of difference in terms of those monthly mortgage payments that we're not getting back down to that 3% level. So, I think there does need to be growth in housing starts. Um, but that affordability is still just a wet blanket that we've thrown over the growth rate. >> Why aren't we getting down to the 3% level, Lauren? >> Oh, I hope we don't need to. [laughter] Again, inflation coming back, I think, is going to be the thing that hamstrings the Fed the most. That's why we will see rate cuts stop when they eventually do. I think that limits how deep into next year we'll continue to see rate cuts. And at the end of the day, I think that is going to be the thing that gets us to start talking about rate increases on the other side of this cycle. >> So, let's close off on fixed income then. Uh 10-year Treasury yield has been coming down most of the year. Uh what is that trend? Is that following expectations for the Fed funds rate? know there's no direct relationship between the long end of the curve and the short end, but uh what's your take on fixed income for next year? >> Sure. Um so we we do have an outlook for uh say long-term government bond yields and again that's marrying our expectations for rates maybe to go down slightly more in the very near term but beyond that we're looking for rise not decline. I think over the longer term we've got some demographic issues that are going to keep yields quite well supported. Um so I I don't see significant decrease from this point. Does that mirror economic growth at all? The long end of the curve, >> yes and no. Again, I think our aging population is going to have some very real inflationary impacts in the next call it 5 years. Um, I think inflation is the big thing if you're just trying to take an interest rate stance. That is the warning sign that we will see. So, watch that that inflation data once we get it again. Um, that's going to be the the turn, right? Like I said earlier, the inflection point this cycle. How likely can we see uh the current uh Fed with the current Fed chair or even the next one when whenever uh the next Fed chair takes over um intervene in the markets and implement yield curve control again? >> Oh, I hope not. Um some of those more extraordinary um measures really are just taken during times of panic and I I hope we don't get a future crisis. You know, knock on wood because none of us saw COVID coming. That was a medical like a health event that was not from the underlying world of economics. But um I don't see a bomb waiting to go off in the economic world right now. >> But they could do it just to have the rates lower as the administration wants. Right. >> Yeah. I know I know the next Fed share will very likely be more doubbish than the current one. Um but uh most of the names floated I think are more on the um you know kind of I'm trying to find the right word [laughter] without being political but uh they're more in the kind of legacy mold. This is not someone coming in from left field. >> The mainstream media hasn't talked too much about the end of quantitative tightening and uh from my understanding uh that's going to end coming December. Correct. And so we're going to see the Fed continue to add or at least maintain the balance sheet size. >> Yeah. Um I think that was quite well signaled. I think the expectations are very much built in for that now. So I don't expect that to be a market moving event. Great. Thank you, Lauren. Appreciate your thoughts. Where can we go to follow you? >> Excellent. Uh, come find us at iteconomics.com. You can find us on all the usual social media. Um, at ITR Outlook is our, uh, sorry, X, I think it's called now. Um, but we are on everywhere you'd normally find us. Um, my favorite pick is on YouTube. We put out a lot of quick videos, just five to seven minutes that you can see what we're thinking about. Um, I put one out every Friday just talking about the Fed. So, if you haven't gotten enough Fed talk here, find us on Fed Watch. Um, but we are putting out blog posts and a lot of other information if you want to dig deeper. >> What's your favorite thing about being an economist? Do you ever like get people at dinner parties ask >> Yeah. Am I am [laughter] I am I uh well, what should I do with my investments? Do you ever get that? Does that get annoying? >> Oh gosh. >> All the time. But no, my favorite thing is that no two days are the same. Um I really [clears throat] It is a fun world and it's fun to make sense of it in this way. >> All right. Well, follow Lauren and ITR Economics in the links down below. Appreciate it, Lauren. Thanks for having uh thanks for coming on. >> My pleasure. >> And uh thank you for watching. 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Inflation Reaches 'Inflection Point'; Fed Rate Hikes Could Return In 2026 Warns Economist
Summary
Transcript
