The Bond Market Is Exposing the Truth About the US Economy | Neil Dutta
Summary
Macro Outlook: Guest is more cautious than consensus, citing slowing nominal growth, weak labor breadth, and state/local government drag.
Disinflation: Expects further disinflation as rents cool (Zillow, Apartment List), wage growth moderates, and tariff effects are largely one-off.
Rates Strategy: Sees value in the long end of the curve; slowing nominal growth and stable-to-lower inflation support a long-duration stance.
Yield Signals: Despite numerous reasons for higher rates (AI optimism, tax refunds, easier financial conditions), 10-year yields aren’t rising, which he finds revealing.
Housing Weakness: Mortgage-rate declines haven’t sparked strong demand; Home Depot (HD) cited weak turnover and builders hold the most completed unsold inventory since 2010.
AI Perspective: AI is boosting sentiment and CapEx, but its labor/productivity impact appears more forecast than present reality for now.
Labor Market: Consumers report tougher job-finding; job gains skew to acyclical sectors, with risk that small shifts could worsen unemployment.
Fed Path: Expects the Fed to cut rates, potentially more than markets price, driven by softer growth and cooler inflation rather than a “golden age” productivity boom.
Transcript
Yields have every reason to go up. I mean, financial market conditions have ease. You know, we talked about the ai boom, tax refunds, Trump vibes. There's every reason to kind of, expect interest rates to go higher and they're not. And so I think that's revealing. Nominal growth is slowing. Hi, I am Ed D'Agostino from Mauldin Economics and today economist Neil Dutta of Renaissance Macro joins us. We're going to get into the direction of the US economy. Inflation interest rates, and I'll get his thoughts on the Fed Share nominee. Welcome to Global Macro Update. Neil, I've been wanting to get you on this podcast for, at least a year now, so I really appreciate you taking some time. It's, it's good to have you. And we were talking before, I had no idea that you used to work for David Rosenberg? Yeah, I mean, that was my first role, really outta college. It was, it was an exciting time, you know, being sort of with the premier growth, pessimist of the, of the time on the street. it was sort of a interesting time because obviously, the Merrill Economics department was kind of wrong. Wrong, and then spectacularly, right, right. And so, um, you know, kind of. Learning from Rosie and being with Rosie, uh, you know, during that time, uh, was a real education. Uh, and so, uh, yeah, I mean, I got, I got, you know, I, I got my, uh, my experience very early. We've got a lot of fans of, of Rosie's in our readership. So, uh, that, that gives you credibility, I think, for those who don't know you. But I've been following you for a while and, uh, I just, I find your work. To be fascinating. For those who don't know you, maybe we could just start out with sort of big picture and then we'll work our way down. Uh, if you could just kind of give me your top level view of what your, what your thoughts are on the US economy right now and, and, and then the timeframe at which you're looking out. When I think about my process, to me, you know, when, uh, we have our, our clients at redneck, right, ed, and I think they're not really paying me for. Like, what's your GDP GR growth forecast? I mean, I don't think that by itself is especially relevant. It's really, you know, trying to understand what are the risks to the consensus and, uh, and then choosing those battles wisely. I mean, I'm not always gonna be at a consensus. I mean, sometimes, you know, wisdom of crowds, I mean, the consensus is usually right. Um. But really it's about balance of risks. I mean, that's sort of what I'm thinking about. And I would just say that relative to the consensus, I am probably a lot more cautious on the economic outlook. I mean, there's, there is admittedly a lot of enthusiasm out there. Um. And you can kind of go down the list, right? I mean, the fed cut a few times last year. Uh, so people think that there's a bit of a lag from those cuts to economic growth. Uh, obviously the, the tax refund season is in full swing. Um, and it's anticipated that that's going to be a lot stronger this year over last year. Uh, there's an anticipation that people will go out and spend that money. Um, and so, you know, there's, uh, there's the ai CapEx boom. Uh, and so people are optimistic about that. Uh, that's pushing upward, putting upward pressure, frankly, on equity prices. And that's one reason why we've seen consumer spending kind of hang in there despite a sluggish employment situation. Right. Uh, the wealthy people are, uh, drawing down their savings and going out and spending, which makes sense because their asset values are going higher. Um, so I guess, you know, for me, when I think about the outlook, um, the reason I'm cautious is, I mean, there's multiple reasons. I mean, first I, it's about labor. And I think the, the labor markets are still sluggish. Uh, you know, if you, if you look at people and what they say about the job market, they're continuing to say that job, finding rates are very challenging. Usually when consumers tell you that it's hard to get a job, it pays to believe them. That has the habit of kind of leading the actual data, right? Because, you know, they know about the pink slips. They know about who's getting hired and fired in their local communities. And so typically that kind of. Gets picked up before the BLS statisticians pick that data up. Um, the next thing I would say is housing. Now, again, there's a lot of enthusiasm for housing at the moment, right? Because mortgage rates have come down. Um, and you know, people think that, okay, mortgage rates are down. That should be good enough for the housing market. I think the issue is. Has demand really picked up as much as anyone would've thought given that decline in mortgage rates? I'd argue probably not. Um, if you look at turn, I mean, home Depot was out just this morning talking about how weak housing turnover is, right? And so, um, that's in the resale market. And if you look at the new market, I think it's a problem frankly, that home builders are going into the new year with essentially the most completed unsold inventory since 2010. And. I think that's a problem because they've been doing affordability adjustments and mortgage rates have been coming down, and yet they're still sitting on all that inventory. So, um, and to me it's, it's almost like a mathematical certainty, right? That that residential construction will come down because housing starts are running below the level of housing completions. Whenever that happens, that means that units under construction will decline. Which means in turn, that residential investment will be, uh, sort of pressured. Uh, the next thing is state and local governments, uh, state and local governments, uh, are likely to be a drag on economic activity this year. So there's been a lot of sort of attention paid to what's going on at the federal level. Um, you know, and the kind of things that the administration is doing to kind of stoke animal spirits and growth. But when you look at the state and local level, um. It's not a pretty picture. I mean it, you know, state and local governments are actually, their job growth has slowed over the last year, um, state governments have seen an outright contraction in, in, uh, in employment. Um, and I suspect that probably continues, um, you know, over the course of the fiscal year, we know, um, you