The Fed Is Losing Its Easing Bias While AI Props Up The Economy | Neil Dutta

Hinzugefügt: 2026-05-13

[00:00:00]The labor markets are okay. They're not falling apart. And inflation's above target. And the stock market's basically at highs. So, if you're a central banker and you have you're faced with those three things, there's only one direction you're going to be pushing yourself towards. Right. Right now, it just makes sense for the Fed to focus more on inflation because it doesn't look like there's much of a trade-off to focus on anything else. This is the biggest capex boom we've seen in our careers. If that slows down then the equity market appreciation that we've seen also probably goes away which will in turn have ramifications for consumer spending. All I can tell you is that when it slows down that will be a macro issue.

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[00:01:09]All right, what's going on everybody?

[00:01:11]Welcome back to another episode of Forward Guidance. And joining me today, Neil Dada, one of my favorite economists out there, Renaissance Macro. Neil, great to have you back on the show.

[00:01:21]what's going on.

[00:01:23]>> Thanks for having me, Phyllis. Good to see you again.

[00:01:25]>> Yeah. Yeah, likewise. Um, feels like classical macro is starting to matter again. We've got we're we're recording today, Tuesday, May 12th. We just had a a pretty spicy inflation print and suddenly people are starting to to speculate on where that leads us and, you know, is is it time or not to start thinking about rate hikes and all of that nature again? So, we're going to get into all of it. Um, and how you're thinking about us, you can guide us through, but yeah, why don't we just start with we'll dig into how this all nets out for the Fed's dual mandate, but let's just start with this inflation print that we got today. What are what's your high level takes from it, your takeaways, and how are you thinking about it?

[00:02:01]>> Well, it's interesting because you mentioned that the traditional macro matters again, but I thought what was interesting about today's data is how little it actually mattered. I mean, the reason why rates are up today has very little to do with inflation data. I think it has primarily a lot to do with oil markets and we know that oil markets are um well bid because of what's going on in the Middle East and that is releasing into the financial markets in the form of higher longerterm interest rates and that in turn is why equity markets are down. Right? So in in some respects, you know, the um it doesn't really have much to do with the inflation data. I mean, if you had a benign print on inflation today, uh like let's say there was a counterfactual where the inflation number was uh somewhat more benign, uh do we really think that longerterm rates would be down today? No. Uh they wouldn't be because it has primarily to do about oil. Now when you look at the um so I think you know for me I think what's important frankly is that the rise in energy prices um that we've seen over the last couple of months is squeezing households uh and I think that's the main story. So there's a lot of discussion about how real wages are coming down. The way I like to look at it is basically when you look at the in index of aggregate weekly payrolls which as you know is the kind of sum product of jobs times the work week times hourly earnings that's basically negative over the last 3 months. That's a very unusual phenomenon. Um so it kind of just speaks to this idea that household balance sheets are under pressure. Um, specifically looking at the inflation data, obviously this was a little bit quirky because um of the shelter component. Um, remember that we had a government shutdown in October and so um that effect when the BLS basically assumed zero for shelter that unwound in April. Um, but I think the broader story is that rents probably keep cooling through the remainder of the year. Um, they won't be cooling as fast as they had been. Um but what's interesting also is that there are some areas um that look a little better, right? Like so tariff related stuff, right?

[00:04:19]Household furnishings were down. So there are some things you can point to, but I just don't think it matters anymore. I mean, at the end of the day, you know, the uh the labor markets are okay. They're not falling apart and inflation's above target and the stock market's basically at highs. So if you're a central banker and you have you're faced with those three things, there's only one direction you're going to be pushing yourself towards, right?

[00:04:46]So I think that's really I mean that doesn't mean that the outlook isn't without risks or that things may not change later, but you know if it's really just about equities, unemployment and inflation.

[00:04:57]Um, the fact that you don't really have to worry about uh financial conditions or the labor market right now means that you have a laser focus on the inflation piece of it and that doesn't look good.

[00:05:12]>> I guess yeah, I mean it's a it's a good point around what's been driving so much is is really not all that closely related to just the super granular fine points of CPI data that everybody loves to debate. I mean, we we had a little back and forth even just before this talking a bit about owner's equivalent rent and it's like, okay, to your point, like it's like we had this thing in October, the shutdown, and then now we're seeing this this higher core CPI print and then people get into the semantics of, okay, what does it actually mean to see that OE is going to go higher? Um you're right that it's like that doesn't really move the mark nearly as much as some of these bigger forces at play, but it does bring forth that just be, you know, the Fed will look at these things because everything else is sort of okay. So then when you go through with a with a fine tooth comb, it feels to me like to your point is is that we're skewed to the upside in terms of their their hawkish tilt. Do you still agree with that framework that regardless of really what matters like what matters to the Fed is that okay look like these numbers are heading higher core CPI is heading higher obviously there's the energy story on headline um and it makes for this hawkish tilt like do you still agree with that that idea?