The bottom has not fallen out from under the labor market. Whenever that gap widens, it starts to flash warning bells for me. We certainly don't see a recession coming. Recessions can trigger that panic, right? Trigger that sell-off. I I do not think we are headed for a recession. However, I do think we're headed for a slower pace of growth. The bond market's taking a very clear view that inflation is worrisome, that we we should be concerned about future inflation coming into the mix. Um, and that's why I don't think the consumer is necessarily enjoying the benefit of each cut that the Fed makes. >> I'm pleased to welcome to the show Lauren Sidal Baker. She is the economist at ITR Economics. We'll be going over the Fed's next move, what's after the FOMC announcement this week. We'll be going over what's next for inflation, the job market, and uh, equity sectors. Welcome to the show, Lauren. Good to see you. Thank you for being here. >> Thanks. Great to be here. >> I want to start by going over some highlights from yesterday's uh, FOMC press conference. We're speaking today on the 30th of October. Uh take a listen to uh this clip to start off with. This is of a reporter asking Powell, Chair Powell, why they made the decision to cut with inflation where it is. Take a listen. We'll respond together. >> The rationale for cutting interest rates even as inflation moves away from the 2% target seems to be, you know, that there are these mounting downside risks to the labor market. But if those don't materialize and the labor market either stabilizes around current employment levels or even starts to strengthen somewhat, how would that change your perception of how much interest rates need to fall from here? Would you then be a bit more concerned about underlying inflation and the possibility of second round effects from tariffs? >> Yeah. I mean, in principle, if if you were to see data that suggested the labor market strengthening or even that it's stabilizing, you know, that would certainly play into our decisions going forward. So, and we do have, you know, we get some data. The labor market is a place where we get for example we get the state level data on initial claims which which are sending a sort of a signal of more of the same. We also get you job openings um and we'll get lots of survey data. We'll get the beige book and things like that. So we'll have a we'll have a picture of what's going on in the labor market and you know the fact that we're not seeing an uptick in claims or a down tick really in openings um suggests that you're seeing maybe maybe continued very gradual cooling but nothing more than that. So that does give you some comfort. >> Okay, let's stop there. It is it is top of mind for everybody. Why are rates coming down when inflation's at 3%? A couple years ago, uh they probably would have said this is too far from the 2% target and um and here we are. Why is this happening? >> Yes. Uh you know, and it's funny because there is a lot of u movement beneath the surface. If we just take the kind of consensus from the FOMC that is going in one direction, but we're starting to get and even in this most recent decision this week, we got one descent to the downside, one to the upside. Someone said we should have cut more and someone else said we should not have cut at all. So I think it's a very precarious balancing act really between the labor and the inflation side of things. Inflation had been making gains right our CPI peaked around 9% this cycle that is a big number that was really um you know uncomfortable and so I think it's only by way of where we are coming from the fact that we are in this general disinflationary environment. Yes, inflation's starting to rear its head again. That's something that we at ITR are concerned is coming back in greater force than I think maybe the Fed is worried about. Um, personally, I have greater concern, but it's just that pesky labor market weakness that things don't feel good right now, right? We see this in every sentiment survey. Um, we see this in some of those softer data points uh with regards to like how long someone is out of work if they do lose their job. We don't see a full movement in things like the unemployment rate. Um, the big ones here are just things like the jobs reports, right? There were such severe revisions that Trump even fired the head of your Bureau of Labor Statistics. These were big, big numbers, but I was reading uh just this last week there was a new report that came out from the Dallas Fed um about if the monthly break even requirement they estimated that the peak break even requirement had been 250,000 jobs in 2023. They said now it's about 30,000 jobs just due to immigration. So, I'm not sure if the Fed is really accounting for a lot of these other offsetting forces, the fact that we will have negative net migration this year and what that means to certainly the monthly jobs break even. So, how I'm trying to cut through that noise is I don't look at the jobs report. Well, I do, but I don't hang my hat on those numbers. Um, I'm looking at the balance uh between unemployed workers and job seekers. We have that ratio between um like how many people are there out there for these available jobs. Back in 2022 3 time frame that was a 2:1 ratio. There were two jobs out there posted for every single unemployed worker. Today it's about a 1:1 ratio which sounds like balance but if you look back historically a normal labor market where we spend much more time is with that ratio above one. That is multiple job seekers out there for every available position. So I still think our labor market is in balance. It's just that we're coming from such an incredibly tight starting point that it's easy to see the momentum, to see the direction and lose the levels. >> Jerome Powell did say that unemployment at 4.3% is his, in his words, historically low, very low. And he does kind of have a point there. If you ignore the anomaly that was the pandemic, uh it is far below what the average was between 2008 and 2019. Now uh it is rising this trend but how would you describe the labor market to let's say a layman uh who maybe not a professional economist or investor. I know that you said we feel that there are soft spots appearing in the labor market. Um but definitively what would you look at