Latest / Trumponomics / Is a Trump Recession on the Way?

Transcript

Is a Trump Recession on the Way? · Trumponomics

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Tariffs are about making
0:09
Speaker 1: America rich again and making America great again. And it's happening,
0:13
Speaker 1: and it will happen rather quickly. There'll be a little disturbance,
0:18
Speaker 1: but we're okay with that.
0:29
Speaker 2: Welcome to Trumponomics, the podcast that looks at the economic
0:32
Speaker 2: world of Donald Trump, how he's already shaped the global economy,
0:36
Speaker 2: and what on earth is going to happen next. Today
0:40
Speaker 2: we're asking have Donald Trump and Elon Musk stalled the
0:44
Speaker 2: US economy? A week or two ago, the highly influential
0:48
Speaker 2: now cast of the US economy that updates every day
0:52
Speaker 2: was suggesting that the US economy was going to grow
0:54
Speaker 2: at an annual rate of two point three percent in
0:57
Speaker 2: the first three months of this year. But now a
1:00
Speaker 2: lieu of negative data just in the past week has
1:03
Speaker 2: that measure predicting the economy will shrink by nearly three percent. Now,
1:07
Speaker 2: that's the first time that gauge has turned negative since
1:11
Speaker 2: twenty twenty two. Now it's just one measure, it's a
1:14
Speaker 2: now cast, It jumps around, But several prominent Wall Street
1:17
Speaker 2: forecasters are also now expecting the US economy to shrink
1:22
Speaker 2: just in those first three months of the year, and investors,
1:25
Speaker 2: amid all the gloom, amid all the worry about tariffs
1:28
Speaker 2: and other things, are betting on three interest rate cuts
1:32
Speaker 2: by the US Central Bank, the FED to support the
1:35
Speaker 2: economy this year, rather more than they were expecting a
1:38
Speaker 2: while back. So is this all Donald Trump an Elon
1:41
Speaker 2: Musk's fault instead of that Trump bump to the economy
1:45
Speaker 2: that we were talking about at the beginning of the year.
1:46
Speaker 2: Has a combination of layoffs in the federal government, sweeping tariffs,
1:51
Speaker 2: and a whole lot of uncertainty raised the prospect of
1:54
Speaker 2: a Trump slump or is it as the Treasury sectary
1:57
Speaker 2: Scott bessn't reassured us this week, just a period of transition. Well,
2:03
Speaker 2: to answer that, we felt here at Trumponomics that we
2:06
Speaker 2: had to double down on the number of economists on
2:08
Speaker 2: the show. So we have two pH d economists, both
2:11
Speaker 2: of whom spent time one time or another in the
2:14
Speaker 2: President's Council of Economic Advisors in the recent past. First
2:23
Speaker 2: our guest Catherine Holston, new to the show now at
2:26
Speaker 2: Evercore ASI Research, was a senior economist in the White
2:30
Speaker 2: House last year and before that in the Office of
2:32
Speaker 2: the chief Economists of the World Bank. Catherine, very good
2:35
Speaker 2: of you to be here.
2:37
Speaker 1: Thank you so much for having me. It's great to
2:38
Speaker 1: be here.
2:39
Speaker 2: And our regular in house guest, Anna Wong, chief US
2:41
Speaker 2: economists for Bloomberg Economics and also formerly an economist at
2:45
Speaker 2: the Federal Reserve and at the Council of Economic Advisors
2:48
Speaker 2: in the White House swamps comment during Donald Trump's first
2:51
Speaker 2: time Anna, always good to have you.
2:54
Speaker 3: Oh, it's good to be here again.