[00:06:24]>> Well, I don't know that it matters whether I agree with it. I mean that's the direction that they're going right.

[00:06:28]My job is to try to tell our clients what I think will happen and I think >> you know is core inflation accelerating here? I mean, I think we had the first three months of the year were bad. The last couple of months have been a bit better. That doesn't mean that it's good, right? I mean, so I think that's what's important. And I think the inflation data, it's all about the threshold. Like what is the threshold that will get the Fed to think differently about the world as it is right now? And that threshold, that bar has gone up. And so even if the like I don't necessarily think that core inflation has accelerated here um but at least relative to Q1 but that doesn't mean that it's running at target and I think that's ultimately what matters right so when you you know when you listen to the the more hawkish elements on the FOMC it's really not about um the trajectory necessarily of inflation I mean of course that matters to some extent but if you listen to them what are they really saying it's been many years that inflation has been above target, right? So, I think if you're So, it's not even about the near-term data flow to some extent. I mean, as I say, it matters, but maybe not as much as people think. And, you know, look, for me, this is really we're back to where we've been, which is in order for something to change, you need to see something in the economy break. And we're not we're not there yet. So when we talk about the tradeoffs right now, it just makes sense for the Fed to focus more on inflation because there's no it doesn't look like there's much of a trade-off to focus on anything else, right? So if the unemployment rate begins to go up again or you get some weaker employment data or GDP numbers come in weaker and that begins to shift the conversation, then that's something we can talk about that. But that's that's still very much a forecast more so than a present day reality.

[00:08:16]>> Yeah. Yeah. 100%.

[00:08:18]um catch us up on what's been going on in the labor market because it feels like that was obviously the main focus of of a lot of Fed commentary. I know you're pretty closely focused on it over the last 6 to 8 months. It feels like you know we were in this new regime where just the the break even rate of the quality of the labor market was such that we were getting you know some some pretty low numbers on the NFP even some negative numbers and that led to a lot of speculation of like how solid is this labor market right now? Is is is something falling apart here or is it just the nature of this new regime of of a labor market that we're in in the US and how does the Fed react to that? and it led to a lot of discussion over the last six to eight months that was really focused on on more of those dovish inclinations, but it feels like we've had this this shift uh where suddenly we're starting to realize that you know things are actually pretty okay. You already mentioned that in some ways but just love to hear a bit about like what what happened there in the last six months and and what's shifting now that you think that it it we don't have to worry as much about the labor market.

[00:09:24]Well, I don't know that. I mean, I guess relative to cons consensus, I'm probably a little bit more cautious on the job market, but you know, the data are what the data are. And um, you know, I think it's probably premature to say that labor market conditions are accelerating, but I think it's pretty clear that they're not getting any worse relative to where they were maybe 3 to 6 months ago. And I think that's important. Now, you mentioned the break even rate, and again, there's a lot in the data that's just very hard to kind of game out. Um, you know, non-farm payrolls over the last six months are running like I think 50 to 60,000 on average per month. And then you look at the household survey, it's a lot worse than that. So, what's the real break even rate? Um, maybe it's somewhere in the middle. Um, you know, for me, I think it's, you know, the shest sign of a tight job market, Felix, is accelerating wage growth. Okay? I mean, that to me is, if you want to talk about the Fed really kind of leaning into a hawkish bias, I think that's how it would happen is that wage growth would begin to perk up. And, you know, fortunately, we're not really seeing much evidence of that. Um, so wage growth is still quite sluggish. If you look at average hourly earnings, you know, generally speaking, they're running like around three and a half percent. You know, if you look at the employment cost index, it's kind of in that ballpark. Uh so I wouldn't say that labor market conditions are tight. Um but and I think that that to me is probably the the main conviction I have.

[00:10:55]Um I would also say that, you know, on the plus side, the breath of employment has clearly improved, right? I mean, six months ago, we were talking about, well, the entire thing is healthcare and and and that's it. But, you know, you've seen some broadening out of the labor market growth. Um, and I think what's been really notable is just how strong the contribution has been from uh, you know, the non-residential construction piece, right? So, when you look at uh, resident non-residential building, it's up. If you look at non-residential specialty trade contractors, they're up. If you look at heavy and civil engineering construction, it's up it's up quite a bit. I mean, that's responsible for a lot of the acceleration in uh in the uh in the payroll data outside of uh healthcare. So, I think it's one of these areas where the the data center buildout is providing a tailwind to employment to some extent and you you see it to a lesser degree in manufacturing. Um but that's to me what's been the most notable is this kind of rebound in in sort of specific areas of goods producing employment. H I think you Yeah, you bring up a good point which just has me reflecting that I mean even Pal got asked about this I think in his last press conference maybe the one before about just you know how do you manage or forecast the economy in this world where we just get these rolling supply shocks whether you know positive they've been mostly negative but you know you've had the tariff thing then you've had these government shutdowns um and then now we have geopolitical risks an Iran war energy shock Like I don't know. I just I imagine it's a freaking nightmare to try to understand even like what's what's true in the data these days. So I mean obviously you mentioned wage growth is one of those true factors that you look at but I'm curious like what else do you look at to figure out what the hell's going on despite all these uh idiosyncratic shocks that keep happening. Well, I mean, I, you know, for me, I think I'm always trying to benchmark myself relative to consensus because I think that's ultimately why clients pay me, you know, to the extent that that happens.