to make the conclusion that the labor market is weakening especially since you said earlier we don't have the data right now. The government's in shutdown. That's the hard part, right? Without government data, which is our gold standard. Uh that's what we're looking for to get this evidence. But as Powell mentioned, we do have private data sources. We do have other even just proxy indicators. So we can tell maybe not exactly pinpoint where we are with full precision, but we have a general sense. The bottom has not fallen out from under the labor market. Now, with regard to jobs, that's a really hard thing to take out of the data and bring it into the real world just because I mean jobs are emotional, right? If you lose your job, you feel terrible even if that's not the aggregate. Um, as an economist, all I can do is point to the median worker, right? The average consumer out there. Um, so what's happening within our labor market right now, it's just movement beneath that surface. Yes. Overall unemployment is still relatively low, right? Overall, that work seekers to job openings ratio is about imbalance. But if you are maybe a laid-off federal worker who there are very limited roles to go into, so maybe you will be out of work for longer. That feels terrible. But on the other hand, we also have a lot of very niche um skill sets that are in such high demand and we do not have the population here um to to fill. So, every time I do a lot of one-on-one consulting work with uh frequently manufacturers, every single time they tell me if I could just hire a CNC machine operator, I would be the happiest person you can imagine because that is a specific skill set. Maybe there needs to be some reskilling into these high demand needs. And I really worry, I'm going to come back to immigration again because that is something that I'm concerned about for key sectors like agriculture, like construction that have a a disproportionate reliance on those undocumented workers. When we do see net outflows this year, um people choosing not to be in this country anymore, those sectors could be very hard hit on just labor availability. >> Okay, Lauren, let's go back to uh what you said earlier about uh inflation. Now with inflation at 3%. Uh I think the assumption that the Fed is making here is that this cut, this 25 basis point cut that we see this week is not going to significantly add to liquidity such that inflation will start going out of control. Is that a fair assumption to make? >> Yes, I completely agree. Um this 25 basis points, this is a drop in the bucket. Um again, that bucket is full for other reasons. I I'm not just talking tariffs here. I don't think we've seen the full impact of tariffs on inflation quite yet, but we have a lot of very fundamental drivers for inflation in terms of just money supply, liquidity measures out there, the wage pressures that are cycling through on on producer prices. There are very very clear fundamental drivers that will cause inflation. I think this is our inflection point, the the resurgence of inflation yet to come. So, will this 25 basis points make or break us? No, not at all. But when you add them to, you know, another 100 plus basis points of cuts that have already occurred and going forward, what that path looks like from here, if some of the more doubbish voices do have their say in the Fed and we we see continued cuts this year and into 2026, that's when we could start to be adding a little bit more fuel to the fire. But nope, I I do completely agree this is not the point that will make or break us. And so many of those other factors, they are pervasive. they are already in the pipeline of what's coming down into pricing pressures going forward. >> Should the average consumer be more worried about rising inflation right now or rising unemployment or neither? Perhaps the economy is just fine. [laughter] >> I hope the average consumer isn't staying up worrying about these things. Um but you know at at this point if we talk about interest rates to the consumer I I know cuts sound good, right? That means my consumer debt, my mortgage rate, right? those things get cheaper, the cost to borrow gets cheaper. We're not seeing necessarily a onetoone pass through at the moment on those measures. That is the cuts in the target rate, those are not necessarily mirrored by things like bank lending, right? Mortgage rates are not coming down to the same degree. Even our government long-term government bond yields are not moving in lock step with the target rate. So right now the bond market's taking a very clear view that inflation is worrisome that we we should be concerned about future inflation coming into the mix. Um and that's why I don't think the consumer is necessarily enjoying the benefit right of each step down each cut that the Fed makes. Overall um I every consumer is different right everyone has their own individual inflation rate. with inflation being just so top of mind for so many people, I think that is to my mind the more pressing concern for most. But if you're in that group that you know has been facing layoffs, right, or or has been um having trouble finding a new job after a job loss, obviously that's going to feel weighted to you. >> I'd like to ask you about wages. Now, we brought up wages earlier. This is the Orlando Fed's wage growth tracker. It's a measure of the nominal wage growth, not real wage growth. It's been coming down ever since its highs in the in in in mid 2022. And I think people are just wondering when this number will get back, if it ever will, and what's been