2:55
Speaker 2: Look, there's two pieces of this, and I told you
2:58
Speaker 2: before we started recording a little bit about having so
3:01
Speaker 2: many super smart economists, though very happy that we're all women,
3:05
Speaker 2: to talk about the impact of tariffs, of the so
3:09
Speaker 2: called Department of Government efficiency, and just generally this mood
3:14
Speaker 2: of gloom that seems to have been starting to descend
3:17
Speaker 2: around the US economy in the last week or so
3:20
Speaker 2: after so much optimism about in the first weeks after
3:24
Speaker 2: President Trump was reelected. We're going to get into all that,
3:27
Speaker 2: but maybe we could just have a top line view
3:29
Speaker 2: of how you both think these two shocks, the tariff
3:32
Speaker 2: shocks and what's happening to the federal government will affect
3:36
Speaker 2: the economy. Catherine, I know that you are my old
3:39
Speaker 2: friend and your colleague Krishna Guha have looked at both
3:42
Speaker 2: trade policy uncertainty and the impact of Elon Musk's DOGE
3:47
Speaker 2: efforts and how they affect growth this year.
3:50
Speaker 1: So I'll start on the tariff side, and I'll mention
3:53
Speaker 1: that I'm going to be comparing apples and oranges a
3:55
Speaker 1: little bit in our estimates here, So I just want
3:58
Speaker 1: to flag that. But this tariff scenario with twenty five
4:01
Speaker 1: percent on Canada and Mexico going to twenty percent on
4:04
Speaker 1: China matches the kind of max tariff scenario that we
4:08
Speaker 1: laid out in a recent note. We think this could
4:11
Speaker 1: add fifty basis points to core PCEE inflation in twenty
4:15
Speaker 1: twenty five, another twenty basis points in twenty twenty six.
4:19
Speaker 1: That's pretty substantially more than our base case in terms
4:22
Speaker 1: of what the FED is looking at. That includes two
4:24
Speaker 1: pieces in this shock here. One is the actual impact
4:28
Speaker 1: of the tariffs, and then second the really big uncertainty
4:31
Speaker 1: that we're seeing trade policy uncertainty, and there's good reason
4:34
Speaker 1: to think that's going to continue to remain quite high,
4:37
Speaker 1: potentially pushing up inflation expectations, which is what the FED
4:41
Speaker 1: is of course worried about on the DOGE side of things.
4:46
Speaker 1: Within the government, we think the impact in March, April
4:49
Speaker 1: and May could lead to payroll employment growth that is
4:52
Speaker 1: seventy thousand less than expected in a baseline, which is
4:55
Speaker 1: a pretty big hit considering where we're at with payroll
4:58
Speaker 1: growth right now.
4:59
Speaker 2: We'll get into how that compares with the overall size
5:01
Speaker 2: of the economy. But Anna, I mean just the same
5:04
Speaker 2: question to you, your sort of top line thoughts on
5:06
Speaker 2: this sort of double whammy that we have now coming
5:10
Speaker 2: you know, at very similar time hitting the US economy
5:13
Speaker 2: on the tariffs and the DOGE cuts.
5:17
Speaker 3: Right, So my top line effect estimates on the direct tariff,
5:22
Speaker 3: not including the uncertainty, or at least what I think
5:26
Speaker 3: the FED will have is quite similar to Catherine's estimate.
5:29
Speaker 3: So I have one point three percent hit on GDP
5:33
Speaker 3: and also zero point eight percent increase on core PCE.
5:39
Speaker 3: And these are the estimates implied from the general qualiber
5:42
Speaker 3: model that the International Finance Division at the FED use
5:46
Speaker 3: as a dashboard to track coming trade policy in the
5:49
Speaker 3: first Trump administration, and typically the horizon is about two
5:53
Speaker 3: years or two or three years. That's because that's usually
5:57
Speaker 3: our forecast horizon. So if you take that point eight
6:00
Speaker 3: percent core PCE inflation hit spread over to R three years,
6:04
Speaker 3: with the maximum arriving in the first two years, that's
6:08
Speaker 3: very close to where Catherine has on the uncertainty piece.
