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Today, the weirdest economy, ever takes a new weird turn plus a huge week for economic news.
We’ll start with the huge week by my count.
There were five big economic stories that would otherwise Define a normal week and they all have happened in the last like 72 hours.
The Federal Reserve announced its decision to raise a key interest rate by 0.75 percentage points.
Again, this is a huge move to destroy aggregate demand and bring down inflation.
Number two, the House and Senate approved the chips and science act, which injects billions of dollars into the domestic, semiconductor manufacturing industry and also funds a great New Deal of scientific research.
That’s very cool on Wednesday.
Number three, Senator Joe manchin shut pretty much everybody journalists his colleagues by agreeing to back a landmark, climate and infrastructure, Bill and episode explaining, that bill is right around the corner number for the bite.
Administration adopted a plan to stabilize oil prices.
It is very, very close to the plan that we discussed just a few weeks ago with scada armor, not always nice.
When planning, this leads public policy by a month and a half.
And number five, the Big Kahuna GDP fell again, the Bureau of economic analysis announced on Thursday that the economy declined for a second consecutive quarter that is the popular definition of a recession.
But as we’ll discuss in just a few seconds it is not the actual definition of a recession still there’s no sugarcoating.
What is going on right now?
This report is bad GDP fell by an annualized rate of - 0.9%.
There’s a story behind.
Why is pretty simple inflation?
Is eating personal income growth.
Inflation is eating the economy and the FEDS interest rates are eating the housing market and other loan.
Go up housing It contracts.
And with all this bad news, the stock market went up Because of course it did, stocks don’t make sense.
That’s their job.
So to discuss everything that is making and not making sense the GDP report.
The Big R word, today’s guest is austan.
Goolsbee Austin is a professor of Economics at the University of Chicago Booth School of Business.
He is the former chair of the Council of economic advisers under President Obama.
And in today’s episode, we talk about the most important details from the GDP report we The Curious Case of America’s plummeting productivity.
And we talked about why the question are we in a recession?
Is so annoyingly impossible to answer?
I’m Derek Thompson.
This is plain English.
Austan goolsbee, welcome to the podcast.
Great to talk to you again.
We are talking on Thursday morning, the GDP report is just out.
I have my own read on this report but I am not an economist.
I don’t teach economics, I’ve never shared the Council of economic Is first sitting president.
You are on the other end of mine on accomplishments.
So I’d first like to know how you read the report, what jumped out to you.
Well, that mean, the obvious thing is we got a second quarter of negative GDP growth.
It’s tremendously hard to reconcile, the GDP going down, while the job market is booming, like, crazy, three four, hundred thousand jobs a month.
And I guess the second thing that jumps out at me is for all the discussion in 2021 about stimulus.
It’s worth remembering everything is compared to last year.
So in 2021, it was, it was like a plus two trillion from fiscal stimulus, but that means it becomes minus 2 trillion in 2022 and you kind of see this in the data that Fiscal drag I think is pulling down brothe there.
A couple things that I saw in this report that I want to get your brain on one is that residential investment.
Absolutely crashed less quote last quarter it fell by 14 percent annualized.
That’s a huge huge number and at the risk of sounding like an idiot, it’s so big that I almost can’t believe it in plain human language.
What does it mean that residential investment declined last quarter by 14 percent?
Realized what does it say about what’s happening in the housing market right now?
Well, I mean, it says the part that’s not surprising about that.
Is it says, people care about the interest rate.
When they go get a mortgage on a multi hundred thousand dollar purchase, that’s known.
We’ve no, we absolutely know that.
And and usually, that is one of the main vehicles that the FED uses to cool demand that they raise the interest rate knowing that it will chill.
In and it will chill people going out to buy houses and it will slow purchases of autos and consumer durables and stuff.
That’s interest rate sensitive.
That’s that’s literally the only tool that the FED has is they can dial up or dial down Demand on interest rate sensitive things.
I think it’s precisely this Bizarro Universe downturn in 2020 that in which a bunch of Of cyclically sensitive things went up, so people bought more housing, more cars and more TVs and durable goods because there was nothing else to spend their money on.