driving this decline. >> Yeah. So, it is declining, but you'll note it's also higher than that, you know, precoid uh kind of norm. So, wages really, this just speaks to me to labor availability. We had that pinch postcoid when everything was spooling back up. There was so much demand. our producers, right? Our our service providers, no one could keep pace with demand. It was a very fraught growth cycle. And that's when you remember everywhere I looked, every time I drove down the road, there are big banners outside of buildings. Now, hiring this amount of hourly wage, right? This amount of signon bonus. That was the tightest competition for workers. And the easy way if you're competing for workers is just to do it with dollars, right? everyone can have a good work culture and healthy work life balance but at the end of the day we are looking out for that salary for that wage number. So that's why we saw this this rise so quickly going forward wage um excuse me labor availability it it's not plentiful quite yet. There are some long-term demographic reasons for that in addition to the immigration that I was talking about. So I think that's keeping the pressure up on wage growth. Um folks are still uh you know in demand. Maybe you don't have your pick of jobs as you did a couple years ago. But these companies, they still want to retain their top performers. They know it costs money to do that. Especially when prices are up across the board. So these same employees, they're also consumers going out there, going to the grocery store, seeing what a dozen eggs cost these days. They know those cost of living adjustments have to be a little bit higher today maybe than they were 5 10 years ago. So at I know you're showing uh nominal wage growth here, but if we offset this with inflation, wages are still rising at a faster pace than inflation. That means net net our consumer is actually better off today than they ever have been. They're still moving in that positive direction. I'm personally not going to get worried about the US consumer until that balance switches, right? That we are uh not more than making up this inflation. >> Well, you see headlines like this and you start getting worried. Amazon laying off 14,000 jobs. This is on top of the other jobs they've already laid off previously in the month. So I think 30,000 in total in last month. They're just one of the big companies announcing layoffs this month, Lauren. And people are wondering if this is the beginning of a bigger trend. Are you seeing any signs of that? >> At least thus far, most of these trends seem to be isolated. Right. We we can talk about tech sector layoffs, but sure, man, did the tech sector really overhire at the peak, right? Was there some overhead that just wasn't fundamentally justified? So then we move on to well we've also seen huge layoffs from the federal government that is for very political reasons not economic fundamentals there. Um so I I I think it it's hard when things are coming from so many different directions to keep in mind I I don't see this as like a major recessionary trend um in terms of job layoffs. We don't see any of our um you know kind of crisis-like spikes happening this time around. But it's also not humming along so merrily as we were in say uh 2022 or three. the uh let's talk about government shutdown itself. Any long-term impact on either the labor market or consumer demand overall? How how mean how significant is uh the shutdown on the economy itself? I'm not just talking about lack of data which economists [laughter] like yourself use, you know, I'm talking about for the for the average person, does it affect them? >> Yeah, you know, we get frustrated as economists. I'm only as good as the data I can get. But no, put taking myself out of the mix for a minute. Um, this has been one of the longer government shutdowns that we've seen. So, I I am not I would say I'm not worried. Right. At first, it's just political noise. Maybe some demand is delayed, but it will still happen once things start back up again. The longer the shutdown goes on, the more we could really see these effects um multiply on top of each other. I think we're getting to that territory right now. So, again, government spending is a major portion of GDP. It's a a significant wedge of that pie. Consumer demand is about 2/3. So it's not the overwhelming majority, but it is contributing something here to just growth for our our economy in general. If these do become more permanent cuts, right? Again, even like the Doge cuts earlier this year, that wasn't enough to change the course to change the direction that things were happening. But something like a government shutdown, we push out, we push out, and those effects, I think, do multiply over time. At the moment, um, this is not enough to send us into a recession, but depending on how long this goes on, that's when I'm going to have to start to scale up the impact to our forecast. >> Interesting. Let's follow up on that later. Uh, Trump and Xi Jinping from China are meeting uh or have met this week in South Korea. Trump rated this meeting 12 out of 10. Uh, some uh some concessions have been made on both sides. Importantly on the US side, Trump has uh agreed to lower what's called the fentanel tariff on Chinese goods entering the US from 20 to 10%. Uh China has agreed to lift a few blockades on road uh sorry rare earth minads. Uh so rare earth minerals as you know have been um banned certain certain rare earths have been banned for export and now I think they're uh making some concessions there. overall does