6:12
Speaker 3: Though the experience of the First Trade War has taught
6:15
Speaker 3: I think the FED economist that the general equilibrim model
6:20
Speaker 3: the estimate might be a maximum take, because ultimately in
6:23
Speaker 3: the First Trade War, both a GDP estimate and the
6:26
Speaker 3: core PC estimate actually undershot what the model suggests. The
6:30
Speaker 3: bigger piece is actually uncertainty, and the FED has developed
6:34
Speaker 3: a trade policy uncertainty. Currently, the index of that trade
6:38
Speaker 3: policy uncertainty developed by my former colleagues at a monthly
6:43
Speaker 3: level is eleven standard deviation above historical norms, and it's
6:48
Speaker 3: almost doubled the size of the first Trump administration trade
6:53
Speaker 3: policy uncertainty. So that piece should be translating to a
6:57
Speaker 3: hit GDP. Hit based on that value should be aboutero
7:01
Speaker 3: point eight percent GDP and on DOGE, So I think
7:06
Speaker 3: that the DOGE cuts so far or very small relative
7:09
Speaker 3: to GDP, so really it doesn't really work in terms
7:13
Speaker 3: of translating to GDP. However, keep in mind that it
7:16
Speaker 3: is the difference in the fiscal impulse that affects GDP growth. Right,
7:21
Speaker 3: So if the first two quarters of the DOCHE cuts
7:24
Speaker 3: has generated a bigger change a decline in fiscal spending
7:28
Speaker 3: compared to last year, which is the quarter still under Biden,
7:33
Speaker 3: then that rate of change annualized could generate a pretty
7:36
Speaker 3: large decline in GDP growth. And according to the shock
7:40
Speaker 3: model that Bloomberg Economics has developed, the contour of the
7:45
Speaker 3: GDP growth from DOCHE excitivities should begin to show up
7:49
Speaker 3: in the first and second quarter of this year, and
7:52
Speaker 3: especially peaking in terms of GDP growth in the fourth quarter. However,
7:57
Speaker 3: the impact on payrolls, as Catherine suggested, will be more
8:02
Speaker 3: obvious sooner, and the February payrolls, which we will be
8:06
Speaker 3: receiving this Friday, we expect we won't be seeing much
8:09
Speaker 3: of that yet. However you'll start to see that in
8:12
Speaker 3: the next month. And also just again the uncertainty alone
8:16
Speaker 3: you talked about the domain gloom economic data we have received.
8:20
Speaker 2: What is a.
8:21
Speaker 3: Sign of weakness is the pullback in consumption which we
8:25
Speaker 3: saw in January. Last December it was very strong, but
8:30
Speaker 3: then in January the consumers pulled back, so there's no
8:33
Speaker 3: underlying strength and consumptions just pulling back. And as we
8:37
Speaker 3: see more of this pullback as a retrenchment to the
8:40
Speaker 3: strength last fall, you're going to see more and more
8:43
Speaker 3: impetus on this pressure on GDP growth.
8:46
Speaker 2: ANA in the sort of educational byways department, just to
8:50
Speaker 2: get our sense around this trade policy uncertainty, and you
8:53
Speaker 2: talk about it being eleven standard deviations from so when
8:57
Speaker 2: you sit roughly meaning when we say that.
9:01
Speaker 3: In terms of the index, this index goes back to
9:04
Speaker 3: the nineteen sixties and the Fed Economist collected mentions of
9:09
Speaker 3: the trade policy uncertainty or references of trade policy uncertainty
9:13
Speaker 3: in media and social media and all the newspapers, and
9:18
Speaker 3: right now the index has doubled the level of twenty sixteen,
9:23
Speaker 3: which means that uncertainty is through the roof and there's
9:27
Speaker 3: just no historical comparisons. Is nineteen sixty at the level
9:31
Speaker 3: of uncertainty we're facing right now.
9:34
Speaker 2: And I guess we have been saying that the tariffs
9:36
Speaker 2: that were announced this week are taking US tariffs back
9:39
Speaker 2: to where they were in the forties. Obviously we're still
9:41
Speaker 2: not at the levels of that preceded that era, there
9:45
Speaker 2: were much higher tariffs than the global economy before that,
9:48
Speaker 2: and I guess that's one thing that the President says
9:50
Speaker 2: is we're in some sense going back to some previous
9:54
Speaker 2: eras for that, Anna was mentioning the fed's Trade policy
9:58
Speaker 2: Uncertainty measure, which has become something as a sort of
10:02
Speaker 2: standard thing that people refer to. But I noted in
10:05
Speaker 2: your recent research with Krishna, you're also thinking about DOGE
10:09
Speaker 2: policy uncertainty and starting to think that that might be
10:14
Speaker 2: almost of the same order of magnitude. So could you
10:17
Speaker 2: just talk us through it, because obviously I suspect you
10:19
Speaker 2: agree that the narrow impact of those federal layoffs is
10:23
Speaker 2: not necessarily going to move the dial that much. But
10:26
Speaker 2: it's this sort of broader ripple effect that's.