know, that most. More states, uh, in the coming fiscal year, uh, expect to have sort of flat to slightly down, uh, kind of general funds relative to, uh, the, the last year. So there's reason to expect that to be a drag. And then finally, I would just say, you know, I'm a big believer in the idea of like, expectations management, right? So if everyone expects things to be okay and they're not, that's a problem. If everyone thinks, you know, a couple of years ago. Um, everyone was kind of thinking that there was going to be a recession and there wasn't. And so the fact that that didn't happen means you have to restock your inventories and invest and hire because you had anticipated this bad outcome. It hasn't happened, and that kind of, uh, sort of kicks, uh, kicks growth into a higher gear. And the opposite is true in my opinion today. So, you know what's interesting about the sort of four factors I just outlined? I mean, these are exactly the same four factors that I, that I used. Back in 2022 when, um, you know, the consensus was sort of on board for recession. I was arguing there wouldn't be one. Um, and you know, so to me it's like the process hasn't really changed. Uh, I would just say that, um, you know, at the, the most interesting thing I've seen, frankly, in the financial markets is every, we have every excuse to be super bulled up right now. Right? Like I mentioned the refunds, the, uh, you know, the, um. The, the AI optimism, unemployment rate. Yeah. I mean, or, or you know, we're gonna get like this fed chair that's just gonna come in and cut rates and, and all the rest of it. And yeah. You look at this and 10 year yields are actually going down, right? Like, so wouldn't this be the period, um, to actually see rates going up? And in fact, that's not the case. So. Um, you know, maybe a lot of that's already reflected in the price. I mean, it's, it's hard to know. Um, but I do think that's pretty revealing. Where do you stand, Neil, on inflation? Do, do, do you see, I know you're just from watching you, that you're, you're in sort of the disinflationary camp. Um, do you think there's any risk of deflation? I don't think there's any risk of deflation. I think there's a risk of further disinflation. Um, it's really hard to get. Partic especially worried about the inflation outlook because if you look at housing rental inflation, it continues to slide. Um, that's true not only of the sort of official statistics, but also if you look at sort of, uh, more UpToDate market-based measures like Zillow, uh, observe, rents continue to decline, apartment list, observe, rents continue to decline. Um, so. I mean, I think that's an important part of the inflation process. Uh, a lot of the sort of hawkish argument seems to be inflation has been high, therefore it will be high, right? Like it's very inertial in that sense. Um, and I would agree that inflation has been high. I mean, core inflation I think was close to 3% last year. Um, but just because it something has happened doesn't mean that it'll continue to happen. And when you sort of look kind of down the list, uh, you know, wage growth continues to cool. If you look at. You know, the Indeed wage tracker, I mean, that's basically a measure of wage growth in advertised jobs. It continues to slow. Uh, so it stands to reason that, uh, if, uh, wage growth is slowing in advertised jobs and actual wage growth will also slow down. Uh, that should take pressure off of things like, you know, non housing services inflation. Uh, you look at, uh, I mentioned housing rents. Housing rents continue to, to slide. Um, you know, part of the issue is. You have a bunch of people that don't want to admit that tariffs are inflationary. And so, but, uh, you know, at the end of the day, I mean, core goods, prices are up to the extent that that's all has a lot to do with tariffs, and tariffs are a one-off. It stands to reason then that core goods won't be as much of an upward source of inflationary pressure. Over the next 12 months, as has been the case over the last 12. I just wanna touch on the tariff point. Uh, are they inflationary? I mean, I, I could see how they are inflationary in the short term, but in the long term, do they suppress demand because they, because of the inflation? Like is it sort of a circular thing? To me, it's like a relative price shift, right? I mean, basically, um, you put the tariff on it, it pushes up prices for. Those areas of, you know, imported goods basically. Um, and in the sense, and, and as a result, people have less leftover to spend elsewhere and they have to cut back on those other places. I mean, unless there's some kind of a fiscal response where, um, you know, the, uh, the government is kind of giving people more money. Um, if the household's budget constraint isn't going up, then you don't really have the wherewithal to absorb all the, you know, a, a sort of broad base increase in prices, which is what inflation is. So it really results in a relative price shift more than anything else. You touched on a couple other things that I wanna, I wanna mention and I wanna bring in some other economists' thoughts. Um, you mentioned wage growth, um, looks like wage growth. Stagnating a little bit and people are dipping into savings to continue spending. Um. Ed Denni was out this morning with a note saying that really what's happening below the surface is he believes it's more and more baby boomers retiring and they're moving from high paying jobs to starting to spend down their savings. And so maybe it's not as bad as it sounds on the surface. I mean, it's possible, but then again, those people have the least propensity to spend in the first place. So I don't know that that's. I mean, I just think I'm a big believer in sort of Occam's razor type analysis, right? Like I don't try to find like a lot of these little narratives. I mean, to me it's like at the end of the day, uh, real incomes x government transfers, which is like the primary determinant. Um, in terms of like recession determination, uh, you know, and I'm not saying that we're in a recession or anything like that, but it's an important indicator for this reason. Real incomes, net of net of transfers over the last year is basically flat. Basically flat. Right. So why is that? It's because wage growth has slowed and it's because employment growth has slowed. So, um, you know, I mean, as I say, like, okay, maybe, maybe there's some of that going on. You know, boomers people have making all sorts of, kind of rationalizing rationalizations of this. Like, oh, you know, they're the one. High interest rates are good con for consumer spending because boomers are sitting on mountains of money, market funds and so forth. I mean, it's just, um, I would, I, you know, it's just, again, it, uh, if income growth is slowing, if you assume that the savings, the reason why the savings rates probably come down is because asset prices have gone up relative to income. So if asset prices don't go up as quickly as they have been, or let's say the market's correct a little bit. Then it's less likely that the savings rate will come down. You know, I think you can even frankly make an argument that, uh, maybe a lot of people pre prespen the refunds, right? And so when the refund, when the refund actually goes out. Uh, you, you actually see it show up in savings, um, as opposed to going out and getting spent. Well, I think you're right about the, uh, boomer generation not spending, I mean, I just had an argument with my 79-year-old father about why he can afford to have somebody snowplow his