Join David Greene, CEO of CJM Wealth Advisers, for a discussion with Ben Harris, Vice President at Brookings and former Assistant Secretary of the Treasury, as they dive into the macroeconomic and political outlook for 2024. From inflation and the labor market to interest rates and the potential impact of upcoming elections, this conversation is packed with expert analysis on the key issues shaping our economy today. Don’t miss this chance to get a clearer understanding of what’s ahead and how it could affect your financial future.
David D. Greene:
Good afternoon. Thank you for joining us. I’m David Greene, CEO and Financial Adviser here at CJM Wealth Advisers. I have the privilege here today to be speaking with Ben Harris, both a friend and an expert in the economy. Ben, thank you for joining us today.
Ben Harris:
Thanks for having me.
David D. Greene:
Absolutely. Looking forward to this discussion. As we jump into it, I’m going to give a quick intro and bio of Ben Harris, currently the Vice President and Director of Economic Studies at Brookings and most recently served as Assistant Secretary for Economic Policy and the Chief Economist under the US Treasury Department with Janet Yellen. Also a professor at Northwestern University, Kellogg School, Associate Adjunct Professor at Maryland and Georgetown, various roles at Brookings, and an author, co-author, the Retirement Challenge. Riveting. His three daughters love reading this as they head to sleep.
Speaking of college, you’ve done a fair amount of studies yourself, Ben, PhD in economics from GW, Masters, both from Cornell and Columbia, and a BA in Economics from Tufts, plus a Fulbright Scholar. So I think we can say that you’re well qualified for this conversation.
Ben Harris:
I like to think so.
David D. Greene:
And what is this conversation? We’ve termed it the macroeconomic and political outlook for the rest of 2024. Ben is an economist supreme and is going to talk about the major topics that are going on, that you’re reading in the headlines. We’re going to try to make this a lightning round. We’re not going to spend 10 minutes on each of these topics. Really want you to get an understanding for what’s going on and how it impacts you.
So with that, Ben, jump into it. Ready to go?
Ben Harris:
Yep, sounds good. Let’s jump in.
David D. Greene:
Big topic out there, probably the biggest, inflation. It’s hitting everybody in their pocketbooks, whether it’s coffee or cars, people are feeling this. It feels like it’s everywhere and on everyone’s mind. What’s the current state of inflation and the outlook in the year ahead?
Ben Harris:
To start, let’s just talk about what inflation is because I think there’s a lot of confusion. Inflation is the rate at which prices are going up. Take one example. Our kids all played soccer. Let’s say that in 2020, the price of a youth soccer jersey is a hundred dollars.
David D. Greene:
Got it.
Ben Harris:
And then it goes from a hundred dollars to $110. Well, the inflation rate for that item is 10%. It increased by 10%. If in 2022, it then stays at $110, so the price doesn’t go up or doesn’t go down, inflation rate is zero. So the price level, is it going from a hundred dollars to 110, but the rate of change, the rate at which it increases is 10% and then zero.
What we’re seeing now in the US economy is we’re coming out a period of not entirely unprecedented because people who lived through the economy of the 1970s might remember this long period of elevated price increases in inflation. But for people who don’t remember the 1970s, this is really unprecedented, what we just lived through, where we had inflation rates peaking around 9% at the middle part of the pandemic and then coming down now to close to more normal levels.
I think that from an economist standpoint, the view is, well, inflation is largely solved. Inflation, depending on which measure you look at, just fell beneath 3%. That’s a level which is a little high, but in general, many economists are comfortable with. But for American consumers, you still have this higher price level. The price of everything we’re used to is much higher than it had been, and a lot of those prices are not coming down. I think it’s unrealistic to expect a lot of deflation.
So I think that we’re living kind of in two worlds. In the economics world, there’s a lot of comfort with the lack of or the very slow rate of price increases. But for American consumers, I think there’s a little more concern around things that feel really high. We’re not used to going to the grocery store and paying some of these prices. We’re not used to necessarily paying prices for cars.
That’s where things are, which is that prices are coming down to the point now where the Federal Reserve, which has its dual mandate, where the Fed looks at both price levels and employment, and for the past four years, the Fed has been mostly concerned with price levels, is now shifting away. The Fed is less concerned with inflation moving forward and is more concerned with having a healthy labor market.
David D. Greene:
That’s really, so back to inflation, people are still feeling it. Even though prices, the rate of price increases has come down to more normal levels. We’re still paying more, and the idea that it’s going to get cheaper, probably not over the next couple years. But as you just state, what people are also feeling is some people have lost a job or are looking for work. It’s hard to read the tea leaves of what’s going on in this labor market. Sorry to interrupt, but can you expand a little bit about what’s going on with that?