[00:13:03]Um, no. Um, but in all seriousness, I mean, it's really about no one's going around asking me like, "What do you think GDP is going to do this year, right?" Like, it's all about benchmarking to consensus. And so going into the year there was a lot of enthusiasm as you know for like the growth reaceleration story. Now when you know it depends what you have what you when what you mean by reaceleration like there's not much of a reaceleration in real economic activity right like if you look at the last two quarters and you just look at GDP net of uh federal government it's running about one of one and a half%. So you had a weaker GDP in Q4 because of the shutdown and that kind of unwound in Q1. And if you look at where we are right now, you have survey data to kind of go on like what is like the ISM data? What is the market PMI numbers telling us? What is um you know NFIB small business you know if things were really accelerating wouldn't you see expect to see business sentiment be rising in a more appreciable way? that's not actually happening, right? So, you know, a simple rule of thumb is trying to take like some of these composite PMI data points and kind of, you know, what does this imply for GDP growth? It's a it's something it's slightly below 2%.

[00:14:24]So, you know, I don't see much of an acceleration in the data in the at least in terms of real economic activity. Now, there's been an acceleration as we talked about earlier in inflation, but that's not the kind of acceleration people were really uh talking about when um when we were going into the year, there was this sort of enthusiasm around tax refunds and that's going to get spending going and so forth. And you know, I think the balance of risk around consumer spending is probably getting a little bit worse at the margin. I mean, people are spending dollars, they're not necessarily getting stuff.

[00:14:56]>> Yeah. Yeah. Yeah, I want I want to double click on that into the state of the consumer because when you get oil doubling in a month and gasoline going where it's at right now, the big question is okay, how much buffer can the average consumer weather of this to sort of situation. Um, and going into that like you mentioned that incomes have been coming lower. It seems like, you know, spending has been pretty okay, but but, you know, definitely not strong. And then that brings forth the question of uh where that nets out in terms of a savings rate. And then how much buffer does that provide to something like a a pretty substantial energy shock? And I'm I'm curious how you net that and how you think about when you just add in uh yeah, doubling of gasoline or whatever it got to recently.

[00:15:46]Well, I mean, I think it's important to just kind of think about first like where you are because there's a lot of this in my there's a lot of like misrepresentation around how strong the consumer actually is. Like you get, you know, oh, look at this data point, it's like really strong, you know, look at that data point, it's really strong. You know, um, consumer confidence rebounded miraculously. when you look at like the aggregate like sort of GDP data and you look at just nominal spending on goods over the last um you know year or so just nominal right like if you look at nominal goods consumption it's up about three and a half% over the last year that's nominal that's price times quantity that is not great I mean yeah that is not a good outcome for goods.

[00:16:40]Okay. So I think people need to think about like what kind of when we talk about like price inflation like this is not demand driven price inflation right this is a function of supply shocks primarily >> like so the nominal spending anchor I think for the household sector is not particularly strong >> like so that's I think my main point um when you look at real consumer spending over the last two quarters it's it's running below 2% in real terms that's where we are right now, right? So, what's the argument that oh, despite higher oil prices, we're going to accelerate into that? I mean, it seems a little ridiculous. Um, so I just think it's like let's think about first principles. Um, and you know, real consumption is basically running slightly below two over the last two quarters and we have uh weaker income growth in nominal terms. Um, and we have a price shock on top of that, which means that real incomes are going to get squeezed, which in turn should weigh on consumer spending. Now, consumers might be drawing down some of their buffers.

[00:17:44]Now, they don't have as much of that as they did maybe a few years ago when we when we still had the sort of pandemic era excess savings. Um, and yeah, I mean, there's a limit to how how long that can go. And the more that prices stick around at these levels, the more people begin to believe that it's permanent, in which case they have to readjust their savings, which they've drawn down. And when that happens, it'll weigh on consumer spending. So, I don't know. I feel like um you know, we talk about you know, have the markets Felix priced in a growth shock. Like I don't know that. I mean, that's sort of the standard boiler plate right now. It's like we've priced in the inflation shock. We haven't priced in the growth shock. Again, like I don't know whether that's actually accurate because if you look at a basket of consumer companies, >> it doesn't look good. I mean, pull up a chart of home building stocks, it looks like horrible. Home improvement retailers don't look good. Like the the uh the XRT, right? Like the the retail ETF doesn't look good. So, there's clearly the markets are pressing a little bit into this idea that consumer spending is slowing. And I think obviously that matters I think for policy makers because if people are buying less stuff that means that businesses don't need to produce as much and if they don't need to produce as much their labor demand shouldn't be as as strong as it's been.