That’s made this totally weird.
That space is totally weird.
And so the FED is raising rates faster than than it has in decades if not ever.
And when the interest rate goes up that fast like one and a Have two full percentage points in a matter of months.
Of course, the housing market collapses because people care a lot about that.
The second thing about this GDP report that struck me is that we’re still living in a supply, shocked world, like energy and energy.
Inflation was a huge drag on real growth last quarter as basically Russia.
That’s just a result of Russia.
Invading, Ukraine gunking up, energy markets.
But then there’s this second thing that I’ve been focused on recently, which is Has China that China shut down a lot of major cities in the last quarter to deal with the spread of covid and that is really effective Global Supply chains that run through these major Chinese cities.
So keeping those two things in mind, how would you describe the supply side challenges?
The US economy is facing right now.
Well those are true.
I think both of those are true and both of those are kind of like your grandpa’s Supply shock.
They’re totally understandable and on like your grandpa, you know, remember The Oil Embargo of 1972 And whatever, but I think the thing that’s different here, there was a supply shock.
Unlike any other that we’ve seen, which was there was a major negative Supply shock to the supply of labor to the service sector that came from Colvin and that you’re saying, people just literally couldn’t go to work in restaurants and the restaurant was shut down.
Used to go to work.
They got sick, they’re taking Care of somebody who’s sick, they don’t want to get infected when they’re at work.
That shift back of Labor, Supply to services.
Was a supply shock and an important one and generated.
Some weirdness that has led to the confusions that we see.
Like, if you have a supply shock to labor in services and that means a bunch of people shift to buying more physical Goods.
That’s going to look like an overloading of the ports in Los Angeles but The overloading of the ports in Los Angeles itself is not a supply shock as the kind of the critics of the supply jog, but they look at their like but it but there are at record levels of output.
So that’s just an overload.
That’s not a supply check that just an overload they are.
That’s just an overload.
But I think this big Supply shock to labor in the service sector plus Supply shock to oil prices plus Chip factory, shutting down China, shutting down suppliers.
All those are three different Supply shocks and they’ve all kind of landed on top of each other or gone sequentially.
And I do think that some of those are partly why he didn’t see inflation come down when they thought it was gonna visit.
This is really helpful to me, in terms of putting together, a couple ideas that have been floating around in my head because, you know, I think you’re absolutely Right.
That the covid shock to labor Supply in Services has had a bunch of very strange outcomes.
So just looking at something like Delta, firing a third of its staff in 2020.
So what does that do sort of sort of?
What do you think about that across the economy?
Because Delta is doing it but so are you know restaurants doing the same thing?
Hotels doing the same thing, okay, that’s going to do a couple things.
Number one, unemployment’s going to go up, obviously number Two people can’t fly or go to hotels anymore because of covid speaking to shift their spending toward durable goods, like Furnitures and electronics and whatever.
You know stoves with that does is it gunks up International Supply chains around durable goods?
Because now we’re demanding more stuff to be pulled through ports in the ports, can actually service.
So it creates inflation in durables.
But then what it also does is it creates an annualized decline in durable.
Goods and services come back online.
Suddenly we decide we don’t want shirts anymore.
We don’t want the furniture anymore.
We don’t want all that stuff that we were telling the Walmarts and the targets of the world, a year ago that we wanted.
So now there’s an inventory, overhang at the Walmarts and targets and at places like Delta, what are you seeing?
You’re seeing chaos because they had a higher back.
All these people very suddenly but they’re hiring them back and and not being able to train them fast enough.
So you’re seeing all sorts of service sector weirdness.
Whether it’s You know, like, for example, people, you lots of cancellations in flights and lots of delays because these problems are cascading through the system.
So it’s just interesting to think that like, the original sin.
Like the first Domino to fall here, is this Supply shock to labor in services and so much of this weirdness is just still emanating from it.
Now obviously, that’s an over simplification and there were demanded things going on.
And they were policy decisions going on, but I still think that labor Supply impact of covid is that’s the central thing of what happened.