10:30
Speaker 1: Right, and we think it plays out, you know, maybe
10:32
Speaker 1: quite similarly to how adding trade policy uncertainty to our
10:37
Speaker 1: general equilibrium models does. Because the thing that's unique about
10:41
Speaker 1: trade policy uncertainty right now is that it's much larger
10:44
Speaker 1: in level terms, as Anna said, but it's also has
10:46
Speaker 1: the potential to be very long lasting. And this is
10:49
Speaker 1: really not what you would model if you were seeking
10:52
Speaker 1: efficiency in the model, and so we wanted to think
10:55
Speaker 1: about how the same impact might be coming out of DOGE,
10:59
Speaker 1: and specifically how the uncertainty for private sector firms that
11:05
Speaker 1: are heavily exposed to federal contracts and grants might weigh
11:10
Speaker 1: on decisions to hire or potentially even do layoffs at
11:15
Speaker 1: these firms. So there's three pieces that we look at here.
11:19
Speaker 1: The first, as you mentioned, is the direct impact of
11:22
Speaker 1: firing probationary employees and other employees in the federal government,
11:26
Speaker 1: and that's relatively small given the number of workers that
11:30
Speaker 1: we have in the US. There are two point four
11:33
Speaker 1: million federal civilian employees. We don't know how many federal
11:36
Speaker 1: contractors there are, but some estimates from Brookings suggest there
11:40
Speaker 1: are more than five million, more than a two to
11:42
Speaker 1: one ratio between federal contractors and federal employees, and another
11:47
Speaker 1: two point four million employees potentially connected to grants. So
11:51
Speaker 1: what we do is we look at first our baseline
11:55
Speaker 1: for direct impacts on federal payrolls. This year, I think
12:00
Speaker 1: there could be two hundred thousand federal workers fired over
12:03
Speaker 1: the year. That includes the seventy five thousand who have
12:06
Speaker 1: taken the deferred resignation scheme. But we also look at
12:10
Speaker 1: two impacts on private sector payrolls. The first is really
12:15
Speaker 1: just the direct impact for if there are substantial cuts
12:18
Speaker 1: to federal contracts and grants. So we're not seeing that
12:22
Speaker 1: yet on a large scale, but if that plays out,
12:25
Speaker 1: we think it's reasonable to assume that firms are not
12:28
Speaker 1: going to be able to hold onto all of their
12:30
Speaker 1: employees as these contracts and grants are cut. The piece
12:35
Speaker 1: that we're calling DOGE policy uncertainty or DPU, and here
12:40
Speaker 1: I would just say TPU trade policy uncertainty. This is
12:44
Speaker 1: something that's measured that we have an index going back
12:47
Speaker 1: really far. DPU we're putting forward as a proof of
12:50
Speaker 1: concept for just another form of uncertainty that's really unknown
12:54
Speaker 1: how this will operate. And so this is not meant
12:57
Speaker 1: to be precise estimates, but just to say, if we
13:00
Speaker 1: make what we think are pretty modest reasonable assumptions, can
13:04
Speaker 1: we see this having big impacts in the private sector.