[00:19:07]So it just that's why I say like a lot of this um enthusias I mean it's just a mark tomarket. I wouldn't say that um you know we're out of the woods or anything like that.

[00:19:18]>> Yeah. Yeah. 100%. It it does bring up I I wonder a lot about the the distribution of that consumer strength because you know it quickly brings up the question of this whole K-shaped economy thing that's been talked endlessly about and but but I am curious about what your thoughts are on the premise that look the the lower shape the lower part of the K is the one that's really struggling which we we just talked about but the upper side of the K you know stocks are at all-time high every single week and as long as equities are high there that upper quadrant K is going to keep spending and keep the economy afloat and keep real consumer spending pretty solid. Like, how do you think about that premise?

[00:19:58]>> I mean, it's like anything else with with economics. You put two economists in a room, you're likely to get like six opinions on the matter.

[00:20:06]Um, you know, look, the the uh I believe the Minneapolis Fed um and you know, this is this would be great to share with your viewers. They did a whole like survey of the literature of, you know, the K-shaped story looking at all different data sources and lo and behold, like there it's it's sort of inconclusive. It doesn't really show like some data sources do show a K-shape, other data sources you don't see that. Um so I mean it makes sense to me like why people would think that um because the stock markets are high. All I would I mean I would my view is that there is probably a very strong like equity market wealth effect going on in the data right now. Right? If you look at disposable income growth over the last year it's basically been about you know maybe 1% in real terms if not a little lower than that. And um and real consumption's been around two. So there's a gap. So we, you know, the savings rates being drawn down. One reason why it might be getting drawn down is because people look at their wealth as a sort of lowrisisk form of uh income substitution. And so they spend out of it. And so um I think that that's a risk, right? I mean that's and that to me is something that goes like sort of undetected by these sort of like GDP accounting things that people are doing lately around like what is the tailwind from AI to the economy? Oh, maybe it's not as much as people think because a lot of the growth leaks are brought in the form of imported equipment and chips and things like that. Um, but that kind of ignores the uh the huge boon this has been for corporate earnings and in turn equity market prices particularly in the US. Um, and that flows through um to some extent into consumer spending and to a lesser extent into like state government finances. Like look at what's going on in California because you have like a handful of tech companies that are you know whenever the restricted stock units vest that counts towards the income tax withholding tables right so that's juicing state government finances which is in turn keeping that driver of growth afloat right so it has a lot of kind of um I think has farreaching implications you know beyond just um you know these sort of simple um you know these sort of GDP accounting things.

[00:22:27]>> Mhm.

[00:22:29]It just Yeah. I mean it feels like there's just this emerging new flywheel of sorts. You know, maybe one simple way to put it is is the stock market the economy or does the or or vice versa?

[00:22:43]because you have this flywheel that we're kind of hinting at right now which is that growth is strong because there's just this huge amount of investment coming in to for the AI data center buildout and then that leads to you know higher equity prices higher max prices if if you believe in that in that line of thinking and then therefore higher equity prices means that consumers feel good about their net their their wealth even though a lot of it is in equities and then they go and keep spending and you know the the circle just continues as long as this AI data center buildout occurs and then um you know that data center buildout is is leading to a higher investment component in GDP um and it's also leading to jobs for for the buildout of it you know I I heard that like plumbers are the most soughta jobs right now because of all the need for that for data centers like yeah just how do you think about that flywheel it feels like is that a new thing or is that just uh you know kind of how the world works >> no I mean it's something I've never I mean this is the biggest capex boom we've seen in our careers, right? This probably this is this goes beyond what we've saw in the late 90s.

[00:23:50]>> Uh so I think it I think it matters. I mean look, I have no idea when this I'm not an AI data center expert. I mean all I can tell you is that when it slows down that will be a macro issue. There's no doubt about it in my mind. And there's also um and I think I think to the extent that you know people are being seduced by this idea that oh well you know it's only adding half a point to GDP therefore when it goes away it's not going to be that big of a deal.

