When you’re feeling anxious about your future, you talk to a therapist. When you’re feeling anxious about the future of the economy, you talk to an economist…and that’s exactly what we did on the most recent episode of Three in 30.
Considering that the news headlines feel a lot more like tabloids these days, we figured we’d cut through the noise and call back our favorite armchair economist, Eric Tannenbaum, and his longtime pal and colleague, Gus Faucher (pronounced ‘faux-shay’ JSYK). If you’re not familiar, Gus is something of a rockstar in the world of Economics and he’s got the pedigree to prove it. After a long and impressive career reading financial tea leaves, he’s parked himself over at a little spot called PNC where he serves as their Chief Economist.
When he’s not making the rounds on major news publications like The Wall Street Journal or Bloomberg, Gus likes to wind down with a good book….or a marathon or two. He makes headlines. He reads. He runs. What can’t Gus do?! We’re not sure, but we had an absolute blast taking a peek inside his brain.
Lace up your favorite sneaks and tune in to find out what in the world is going on with the economy, where you can find a great sandwich in Philly (TW to die hard lovers of Primanti Bros.), and what a busy economist does to quiet the mind.
Listen to the full episode below, or keep reading for a quick skim of the highlights.
We asked Gus for his baseline economic outlook, and for a proverbial penny, Gus gave us a fistful of dollars in solid predictions for what’s to come in 2023 and beyond. Here’s just a snippet of what he had to say…
Obviously we had quarters of decline in real GDP in the first half of 2022 and some people use that as a rule of thumb for recession. But let me state very clearly that the US economy is not in recession. The US economy is not in contraction even with the drop in GDP. And in particular you look at the labor market, it’s very strong right now. Unemployment was 3.5% in July and that’s the lowest we’ve seen in 50 years. When you look at everything in total, all of that indicates that the US economy is expanding.
Now…We are in a tricky place in the business cycle with a very strong recovery from the pandemic in the labor market in consumer spending and manufacturing, but we are seeing the Fed raise interest rates aggressively. So inflation is much higher than the Fed would like (running anywhere from 5 to 8-9 percent). It’s close to the highest inflation rate we’ve had in 40 years. They are also raising the Fed funds rate (from basically zero to above 2% as of late summer of 2022) and it’s going to get higher. By raising interest rates, they’re trying to cool off growth and so we’re starting to see indications of these higher rates weighing on the economy. What is the impact? I’m hopeful that the Fed can pull it off: to cool off growth and bring inflation back down without pushing us into recession. Our baseline outlook is for pretty weak economic growth in 2023. We expect real GDP growth to be just barely above zero – basically a stagnant labor market with the unemployment rate increasing in 2023 to north of 4%. That should be enough to bring inflation back down. I would put the probability of recession over the next couple of years at 40%.
Joe: “Wow Gus, I think I need to listen to that about 5 more times just to digest every single data point that you had in there. That is a PhD chief economist if I’ve ever heard one.”
All of us: Same, Joe. Same.
It’s a strange time to be alive. On the one hand, you see news about employers that are struggling to fill open positions. On the other, you see news of massive layoffs. What gives? Just how healthy is the labor market?
There are two ways to look at it. If you look at the actual size of the labor force, it’s just about back to where it was before the pandemic. If you look at it relative to the size of the population (the labor force participation rate) that’s actually about a percentage point below it’s pre-pandemic level. We have a lot of people out there, most who are close to retirement age, that decided to stay out of the labor market when the pandemic hit. It’s been stuck there for about a year. What I think that means is that we have a structurally tighter labor force now than we did before the pandemic. That’s why we see all these businesses unable to get employment back to where it was. Restaurants have reduced their hours and so on. This is going to be a permanent feature of the labor market post-pandemic. Businesses need to think about what they can do to get around that to attract new workers.
If you’ve been on the job hunt recently (or are on the other side of it) you’ve surely noticed that the conversation around perks, incentives, and benefits is drastically different than it was even just a few years ago. Gus brings up a salient point for businesses of all shapes and sizes: this shift in expectations isn’t going anywhere. His advice? Rethink your strategy around HR and compensation policies (what can you offer that’s really going to draw the right talent?). Reevaluate your strategy around technology investment so you can help enable a more productive existing workforce. And most importantly, readjust your expectations around employees being in the office.
You’re sick of hearing about it. We’re sick of talking about it…BUT the fact of the matter is that the WFH / RTO debate is still broiling right under the surface – and still largely unresolved. Gus’s take? It’s all about leverage…and businesses don’t have any.
Businesses can try to force their workers back to the office, but I think right now workers have the upper hand. Businesses need workers more than workers need businesses at this point. I think that if you push too hard on this, you’re going to find workers revolting and you’re going to have trouble retaining them. Workers have demonstrated that they value flexibility. To expect that every business is going to be back to the office 5 days a week, that’s just not going to happen because they don’t have the leverage to force that. I’m not quite sure how this is going to play out – maybe people will be in the office 50-60% of the time instead.
Wherever you stand on the issue, it’s rising in ranks as one of the most polarizing topics of our time.
We asked Gus for a quick read on future up and downside risks.
The upside: A quick resolution of the Russia Ukraine War. This would result in lowering the energy crises in Western Europe and the US.
The downside: A continued retreat from globalization. Countries have turned more inward due to equity concerns between nations and within nations. But globalization drives higher living standards around the world. Then, you add the pandemic, supply chain issues and the war. Nations could turn further inward and that’s a serious risk to living standards in the long run.
Listen to the full episode here.
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