Ben Harris:
Yeah. We’ve now transitioned out of this period of really high inflation, and I think most forecasters are expecting it to come down to around 2%, which is where the Federal Reserve and others think is a healthy level. Now we’re starting to turn our attention more towards the labor market. We saw last month the unemployment rate jumped up to 4.3%. There are a lot of different indicators of the labor market. There’s the unemployment rate, of which there are many unemployment rates. We can look at how frequently people are quitting. We can look at how frequently people are laid off. We can look at the job posting. Taken on the whole, I think the rise in the unemployment rate, and also the speed at which it’s been increasing, is cause for concern.
But then you can look at other labor market indicators. For example, every Thursday we look at all the state programs that run unemployment insurance, and we can look at how many people are on unemployment insurance. That’s not suggestive really of a weakening labor market at all. And if we look at layoffs, that’s somewhere in between the two. That shows that the labor market is softening a bit. It’s not as hard to find workers as it was in the middle of the pandemic, that’s for sure. But it’s really coming down to a more health to healthier level.
Right now, if you look at the level of where we are at with the labor market, with respect to the number of workers relative to the number of job openings, we’re kind of in a good spot. But it’s been weakening over the past couple of years, which is cause for concern, both for economists and for the Federal Reserve.
If you want to tie this all together, we’ve got a Federal Reserve which had raised interest rates very steeply to deal with inflation. So we’re now up to around five and a half percent for the headline rate. But that means the Fed has a lot of ammunition to deal with a sluggish labor market if it becomes really concerned about that.
This Friday, all eyes are on Fed Chair Jay Powell, who will go out to Jackson Hole, who’ll give a speech. Usually that’s an opportunity for Fed Chairs to give this big vision speech. But right now, everyone’s so concerned about as far as what’s the Fed going to do? Do they want to keep interest rates a little bit higher to deal with inflation? Or are they more concerned about a labor market which is softening a bit? And are they going to drop it quickly?
If you look at surveys of economists who watch the Fed, roughly about two in three think the Fed will drop rates by a quarter of a point in September, and one in three think they’ll drop interest rates by half a point in September. And this is-
David D. Greene:
Let me jump in there on the likelihood and/or expectations of economists as far as Fed rate increases or decreases, because we started the year with one idea of what was going to go on with interest rates, potentially six or seven decreases throughout the year, and then rates actually went up. And now we’re back to there’s potentially going to be some rate decreases. Can you put a probability on the idea of what’s going to transpire most likely in the next 6 to 12 months with rates?
Ben Harris:
Yeah. We can look at these implied probabilities, which is we look at the prices of various derivatives. If we want to look at… For example, going out over the next year, so between now and September ’25, there is a distribution of probabilities. About 55%, there’s about a 55% chance, if you look to the markets, that rates will be between 3% and 3.5% a year from now. That’s a reduction of about 2 to 2.5%, which is pretty steep. That’s a lot of ammunition for the Fed to stimulate the economy.
Now, what would prevent that type of cuts from happening? Well, either we see inflation rise again. I think that’s pretty unlikely. The drivers of inflation seem to largely have dissipated. We don’t have those supply chain concerns that we had in the middle of COVID. We don’t really have constrained labor markets, where companies have to keep jacking up wages to attract more workers to come the labor market. It’s probably not going to be inflation. The Fed isn’t going to have to keep rates higher to deal with inflation. But it may be that we have a stronger labor market than we think, and the Fed wants to hold onto some of that ammunition and not cut rates so quickly. Or it could be that we fall into a recession, and the Fed wants to cut rates really fast, and instead of being at 3.5%, we go all the way down to 2 or even lower.
David D. Greene:
You mentioned one of the R words, which is recession, which two years ago is what was in the headlines. The new R word seems to be resilience, connected to this soft landing hypothesis. Our clients remember ’00 to ’02, they remember ’07 to ’09. So you can understand the hesitancy and some nerves around we don’t want to go through a recession again. When we put it all together, as you stated, interest rates, inflation, unemployment, the likelihood of a soft landing coming to pass?
Ben Harris:
Goldman, who I think… They’re some of my favorite forecasters. We got this fairly weak jobs report a couple Fridays ago, and that led Goldman to rise the probability of recession from 15% up to 25%.
David D. Greene:
Okay.
Ben Harris:
Recessions happen once every seven years on average. So 15% is your baseline case. If you didn’t know anything about the US economy, and you have to put a percentage on it, it’s got to be 15%. That’s the baseline.
So going from 15% up to 25% is a pretty big jump, but it is also suggestive of an economy which is pretty strong. There’s still a 75% chance of no recession in the past year. Then Goldman got some additional information, where we saw there weren’t as many people going onto unemployment as maybe we expected, and they took the probability down to about 20% of a recession in the next year, which again means 80% of recession, of no recession in the next year.