this uh you know did we make any significant progress here or is this just back to square one um you know the the the 100% tariff on China was supposed to be placed 2 days later on November 1st I guess that's not happening anymore so I guess that's good news but you know then again are we just treading water here or is this progress from earlier in the year as well >> sure well it's certainly progress from the I forget the exact number but how high tariffs had been on China Um again there was more of a delaying impact. So we saw that 100 plus% tariff on China there were no containers ships at one point one day this spring zero container ships flowing from China to the US. That is huge right when is the last time that has been the case. However once the tariff went back down to I think it was 30% immediately in the wake of that. Um that's when the floodgates opened everything we had just been waiting to ship in. We then started to see it move. So, a lot of this tariff negotiations, it's been like two steps forward, one step back. Eventually, wherever these levels level out, um, sorry to be repetitive, but but whatever percent tariff we have on Chinese goods, that will add cost, I don't think that's going to be enough to completely change trade relationships, given that these trade relationships have already been occurring. Europe is now by far our top trading partner. Really, so much more than China. even um Mexico and Canada, we import more from each of those nations than we do from China. So there has been a shift in the past several years on that USChina trade. It's not just tariffs that started this trend. There are other very fundamental reasons to be either buying from other countries or just doing it here, right? We see a lot of near sourcing reonshoring happening in the US. That is a trend that was pre-existing tariffs. So, wherever the exact number falls out, you know, maybe this keeps things competitive. It doesn't have that immediate um, you know, take China completely off the table effect. Uh, but again, as long as these tariffs are going back and forth, up and down, we're not fully settled. The hindrance is that means businesses can't plan for exactly what the cost will be. And I think the other side of that is whenever things go back and forth, if I am a producer, right, looking to bring my production back to the US from China, am I necessarily going to make that move knowing that today's tariff level might not be in place for even a couple of months? Certainly, we don't have visibility beyond the end of this presidency. And if I was looking to reonshore, right, to build a new manufacturing facility here, that probably takes more than the three years left in Trump's term. So I think the overall impacts um it makes good headlines. Does it actually change the underlying trends? Maybe a little bit less. So >> the um other thing that China announced is that they would resume buying US soybeans. Previously they said they would buy it from Brazil uh to bypass US trade tariffs. Um Brazil is now shrugging off the US China deal is something called seasonal trade according to what they're saying. So I I I wonder if this the trade deals that have been made so far up until today or this week have done permanent damage to US industry. In other words, have Chinese companies in Chinese industries looked at other sources for their supply and permanently shifted their supply source? In other words, is this concession this week from Trump a little bit too late? again uh that shift had already been taking place um before recent months and quarters. So China uh in terms of an importer of US goods that has never been such a major piece of the puzzle for us. Again here Europe is far and away the leader in destinations for US exports. Um Canada, Mexico, uh many others do surpass China. So the soybeans that's going to be a nice boost for US farmers. They've been facing some trouble for other reasons. If you look at, you know, farm incomes and um just crop prices right now, it's really adding insult to injury of the past couple of years of very severe weather swings which have caused some crop uh shortages and and some growing season issues. So, I think that's a nice little boost for them to get the the soybeans back out to China. But overall, there are I think much more um pervasive fundamental issues for our trade relationships. So overall then I know it's unpredictable uh Trump would announce 100% tariff one day and then couple weeks later uh be best friends with Xi Jinping. So we don't know what's going to happen. But I think the overall trend from earlier in the year is that every time we've had an escalation seem it seems to have deescalated shortly after in most cases not all. Would you agree with this trend? And so as an investor, let's say making a longer term play, is this something that we need to take account, take into account or maybe just ignore because clearly the markets have ignored noise recently. >> Absolutely. I mean, Trump is a negotiator. He says that himself, right? He will push too far so that he has somewhere to come back. And I think that has proven true time and time again in these especially trade negotiations, but in many other policy issues. Now, for a business, I'm not saying you should completely ignore it, right? Maybe there are some timing quirks that you can do. Delay the shipments till we're at the better trade uh environment. We saw this in the first quarter of this year. There was a major dip in GDP just because so many companies front ran all of those tariffs. They knew they were coming. They