13:07
Speaker 1: And the answer that we get is yes. So we
13:10
Speaker 1: first construct what we call employment at risk in the
13:14
Speaker 1: private sector, and so this is just if at the
13:17
Speaker 1: industry level, industries are receiving federal contracts, just look at
13:22
Speaker 1: that relative to the share of output in those industries
13:26
Speaker 1: and then look at how many employees we think might
13:28
Speaker 1: be supported by these contracts. And then once we have that,
13:32
Speaker 1: we can say, maybe, let's assume five percent of these
13:37
Speaker 1: employees at risk are not maintained in payroll growth because
13:41
Speaker 1: of this DOGE policy uncertainty. We want to think about
13:44
Speaker 1: two kind of distinct scenarios around the uncertainty. The first
13:49
Speaker 1: is uncertainty lasts for maybe three months. We can think
13:52
Speaker 1: of this as a case where if you're a federal
13:55
Speaker 1: contractor maybe you can maintain your current employees, you institute
14:00
Speaker 1: a hiring freeze, leading payroll growth to be lower than
14:04
Speaker 1: last year. And in this scenario, we might have uncertainty
14:09
Speaker 1: resolving when DOGE kind of finishes whatever it's choosing to
14:13
Speaker 1: do in a few months, and we might see some
14:15
Speaker 1: catchup hiring over the rest of the year as these
14:18
Speaker 1: firms go back and bring on workers. So in this case,
14:21
Speaker 1: we see some larger impacts in March, April, and May,
14:25
Speaker 1: but we then because of this catchup hiring in our baseline,
14:29
Speaker 1: only see about fifty thousand fewer payroll over the year
14:32
Speaker 1: coming out of this effect, which is really not very large.
14:35
Speaker 1: But then we look at another scenario where we still
14:37
Speaker 1: have a relatively low magnitude of uncertainty, but it drags
14:41
Speaker 1: out over the remainder of twenty twenty five, and in
14:45
Speaker 1: that case, we can get something like three hundred and
14:48
Speaker 1: thirty thousand fewer payrolls over the year just from this
14:51
Speaker 1: DPU effect, just by assuming that maybe initially firms are
14:56
Speaker 1: hiring less, but then over time they're actually having to
14:59
Speaker 1: go through with layof and the continued weight of this
15:02
Speaker 1: uncertainty induces kind of a paralysis effect on these firms
15:06
Speaker 1: that are pretty heavily exposed to federal contracts in grants.
15:10
Speaker 2: It's interesting, just while we're recording this, which is on
15:13
Speaker 2: a Tuesday afternoon, the S and P five hundred has
15:16
Speaker 2: lost all the gains that it made since Donald Trump
15:20
Speaker 2: was elected in November. We've had something like three point
15:23
Speaker 2: four trillion dollars increase in the S and P five
15:26
Speaker 2: hundred index that we'd had in the weeks after Donald
15:29
Speaker 2: Trump's election win, and that has now all been completely
15:33
Speaker 2: wiped out in a big chunk of it from this
15:35
Speaker 2: the negativity around the tariff news. So neither of you
15:39
Speaker 2: are market analysts, and I wouldn't ask you to comment
15:41
Speaker 2: on that but is this overdone? How likely is it
15:44
Speaker 2: that we will actually have a recession or a serious
15:48
Speaker 2: bout of stagflation as a result of this, These policies
15:53
Speaker 2: that have been it's fair to say, you know, unexpectedly
15:56
Speaker 2: aggressive in the first few weeks of the Trump ad ministry.
16:01
Speaker 3: Stackflation requires the word stack. Typically in a recession, with
16:07
Speaker 3: contraction of economic activities, you also have a decline in inflation.
16:13
Speaker 3: So for inflation to be rising, meaning that firms continuing
16:18
Speaker 3: to be successful, not just trying, but successful at passing
16:23
Speaker 3: through higher prices. For stackflation to happen, we will need
16:27
Speaker 3: to see this. And that's not my baseline because I
16:30
Speaker 3: still agree with Powell that inflation expectations are anchored and
16:34
Speaker 3: from what we're seeing, firms actually have very little pricing
16:38
Speaker 3: power left to pass through these price increase And second
16:42
Speaker 3: of all, the second piece of these is that I
16:44
Speaker 3: think that there's just structural component to tariffs and a
16:48
Speaker 3: negotiation component to the tariffs, and the tariffs on Canada
16:53
Speaker 3: and Mexico are the negotiation pillar of tariffs, and those
16:58
Speaker 3: will go away. My baseline is that they'll come and
17:01
Speaker 3: go really quickly. The ones on China was the ones
17:05
Speaker 3: I have in my baseline, in my earlier baseline last year,
17:08
Speaker 3: I have the tariffs on Chinese goods going to forty
17:12
Speaker 3: five percent. We're very close to that. Now those will stick,
17:16
Speaker 3: and I think that is the piece that to me,
17:18
Speaker 3: is the biggest source of permanent inflationary risk, particularly because
17:24
Speaker 3: a larger portion of the goods we import from China
17:27
Speaker 3: are consumption goods as opposed to our trade with Canada
17:32
Speaker 3: and Mexico, which are primarily intermediate goods.