[00:24:23]No. Like I don't I don't believe that for a second. I mean, you know, it's because if that slows down, then the equity market appreciation that we've seen also probably goes away, which will in turn have ramifications for consumer spending and the rest of it. So, it's almost like saying I mean this isn't exactly the same thing, but it's like saying, well, you know, residential investment is 6% of GDP, but a lot of the growth leaks abroad because we have to import all the drywall and the lumber Canada and so, you know, that maybe it's not as big of a of a juice to GDP. Um, of course that was also what was driving to consumer spending and credit to to a large extent, right? So it's it's sort of a financial accelerator type model and um I I don't I don't I don't think those things can be well captured by kind of simple GDP accounting identities. Um >> so I'm a little bit more um concerned about it. I mean I think you know people do make the argument that in the absence of AI we'd be in recession. I wouldn't go that far. Um, >> but are we really trying to argue that in the absence of AI growth would be the same? Like of course not. It would be a lot weaker. It would be weaker. And I think that I mean, and that's if you're saying interest rates would be lower and that's why housing would be better. Like what do you think that means in the aggregate than for for growth? It obviously really be softer as a result.

[00:25:42]So I think when this thing, >> you know, slows down, I think it's going to be a macro issue. And uh >> you know >> I don't have any insight as to when that might happen but >> you know certainly like the growth rate of hyperscaler capex isn't going to be rising as quickly next year as it as it is this year. So you know that's something to think about going forward.

[00:26:01]M yeah on that note of how these dynamics affect the the funkier components of GDP especially export and imports it feel I was just looking at the balance of trade data last week when it when it came out and it's just really interesting to see okay imports are surging because it's related to the to the whole AI thing and and bringing in chips and and then the other side as well is that exports are surging and it seems like that is also related to the Iran war and and the energy shock where suddenly that US oil exports are are a lot more attractive to to the rest of the world right now. And so you have these two levers it feels like that are going on and it just uh yeah I'm curious how you think about that because it could be tempting to just you know really focus on I mean like we've been doing in the show already focus on the consumer side and the investment side of GDP but there are some really wild things happening it feels like right now in the import and export component. So I'm curious how you think about that. Well, I mean the Well, it's interesting. I mean, the administration has been touting a lot about the fact that we've we're exporting more energy. Um, and you know, why that's you know, I think Hexf called it like a giant a conga line and of flotilla of ships coming to the Gulf.

[00:27:12]And you know to the extent that you know oil is a globally traded commodity it's not necessarily the best thing for us consumers that we're exporting more oil because obviously that will close the gap between WTI benchmark and Brent crude prices >> right so then we're if we're the marginal exporter then that's that means that prices are going higher and that's not necessarily the best thing. Um so I don't necessarily view the the rise in energy exports out of the US as a good thing. And I think it's a sign of desperation on the part of a lot of countries because they can't get the oil from their traditional sources, you know, which is through the Middle East, uh, the straight of Hormuz, right? So, I I wouldn't characterize as a good thing.

[00:28:00]And that's coming back, um, to the US in the form of, >> uh, higher gas prices, which, you know, rotates money away from US consumers to oil producers. And and the and the problem of course with this is you know in a in a perfect world the money would kind of recycle very rapidly right like you would you know you spend more at the pump and then the energy company starts drilling wells right away and so it's all good but obviously that does not happen in the real world I mean if anything you know uh capital spending intentions for you know if you look at energy companies still pretty muted. I mean they have a lot more capital discipline now than they did maybe 10 years ago. Um and so really the uh the pain is felt by consumers up front and the payoff from the producers is something that's further out in the future.

[00:28:58]>> So I don't view the export thing as necessarily a good thing. I think it's a reflection of the idea that the rest of the world is getting very desperate and that means that >> um US prices will get up to the global price less transport costs basically. Mhm. Mhm. The reason I bring that up is that there's been a lot of talk, you know, obviously a lot of the goal of the administration, if you just, you know, all the way look back at even the tariff policies is to try to spur some sort of manufacturing boom or reshoring boom in the US and I don't know if you look at, you know, just like freight truck data and that sort of thing, it's it's absolutely skyrocketing right now. And we've had, you know, manufacturing PMIs have gone positive above 50 for the first time. in a couple years and been holding pretty strong there. Seems like there's a lot of things percolating right now and I'm I'm trying to figure out what's genuine there or what's idiosyncratic from all these insane amount of risks that we just talked about. Like yeah, what's what's the signal here?

[00:29:58]>> Yeah. I mean it's, you know, look, I mean, the like if you look at truck tonnage and some of the trucking indicators, they've they've probably gone vertical lately because >> so much capacity came out of the system.

[00:30:13]And so even if demand was moving sideways, there was going to be a meaningful rebound, right? So the fact that demand has gone up a bit has made these data points look even crazier, you know? And look, I mean, there's been a lot of dispondency. I mean, you know, a lot of the trucking folks were talking about like the worst conditions since the financial crisis, and now all of a sudden things have gotten better. I mean, it's a little bit. Yeah. I mean, you kind of have to take a step back to your point and just sort of assess like where where are we really? Um, I've been around a long time. Uh, I don't want to date myself here, but um, back in 2009, I worked at Meil Lynch and we wrote a piece called the US manufacturing renaissance. That was back in 2009.

