50-50 Chance of a Recession This Year: Larry Summers

[00:00:00] Speaker 1: The talk of the town are the markets. I won't press you on the markets but tell us about the economic numbers underlying this because there [00:00:06] Speaker 2: are indications of a slowing economy. David I I think we've seen a sea change in perception in the just almost two months since President Trump was inaugurated. At that time the prevailing view was very strong economy possibly inflation risk United States exceptionalism relative to the rest of the world likely to manifest itself in continued U.S. out performance. But the combination of substantial immigration restrictions substantial layoffs in possible prospect from the federal government the damage to U.S. competitiveness into U.S. production done by tarification and above all a big increase in risk premiums have led to sharp reductions in spending on the part of both consumers and on the part of businesses. And even more sharp reductions in intended future spending. You saw that for example when Delta Airlines reported a soft first quarter and a very soft set of reservation requests going forward last night. So you take all that together. You take the fact that markets were starting at a very high level in terms of valuation. And I think you have to say that there's in the range of I'd say still slightly below a 50 percent chance of a recession starting this year. You know I've watched economic forecasts for a long time. And one thing I've observed is when they start being revised in a direction there tends to be momentum. And all the revisions are going one way at this point which is towards less growth. So I think we've got a real uncertainty problem. I think it's going to be hard to fix that. And we're looking at a slowdown relative to what was forecast almost for sure. And a serious near 50 percent [00:02:49] Speaker 1: prospect of recession. So taking you very literally about that close to 50 percent chance for our audience. What numbers should they be looking at to determine what side of that 50 percent we end up on. They should be looking at what the slope of the yield curve is and what people are expecting the Federal [00:03:07] Speaker 2: the Federal Reserve to do. The more people are looking for sharp cuts by the Fed the more they're judging that a recession is likely. They should be looking at what's happening to stocks and particularly stocks in traditionally stocks in traditionally cyclical industries. They should be looking at data that points a little bit over the horizon. data on order books of businesses data on consumer intentions to buy a car or to buy a house in the next several months as an indicator for for judging what is going to happen. All those things taken together. I think will tell a story. There's also information in what is happening. To commodity prices. And I pay a lot of attention to the various compilations that come from investment analysts who are very close to firms who are reporting which way the firms are revising their own forecasts of future revenue and future earnings. All of that are the sort of indicators of what's happening in the economy. I think at a different level the thing to be looking at is are we getting more policy certainty or are we getting more policy uncertainty. Every time there's a major vacillation. Every time there's a question about commitment to law and to commitment to following the law in any sphere you're going to be getting more uncertainty that is ultimately a prospect for chilling investment. So President Trump has addressed this and said we're going through what he called a transition period on the way to what he called something very big here to try to argue his side of it. Is this a necessary sort of transition [00:05:52] Speaker 1: to rebalance the economy to rebalance the economy. Get the government out of the economy to the extent that it was and really go forward to a better future for the economy. [00:05:59] Speaker 2: No. Look David transition period. Doesn't it sound like a lot like the word transitory. The idea of transitory inflation when it was put forward by the Biden administration and the Fed when things weren't going well. I don't think the idea that couldn't work out very well. And I don't think the idea that this is some kind of transition period is going to work out very well at all. And why do we think that it is going to help the U.S. economy to not be able to use Mexico and Canada as a as a production partner given that we are competing with Asia and Europe. I don't see what that logic is. Why is scaring people about whether they're going to get their social security benefits scaring people about whether the United States is going to continue to develop new medicines at the NIH. Why are those things thought likely to increase confidence. If this was going to increase confidence and people saw it. You'd expect to see surveys of consumer confidence showing an improvement. In conditions and you don't see that at all. If this was going to increase was just a temporary dip that was going to increase the prospects of businesses. You'd see their stock market values going upwards. Not downwards. I think by far the more likely thing is that we are in the shallow end and we're walking towards the deep end. And the problems are only going to increase with the passage of time. You know this is not the first time that a country got a new leader who gave a lot of orders and imposed a lot of tariffs. That populist policy mix is a standard