17:37
Speaker 2: And let just quickly come back on you, I mean,
17:39
Speaker 2: careful listeners to this show will maybe note that though
17:42
Speaker 2: you may well think there's an emphasis on negotiation in
17:45
Speaker 2: the Canada and Mexico tariffs, we have all been and
17:47
Speaker 2: you have been surprised so far by how willing and
17:52
Speaker 2: aggressive Donald Trump has been to put these tariffs on.
17:56
Speaker 2: We had a delay, but now against expectations, he's gone
17:59
Speaker 2: ahead with full rate of twenty five percent. Many people
18:02
Speaker 2: thought it would be graduated. It's fair to say you've
18:05
Speaker 2: been a bit surprised.
18:07
Speaker 3: Yeah, I was a bit surprised. Then I went back
18:10
Speaker 3: to look at his playbook in twenty eighteen and twenty nineteen.
18:14
Speaker 3: Then I realized there was a long period of the
18:18
Speaker 3: FED in the first half of twenty nineteen where all
18:22
Speaker 3: we worried about actually is not the Chinese tariffs, but
18:25
Speaker 3: on auto tariffs and on tariffs on Canada and Mexico.
18:30
Speaker 3: And recall that Trump was very close to using AIBA
18:34
Speaker 3: on Mexico. Mexico was the country that was able to
18:38
Speaker 3: push the line on using emergency power. This time he
18:42
Speaker 3: actually used it. So what that period of tariffs spears
18:46
Speaker 3: on Canada and Mexico shows is that it turns out
18:50
Speaker 3: that those two countries are always on Trump's list to hit,
18:54
Speaker 3: even back then.
18:55
Speaker 2: Catherine, I think there's a few forecasses that are now
18:58
Speaker 2: suggesting that no one is suggesting really that there will
19:00
Speaker 2: be a recession. I mean, are we overdoing this or
19:03
Speaker 2: is there actually in all this uncertainty a possible sort
19:08
Speaker 2: of trigger point where we could be kind of find
19:11
Speaker 2: ourselves in recession.
19:12
Speaker 1: I don't think it's overdoing it that there's a trigger
19:15
Speaker 1: point out there. I share a kind of Anna's base
19:18
Speaker 1: case that the twenty five percent tariffs on Canada and
19:21
Speaker 1: Mexico likely will not hold for very long, but that's
19:24
Speaker 1: because they're just too economically damaging if they do. And
19:28
Speaker 1: of course, if we end up in that scenario, it
19:30
Speaker 1: changes the call. I think now I'm not seeing stagflation,
19:34
Speaker 1: but if that seems like it's going to maintain, it
19:36
Speaker 1: does change things.
19:38
Speaker 2: So if we just carry on with the policies that
19:39
Speaker 2: we now have implemented by the administration, the twenty five
19:43
Speaker 2: percent tariffs against our two most important trading partners and
19:47
Speaker 2: the ones that are forecast to come in I mean
19:49
Speaker 2: actually have been declared to come in, that that would
19:53
Speaker 2: potentially be ass cause of a recession where just everyone's
19:56
Speaker 2: vetting on that they won't stick.