driveway. Uh. The a hundred dollars. Too expensive. Yeah. Right. Let's talk a little bit about the labor market. Uh, going a little deeper into it, you, you know, some economists are saying that the labor market is showing slack. Um, others are saying, you know, 4.3% unemployment. It's, it's Goldilocks. Where do you stand on that? To me, the breadth is the, is the, is the problem, right? I mean, um, you have, uh, you know, a labor market that's clearly not firing on all cylinders. Um, there's a big contribution from sort of acyclical industries like education and health. And everything else is somewhat more sluggish. Now, maybe that starts to turn around. We did see some, uh, improving data in January. We'll see whether that lasts. Um, but uh, but generally speaking, over the last year, most of the jobs growth was, uh, in acyclical areas and cyclical areas like goods producing employment like white collar professional services, employment. I mean, these. These were generally down and uh, you know, and I think that's, that's a problem. Um, you know, you can't, you can't run the labor market. Just on one thing. I would also say like the trade-offs are getting a little bit less favorable for policy makers, right? So when you look at something like the beverage curve, like this is the relationship between. The, um, unemployment and, uh, job openings, right? I mean, job o excess labor demand continues to come down, right? Like if you look at labor, uh, job openings, I mean, they've generally been going down. Um, and you're probably operating on a point where if you see further declines in labor demand from here, you probably see more, uh, sort of outsized increases in the unemployment rates. So, you know, I think people have kind of been lulled into this sort of, um. Everything's kind of okay because, oh, it's low, higher, low fire. This is what happens when things are uncertain. You know, it's fine. But I guess my concern with that is it's precisely because of that, that you wouldn't really need to see much in the way of a additional layoffs to get some pretty spooky jobs numbers, right? Like, so you, you know, every month millions of people are hired, millions of people are fired, and that that gap is what gets you the monthly employment numbers. Have very low rates of hiring and very low rates of firing. You wouldn't really need to see much one way or the other, um, to get, you know, more layoffs and in turn, higher unemployment, uh, and weaker job growth. And, you know, when you look at the anecdotes out there, it's not very encouraging. I mean, I, I don't really, um, you know, every day it feels like there's some layoff announcements. Now that's not a substitute for hard data. Um, and I, I, I sort of acknowledge that, but, uh, I, I just think for me it's really about balance of risks and, uh, you know, consumers are still signaling a very, very challenging employment market. Are we at the point where we're, where you are actually able, as an economist to see in the data. Any impact from artificial intelligence? You know, it's like anything, ed, if you put two economists in a room, you'll be lucky to get five opinions. Right. Um, I, I don't, I don't know. I mean, I, I, I, I mean it's, it's, and I think it's okay to say that you don't know. I mean, we've done some work that shows. That a lot of the industries that are spending more on AI are also doing a lot of hiring themselves, which kind of, which is sort of in line with what you'd expect, right? Because typically the companies that are investing also have the wherewithal to hire. And so, you know, that's why typically those two things move in tandem. Um, others, uh, disagree. Um, but I do find it fascinating that we're, you know, uh. To me, like the, the, it's about the outlook. Um, people are talking as if this is happening right now. And, you know, you look at, um, you know, prime Age employment is basically close to pies. Um, so where's all the displacement? You know, I don't, I don't really see it. Maybe that will happen, but it's certain, it's more, it's, it's clearly more of a forecast at this point than a. Than a present day reality. So we shouldn't really be talking about it like a present day reality. That's my opinion. Do you have an opinion on what AI's impact will be? I mean, are you in the cii uh, 2028, 10% unemployment camp? It's a very unusual kind of, uh, thing to think about because historically when we, when we have productivity booms, like if workers are generally becoming more productive, then businesses should want more of those productive workers, right? So why is it. Uh, you know, you go back to the last productivity boom, uh, of the, uh, sort of late nineties, that was a period of, of, of very, very, uh, strong employment. And, um, so, you know, I, I don't know. I, I would certainly sort of, I would resist the idea that, um, that this is going to create sort of widespread job losses. Uh, my own experience is that AI is helpful, um, but it doesn't. Like something like Claude, I mean, that's not making me get rid of the person that works for me. It's supposed to, it makes them a little bit more efficient. Um, I think it's a very good replacement for search. Um, but you know, usually there's a period of time where people have to kind of make. And gain the knowledge necessary to use the technology more efficiently. And I still think we're probably in that process. Uh, when you look at sort of labor or total factor productivity, there's no evidence as of yet that we're kind of breaking out. Maybe that will happen, but as I say, like that's very much a forecast. Um, and it's, it's, um, you know, it is very difficult to know that. Um, I, I think for your listeners, the way you know, we're in a productivity boom basically is if. The consensus just gets repeatedly surprised to the upside on the economy. Right? Like you go back to the nineties, I mean, one of the things you found, like you can go back and look at the evolution of like the blue chip consensus forecast, and every year, like in the late nineties, we sort of started off around two and ended at four. Year after year, after year. And if you, if you go back to the 2010s after the financial crisis, the opposite was true, right? I mean, we remember every year it was like, oh, we're gonna have 3% growth. And then by the end of the year we were at like one and a half. Right. So what explains that productivity, right? Because productivity booms are notoriously difficult to forecast, and they usually go on for a number of years. So if we're going to get into one, um, it's not going to be, it's gonna last for a while. Um, and uh, the other thing I would say is, um, it's really unusual to see a productivity boom with no. Follow through in terms of like real compensation, like historically, right? I mean, you, you know, ultimately the point of all this is to raise household living standards, right? Uh, and is that really happening right now? I mean, it's uh, you know, you go back, um, to the nineties as an example, and real compensation was very, very strong. Uh, over the last number of quarters, we've sort of, people have talked a lot about strong productivity growth and during that time, real compensation has been flat. Great way to look at it. That's, that, that's definitely not the consensus way to look at it, or at least it's not the, uh, it's not the seductive narrative. Put it that way. I don't wanna let you go without asking you about the Fed. Um, 'cause, uh, I, I can't resist. I've, I'm a fan of your, you're and Jeff's podcast, so I try to catch that every week