around the world. Particularly tip common in Latin America. And what the studies show is that it can go either way in terms of its impacts in the short run. But it's almost always bad. Over the medium to long run. So I'd expect unless there's a reversal in policy. I would expect this situation to get more serious. And every time the president uses rhetoric that conveys steadfastness on this policy course of clarification of economic nationalism of greatly expanded concept of government action and vast wide interpretation of government power. Every time he recommits pessimism increases. And so I think those explanations of downturn being temporary are actually quite counterproductive. [00:09:30] Speaker 1: Larry to play devil's advocate I think that if somebody were here from the Trump administration they say the transition is to a world where we have a bigger manufacturing base. We had Sean Fein from the UAW just recently say he thinks what you're doing is exactly right because we've lost so many jobs. Is there an argument that in fact we could be rebuilding the manufacturing base that could help the economy in the long term. [00:09:54] Speaker 2: But manufacturing has trended downwards for 60 years. It has trended downwards in Germany as a share of the economy. It is even trended downwards in China as a share of the economy. There's a reason which is that there's just lots that used to be done by people on assembly lines that can now be done by machines. And there may be blips from one year to the next. But the idea that we were going to have some kind of durable manufacturing renaissance was a shimmer when Joe Biden said it. And it's an illusion when Donald Trump says it. And the much more likely thing is that the particular kinds of protection that the Trump administration is stressing are actually going to hurt manufacturing. Think for example of those promised aluminum and steel tariffs 60 times as many people use aluminum of businesses use aluminum and steel in their production as are in the aluminum and steel industries. So we're raising costs. The what they this administration can't understand or seems not to be able to understand is that today we live in a world of supply chains. And in that world of supply chains when you tariff things you're increasing the price of inputs that would have gone into exports or would have gone into competition. With totally imported goods from further abroad. So I think the idea that we're going to have some manufacturing renaissance of employment is misguided. And I think in terms of strategy for getting there it would be if you wanted to have that as an objective your chances would be much better subsidizing their outputs. Raising the price of manufacturers inputs. So I think this is protectionist policy which as an economist I don't like but entirely separate from that it's misguided and confused protectionist policy. [00:12:34] Speaker 1: Even if one accepted the protectionist philosophy. Larry one last one here. We are going into FOMC federal open market committee meetings. We're supposed to have statement of economic projections coming out. How on earth does the federal reserve issue a statement of economic projections given the uncertainties. I think they should follow the consensus and the consensus is moving downwards. [00:13:03] Speaker 2: I hope they don't set them in stone too far in advance of the meeting because I think we've got a rapidly evolving situation. And I think the Fed's in a delicate situation. On the one hand. Some people no doubt will think that as the economy weakens you should be moving more towards signaling strong interest rate cuts. On the other hand for the Fed to send that kind of signal would be alarming to people. Would have a material effect on sentiment. And I'm not sure just how much it matters. If a car is a lemon or you're worried that a car might be a lemon. You're not going to buy it because somebody gives you a discount. Or cuts the loan rate. In the same way when there's so much swirling uncertainty and the props from under your investment might be removed by some new policy coming out of some decree. You're going to wait before you invest in the exact level of the interest rate isn't going to matter very much. So I think the Fed needs to express its concerns about its concerns about the economy in the context of the current moment. It wouldn't be the first time federal central banks have expressed concern about rigidities. They've expressed concern about budget deficits before. I think they need to highlight just the very substantial toll that uncertainty is taking on the economy. And note that they've only got very limited capacity to respond to that uncertainty. And I think they need to remind us all of something. They need to remind us that the test of policy is economic performance. Sometimes this administration seems to be saying that as long as as long as the 10 year interest rate is coming down things are going well. Well the 10 year interest rate fell the fastest during the financial crisis. It fell the fastest after the as the 2001 recession was starting. So it fell the fastest at the beginning of covid. So the idea that somehow trying to get the 10 year rate down fast is some measure of how well you're doing. policy, which is another thing we've heard from the administration, I think isn't right. And I hope as he answers questions and talks about things, Chairman Powell can emphasize the centrality of simply trying to have stable economic performance.