[00:31:00]Okay, so that the the idea behind that piece was basically that we came off an extended period of dollar weakness, right? Like so the dollar got basically got rinsed from 2002 to 2008 and that made the US cost competitive again. you know, manufacturing labor costs were uh under pressure relative to our major uh trading partners. And so um you know, that's what was going to kind of plant the seeds for kind of an industrial renaissance in the US. And in the 10 years since then, if you just pull up a chart of manufacturing production, absolutely nothing has happened, >> right? you know, the ISM manufacturing PMI, you know, that doesn't tell you much about like how much it's improving. It just tells you that it's getting better, right? Um, >> vibes.

[00:31:51]>> Yeah, it's Well, I mean, it's Well, I mean, there's a there's a cottage industry on the street of like uh you know, running asset allocation models off the ISM. Um, I would just say that if you look at manufacturing production over the last year, it's up about half a percentage point. I mean, it's no great shakes.

[00:32:09]>> Now, maybe maybe that gets a little better, but you know, I think the primary reason to expect a rebound in manufacturing is that we drew inventories down a lot last year and the and we need to rebuild those inventories. Now, beyond that, what happens is a little bit more of a a difficult thing to ascertain. Um, you know, so for example, I mean, we've been we but we talked about how most of the uh the AI data center stuff is imported, right? So why would that help US domestic manufacturing? Um what I can tell you is that the energy shock hits the rest of the world a lot harder than it hits the US.

[00:32:46]>> And so what to the extent that you know manufacturing is a function of let's say inventories like US final demand and housing right because there's a lot of manufacturing that goes into homes and lastly exports. A lot of what we export is manufactured goods. Tell me why manufactured goods exports should be getting better when Europe is basically >> getting wrecked by this energy shock >> to a lesser extent u you know South Asia right I mean India I mean so you have like you know some of our export markets are not doing really well right now and so why why would that so are we going to be exporting more goods >> uh so does that help manufacturing probably not are we building more houses I mean we just saw how building permits >> hit I think the lowest in a while. Um total building permits that is. Um so residential construction looks challenged to say the least. Um so are we going to be is there more manufacturing going into housing? Uh residential investment's been quite sluggish. So I think this is largely an inventory restock and we'll see what happens on the on the other side of it.

[00:33:56]But >> um >> I don't you know as I say like the data are what the data are, right? I mean the ISM is a useful kind of rough and ready measure a substitute for actual data it is not. And >> and if you look at manufacturing production over the last year or so um you're talking about a situation where um manufacturing production uh in the aggregate is up half a percent over the last year.

[00:34:25]That's >> yeah, >> you know, it's, you know, it's gotten better than it was like, you know, it's but I, you know, I don't know like I don't I don't see like a big boom. And you just, you know, as I say, like I encourage everyone to look at a chart of manufacturing production of since 2010 >> when all these like industrial renaissance >> discussions came about and >> it's just not there. I mean, it's just not there. There's been an increase in value ad to be sure like we've kind of moved up the value chain but that doesn't mean that we've been making like the production data hasn't actually been better.

[00:35:00]>> Yeah. I mean it just to try to reverse these huge huge secular winds, tailwinds, headwinds, whatever you want to call them of global economies that that turn towards being more like service based, consumerbased like we see like this is just global capitalism you know it's like the US is largely service-based and it's other countries that can that can manufacture cheaper and then comes into the other countries and you know same with Europe it's like you know they don't have the same manufacture ufacturing capacity that they had 100 years ago. Like it just feels like these are trends that are sort of set in stone. It's the natural progression of where economies go. And then it's like okay over the last year and a half we have this experiment where we have these like very interventionist policies to try to shift our our way out of that natural progression where whether it's you know tariffs or or or what have you. And like do you are you a believer that that's even possible for just like an economy in general to to be able to shift out of that natural progression and go in the other >> direction? Policy is very difficult. I mean I'm not an industrial policy expert. I mean, it's not that it's not having any effect, but there are other areas that aren't. It's not like we're not making more batteries or semiconductor or, you know, these things that are tied to the chips hacked and like the data center buildout. Like, that is happening, but there are other things that are happening, too. Like consumer goods production is weak, right? Like, so, you know, that's down over like a percentage point over the last year. So, it's it's not that we aren't producing more of these things that we've been talking about, but there are other things going on as well. And that to me is the tension, right? So, um that's what that's that that's all I'll say about that. Yeah.