and, um, we appreciate it. Uh, I think, uh, I think it's fair to say that you're, uh, you are not a fan of this appointment, uh, of the Wars nomination, for fair to say. Yeah. For chair. Any, any thoughts on what this fed looks like and, and what it might mean for rates? Well, I mean, I think the Fed is bigger than any one person, so that's, that's the first point. I mean, just because I don't like the pick that the president made doesn't mean I'm telling everyone go out. Sell all your stocks and, you know, pun punt, the punt, the bond market. I mean, the, the Fed is bigger than any one person, so you should never make, uh, you know, changes to your portfolio based on personnel decisions, uh, like this. But yeah, I mean, my view on this is, um, I've, I've always, I've long believed that the Fed job. Is basically a job of economic forecasting. Like your main job is, do rates go up, down, or sideways? That's it. That's the job. And what about Kevin Walsh's record makes anyone think that he's good at that? Like it's really that simple, right? I mean, as I say, like. Um, I was working for Rosie at the time in 2008, you know, and, um, and in May of 2008 at Wars was talking about like commodity price spikes and, you know, even as the labor markets were clearly falling out of bed, and it's because he was making those arguments that actually kept the fed from easing more that summer. Right? Because the, the whole thing is trying to build consensus among your colleagues and. If you have people that are making these sorts of arguments, it becomes more challenging to get the policy that you need. Um, or it takes a little bit, I mean, it's becomes very obvious at that point. Right. And so, um, and I think it's sort of, um, and obviously the most notoriously of course is, is in the period after qe. I mean, he was obviously, uh, an opponent of qe. He went along with it for the sake of Bernanke. Uh, but when he left the Fed. Um, you know, he kept sort of talking about the inflationary consequences of it, even after inflation was coming in better than expected. And, you know, there wasn't any inflationary, uh, you know, so I think he kind of missed, like how it actually worked. It was really a signaling mechanism around rates not so much, uh, you know, putting high powered money into the economy to kind of get the inflation that you would, you know, so I, so I think his forecasting record. It leaves a lot to be desired and I think it's very curious that someone that has been ish, really his entire public career, all of a sudden and in the last like six months, he is dovish now he's not dovish in the way. Christopher Waller is dovish. And I think that's what's interesting, right? So if you listen to someone like Christopher Waller, he's dovish because, you know, he's cautious on the job market and he thinks that the unemployment rate might go up. And he thinks that the growth, the sort of the breadth of, uh, the economy's very, very narrow. I mean, these are sort of more traditional kind of ways to think about the, um, the rates outlook. War by, uh, by contrast is really kind of selling this golden age, uh, thesis, um, as a rationale to, uh, to cut rates, right? Like we earn a productivity boom that takes pressure off of inflation and it allows us to cut interest rates without stoking more inflation. Like now, I think that's really a tough sell. Yeah, that's a tough sell. We just talked about this, right? I mean, what evidence, uh, is there? And you know what's interesting is. It's an app. You know, war show has always said he doesn't like, like discretion, using discretion in policy. But what is getting someone to vote for rate cuts based on a golden age, if not an appeal to discretion, right? You're asking someone to trust you as an economic forecaster, even though you're really bad at forecasting. So, so I don't know. I mean, I think he's gonna have a really tough time of, uh, things, uh, once he gets in and it's, you know, sort of like, maybe it's a. What do they call it, A ferric victory? I mean, maybe the cost is too high. He's been campaigning his entire life for this seat, and, um, now that he's gotten it, he may. May come to regret the fact that he campaigned so hard for it. And why would you cut rates? If everything's going great and we're in a productivity boom, why w why would you cut rates? The theory would be that nero's lower that, uh, that inflation would come down. Right? So that would be the rationale to, to cut rates. I mean, I think, again, the challenge with cutting rates now because of that is, is, is, um. You're doing, it's an appeal to discretion. You're basically asking people to kind of ignore the data and just say like, okay, it's gonna be fine. And, you know, um, and again, I mean that, you know, the, the administrator, the defenders of this sort of view, they always keep kind of bringing up the Greenspan example of the nineties. And of course, and there is some truth to that. I mean, Greenspan famously didn't hike in the mid nineties, um, because of the productivity story. Now that was. Uh, that was coming off of a period of very high inflation and we had this sort of opportunistic disinflation of that era. Um, but really he was just following the data, right? I mean, inflation was coming down and that was neutralizing whatever tightening of the job market you got. But look at what he was doing in the late nineties. Um, he was hiking very aggressively because the labor markets were overheating. And so it's like, which Greenspan in the nineties are we really talking about here? I think the Fed's going to be cutting interest rates this year. I think they'll probably end up doing it more than the markets currently expect. But that's, that's really because I think the outlook isn't as rosy as people expect. And I think that, you know, we'll see, uh, weakening employment growth, uh, and. Uh, more importantly, cooler inflation and that'll give the fed the opportunity to norm to do more reason. What do you think that means for the long end of the yield curve? I think there's value in the long end. I mean, um, you do. Okay. You know, I mean, I think nominal growth is slowing. If you think nominal growth is slowing, why would you want to be? Um, why wouldn't you want to be long duration Yields have every reason to go up, right? I mean, financial market conditions have eased. You know, we talked about the AI boom. Um. Reef tax refunds, Trump vibes, right? He is about to do the State of the Union, like how, you know, how many times I get in client meetings? There's no way Trump is gonna let the economy get, get worse this year. You know? I mean, it's sort of, there's every reason to kind of, um, expect interest rates to go higher and they're not. And so I think that's revealing. I mean, I don't know what the right level of the 10 year yield should be. I mean, I have views on like what fair value might be, but. To me it's about direction of travel and uh, I think it's revealing frankly, that rates are not, uh, going up. And maybe that's, maybe that's because a lot of the upside scenario is already priced into the market, or it's a sign that, you know, the, uh, you know, the bond market is kind of sniffing out the fact that inflation is not really a problem. Neil, uh, I appreciate your thoughts. I hope you'll come back and join us again. Would love to. Thanks Ed. Appreciate that. Take care now. See you Neil. Thanks Neil DDA is the head of Economic research at Renaissance Macro, and you can learn more about his work@renmac.com. I'm me, dagostino. Thanks for joining me. I'll see you next week.
