00:01Fundamentally, how is the U.S. doing?
00:03Like, what do you think about it?
00:05I think if you take a step back and you look at the incoming data,
00:08we have an economy where growth has been very resilient.
00:11You know, the economy has experienced abnormal and historic shocks
00:15over the past 12 to 18 months.
00:17And despite that, the economy has been continuing to grow at 2% or above.
00:21The labor market, extreme volatility in the month-to-month readings.
00:26But if you look at the unemployment rate today, it's about where it was last summer.
00:29It's still at historically low levels, almost 4.2%.
00:32Most measures of labor market slack are very stable.
00:35The hiring rate has been stable.
00:37The quits rate's been stable.
00:38And so despite all the worries, despite the fact that we are experiencing
00:41the significant adverse shocks that are putting attention to the Fed's dual mandate,
00:45the economy is actually performing quite well.
00:47The economy is not monolithic, and there are different parts of the economy.
00:50And the way that, you know, different people feel this energy shock is a lot different.
00:54We spoke to Chris Britt, the CEO of Chime last week, this neobank or fintech,
00:58whatever you want to call it, where the average income of the user is about $75,000.
01:03He said his consumer's fuel spending rose 25% over the last month as a result of the war with
01:10Iran.
01:11What does it do when that consumer is hit so hard to your outlook of the U.S. economy?
01:16Yeah, you know, you've had an economy, and part of this is always the state for the U.S. economy,
01:20which is that it is heavily skewed in terms of the impact of consumer spending
01:24towards higher-income households that drive a disproportionate share of consumer spending.
01:29Now, the shocks that we are seeing tend to be regressive.
01:32So they're hitting the middle and lower part of the income distribution more.
01:35So they're raising fuel prices.
01:37They will be raising food prices, most likely.
01:39The tariffs that we've seen impact goods more than they do services.
01:42So all those are negatively impacting the lower part of the income distribution.
01:46That part of the income distribution is generally always more fragile,
01:49but has been shown to be more fragile in an environment of higher interest rates,
01:54higher inflation that we've seen.
01:57But if you take a step back, all of the aggregate spending data still looks quite good.
02:02Consumer spending looks relatively solid.
02:04From a business CapEx perspective yesterday, we got durable goods orders
02:08and shipments, which remain pretty solid.
02:11So there's still these kind of distributional concerns about the consumer
02:14and the broader economy.
02:15But on average, in the aggregate, things look very resilient.
02:19So we keep talking, Matt, a lot around this table about,
02:22though, the longer impact of the war.
02:24And I can't remember if we...
02:25Protracted.
02:26Yeah, protracted.
02:27In the words of the Federal Reserve.
02:29Yes, exactly.
02:30But I just think about...
02:31And I can't remember if we've talked about this yet with you,
02:33is that this idea that you have nations thinking about what they need
02:37to protect domestically for their national security.
02:39And so producing more at home, making sure they have access to raw materials.
02:44I don't know.
02:44I'm obsessed with this about the rethink.
02:47And I do wonder if that's factoring into your models longer term.
02:52And with that, I think about labor costs in here,
02:54that would make things probably more expensive here.
02:56Even if you take out the moving stuff around costs,
02:59I just think about what that does to inflation longer term.
03:03Yeah.
03:03So I think there's probably two aspects of this.
03:04One is supply chain resiliency.
03:06And it was a key topic coming out of the pandemic.
03:10And maybe we've forgotten a little bit about it over the past several years,
03:14even though you had this historic tariff shock.
03:16Yeah.
03:16But what's happening over the past month certainly intensifies those concerns.
03:20Now, it might mean that you have to invest more across multiple supply chains.
03:26You incur more costs because of that.
03:28And therefore, yes, you're more resilient, but at the same time, your average cost is higher.
03:32And so that could feed into inflationary pressures.
03:35The other part of this is how are people thinking about their own defense?
03:38And so can European economies rely less on the U.S. for defense?
03:43I think certainly we've seen Germany take a strong stance on that position.