The third thing I want to point out returning to the GDP report, is that even as we heard girding up to talk about the Big R word here?
I want to say the Bureau of economic analysis, which publishes these GDP estimates.
Is publishing estimates and estimates are revised.
In fact, there’s about a 50-50 chance a coins flip that with future revisions.
We could learn that the first or second quarter GDP was actually positive.
How should we think about that?
Look you your right to your right.
A highlight that you now you’re doing your joy that you’ve become one of us there and you know you’re joining us down in the weeds of the how they add up.
The data and what things, they measure these things can matter.
A lot of times people will say, well, why don’t they just go measure it?
I mean, what I like, why, why do they have to revise it?
And the answer, is there a bunch of things that they don’t get in time?
So they just kind of project forward based on past relationships like, well, how much trade was there?
Well, you know, they’ll observe certain things and they’ll say for the last 50 years whenever we All this, you know, about 20% of that will end up being exports.
So we’re going to put in a placeholder of 20% of this thing we observe and then over the following months, you know they they revise it for up to two years.
Sometimes the revisions are not small.
I remember back in the at this in the great financial crisis and then the Great Recession, the first estimate for the Fourth quarter of 2008 was minus three and a half percent GDP, which pretty dramatic - that was revised to minus nine percent.
So that, I mean it went from like oh, that’s a bad recession to the like that.
That’s one of the worst Corners we’ve ever measured.
So it’s so we don’t, we don’t know what the revision will be, just to not to get into the got to weigh into this argument about.
Is that a recession or not a recession?
Why it go get away into that argument?
No matter whether or not you want to get into it.
We are waiting and do it well.
So yeah, let me just put it to you this way.
Look like I kind of want to present to you.
The question, are we in a recession like for analysis rather than actually ask you?
Like if you want to make a prediction you can make a prediction if you want to tell me, it’s an unanswerable question at the moment and that I should feel bad about even asking you to try to answer a question like this.
That’s on the table too.
But you know, how do you as an economist think about the Question, are we in a recession right now?
Because I have a pretty strongly felt pretty strongly held answer to this, but I’d love you to go, first.
Let me give you two, two segments of an answer.
What is about philosophy and what is about the Practical?
Is this a recession?
By the way?
Is this is this what you would do?
And Obama, would ask you questions about?
Like are we gonna Harvest a recession?
I’m gonna give you two answers. podcast that then the typical but look, the philosophy is Is, as I say this, you’re going to think it’s a joke.
This is not a joke, economists forget about forecasting.
The future economists, argue vehemently about forecasting, the past and things that already happen, and we’re terrible at not just predicting recessions.
Figuring out if you’re in a recession, okay?
So if you go back to 2001, it was a short-lived recession and in the Wall Street Journal survey we were halfway through the recession.
And only 26% of Economist thought there would be a recession that year, okay?
But it was, it had already been going and what its gonna be it was still gonna come to conclusion and that’s because the data come in with a leg and the normal definition of recession Hinges on that, it’s done by a commission, you know.
And who are the of the, who are these Council of see, you know, the Supreme Court of of recession, determination their bunch of very distinguished macroeconomists.
Some Democrats and Republicans.
Some, you don’t even know what party they are, and they’ve seen a whole lot of downturns.
And so they look back and they only look Back with the leg.
So we won’t know the official answer for months, that they’ll come back and say, oh, here’s what.
Here’s what it was.
Well, now that we have all the data in, we can see whether there was a broad-based downturn so they tend to look at a collection of things.
Not just one thing, GDP growth is one real income employment industrial production a series of things that they look at because Visions aren’t secret there?
Does not like oh was it recently?
I need to look through the through this at this angle to see.
It’s is there a broad-based decline of economic activity?
But it’s very hard to know that in real time and you can easily have recessions that you didn’t you didn’t realize in the moment and can you just explain why the popular definition of two consecutive?
Quarters of negative GDP?
Growth isn’t the actual definition of a recession The reason they don’t economists, don’t use this kind of crude rule of thumb of two consecutive, quarters of GDP - GDP growth is.