The Bond Market Is Exposing the Truth About the US Economy | Neil Dutta
Summary
Transcript
Yields have every reason to go up. I mean, financial market conditions have ease. You know, we talked about the ai boom, tax refunds, Trump vibes. There's every reason to kind of, expect interest rates to go higher and they're not. And so I think that's revealing. Nominal growth is slowing. Hi, I am Ed D'Agostino from Mauldin Economics and today economist Neil Dutta of Renaissance Macro joins us. We're going to get into the direction of the US economy. Inflation interest rates, and I'll get his thoughts on the Fed Share nominee. Welcome to Global Macro Update. Neil, I've been wanting to get you on this podcast for, at least a year now, so I really appreciate you taking some time. It's, it's good to have you. And we were talking before, I had no idea that you used to work for David Rosenberg? Yeah, I mean, that was my first role, really outta college. It was, it was an exciting time, you know, being sort of with the premier growth, pessimist of the, of the time on the street. it was sort of a interesting time because obviously, the Merrill Economics department was kind of wrong. Wrong, and then spectacularly, right, right. And so, um, you know, kind of. Learning from Rosie and being with Rosie, uh, you know, during that time, uh, was a real education. Uh, and so, uh, yeah, I mean, I got, I got, you know, I, I got my, uh, my experience very early. We've got a lot of fans of, of Rosie's in our readership. So, uh, that, that gives you credibility, I think, for those who don't know you. But I've been following you for a while and, uh, I just, I find your work. To be fascinating. For those who don't know you, maybe we could just start out with sort of big picture and then we'll work our way down. Uh, if you could just kind of give me your top level view of what your, what your thoughts are on the US economy right now and, and, and then the timeframe at which you're looking out. When I think about my process, to me, you know, when, uh, we have our, our clients at redneck, right, ed, and I think they're not really paying me for. Like, what's your GDP GR growth forecast? I mean, I don't think that by itself is especially relevant. It's really, you know, trying to understand what are the risks to the consensus and, uh, and then choosing those battles wisely. I mean, I'm not always gonna be at a consensus. I mean, sometimes, you know, wisdom of crowds, I mean, the consensus is usually right. Um. But really it's about balance of risks. I mean, that's sort of what I'm thinking about. And I would just say that relative to the consensus, I am probably a lot more cautious on the economic outlook. I mean, there's, there is admittedly a lot of enthusiasm out there. Um. And you can kind of go down the list, right? I mean, the fed cut a few times last year. Uh, so people think that there's a bit of a lag from those cuts to economic growth. Uh, obviously the, the tax refund season is in full swing. Um, and it's anticipated that that's going to be a lot stronger this year over last year. Uh, there's an anticipation that people will go out and spend that money. Um, and so, you know, there's, uh, there's the ai CapEx boom. Uh, and so people are optimistic about that. Uh, that's pushing upward, putting upward pressure, frankly, on equity prices. And that's one reason why we've seen consumer spending kind of hang in there despite a sluggish employment situation. Right. Uh, the wealthy people are, uh, drawing down their savings and going out and spending, which makes sense because their asset values are going higher. Um, so I guess, you know, for me, when I think about the outlook, um, the reason I'm cautious is, I mean, there's multiple reasons. I mean, first I, it's about labor. And I think the, the labor markets are still sluggish. Uh, you know, if you, if you look at people and what they say about the job market, they're continuing to say that job, finding rates are very challenging. Usually when consumers tell you that it's hard to get a job, it pays to believe them. That has the habit of kind of leading the actual data, right? Because, you know, they know about the pink slips. They know about who's getting hired and fired in their local communities. And so typically that kind of. Gets picked up before the BLS statisticians pick that data up. Um, the next thing I would say is housing. Now, again, there's a lot of enthusiasm for housing at the moment, right? Because mortgage rates have come down. Um, and you know, people think that, okay, mortgage rates are down. That should be good enough for the housing market. I think the issue is. Has demand really picked up as much as anyone would've thought given that decline in mortgage rates? I'd argue probably not. Um, if you look at turn, I mean, home Depot was out just this morning talking about how weak housing turnover is, right? And so, um, that's in the resale market. And if you look at the new market, I think it's a problem frankly, that home builders are going into the new year with essentially the most completed unsold inventory since 2010. And. I think that's a problem because they've been doing affordability adjustments and mortgage rates have been coming down, and yet they're still sitting on all that inventory. So, um, and to me it's, it's almost like a mathematical certainty, right? That that residential construction will come down because housing starts are running below the level of housing completions. Whenever that happens, that means that units under construction will decline. Which means in turn, that residential investment will be, uh, sort of pressured. Uh, the next thing is state and local governments, uh, state and local governments, uh, are likely to be a drag on economic activity this year. So there's been a lot of sort of attention paid to what's going on at the federal level. Um, you know, and the kind of things that the administration is doing to kind of stoke animal spirits and growth. But when you look at the state and local level, um. It's not a pretty picture. I mean it, you know, state and local governments are actually, their job growth has slowed over the last year, um, state governments have seen an outright contraction in, in, uh, in employment. Um, and I suspect that probably continues, um, you know, over the course of the fiscal year, we know, um, you know, that most. More states, uh, in the coming fiscal year, uh, expect to have sort of flat to slightly down, uh, kind of general funds relative to, uh, the, the last year. So there's reason to expect that to be a drag. And then finally, I would just say, you know, I'm a big believer in the idea of like, expectations management, right? So if everyone expects things to be okay and they're not, that's a problem. If everyone thinks, you know, a couple of years ago. Um, everyone was kind of thinking that there was going to be a recession and there wasn't. And so the fact that that didn't happen means you have to restock your inventories and invest and hire because you had anticipated this bad outcome. It hasn't happened, and that kind of, uh, sort of kicks, uh, kicks growth into a higher gear. And the opposite is true in my opinion today. So, you know what's interesting about the sort of four factors