03:47Significant investments in their own defense industries and infrastructure.
03:52And that will mean globally fiscal policy is more proactive than it has been in the past.
03:57And because of that, inflation will be higher as well.
03:59Guns versus butter.
04:00Like I'm thinking about the impact on what that does for society.
04:03Correct.
04:03I think ultimately it will squeeze out and push out some of the private sector.
04:08We'll overall raise interest rates, keep interest rates higher, and inflation higher.
04:11You know, when we talk about a duration of a conflict like this,
04:14I think there's this idea that, okay, we're in a period where a ceasefire has been announced.
04:19But it's clear that things aren't going back to what they were before February 28th.
04:23Oil's not there.
04:24Maybe the excitement about what it could go back to is there.
04:28But there's still skirmishes happening.
04:30And there's still negotiations to be had.
04:33Is there a chance that the war may not look like it did in the first five weeks,
04:37but there is still a heavy presence by the United States and Israel in the region for a long time
04:43to come?
04:43And that affects the economy?
04:45Yeah, I think we have to think that there's still uncertainty here, right?
04:47We're in day one of what is still an uncertain truce at this point.
04:53And so, you know, how the world looks two, three, four, five, six months down the road remains highly uncertain.
04:59I think it is very likely that energy prices are just higher than they were before the recent events.
05:06In part, that's because even if the Strait of Hormuz picks back, reopens fully, and we're clearly not there yet.
05:13No, it's oil transit remains halted now.
05:15Correct.
05:16So we're clearly not there yet.
05:17But you've had some damage to energy infrastructure in the region, which is absolutely critical.
05:22And that's going to take longer to get on track.
05:25So I think regardless, you are likely in a world where energy prices overall and therefore inflation for this year
05:32is going to be higher as a result.
05:33Now, I think the U.S. economy can absorb that, and I think that it can be resilient in response
05:38to that.
05:39I think if oil prices were to move up to $150 a barrel, that's the period where we became really
05:45worried that it could wipe out the benefits of tax cuts to U.S. consumers.
05:49You might get into nonlinear effects on the economy where growth begins to be more damaged.
05:53So, you know, yes, I think it has lingering effects on inflation.
05:56I think that impacts the Fed in a hawkish direction, but it doesn't necessarily overturn a relatively resilient view for
06:02the economy.
06:03Matt, I want to throw one more thing.
06:04And, you know, before the war, I mean, every conversation either started or somehow worked its way to artificial intelligence.
06:10And you guys have done a lot of work.
06:11Certainly, we've talked a lot about the impact, potential impact on the labor market.
06:16But you guys also did a recent note on AI's maybe impact on inflation.
06:19What did you look at and what did you guys find out?
06:22Yeah, so I think if you think back six, seven weeks ago, the entire conversation in markets was about how
06:28AI was going to be disinflationary and was going to displace labor, both of which was going to put downward
06:35pressure on inflation and on interest rates.
06:37Now, obviously, that's completely gone away from the discussions at the moment.
06:41But I think there's just this very strong conviction in markets that AI is this massive disinflationary force.
06:46One thing that we did is we actually just went out and asked various AI tools whether or not they
06:51think it is going to be disinflationary.
06:52Did the tools explode?
06:53They did not explode.
06:54Okay, that's a good sign.
06:55And, you know, people, they joke, yeah, of course, if you ask how, whether or not it's going to take
07:00your job, it's going to tell you no.
07:02I'm sorry, Matt, I cannot answer you.
07:04Just got about 40 seconds.
07:05Sure, but from the inflation perspective, I thought you found really interesting results.
07:11So AI is not at all convinced that over the near term it's going to be a disinflationary force.
07:15And it highlights, I think, key factors.
07:18There's a big investment boom that's taking place.
07:19It can add upward pressure on energy prices.
07:21But even if you look over the next five years, it puts about an equal probability that AI is a
07:26significant disinflationary force to it lifting inflation.
07:29And, again, it's kind of highlighting a lot of these supply chain issues and the investment demand part.
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