[00:36:40]>> Yeah. Yeah. Fair enough. All right. So, there's obviously a laundry list of of things going on and and big shifts going on. And then you get uh Kevin Worstress got confirmed to be the new Fed chair today. And obviously there's a lot of there's a lot of hope I would say from those that that supported him coming in that he would uh he would lean into some of these trends namely the the AI productivity boom and and lean into it and embrace it similar to to what Greenspan did during the internet boom and and not you know shy away from from this this growth group and try to fight against it. Um, you know, obviously it's not the uh the Waller hope that I think you and I both had. That would be the Fed chair, but it's it's the Fed chair we have. And and here we go. Um, how do you think he navigates this?

[00:37:27]>> We have, not the one we deserve, I guess.

[00:37:30]>> Far from Dark Knight. Yeah.

[00:37:33]>> Yeah. I don't um Well, I mean, I would say I mean, a couple of things. I mean first it's a first of all I mean this sort of um golden age thesis right where I mean the idea I mean traditionally when we talk about rate cuts the way to advocate for them is through okay the labor markets are fracturing inflation is going to be slower than expected the balance of risks are you know changing so we need to kind of recalibrate policy a bit um those are the traditional dovish arguments >> arguments that Kevin Morris has never been able to make in his career, even frankly when the times have demanded that he make them. Um the golden age thesis is a different one. Right? So what that's basically arguing uh for those that are unaware is that there's a productivity boom going on and that means essentially that our potential growth is higher which in effect means we have a wider output gap than we otherwise would have had. Right? So that gives you the space to cut rates without stoking inflationary pressures. The problem with that is that this is a very that's not in the data. That's the main problem is that it's not in the data.

[00:38:46]And because Kevin Worsh has really never made a good economic forecast in his life, he's not going to get the benefit of the doubt from the people around the FOMC table to push that position. Right?

[00:38:57]Like Greenspan had credibility with his colleagues in a way that Worsh won't have yet. Um, and it's a really unusual pro. I mean, this is one of the points I've been making with our clients a lot lately is that, you know, we talk, I mean, the productivity story that we're talking about is still very much a forecast. You know, it's a what kind of a productivity boom is it that the prices for information technology commodities are going up, not down. I mean, you go to the 90s, you look >> um, you know, look at the price for software, look at the price for other kinds of tech commodities like chips and things like that. they were deflating rapidly for years during that time. Uh is that the case right now? Definitely not. Like the prices for memory chips going up, compute is going up, software is going up. So that's a really unusual productivity boom when the prices for the things we're talking about driving the productivity are actually going higher. And the other way it's weird is real incomes are weak. You know, the whole point of investment is to raise household living standards. And if you look at real income growth, >> it's basically flat, maybe down. So that's also unusual. Go back to the 90s and take a look at what real income was doing at the time. Uh it was exploding.

[00:40:08]Um so it's a highly unusual productivity boom. Uh and that's because it's not a productivity boom. Uh what we have is a investment boom that you know maybe the productivity comes later. Um >> you know the markets are clearly pricing in a productivity boom. So it kind of begs the question like as to what happens if the productivity does actually materialize. Um >> so you know but I I I just think for for Worsh to be making these arguments as kind of a way to um persuade his colleagues around to cuts I think that is a really really tall order. It's an impossible task in my opinion. There's not going to be someone doing that.

[00:40:50]>> Yeah. Yeah. I mean it's a tall order especially when you're when you're going into a situation where the last meeting before you start you have descents in both directions you have you have doubish descents from from you have other other descents on on just the language um you know not the actual decision but still you know you have a you have a divided Fed and then you throw in somebody who has to come in here and try to build consensus on on a premise that they're all going to be potentially skeptical of okay why did this renown Mount Hawk suddenly start shifting his his rhetoric going into this situation. I mean, is there any sort of historical precedent for for what we're about to see unfold here in this uh in this first June meeting?

[00:41:33]>> I mean, it's it's a very unusual setup.

[00:41:36]I mean, that's for sure. Um, >> you know, if if you just sort of pull the last few months and just push them forward. So, just say like everything that we've seen over the last month or two just kind of continues. Not that I think that's a good way of forecasting, but you know, like in other words, like we continue to see like stable unemployment and 100,000 on jobs and inflation remains sticky and markets remain buoyant. It's hard to see a scenario where the Fed is not removing >> its uh current bias in the press statement, right? Like so the language that the hawks are upset about is this additional adjustments language. Um that historically that's basically code for cuts. Um I don't know whether it comes out as soon as June. I mean maybe there's a little bit of difference to WSH coming in. Maybe he gets to make his case you know um but you know certainly by July or September it's that that language is gone. Now whether the Fed ends up hiking is a different matter altogether but you know certainly you could see a scenario where the language is adjusted so that um so that you know the the statement makes it clear that there's no intent to go one way or the other.