I think that’s a pretty reasonable point of view. The US economy, if we want to take a two- or three-decade view, is incredibly resilient. We’ve only had two recessions. One was this unprecedented experience with COVID, where it was just, there was no way around a recession. And then before that, of course, was the great recession of 2007 and 2008, where you had this incredible financial crisis that was decades in the making.
So the US economy is just resilient across the board. I tend to think that you need, in general, in the modern US economy, some sort of big shock like that, some sort of big change like the financial crisis or COVID. That can come out of left field. For example, when I was at Treasury, and you saw the Silicon Valley Bank episode, that-
David D. Greene:
We remember.
Ben Harris:
Yeah, that came out over a couple of days. Things can come out of left field, but if we think we’re going to have a recession driven by normal business cycle dynamics, where you basically have a weakening labor market, and that causes people to spend less, and then you get this cycle, it just doesn’t feel like we’re there yet.
David D. Greene:
Thank you for bringing that all together and where it sits as far as the macroeconomic outlook here in the next 6 to 12 months. We also mentioned politics. Quickly, what is the implication, either A, on elections, or the election’s implication on the economy? And how does this maybe level out into the markets, whether it’s the stock or bond markets? That was an easy question that you can probably answer in 30 seconds, right?
Ben Harris:
No, it’s a great question. The implications for markets depend not just on who wins the White House, but what the composition of Congress looks like. I think the assumption is that if you get a situation where former President Trump wins the presidential election, and you have a Republican Senate and a Republican House, that at very worst or very best, depending on how you look at it, you would see an extension of the 2017 tax cuts, which costs around $4.5 trillion, which is quite expensive. I think you would probably see debt rise relatively quickly. That could probably get paired with some pay forward. For example, Republicans in Congress want to roll back part of the Inflation Reduction Act, credits for electric vehicles, and the like. But overall, we’re talking about a multi-trillion-dollar increase, which would drive up interest rates in the market fairly substantially. I’m not sure by exactly how much, but we’re probably talking about – I don’t know – 1 to 2% for the 10-year over time. It’s really the big impact.
If you get divided Congress, I think the thinking is there’ll probably be more of a compromise on certain things. Both sides tend to seem to like child tax credits, which are beneficial for families, but really expensive from a budgeting point of view. You may get some sort of compromise that increases the debt or deficits.
That is to say, unified government on the Republican side will probably be more stimulative than if you get a situation where you’ve got, say, Kamala Harris in the White House and a Republican Senate, and I don’t know how the House shakes out.
As far as what happens on the Democratic side, it’s really not clear. Vice President Harris hasn’t really clarified her position on debts and deficits. Joe Biden, for whom I was an economic advisor for a long time, was very much anti-deficit. His signature piece of legislation, the Inflation Reduction Act, actually reduced deficits by about 230 billion over 10 years. But that was a situation where you had Joe Biden in the White House and then a very narrow majority in the Senate, it was actually 50-50, and then a narrow majority in the House. A lot of the senators were anti-debt and deficit.
This is a very long way, Dave, of saying that it depends on the composition of Congress. But I do think if you get a Republican in the White House, Republican control of the Senate, Republican control the House, you’ll probably see a wholesale extension of the TCJA, which was that big tax cut passed in 2017. That’s a lot of action debt.
David D. Greene:
Well, there’s jokes about economists, and finding an economist and telling you what you want to hear sort of thing. So I’m not going to go there, speaking to an economist.
However, it will depend. But what we have mentioned, both Kevin Donovan, our Portfolio Research Director, and there’s white papers across the board, and you’re aware of this, Ben, is the fact that over time, regardless of Democratic administrations or Republican administrations, from a rate of return standpoint within a balanced portfolio, there is not much difference as far as what the rates of return are. Just a little bit of a reassurance plug in general, we don’t tend to make, as a firm, major allocation or strategic decisions based on political elections, whether they be congressional or presidential.
Great information. There’s more to look into, but I think for our time today, we might wrap this up. I would like to invite you to join us again, maybe in early 2025, and we can do a year-end review and a little outlook in 2025. How about that?
Ben Harris:
Yeah, happy to do that. I’ll say yes in advance.
David D. Greene:
Really, really appreciate your time, Ben. Very insightful. We’ll look forward to early 2025. And just want to say thank you to our clients. Thank you for taking the time to tune in. We appreciate your trust and loyalty. Share this podcast with a friend or a family member if you think that they might be interested. And we will post this to our website. There’ll be some additional links, potentially Brookings has a really solid, easy-to-understand, quick video on inflation and the basics of it.
So again, Ben Harris, thank you very much for your time. We will see everybody soon. Take care.
Ben Harris:
You too.
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