The last time today's expert was on the program back in July, she was concerned about rising unemployment.
Is she still as worried about it as we prepare to enter a new year with a new Administration taking over?
To find out, we have the good fortune to talk today with Dr Anna Wong, Chief U.S. Economist for Bloomberg Economics. Prior to her current role, Anna also worked at the Federal Reserve Board, the White House Council of Economics Advisers, and the U.S. Treasury.
The punchline is that, yes, Anna still expects the unemployment rate to surge higher throughout 2025. That forecast, plus a number of other structural issues we discuss in this interview, makes today’s economy look “very shaky” to her.
Here are my key takeaways from the interview:
The U.S. election significantly influenced market movements, with anticipation of Trump’s policies driving notable changes. Inflation expectations rose due to projected fiscal policies, and 10-year Treasury yields increased by 80 basis points between September and November. The market's focus is shifting from election outcomes to the specifics of economic policies under new leadership, including the potential impacts of personnel like nominated Treasury Secretary Scott Bessent.
Anna projectes a significant increase in tariffs, including a rise in U.S. tariffs on Chinese imports from 12% to 36% by 2026 and an overall increase in U.S. tariffs from 3% to 8%. She highlights that targeted tariffs on intermediate and capital goods, rather than consumer goods, historically mitigated inflationary impacts. While tariffs may generate government revenue, they are expected to negatively affect firm profits and employment, with broader disinflationary effects anticipated by 2026.
Labor market data shows ongoing cooling, with significant downward revisions expected to non-farm payrolls—around 800,000 jobs for the year ending Q1 2024, and perhaps 1.2 million jobs for the year ending Q2 2024. Recent QCEW data indicates accelerating weakness, with downward revisions potentially averaging 100,000 jobs per month in 2024. These trends suggest structural weaknesses, with real unemployment figures masked by temporary election-related hiring and data distortions.
The recent surge in government hiring, particularly for election-related roles, temporarily bolstered employment data. This hiring, described as one of the fastest paces since the 1990s, is expected to reverse after the election cycle, potentially increasing unemployment in early 2025 as temporary workers and outgoing administration staff exit the workforce.
The Trump administration plans to stimulate growth by reducing government spending, deregulating industries, and using tariff revenue to offset tax cuts. However, Anna warns of short-term pain, including increased unemployment and financial strain on middle-income households. Policies such as ending student loan forbearance and increasing fiscal discipline could exacerbate economic challenges before potential improvements in 2027 and 2028.
Equity markets appear overvalued based on metrics like CAPE ratios and the Buffett Indicator, with valuations at levels only seen once or twice in history. Anna highlights the fragility of market optimism ("animal spirits"), which could dissipate if labor market weaknesses and fiscal constraints come into focus. The bond market, often a better predictor of economic conditions, has already signaled concerns, with yields initially rising but now expected to fall as a "safety trade."
Tariff-driven inflation is likely to be subdued due to strategic targeting of goods and disinflationary pressures from lower firm profits and employment. Anna expects the Federal Reserve to begin cutting interest rates by late 2025, barring extreme scenarios such as a sharp rise in core PCE inflation to 3.6%. She cautioned that any reluctance to cut rates, especially citing an unobservable "neutral rate," could amplify economic downturn risks.
Consumers, particularly lower-income groups, face near-term challenges from rising costs, stricter fiscal policies, and diminishing government support. For example, the cessation of student loan forbearance could worsen credit scores for younger borrowers, while potential healthcare cost increases may strain household budgets. Anna advises individuals to reassess job security and financial resilience as unemployment is likely to rise, emphasizing prudent financial planning during this transitional period.
For the full interview with Anna Wong, watch the video below:
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