got their goods through the US border before the tariffs hit. Uh we can quantify that impact in terms of uh what the first half GDP did. So at the end of the day for a business um it's important to know it's important to be a little bit tactical for but if you're really making your plans I think a much more important trend is going to be just looking at what are my key leading indicators. That's what we do here with our consulting work at ITR. We're finding what correlates to your business. Maybe it's some of these overall production or trade indicators but more likely there are other things happening. we can get that hard data and find some kind of leading relationship. Um, and and that will give you better planning ability because you'll have the foresight. >> Okay. Uh, let's talk about the markets itself. I'm going to pull up a chart of the S&P 500 versus the Fed funds rate. Uh, the relationship between when the Fed cuts and where the S&P was. When it cut is kind of inconsistent. So, here we are now. um in 2019 uh when uh when the Fed cut rates uh the S&P was at a then high and then a year later it went higher. So So there's one example of uh when the Fed cuts at an all-time high. It tends to have gone higher a year later. That was not the case in 2007 and 2008 as you know uh for different reasons. In 2000 they cut uh during the tech bubble burst that also did not apply. So, it seems to be that unless there was some sort of economic crisis or major market uh correction or reversion to the mean, um if the Fed does cut during a market high, the market tends to go higher a year later, can we apply the same pattern to now? [laughter] >> Um, as an economist, I don't enjoy being wrong. So, that's why I do not forecast stock prices. I will not give you an outlook for the S&P. But you know I can say these cases uh clearly there were different fundamental drivers for sure 2000208 right we had the real um kind of fundamental d driver versus co that came in at us from left field that was a non-economic event so I think that's why there's a big difference in the trend >> what uh macro trends have been most consistent I would say in in >> correlating with the markets >> uh so we're looking here at things like profitability um I just want to know how much dry powder those businesses have. Now, unfortunately, that's becoming a little bit less correlated. That does worry me when we don't have that fundamental backing, the reason that equities prices are as high as they are. Um, I want to see it backed up by something like corporate profits. Um, at this point, you know, it's it seems like there's still some fire left in the market in this rally. I this is not investment advice. It just seems like um we are not seeing the bottom fallout from any of those indicators that would be supportive. But again, I I don't like to see that divergence. Whenever that gap widens, it starts to flash warning bells for me. >> How about actual economic growth like GDP? Does that have any correlation whatsoever with the markets? It's a debated term in academia, I'm sure. Uh I'll just pull up the Atlanta Fed GDP now tracker. I'll leave it here. So, they're estimating um high threes for the next quarter. So, uh, you know, anyway, what's your take on GDP versus the markets? >> Sure. Well, it should be, right? That would make sense. That would make us happy as economists. Um, our personal view here at ITR economics for, uh, GDP, we're looking for 2.5% growth this year, um, and about 2.1% for each of the next two years. So, we certainly don't see a recession coming. Recessions can trigger that panic, right? Trigger that selloff. I I do not think we are headed for a recession. However, I do think we're headed for a slower pace of growth. This is not the bounceback postcoid that we all enjoy. That's the last real accelerating growth trend that most of us have in our short-term memory. So, I'm looking for something a little bit more subdued, kind of taking momentum, more time to build up this time around. I think businesses are going to feel that and I'm already feeling them contend with it where it's tough to say, you know, growth is pretty moderate and and just nothing to write home about. That's not a comfortable place to be when our problem has been. There's so much demand out there and we just can't keep up with it. Is consumer sentiment a leading indicator for profitability? Here we have, for example, uh released this week, US consumer confidence slipped a six-month low according to the conference board survey on Tuesday. Uh economists describe a K-shaped recovery, confidence declining among consumers making an annual income of less than 75,000, but consumers earning more than 200,000 or more are more upbeat. Um tell us about consumer sentiment and confidence right now. >> Sure. I'm I'm going to take that two different ways. First of all, sentiment overall is a notoriously terrible leading indicator. It does not correlate with retail sales. Actually, the um only things it tends to correlate with more are those big ticket purchases like autos for example. Um but it it is not giving us uh any real evidence. We are not basing say our retail sales or GDP forecast on how consumers say they feel. However, I do think there's some truth here to the K-shaped movement um at the upper end. I mean, these higher income earners, those who still have jobs, who have probably own their home, they bought it for a lower price and locked in that low interest rate, they're sitting on a, you know, capital appreciation there. Um, they've probably more often than not been