I feel like the theme of this podcast recently has been that everything is going off the rails: the Supreme Court, inflation, oil prices, air travel snafus. Take the economy, for example. My theory for the past few months has been that the odds of a recession are nervously high. But when I start feeling myself become a bit ideological, it’s always worth asking: What if I’m wrong? So what I want to execute in this episode is a bit of a zag. Today’s guest, Conor Sen, an economic columnist for Bloomberg, explains why he thinks this economy isn’t nearly as troubled as the headlines suggest.
In this excerpt, Derek and Conor discuss the big-picture reasons Conor’s outlook on the economy is more positive than the public’s at large.
Derek Thompson: The theme of this episode is that I’ve been a bit of a catastrophist on this show recently, and I want to see the good news in the world, but I want to see that good news with clarity and with empiricism. So you and I emailed back and forth and came up with five big-picture reasons to be optimistic about the state of the economy, even though inflation came in at almost 9 percent last month, even though stocks have crashed, even though interest rates are rising faster than they have in a long time, even though, even though. Through all that fog, I gather that you think the conventional wisdom has turned too gloomy about this economy. So before we get into all the details, can you give me a thesis statement, like a big, beautiful Christmas tree on which to hang all these data points? What’s the big-picture reason why your outlook right now is sunnier than the prevailing wisdom?
Conor Sen: I think it starts with the fact that the prevailing wisdom has gotten so negative that the bar to exceed that is so low. So last week, the stock market, the S&P 500, was down over 20 percent for the year, or, I guess, since the highs in December. And if you think about the two recessions that everybody’s worried about, the one in 2001, which was the dot-com bust, and then 2008 with the housing financial crisis, by the time the stock market was down over 20 percent, we were already in recession, so that was March of 2001 and the summer of 2008. And so for me, I feel like if we’re just not in a recession right now, or going into one this month, then it’s better than the consensus.
Thompson: Right, it’s like when the S&P 500 drops by 20 percent, that is historically a five-alarm fire. It means either your house is burning now, or the burning is about to begin imminently, and therefore, we ought to direct our focus to real-time data. We should pay super close attention to the most on-time and high-frequency reports about the U.S. economy, but when you look at the real-time data, when you look at the most on-time and high-frequency reports, you’re not seeing a fire, you’re not seeing the imminence of a fire. Now, look, maybe you’re wrong. Maybe the market is right. Maybe the market knows that a lot of growth tech stocks were total BS, and that’s why we had a correct like this. Maybe a lot of value is never coming back. Maybe the market knows we’re getting a recession in late ‘23 or something, ‘24, but again, bear markets like this are a fire alarm, and when you look around, you’re not seeing those flames.
Sen: Right, and I think in general, it’s wise to be thinking about six- to 12-month risks, things like that. But right now, again, when the market is priced in so much negativity, I think the real-time data matters more than it typically does. And if you see things like, we can go into the details, but I just don’t see that imminent recession in the data right now.
Thompson: Right. All right, so let’s go through all of the things that you’re looking at, and I’m just going to alley-oop you for every point here. So point no. 1 is inflation. Right now, obviously, inflation is the biggest problem facing the economy. The Federal Reserve is jacking up interest rates to destroy demand, to help bring down inflation, but the biggest driver of headline inflation isn’t something the Fed has power over. It’s energy prices, it’s commodity prices, it’s shipping prices, supply chains. Tell me what you’re seeing on shipping rates and commodities that is mildly optimistic.
Sen: It’s really ironic that we’ve had these headline inflation prints over the past few months, but all of the real-time data that you might want to look at for where is inflation going over the next six to 12 months, I would argue, are coming down. And so that started with used car prices, which were a big driver of inflation for last year and the beginning of this year. Those have really flatlined over the past few months, and that’s because production has picked up. Pricing got so high that it destroyed demand on its own. So that’s one area.
The second is retailers. Everyone from Amazon to Walmart to Target said that there was a big shift in demand from goods to services around March or April, and as a result, they were overstocked and over-employed. And so we’re going to start to see discounts show up in retailers and things like that. And then just last week in the market, we saw commodities really get crushed, and that’s in part due to the recession fears that people have. But everything from oil to natural gas, to copper, to wheat, to soybeans, to corn, everything on the commodities front is now coming down, and so to me, there’s just a preponderance of evidence that inflation is going low over the next several months.
Thompson: Why are the commodity prices dropping? I understand the Target, Gap stuff. They saw demand for durable goods. They stockpiled a bunch of clothes and whatnot. Now people are shifting their spending toward services. I get the thing about used cars, and I think that microchip supplies are probably going to come back to normal in the second half of this year. Why are commodity prices falling for oil and copper and tin? That seems like a really important factor here, because if all those prices start to come down, headline inflation absolutely has to recede. So explain that for me.
Sen: I would say there are two main arguments for why that would be. The first is that if people are worried about a recession now, then it’s hard to think that commodity prices are going to keep going up because you’re going to see that declining global demand, and so commodities are going to come off. And we did see that in the middle of 2008, right before the financial crisis really got bad, where oil got up to almost $150 a barrel, and then it really crashed in the back half of the year. So if we really are going to have a recession, high commodity prices doesn’t make a lot of sense.
And the second is just with the way that a lot of investors have strategies. One is trend-following in nature, and this year, commodities have been the only thing that have consistently gone up in price. And we finally saw them start to sell off, and so a lot of investors who are long on commodities just decided to sell them all at the same time and thinking maybe this up trend is broken, and this trend-following strategy isn’t going to work anymore.
This excerpt was lightly edited for clarity.
Host: Derek Thompson
Guest: Conor Sen
Producer: Devon Manze