19:58
Speaker 1: I don't think it's automatic res but I think the
20:01
Speaker 1: risk really is there, and particularly there's so much trade
20:06
Speaker 1: between these three countries, there's supply chain impacts that are
20:09
Speaker 1: going to be really damaging. We've just seen the effects
20:11
Speaker 1: of big supply chain disruptions. Of course, this is a
20:15
Speaker 1: different way would play out than during the pandemic, but
20:18
Speaker 1: we know that that can be quite inflationary, and I
20:22
Speaker 1: would just stress that the economic fundamentals going into this
20:26
Speaker 1: administration were quite good. So this is really kind of
20:29
Speaker 1: a test case of how much policy uncertainty and actual
20:33
Speaker 1: policies now with the tariffs, can we throw at things.
20:36
Speaker 1: And to Anna's point about inflation expectations, the FED is
20:39
Speaker 1: really trying to assess two things. They're trying to assess,
20:43
Speaker 1: is weakening growth that we're now seeing in the data
20:46
Speaker 1: going to feed into unemployment? And they're trying to assess
20:51
Speaker 1: is the inflation risk going to show up in inflation expectations.
20:55
Speaker 1: These are really the two triggers for movement one way
20:58
Speaker 1: or the other. But the FED, the markets, the three
21:01
Speaker 1: of us are all facing the same uncertainty in actually
21:06
Speaker 1: seeing that underlying data. And so what's really difficult right
21:09
Speaker 1: now is the TPU. The trade uncertainty is likely to
21:12
Speaker 1: remain quite high. We think that this doge uncertainty could
21:16
Speaker 1: be kind of clouding what's going on with underlying payrolls
21:20
Speaker 1: and really giving us some actual negative effects on unemployment.
21:25
Speaker 1: And this just makes it very hard for the FED
21:27
Speaker 1: to assess do the underlying fundamentals warrant a rate cut
21:32
Speaker 1: or even a rate increase in the face of inflation
21:35
Speaker 1: expectations really becoming unanchored. The other thing that I would
21:38
Speaker 1: just stress is very different from twenty eighteen to nineteen
21:42
Speaker 1: is the initial conditions of this economy and the idea
21:46
Speaker 1: that the FED might have a little bit of a
21:47
Speaker 1: lower threshold for allowing inflation expectations to go up at all.
21:53
Speaker 1: Here I'm talking about longer term inflation expectations, but I
21:57
Speaker 1: think if those start to move up, it's going to
21:59
Speaker 1: be very hard that have Fed to say, actually, this
22:01
Speaker 1: is just one time tariffs and we'll look through it,
22:05
Speaker 1: because there are so many other shocks in the economy
22:07
Speaker 1: that it's just really hard to make that determination.
22:10
Speaker 2: I guess I had had a final question for Anna,
22:12
Speaker 2: which is sort of slightly stepping back. I mean, having
22:15
Speaker 2: been through Brexit in the UK and from a lot
22:18
Speaker 2: of these trade things, there's a hit to the economy
22:21
Speaker 2: that's not a fatal, but a sort of measurable hit
22:25
Speaker 2: that you didn't need to have if you hadn't reduced
22:28
Speaker 2: your openness to your major trading partners, something that the
22:31
Speaker 2: UK has done with Brexit. And the implication of that,
22:35
Speaker 2: it seemed to me, was that you're sort of in
22:37
Speaker 2: a hole, and then you have to find positives that
22:39
Speaker 2: are going to offset that hole. You shut yourself in
22:41
Speaker 2: the foot, or at least you know, stubbed your toe
22:43
Speaker 2: pretty badly, and you have to find some way to
22:45
Speaker 2: make it up. It feels like we're in that kind
22:48
Speaker 2: of situation. We've decided, for whatever reason, to do this
22:51
Speaker 2: damage to our trading situation, and that's going to have
22:54
Speaker 2: a certain hit, not necessarily a fatal hit, but a
22:58
Speaker 2: certain hit the recovery and to growth and maybe to
23:02
Speaker 2: other things. But do you think and are the kind
23:05
Speaker 2: of policies that investors were focused on at the beginning
23:09
Speaker 2: of the administration that made them positive about growth and investment,
23:14
Speaker 2: you know, the tax cuts being made permanent, the deregulation agenda,
23:19
Speaker 2: potentially a smaller, leaner government. Do you think all those
23:23
Speaker 2: things are still much bigger, potentially positives than the negatives
23:27
Speaker 2: that we're going to see from this uncertainty and this
23:30
Speaker 2: trade hit. Or do you think, actually we're not talking
23:34
Speaker 2: about very different magnitudes here, and it's a little bit
23:37
Speaker 2: touch and go whether this administration is going to be
23:39
Speaker 2: really good for the economy overall.