invested in this equity rally. So, they're, I'm sure, enjoying where their portfolio has been moving. On the other hand, lower income earners, they naturally get hit by higher inflation, right? They have a larger share of their income going to those non-discretionary items. They also tend to buy more imported goods. You know, that makes sense to me. We import things that are cheaper and so those if you're trying to make the budget stretch further, maybe you are buying just the cheapest good. So tariffs will hit them harder just due to the fact that there's a tax on imported goods now. So it doesn't surprise me that things are moving in opposite directions. Um, again, I'm only as good as that median data point that we can point out, but we do have several uh between delinquency rates and uh other indicators showing that the there is increasing divergence between the the bottom and the upper end of the income spectrum. >> It says here in the article, lower inome households are struggling to make ends meet amid higher prices, including from Donald Trump's broad tariffs on imports. Can you just evaluate the validity of that statement? And if that's true, why aren't we seeing that being reflected in the broad CPI? Shouldn't it be much higher than 3%. [laughter] >> Uh so again, the biggest individual contributor to CPI is shelter cost. Um so we certainly it's tough again to to pull out, right? We have that owner's equivalent um bucket for those who own their home. Rent is a pretty big driver, right? And even today, if you are trying to buy a home for the first time, you're facing higher home costs. you're facing higher mortgage rates um in some cases very significantly higher than where you know those the existing [clears throat] homeowners have already locked in. So yes, if you're at that lower income, right, if you're a wouldbe first-time home buyer or a continued renter, you're going to feel that pinch a lot more. If you are just again um trying I I won't say to make ends meet, right? That's a very arbitrary term. Um we find that even upper income earners can live right at their means, right? If you just have a jumbo mortgage and a very expensive car payment, we'd still consider those necessary expenditures. You need a home, you need a car, but it gets a little bit murkier somewhere in the middle. But right now, one thing that I'm uh watching closely is the difference in consumer credit cards accounts who are only making the minimum payment monthtomonth on their card versus those paying the entire balance outstanding. What's really interesting is both of those shares are increasing. So at the upper end, more folks are paying off their whole credit card bill every month and more folks are only making the minimum payment, not some it's the partial payment in the middle that's kind of getting more and more narrow. So I think that's the best example I can give you of the ends expanding at the expense of that middle group. >> And do you see that gap narrowing if let's say the Fed cuts rates or continues to cut rates into 2026? Powell did say at the press conference when he was asked if the uh rate cuts affect people on the lower end of the distribution more than others and he said well the the rate cuts don't target their policies don't target any specific demographic of people but he's observed in the past that potentially rate cuts do affect those at the lower income distribution more than the higher ones and so if that's the case wouldn't you expect people to be better off next year Lauren Yeah. So it it will affect those who hold debt more, right? If you owe any amount um then interest rates will affect you more than if you are say more paid off, right? Or have more money. >> Sorry. Just on that note, do credit card rates follow the Fed funds rate? >> Not perfectly. Uh they generally move right in the same direction, but right now we are not seeing a onetoone pass through. We're also though not seeing a onetoone pass through on mortgage rates. So I I think this is a unique position where the bond market is taking a stance. Okay, let's talk about some sectors that you follow then given trade activity and um the seemingly deescalating situation of tariffs with China and the and the US now are you are you are you more bullish on the manufacturing sector or the um or uh or uh are there other sectors that you're following right now that you're semi more bullish on? >> Sure. So manufacturing overall um expect growth not outstanding growth right no nothing stellar for the sector overall within that though it's the legacy manufacturing that's kind of a lagard right now it is high-tech sectors that are doing a lot better that will continue to be the case our investment in AI and data centers um all of those you know high-tech semiconductor etc those segments are due to continue performing otherwise I I still like the you know kind of clean energy space electric vehicles still so much in demand and and we do not have the necessary energy capacity to keep pace with all of that green energy going into those green vehicles. Same thing with data centers. Um they are incredibly energy intensive and these companies don't want to be relying on fossil fuels. So I think there is still more movement in that space. Otherwise I really like medical that's a more of a longer term um theory with our aging population. We see even today personal consumption expenditures on medical services and medical care is at an all-time high and really only increasing from this point. So good long-term winners um even something less discretionary like food is