If you just go back and look at recessions, you would Muffet you you would miss the timing of several of them and take the 2020 downturn, the entire thing lasted only two.
Months, the recession was only 2 months.
So anything that’s like, let’s take six straight months of negative GDP growth.
It’s not going to work.
That does that doesn’t?
That doesn’t work.
If you go back to the 70s we had a recession that started and I believe the recession ended and then we had two quarters of negative GDP growth at the tail end or maybe even after the recession was over.
So that’s that’s a rule of thumb which usually works.
Because recessions are broad-based, declines in economic activity.
So if you see, two quarters of negative growth is usually correlated with a broad-based decline, but it doesn’t always work and that philosophy leads into the right now.
I don’t think that for the first two quarters of 2022 that you should call that a recession because we had Blockbuster employment growth, really unbelievable, the unemployment rates all Already three point six percent and we were putting up almost 400,000 jobs a month.
That’s that’s that’s not a recession.
I mean that’s like a, that’s an unprecedented, boom of employment.
We never had a recession where employment was booming employment goes down in recessions, so I don’t think that they’re going to look back on the first six months barring some massive revisions to employment.
I don’t think they’re going to call that a recession.
The way that I think about this now and my thoughts have changed a lot in the last few months is that there’s a really important distinction between the numbers and the nomenclature and one analogy that occurs to me is, I don’t know.
Are you a football fan?
You know how there’s this debate about quarterbacks of, are they Elite right?
Like, is Joe burrow Elite, right is Joe, Flacco Elite was the huge question.
They’re asking after his after Super Bowl win.
So imagine if the repairs have not had A, any anybody that we’ve had to ask the question about if a long time.
So imagine if there was like an nber like business cycle committee but for evaluating the elite - a professional quarterback.
Like yeah, that’s what the, the only decided like two years later.
Like, you only know if Joe Borough was an elite quarterback in 20, 21, 22 23.
And it’s like wait, the numbers are still the numbers.
Like, it’s not a matter of debate of whether or not like Joe burrow through four.
Whatever it was 4,000 yards, 34 touchdowns and made the Super Bowl like that’s a fact, whether or not he’s Elite.
It’s a determination be made by eight, very smart people.
One or two years later, yours, of course, of course.
So what difference does it make?
If you called it that there’s an old story that great blues record label, Chess Records Was Here in Chicago and and the great Blues Man.
Sonny Boy, Williamson sang a song.
And that ends up becoming a classic and mr.
Chess walks in and says, that was amazing song.
We got to release it.
What’s the name?
What’s the title?
And he says, I don’t know, you know, I don’t it doesn’t have a title.
He goes oh no, it has to have a title.
What’s the title?
He says it doesn’t have what it just insist.
He says called whatever you want to call it your mama.
I don’t care.
And and that’s the GDP is down right, employment is up.
Those are the facts.
So, what do you want to call?
That’s, it’s funny.
I have like exactly this right here in my notes.
It’s like the numbers are the numbers.
Like yes there will be revisions but here’s what we know for pretty much certain the labor market has been really strong for the last six months.
We just know that inflation is really high.
We just know that growth is slowing down.
We just know that like all those things are true, no matter what we call it, I understand the cable news necessity to have a Terminology to fight about.
I understand the political necessity to have a term to fight about.
I even understand the economic historian case for having a term that we need to distinguish.
You know, what is the difference between 2006 and 2008?
Like there’s a big difference between a growing economy.
Declining you do, you know what’s the best part about this?
If you’re an academic, you never get to tell somebody you’re being naive, you don’t get it.
That’s what they tell you.
All the time but Derek.
Now I get to say to you how quite you’re being so naive you know you your your inner academic is coming out here.
Everything you said is absolutely spot-on and yet we are going to be arguing about this for months.
Oh, we’re arguing about it right now, right?
I brought you on to have an earth exactly and And in a way, I think this is just the politicization of everything has gotten to the economic data and it’s not brand-new that that would happen.