[00:42:50]>> Makes sense. Do you think the Fed's going to go through a really significant shift in what it looks like over the next couple years? You know, there's obviously talk of ending forward guidance, cutting dot plots, will there be press conferences, how many um balance sheet policy, there's a there's a lot of >> I mean, my general sense is that these things take time to build consensus and because I don't see Worsh as like the best consensus builder, I have difficulty seeing like major changes.

[00:43:18]>> You know, it's interesting you mentioned like forward guidance. Um, Wars hates that. I mean, he's he's he's lambasted it his entire public career, but what uh and he's like also, you know, hated discretionary uh monetary policy, right? He's always preferred like a rules-based kind of framework, but what but appealing people, what is like trying to press the golden age thesis if not an appeal to discretion, >> right?

[00:43:46]>> And right forward, I mean, it's it's sort of like, oh yeah, trust me, this is what's going to happen. I mean it's kind of like heads I win tells you lose sort of thinking. Um yeah I mean I think I think one thing is is kind of you know maybe bringing the you know not getting rid of the summary of economic projections per se but sort of bringing it into the modern era which is you know my my I I like having more information than less information even if that information is somewhat inongruent and confusing at times. And so um I like the dots. I think you know maybe they can do things around scenario analysis with them. Um you know changing it that way.

[00:44:23]Um you know people talk a lot about sort of like fan charts and like range of outcomes and you know maybe that could be like the the sort of innovation. It would mean it would mean more information. I mean >> um so that would kind of go against his view around forward guidance. Um but you know that would be one way of improving it. Um I think you know will you get less chatter from regional Fed presidents like is he you know or just less chatter in general? I mean Wars hated giving speeches on the economic and policy outlook because he viewed it as a form of forward guidance. So do you you know are you sort of more in the dark about things? Um but if you think about what that means for rates I mean it probably means like higher risk premiums in the fixed income market because there's more uncertainty on the rates outlook. Um, so it kind of goes against what he's trying to achieve, which is lower interest rates, at least as it was understood to the president. So yeah, I mean, there's a lot of ways this can go. Um, for now, I think, you know, think about like other times we've had like changes. I mean, it's just it takes so long for them to actually like get these things done and like the review process. And so, you know, my my general thinking is that uh there's a lot of bark. There won't be much bite. Mhm. This is kind of a a wonkish final question, but I do you see any lead through into a regime where the Fed is is being more rules-based and there's maybe higher risk premiums associated with with with rates and and less certainty on the forward curves for for where rates are going to go in terms of how that impacts the economy versus this regime we've been in, which is that, you know, you have a I wouldn't say a good idea a year out, but more than more than previously. uh before all these new regimes, the Ford guidance, etc. Like is do you do you see a change in in the in the impact on the economy in a in a regime where there's more volatility around that versus not? Like is there a lead through there or is it just kind of noisy?

[00:46:24]>> Well, if there's more volatility coming out of the Fed, >> then there will be more volatility in financial markets. I mean, it's just I I don't know whether it's sort of a that could be a tail wagging the dog kind of thing. I mean, I I don't I don't know.

[00:46:36]like it we have a more volatile economy potentially, right? Like we have all these these supply shocks that are going on and is that creating the volatility out of the Fed? I mean that that to me is actually the causality, right? Like it's not the causality is not necessarily from the Fed to the economy.

[00:46:52]It's from the what's going on in the economy back to the Fed.

[00:46:54]>> Um >> I think the other thing of course that's interesting with this is like where's the volatility emanating from at the moment? It's not really the Fed. like the Fed, we're getting we're getting to a point now where the Fed is actually, you know, it's interesting. Worse is getting in there, but like the there's a confrontation brewing, I would suspect, between the Fed and the um and the White House, even if they don't want to admit that just yet, because most of the upward pressure and inflation that we've seen is largely a function of the policy coming out of the White House, >> right? like you can agree with the Iran war or not, but that's the reason why oil markets have done what they've done.

[00:47:36]>> Mhm.

[00:47:36]>> Right. Um >> yeah, >> you can um and uh you know the the same is true um around tariffs, right? Like tariffs are have put upward pressure on inflation, particularly core goods. Um now maybe that goes away over the course of the year because tariffs aren't getting any worse. And so that was a onetime shock. But you know, to me that's the interesting sort of tension is that um the a lot of the reasons why the Fed is kind of missing on their mandate have very little to do with like sort of demand driven impulses out of the labor market. It's because of uh supply generated shocks coming from White House policy.

[00:48:14]>> Yeah, 100%.

[00:48:16]All right, Neil, always great to have you on the show. appreciate all of that and uh hopefully it gives some bigger better signals to uh how to navigate the the endless rolling supply shocks uh that we try to navigate in this world.

[00:48:28]Appreciate it, Neil.

[00:48:29]>> Thanks, Felix. Good to see you.

[00:48:30]>> Likewise.