I just outlined? I mean, these are exactly the same four factors that I, that I used. Back in 2022 when, um, you know, the consensus was sort of on board for recession. I was arguing there wouldn't be one. Um, and you know, so to me it's like the process hasn't really changed. Uh, I would just say that, um, you know, at the, the most interesting thing I've seen, frankly, in the financial markets is every, we have every excuse to be super bulled up right now. Right? Like I mentioned the refunds, the, uh, you know, the, um. The, the AI optimism, unemployment rate. Yeah. I mean, or, or you know, we're gonna get like this fed chair that's just gonna come in and cut rates and, and all the rest of it. And yeah. You look at this and 10 year yields are actually going down, right? Like, so wouldn't this be the period, um, to actually see rates going up? And in fact, that's not the case. So. Um, you know, maybe a lot of that's already reflected in the price. I mean, it's, it's hard to know. Um, but I do think that's pretty revealing. Where do you stand, Neil, on inflation? Do, do, do you see, I know you're just from watching you, that you're, you're in sort of the disinflationary camp. Um, do you think there's any risk of deflation? I don't think there's any risk of deflation. I think there's a risk of further disinflation. Um, it's really hard to get. Partic especially worried about the inflation outlook because if you look at housing rental inflation, it continues to slide. Um, that's true not only of the sort of official statistics, but also if you look at sort of, uh, more UpToDate market-based measures like Zillow, uh, observe, rents continue to decline, apartment list, observe, rents continue to decline. Um, so. I mean, I think that's an important part of the inflation process. Uh, a lot of the sort of hawkish argument seems to be inflation has been high, therefore it will be high, right? Like it's very inertial in that sense. Um, and I would agree that inflation has been high. I mean, core inflation I think was close to 3% last year. Um, but just because it something has happened doesn't mean that it'll continue to happen. And when you sort of look kind of down the list, uh, you know, wage growth continues to cool. If you look at. You know, the Indeed wage tracker, I mean, that's basically a measure of wage growth in advertised jobs. It continues to slow. Uh, so it stands to reason that, uh, if, uh, wage growth is slowing in advertised jobs and actual wage growth will also slow down. Uh, that should take pressure off of things like, you know, non housing services inflation. Uh, you look at, uh, I mentioned housing rents. Housing rents continue to, to slide. Um, you know, part of the issue is. You have a bunch of people that don't want to admit that tariffs are inflationary. And so, but, uh, you know, at the end of the day, I mean, core goods, prices are up to the extent that that's all has a lot to do with tariffs, and tariffs are a one-off. It stands to reason then that core goods won't be as much of an upward source of inflationary pressure. Over the next 12 months, as has been the case over the last 12. I just wanna touch on the tariff point. Uh, are they inflationary? I mean, I, I could see how they are inflationary in the short term, but in the long term, do they suppress demand because they, because of the inflation? Like is it sort of a circular thing? To me, it's like a relative price shift, right? I mean, basically, um, you put the tariff on it, it pushes up prices for. Those areas of, you know, imported goods basically. Um, and in the sense, and, and as a result, people have less leftover to spend elsewhere and they have to cut back on those other places. I mean, unless there's some kind of a fiscal response where, um, you know, the, uh, the government is kind of giving people more money. Um, if the household's budget constraint isn't going up, then you don't really have the wherewithal to absorb all the, you know, a, a sort of broad base increase in prices, which is what inflation is. So it really results in a relative price shift more than anything else. You touched on a couple other things that I wanna, I wanna mention and I wanna bring in some other economists' thoughts. Um, you mentioned wage growth, um, looks like wage growth. Stagnating a little bit and people are dipping into savings to continue spending. Um. Ed Denni was out this morning with a note saying that really what's happening below the surface is he believes it's more and more baby boomers retiring and they're moving from high paying jobs to starting to spend down their savings. And so maybe it's not as bad as it sounds on the surface. I mean, it's possible, but then again, those people have the least propensity to spend in the first place. So I don't know that that's. I mean, I just think I'm a big believer in sort of Occam's razor type analysis, right? Like I don't try to find like a lot of these little narratives. I mean, to me it's like at the end of the day, uh, real incomes x government transfers, which is like the primary determinant. Um, in terms of like recession determination, uh, you know, and I'm not saying that we're in a recession or anything like that, but it's an important indicator for this reason. Real incomes, net of net of transfers over the last year is basically flat. Basically flat. Right. So why is that? It's because wage growth has slowed and it's because employment growth has slowed. So, um, you know, I mean, as I say, like, okay, maybe, maybe there's some of that going on. You know, boomers people have making all sorts of, kind of rationalizing rationalizations of this. Like, oh, you know, they're the one. High interest rates are good con for consumer spending because boomers are sitting on mountains of money, market funds and so forth. I mean, it's just, um, I would, I, you know, it's just, again, it, uh, if income growth is slowing, if you assume that the savings, the reason why the savings rates probably come down is because asset prices have gone up relative to income. So if asset prices don't go up as quickly as they have been, or let's say the market's correct a little bit. Then it's less likely that the savings rate will come down. You know, I think you can even frankly make an argument that, uh, maybe a lot of people pre prespen the refunds, right? And so when the refund, when the refund actually goes out. Uh, you, you actually see it show up in savings, um, as opposed to going out and getting spent. Well, I think you're right about the, uh, boomer generation not spending, I mean, I just had an argument with my 79-year-old father about why he can afford to have somebody snowplow his driveway. Uh. The a hundred dollars. Too expensive. Yeah. Right. Let's talk a little bit about the labor market. Uh, going a little deeper into it, you, you know, some economists are saying that the labor market is showing slack. Um, others are saying, you know, 4.3% unemployment. It's, it's Goldilocks. Where do you stand on that? To me, the breadth is the, is the, is the problem, right? I mean, um, you have, uh, you know, a labor market that's clearly not firing on all cylinders. Um, there's a big contribution from sort of acyclical industries like education and health. And everything else is somewhat