23:41
Speaker 3: That's a really good question. My read of the economic
23:45
Speaker 3: framework of the administration, or at least the beliefs of
23:50
Speaker 3: the top economic policy advisor, how they see the economy,
23:54
Speaker 3: how they interpret the world, is that they truly think
23:57
Speaker 3: the size of the government is too big, and they
24:01
Speaker 3: are focused on getting rid of this crowding out effect
24:05
Speaker 3: which they see as generating more regulations which is inflationary,
24:11
Speaker 3: and also reduce productive capacity and economy. So everything they're
24:17
Speaker 3: doing right now with the DOCHE cuts is to shrink
24:21
Speaker 3: the size of the government. At the same time, the
24:23
Speaker 3: policy package include raising tariffs because they need to. What
24:28
Speaker 3: they want to do is to raise the taxes on
24:32
Speaker 3: the foreign and international sector while lower the barriers and
24:37
Speaker 3: taxes in the domestic economy. So it's like a full package.
24:41
Speaker 3: You can't see each pillar in isolation. Right, it looks
24:45
Speaker 3: like a lot of the contour of the economic impact
24:48
Speaker 3: of DOCHE and tariffs from all our model are concentrated
24:52
Speaker 3: in the first two years. The trade policy uncertainty, it
24:55
Speaker 3: actually goes away really quickly. If Trump suddenly to wait,
25:00
Speaker 3: I'm making a deal, and then the next day you
25:02
Speaker 3: see that policy uncertainty plunging faster than the actual tariff level. Right,
25:07
Speaker 3: the tariff level will takes time to go down, but
25:10
Speaker 3: it actually is the decline in trade policy that would
25:14
Speaker 3: suddenly spur this reversal of growth. So I think, based
25:18
Speaker 3: on all the models I've assessed that whatever the positive
25:22
Speaker 3: benefits of this DOGE and deregulation agenda, and also the
25:27
Speaker 3: pernicious effect of tariffs will start to fade away in
25:30
Speaker 3: the second half of Trump's administration, while whatever benefits to
25:35
Speaker 3: the fiscal agenda will start to kick in the second half.
25:38
Speaker 3: So basically JD. Van's election as the twenty twenty eighth
25:43
Speaker 3: president is really a bet that this contour of the
25:48
Speaker 3: benefits of their economic agenda will start to kick in
25:51
Speaker 3: in the second half, while it would be pained in
25:53
Speaker 3: the first two years.
25:54
Speaker 2: Well, and of course today will be when they start
25:56
Speaker 2: dating the Trump vance recovery and they'll forget about anything
26:00
Speaker 2: that happened to the stock market before. I think that's excellent, Anna.
26:04
Speaker 2: It is indeed a period of transition and a transition
26:08
Speaker 2: to who knows what, but I think we'll be charting
26:11
Speaker 2: it in in Trumpanomics. It has been a very trump
26:13
Speaker 2: andomic episode. But thank you very much to Anna and
26:17
Speaker 2: to Catherine. I'm sure we'll have you both back. But
26:22
Speaker 2: that's that's it for now. Thank you, thanks for listening
26:28
Speaker 2: to Trump and Nomics from Bloomberg. It was hosted by
26:30
Speaker 2: me Stephanie Flanders, and I was joined by Anna Wong
26:33
Speaker 2: and Catherine Holston. Trump and Nomics is produced by Summer,
26:36
Speaker 2: Sadi and Moses and with help from Chris Martlu and
26:39
Speaker 2: sound design by Blake Maples. Brendan Francis Newnham is our
26:42
Speaker 2: executive producer and to help others find the show, please
26:46
Speaker 2: rate and review it highly wherever you listen to podcasts