But the usefulness of things like consumer confidence for predicting consumer spending have have largely broken down because many measures have just turned into, who did you vote for?
And so, literally, they did.
They’ve been studies where they go.
Look at consumer confidence, and it’s like, on the night of the election.
If you’re a Democrat and you find out Joe Biden, won your opinion of the how has the economy done this past year suddenly changes, you’re like, oh, they caught him, he’s doing great and, and all that happened was that, you know, Was an election and, you know, maybe there’s no way around that as the kids these days.
Say, it’s all Vibes, right?
That’s that’s the, that’s the modern way.
It’s all right.
Amazing, but this thing about The Vibes, not comporting with the numbers necessarily.
That’s not no, that’s happened.
A lot of times and partly I’m scarred by my own personal experience is like in 2009.
Barack Obama pass a stimulus which cut taxes for ninety eight percent of America and left taxes.
The same for the top two percent of income earners.
It was a huge tax cut.
And in the run up to the 2010 midterm, you had like 60 something percent of people say, they agreed with Republicans that Obama’s tax increases were, what was making the recovery slow.
And it was like, there weren’t any tax increases there were none like, what, but the Vibes you know, that, that wasn’t for the vibe people had and if you were, if you’re not old enough to remember the fight of the 1992 presidential election, Anybody who was remembers the entire election, was about the recession.
And the George Bush was mishandling the recession and he couldn’t feel your pain.
And Bill Clinton was was more in tune with regular people.
Go back and look at the numbers.
There was no recession in 1992, the recession ended in 1991 1992 is a perfectly good here, but the Vibes were all about recession and I wonder if we’re going to get into a Thing like that we’re in a way.
All that matters is The Vibes and the discussion.
And the if you are going through the numbers, you know they there you are going through the details of the GDP report you’re like ah, I see residential construction head of it.
Had a record downturn.
What does that mean for investment for the year?
Is it going to matter?
I don’t know if it’s going to matter.
Yeah, you better watch your back because you are your Named professorship at Chicago Booth is going to be soon taken over by an upstart economist of vibe anomic.
So, I think one of these days because that is the future of your industry.
To share is actually named for the guy who was the head of the Encyclopedia Britannica.
And I love that.
Speaking of terminology, absolutely.
I know that some moderate or conservative listeners are going to say, you know, you guys are just saying that the terminology for recession doesn’t matter because it’s a democrat in the white house and I just want to make it clear that I think we’re Exact same page here that like there are aspects of this economy that are like, objectively bad.
Like nine point one percent inflation is like objectively, not good.
The slowdown in GDP, is obvious like this, these things are happening.
What we’re saying is, if you can sort of think about three different categories, and seems number one, there’s what’s actually happening statistically.
Number two, there’s what eight people who are in the nber business cycle committee.
Call it recession or not recession and number three, there are let’s just call it Vibes the way that people People feel about the economy which sometimes comports with the economic statistics and is sometimes a reflection of media representations who’s in the White House whether or not they get a good feeling from that, President sit in the Oval Office.
But these three things stats, terminology and Vibes really are different.
I want to end with a question a mystery that your buddy.
Jason Furman has been talking about Jason’s been on the show a few times and he’s made this point that there’s this very strange and actually his Directly large gap between the labor market and the economy.
We’ve been circling this point a lot in the last few minutes.
If you believe the numbers, then the gap between the strength of employment growth, and the decline in GDP growth is just about as large as anything we’ve ever recorded.
And if you do believe that the numbers reflect reality, it suggests that productivity has plummeted.
Because if you think about it, like if I double my work, Bauer’s producing this podcast but I produce fewer podcast my output declines, my work hours, go up my ringer bosses can totally say, Derek, what’s up?
Your productivity is actually crashed here.
So how do you think about this productivity mystery?
What do you think we’re actually looking at here?
Well first, let me say when you said my buddy Jason Furman, it sounds like you’re being sarcastic.
You weren’t, he is a dear friend of mine and I’ve known a lot, a lot of years.
I think that this Topic of productivity growth is the probably the most important subject that gets the least attention from the from the broader public.