more sluggish. Now, maybe that starts to turn around. We did see some, uh, improving data in January. We'll see whether that lasts. Um, but uh, but generally speaking, over the last year, most of the jobs growth was, uh, in acyclical areas and cyclical areas like goods producing employment like white collar professional services, employment. I mean, these. These were generally down and uh, you know, and I think that's, that's a problem. Um, you know, you can't, you can't run the labor market. Just on one thing. I would also say like the trade-offs are getting a little bit less favorable for policy makers, right? So when you look at something like the beverage curve, like this is the relationship between. The, um, unemployment and, uh, job openings, right? I mean, job o excess labor demand continues to come down, right? Like if you look at labor, uh, job openings, I mean, they've generally been going down. Um, and you're probably operating on a point where if you see further declines in labor demand from here, you probably see more, uh, sort of outsized increases in the unemployment rates. So, you know, I think people have kind of been lulled into this sort of, um. Everything's kind of okay because, oh, it's low, higher, low fire. This is what happens when things are uncertain. You know, it's fine. But I guess my concern with that is it's precisely because of that, that you wouldn't really need to see much in the way of a additional layoffs to get some pretty spooky jobs numbers, right? Like, so you, you know, every month millions of people are hired, millions of people are fired, and that that gap is what gets you the monthly employment numbers. Have very low rates of hiring and very low rates of firing. You wouldn't really need to see much one way or the other, um, to get, you know, more layoffs and in turn, higher unemployment, uh, and weaker job growth. And, you know, when you look at the anecdotes out there, it's not very encouraging. I mean, I, I don't really, um, you know, every day it feels like there's some layoff announcements. Now that's not a substitute for hard data. Um, and I, I, I sort of acknowledge that, but, uh, I, I just think for me it's really about balance of risks and, uh, you know, consumers are still signaling a very, very challenging employment market. Are we at the point where we're, where you are actually able, as an economist to see in the data. Any impact from artificial intelligence? You know, it's like anything, ed, if you put two economists in a room, you'll be lucky to get five opinions. Right. Um, I, I don't, I don't know. I mean, I, I, I, I mean it's, it's, and I think it's okay to say that you don't know. I mean, we've done some work that shows. That a lot of the industries that are spending more on AI are also doing a lot of hiring themselves, which kind of, which is sort of in line with what you'd expect, right? Because typically the companies that are investing also have the wherewithal to hire. And so, you know, that's why typically those two things move in tandem. Um, others, uh, disagree. Um, but I do find it fascinating that we're, you know, uh. To me, like the, the, it's about the outlook. Um, people are talking as if this is happening right now. And, you know, you look at, um, you know, prime Age employment is basically close to pies. Um, so where's all the displacement? You know, I don't, I don't really see it. Maybe that will happen, but it's certain, it's more, it's, it's clearly more of a forecast at this point than a. Than a present day reality. So we shouldn't really be talking about it like a present day reality. That's my opinion. Do you have an opinion on what AI's impact will be? I mean, are you in the cii uh, 2028, 10% unemployment camp? It's a very unusual kind of, uh, thing to think about because historically when we, when we have productivity booms, like if workers are generally becoming more productive, then businesses should want more of those productive workers, right? So why is it. Uh, you know, you go back to the last productivity boom, uh, of the, uh, sort of late nineties, that was a period of, of, of very, very, uh, strong employment. And, um, so, you know, I, I don't know. I, I would certainly sort of, I would resist the idea that, um, that this is going to create sort of widespread job losses. Uh, my own experience is that AI is helpful, um, but it doesn't. Like something like Claude, I mean, that's not making me get rid of the person that works for me. It's supposed to, it makes them a little bit more efficient. Um, I think it's a very good replacement for search. Um, but you know, usually there's a period of time where people have to kind of make. And gain the knowledge necessary to use the technology more efficiently. And I still think we're probably in that process. Uh, when you look at sort of labor or total factor productivity, there's no evidence as of yet that we're kind of breaking out. Maybe that will happen, but as I say, like that's very much a forecast. Um, and it's, it's, um, you know, it is very difficult to know that. Um, I, I think for your listeners, the way you know, we're in a productivity boom basically is if. The consensus just gets repeatedly surprised to the upside on the economy. Right? Like you go back to the nineties, I mean, one of the things you found, like you can go back and look at the evolution of like the blue chip consensus forecast, and every year, like in the late nineties, we sort of started off around two and ended at four. Year after year, after year. And if you, if you go back to the 2010s after the financial crisis, the opposite was true, right? I mean, we remember every year it was like, oh, we're gonna have 3% growth. And then by the end of the year we were at like one and a half. Right. So what explains that productivity, right? Because productivity booms are notoriously difficult to forecast, and they usually go on for a number of years. So if we're going to get into one, um, it's not going to be, it's gonna last for a while. Um, and uh, the other thing I would say is, um, it's really unusual to see a productivity boom with no. Follow through in terms of like real compensation, like historically, right? I mean, you, you know, ultimately the point of all this is to raise household living standards, right? Uh, and is that really happening right now? I mean, it's uh, you know, you go back, um, to the nineties as an example, and real compensation was very, very strong. Uh, over the last number of quarters, we've sort of, people have talked a lot about strong productivity growth and during that time, real compensation has been flat. Great way to look at it. That's, that, that's definitely not the consensus way to look at it, or at least it's not the, uh, it's not the seductive narrative. Put it that way. I don't wanna let you go without asking you about the Fed. Um, 'cause, uh, I, I can't resist. I've, I'm a fan of your, you're and Jeff's podcast, so I try to catch that every week and, um, we appreciate it. Uh, I think, uh, I think it's fair to say that you're, uh, you are not a fan of this appointment, uh, of the Wars nomination, for fair to say. Yeah. For chair. Any, any thoughts on what this fed looks like and, and what it might mean for rates? Well, I mean, I think the Fed is