is not a bad place to be. >> So consumer durables but maybe not very discretionary items you're looking at. >> Yes. Yep. I'm I'm a little bit less enthused about the auto space for example, >> right? Um even with rates coming down, Lauren. even with rates coming down um starting to get a little bit nervous about auto delinquencies. >> Has ITR looked at the housing sector and housing demand in light of slightly lower lower mortgage rates? >> Yeah. Uh we have and I think we need more housing. So the housing stock has not kept pace with new household formations. We've absolutely been underbuilding. We need more inventory right uh out there. But rates are still very high. If you talk about, you know, someone, well, when I bought my house, a 3% mortgage was quite normal. Now to look at five, six, six and a half% mortgage rates. Um, that makes a world of difference in terms of those monthly mortgage payments that we're not getting back down to that 3% level. So, I think there does need to be growth in housing starts. Um, but that affordability is still just a wet blanket that we've thrown over the growth rate. >> Why aren't we getting down to the 3% level, Lauren? >> Oh, I hope we don't need to. [laughter] Again, inflation coming back, I think, is going to be the thing that hamstrings the Fed the most. That's why we will see rate cuts stop when they eventually do. I think that limits how deep into next year we'll continue to see rate cuts. And at the end of the day, I think that is going to be the thing that gets us to start talking about rate increases on the other side of this cycle. >> So, let's close off on fixed income then. Uh 10-year Treasury yield has been coming down most of the year. Uh what is that trend? Is that following expectations for the Fed funds rate? know there's no direct relationship between the long end of the curve and the short end, but uh what's your take on fixed income for next year? >> Sure. Um so we we do have an outlook for uh say long-term government bond yields and again that's marrying our expectations for rates maybe to go down slightly more in the very near term but beyond that we're looking for rise not decline. I think over the longer term we've got some demographic issues that are going to keep yields quite well supported. Um so I I don't see significant decrease from this point. Does that mirror economic growth at all? The long end of the curve, >> yes and no. Again, I think our aging population is going to have some very real inflationary impacts in the next call it 5 years. Um, I think inflation is the big thing if you're just trying to take an interest rate stance. That is the warning sign that we will see. So, watch that that inflation data once we get it again. Um, that's going to be the the turn, right? Like I said earlier, the inflection point this cycle. How likely can we see uh the current uh Fed with the current Fed chair or even the next one when whenever uh the next Fed chair takes over um intervene in the markets and implement yield curve control again? >> Oh, I hope not. Um some of those more extraordinary um measures really are just taken during times of panic and I I hope we don't get a future crisis. You know, knock on wood because none of us saw COVID coming. That was a medical like a health event that was not from the underlying world of economics. But um I don't see a bomb waiting to go off in the economic world right now. >> But they could do it just to have the rates lower as the administration wants. Right. >> Yeah. I know I know the next Fed share will very likely be more doubbish than the current one. Um but uh most of the names floated I think are more on the um you know kind of I'm trying to find the right word [laughter] without being political but uh they're more in the kind of legacy mold. This is not someone coming in from left field. >> The mainstream media hasn't talked too much about the end of quantitative tightening and uh from my understanding uh that's going to end coming December. Correct. And so we're going to see the Fed continue to add or at least maintain the balance sheet size. >> Yeah. Um I think that was quite well signaled. I think the expectations are very much built in for that now. So I don't expect that to be a market moving event. Great. Thank you, Lauren. Appreciate your thoughts. Where can we go to follow you? >> Excellent. Uh, come find us at iteconomics.com. You can find us on all the usual social media. Um, at ITR Outlook is our, uh, sorry, X, I think it's called now. Um, but we are on everywhere you'd normally find us. Um, my favorite pick is on YouTube. We put out a lot of quick videos, just five to seven minutes that you can see what we're thinking about. Um, I put one out every Friday just talking about the Fed. So, if you haven't gotten enough Fed talk here, find us on Fed Watch. Um, but we are putting out blog posts and a lot of other information if you want to dig deeper. >> What's your favorite thing about being an economist? Do you ever like get people at dinner parties ask >> Yeah. Am I am [laughter] I am I uh well, what should I do with my investments? Do you ever get that? Does that get annoying? >> Oh gosh. >> All the time. But no, my favorite thing is that no two days are the same. Um I really [clears throat] It is a fun world and it's fun to make sense of it in this way. >> All right. Well, follow Lauren and ITR Economics in the links down below. Appreciate it, Lauren. Thanks for having uh thanks for coming on. >> My pleasure. >> And uh thank you for watching. 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