The the in the minds of economists, this is Paramount.
You know, one of the number one, most important things and most people have never even thought about it and they don’t consider it.
I think this report shows de facto - productivity growth because the judge it’s taking more jobs to do less output.
This follows on the heels, though of an even bigger puzzle or more frustrating puzzle, which is from the month before covid.
To even today, Real output is higher than it was in January of 2019 the labor force and the number of workers is down so we’re getting four percent, let’s say more output from fewer employees.
So real productivity went up four percent.
And that means in The Economist world real wages.
The wage over and above inflation, should have been able to go up by four percent and real wages were down.
So, some very strange thing is going on.
As you know, we never want to make too much out of anyone report and that’s especially true on productivity.
So yes, this productivity measure is epically - but there’s a lot of noise in productivity and I still think this taking a step back and looking over a few years and trying to reconcile how productivity could be going up and wages going down.
Down in real terms, that’s going to be did that?
That’s there aren’t many things that are more important than that.
Hopefully, this is simply a reflection of let’s call it weird composition effects that, you know, certain and maybe what’s happening in this report is you have a bunch of people in low productivity, lower productivity, occupations, Zooming back into the labor force.
And so it’s kind of bringing the average productivity down and what kind of jobs with those be.
I mean, that would be low, low wage, lower-skilled jobs like in the service sector and let’s say what was happening is massive, rebound of hospitality Leisure, and Hospitality workers, and people going back and working as waiters and waitresses and lower-income flight attendants, whatever it might be, then in a way ever, As wages and average productivity are going to look like they’re coming down.
Even though they’re none of them are really coming down.
That might just reflect the composition.
But this but this this this question, this question of It kind of goes back into our category of a bunch of things that look very strange.
So what I, my big theory about what’s happening, I suppose you could call it a composition Theory but for me it was just Like a stylized story.
Like here’s a scenario that I thought of, let’s say, you own a restaurant and every month during the Great resignation of 2021, 1/7 of your workers quit.
And that is roughly what we saw in the high points.
The great resignation like almost one in 71 in ten workers at places like restaurants quitting every single month.
So now you’ve got an almost all new kitchen staff and waitstaff and you can’t train them fast enough and the new chefs keep like, you know, messing up the nightly specials and the wait.
Just keep dropping and shattering plates and every week someone seems to get covid so that yes, if you look at like employment statistics, your restaurant is fully staffed but you’re not working at full capacity at all and this is kind of like a sort of experience bubble.
There’s this bubble where there’s a lot of people who come back to the economy but they’re low experience and to your point, they’re working in low productivity, a sectors.
So the chief executive of Delta Airlines recently just described exactly the sort of scenario with his He said quote in a recent earnings call quote since the start of 2021 we Delta have hired 18,000 employees a chief issue.
We’re working through is not hiring but a training and experience bubble coupling this with the lingering effects of covid end quote.
And it seems to me that maybe there’s this sort of experience bubble happening right now where you have a bunch of people being hired really, really quickly into these sectors.
The companies can’t train them fast enough so the chefs and the waiters and And the, you know, flight staff are all just making these amazing fascinating idea.
You look, Iowa, if you were a PhD student or sister Professor I’d be telling you go get the data that’s a good that’s a good hypothesis to test.
You would think that as the information comes in we will be able to figure that out that at the least, we will be able to look at whether the productivity losses are greatest in places where they’ve had the highest turnover.
And we’ll be able to get so.
So I think that’s, that’s a, that’s a fascinating hypothesis of what’s going on.
And it it would explain why you might see something different in Services than in manufacturing where where they’ve been kind of absolutely pushed to the edge of their capacity.
And, and you were probably going to see if, you know some fall off the Peloton.
Manufacturers of the world are going to see a drop in their demand while Delta Air Lines.
It’s going to go up austan goolsbee.
Thank you very, very much for talking me through Vibe economics and whether or not we are in a philosophical recession.
Yeah, it’s great to talk to you again, Derek.
I’m Derek Thompson.
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