bigger than any one person, so that's, that's the first point. I mean, just because I don't like the pick that the president made doesn't mean I'm telling everyone go out. Sell all your stocks and, you know, pun punt, the punt, the bond market. I mean, the, the Fed is bigger than any one person, so you should never make, uh, you know, changes to your portfolio based on personnel decisions, uh, like this. But yeah, I mean, my view on this is, um, I've, I've always, I've long believed that the Fed job. Is basically a job of economic forecasting. Like your main job is, do rates go up, down, or sideways? That's it. That's the job. And what about Kevin Walsh's record makes anyone think that he's good at that? Like it's really that simple, right? I mean, as I say, like. Um, I was working for Rosie at the time in 2008, you know, and, um, and in May of 2008 at Wars was talking about like commodity price spikes and, you know, even as the labor markets were clearly falling out of bed, and it's because he was making those arguments that actually kept the fed from easing more that summer. Right? Because the, the whole thing is trying to build consensus among your colleagues and. If you have people that are making these sorts of arguments, it becomes more challenging to get the policy that you need. Um, or it takes a little bit, I mean, it's becomes very obvious at that point. Right. And so, um, and I think it's sort of, um, and obviously the most notoriously of course is, is in the period after qe. I mean, he was obviously, uh, an opponent of qe. He went along with it for the sake of Bernanke. Uh, but when he left the Fed. Um, you know, he kept sort of talking about the inflationary consequences of it, even after inflation was coming in better than expected. And, you know, there wasn't any inflationary, uh, you know, so I think he kind of missed, like how it actually worked. It was really a signaling mechanism around rates not so much, uh, you know, putting high powered money into the economy to kind of get the inflation that you would, you know, so I, so I think his forecasting record. It leaves a lot to be desired and I think it's very curious that someone that has been ish, really his entire public career, all of a sudden and in the last like six months, he is dovish now he's not dovish in the way. Christopher Waller is dovish. And I think that's what's interesting, right? So if you listen to someone like Christopher Waller, he's dovish because, you know, he's cautious on the job market and he thinks that the unemployment rate might go up. And he thinks that the growth, the sort of the breadth of, uh, the economy's very, very narrow. I mean, these are sort of more traditional kind of ways to think about the, um, the rates outlook. War by, uh, by contrast is really kind of selling this golden age, uh, thesis, um, as a rationale to, uh, to cut rates, right? Like we earn a productivity boom that takes pressure off of inflation and it allows us to cut interest rates without stoking more inflation. Like now, I think that's really a tough sell. Yeah, that's a tough sell. We just talked about this, right? I mean, what evidence, uh, is there? And you know what's interesting is. It's an app. You know, war show has always said he doesn't like, like discretion, using discretion in policy. But what is getting someone to vote for rate cuts based on a golden age, if not an appeal to discretion, right? You're asking someone to trust you as an economic forecaster, even though you're really bad at forecasting. So, so I don't know. I mean, I think he's gonna have a really tough time of, uh, things, uh, once he gets in and it's, you know, sort of like, maybe it's a. What do they call it, A ferric victory? I mean, maybe the cost is too high. He's been campaigning his entire life for this seat, and, um, now that he's gotten it, he may. May come to regret the fact that he campaigned so hard for it. And why would you cut rates? If everything's going great and we're in a productivity boom, why w why would you cut rates? The theory would be that nero's lower that, uh, that inflation would come down. Right? So that would be the rationale to, to cut rates. I mean, I think, again, the challenge with cutting rates now because of that is, is, is, um. You're doing, it's an appeal to discretion. You're basically asking people to kind of ignore the data and just say like, okay, it's gonna be fine. And, you know, um, and again, I mean that, you know, the, the administrator, the defenders of this sort of view, they always keep kind of bringing up the Greenspan example of the nineties. And of course, and there is some truth to that. I mean, Greenspan famously didn't hike in the mid nineties, um, because of the productivity story. Now that was. Uh, that was coming off of a period of very high inflation and we had this sort of opportunistic disinflation of that era. Um, but really he was just following the data, right? I mean, inflation was coming down and that was neutralizing whatever tightening of the job market you got. But look at what he was doing in the late nineties. Um, he was hiking very aggressively because the labor markets were overheating. And so it's like, which Greenspan in the nineties are we really talking about here? I think the Fed's going to be cutting interest rates this year. I think they'll probably end up doing it more than the markets currently expect. But that's, that's really because I think the outlook isn't as rosy as people expect. And I think that, you know, we'll see, uh, weakening employment growth, uh, and. Uh, more importantly, cooler inflation and that'll give the fed the opportunity to norm to do more reason. What do you think that means for the long end of the yield curve? I think there's value in the long end. I mean, um, you do. Okay. You know, I mean, I think nominal growth is slowing. If you think nominal growth is slowing, why would you want to be? Um, why wouldn't you want to be long duration Yields have every reason to go up, right? I mean, financial market conditions have eased. You know, we talked about the AI boom. Um. Reef tax refunds, Trump vibes, right? He is about to do the State of the Union, like how, you know, how many times I get in client meetings? There's no way Trump is gonna let the economy get, get worse this year. You know? I mean, it's sort of, there's every reason to kind of, um, expect interest rates to go higher and they're not. And so I think that's revealing. I mean, I don't know what the right level of the 10 year yield should be. I mean, I have views on like what fair value might be, but. To me it's about direction of travel and uh, I think it's revealing frankly, that rates are not, uh, going up. And maybe that's, maybe that's because a lot of the upside scenario is already priced into the market, or it's a sign that, you know, the, uh, you know, the bond market is kind of sniffing out the fact that inflation is not really a problem. Neil, uh, I appreciate your thoughts. I hope you'll come back and join us again. Would love to. Thanks Ed. Appreciate that. Take care now. See you Neil. Thanks Neil DDA is the head of Economic research at Renaissance Macro, and you can learn more about his work@renmac.com. I'm me, dagostino. Thanks for joining me. I'll see you next week.