Podcast Summary: "State of the Economy with Diane Swonk"
Jill on Money with Jill Schlesinger
Release Date: March 21, 2025

In this episode of "Jill on Money with Jill Schlesinger," host Jill Schlesinger and co-host Mark Tulare engage in an in-depth discussion with Diane Swonk, the Chief Economist at KPMG US. The conversation delves into the current state of the U.S. economy, exploring topics such as consumer confidence, inflation, tariffs, Federal Reserve policies, labor market dynamics, manufacturing challenges, immigration impacts, productivity growth, and the potential for an economic recession.

Introduction

Mark Tulare opens the episode by acknowledging the overwhelming flow of economic news, emphasizing the need to rely on expert insights to make sense of complex financial trends. He introduces Diane Swonk, highlighting her expertise in both short-term and long-term economic trends.

Economic Overview

Diane Swonk provides a snapshot of the U.S. economy as of early January 2025. She notes that the economy entered the year with significant momentum, bolstered by a surge in consumer and CEO confidence following an election period. However, she introduces the concept of "mind the gap," referring to the disparity between consumer sentiment and aggregate economic indicators, exacerbated by increasing economic inequalities.

Diane Swonk [03:54]: "We entered the year with some momentum. Even the employment numbers came in better than expected in December."

Consumer Confidence and Inflation Expectations

The discussion shifts to consumer confidence indicators, where Swonk highlights a 22% deterioration in consumer sentiment, describing the current environment as stagflationary—characterized by stagnant economic growth and persistent inflation.

Diane Swonk [06:41]: "Consumer confidence by the conference board... both inflation expectations picking up and job security eroding."

She emphasizes the unprecedented increase in five-year inflation expectations, marking it as the largest one-month rise since 1993, signaling deep-seated concerns about future economic stability.

Impact of Tariffs on the Economy

Mark Tulare raises concerns about the reimplementation of tariffs, questioning their impact on consumer behavior and overall economic health. Swonk explains that the current tranche of tariffs is significantly more substantial than those enacted in 2018-2019, leading to margin compression for companies and potential layoffs due to increased costs.

Diane Swonk [08:25]: "We're going from less than 3% tariff in 2018 to 16.5% by mid-year."

She warns that stacking tariffs not only hurts manufacturing margins but also perpetuates inflationary pressures, complicating the Federal Reserve's efforts to manage the economy.

Federal Reserve Policies and Challenges

The conversation turns to Federal Reserve Chairman Jay Powell's approach to balancing inflation control with employment stabilization. Swonk explains that the Fed is caught in a challenging position, striving to avoid the mistakes of the 1970s stagflation without inducing a severe recession.

Mark Tulare [11:08]: "They use the Personal Consumption Expenditure Index... it's weighted by how we spend things."

Swonk discusses the Fed's reliance on the Personal Consumption Expenditure (PCE) Index over the Consumer Price Index (CPI) due to its alignment with actual consumer spending behaviors. She underscores the Fed's cautious stance, aiming to avoid rapid policy shifts that could destabilize the economy further.

Labor Market Dynamics and Potential Recession

Swonk outlines the fragility of the labor market, noting that government and contractor job losses are beginning to impact overall employment. She explains that the reduction in participation from foreign-born workers has kept the unemployment rate artificially low, masking underlying economic vulnerabilities.

Diane Swonk [18:57]: "This could tip us into a recession... For every one job lost in government, usually, two for contractors."

She highlights that sectors like education, leisure, hospitality, and healthcare are experiencing significant job losses, contributing to the overall economic slowdown.

Manufacturing and Supply Chain Challenges

The discussion shifts to manufacturing, where Swonk critiques the focus on bringing back manufacturing jobs to the U.S. She explains that modern manufacturing often requires highly automated processes and a skilled workforce, making it difficult to compete with cheaper labor markets abroad.

Diane Swonk [34:36]: "Much of manufacturing has not automated as much as we think. It's really slowed down, actually."

She emphasizes that tariffs have not successfully revitalized manufacturing to the extent proponents hoped, often leading to increased costs without substantial job creation.

Immigration and Workforce Growth

Swonk addresses the critical role of immigration in sustaining the labor force. She warns that restricting immigration could lead to a declining workforce, hindering economic growth and productivity. This demographic shift poses significant challenges for industries reliant on a steady influx of skilled workers.

Diane Swonk [38:20]: "Potential growth in the economy is the rate at which the labor force can grow... if that is not growing, it's very worrisome."

Productivity Growth and Technological Innovation

The conversation explores the potential of Artificial Intelligence (AI) to drive productivity growth. Swonk acknowledges AI's transformative capabilities but points out the substantial energy and infrastructure demands required to scale these technologies effectively.

Diane Swonk [40:33]: "The adoption of AI places extraordinary energy demands... it's the first time we've had a technological innovation where the scaling costs are so high."

She cautions that without substantial investments and policy support, AI alone may not compensate for the slowing labor force growth.

Potential for a Recession and Future Outlook

Mark Tulare probes the likelihood of an impending recession, especially if tariffs remain in place and governmental job cuts persist. Swonk expresses concern that continued economic policies could exacerbate uncertainties, potentially tipping the economy into deeper stagnation.

Diane Swonk [19:06]: "It's not clear it could tip us fully into a recession, but we could see red ink unemployment as soon as March."

She reiterates the complexity of the current economic landscape, where balancing inflation control with employment support remains a significant challenge for policymakers.

Closing Thoughts

As the episode wraps up, Swonk emphasizes the importance of building trust within uncertain economic environments. She draws parallels between personal experiences and broader economic behaviors, illustrating how trust can influence consumer and business decisions.

Diane Swonk [17:29]: "Trust allows us to go beyond our doubts and move forward."

Mark Tulare and Jill Schlesinger encourage listeners to engage with their content for further insights and support in navigating economic anxieties.

Notable Quotes

• Diane Swonk [06:41]: "Consumer confidence by the conference board... both inflation expectations picking up and job security eroding."
• Diane Swonk [08:25]: "We're going from less than 3% tariff in 2018 to 16.5% by mid-year."
• Diane Swonk [11:08]: "They use the Personal Consumption Expenditure Index... it's weighted by how we spend things."
• Diane Swonk [18:57]: "This could tip us into a recession... For every one job lost in government, usually, two for contractors."
• Diane Swonk [34:36]: "Much of manufacturing has not automated as much as we think. It's really slowed down, actually."
• Diane Swonk [38:20]: "Potential growth in the economy is the rate at which the labor force can grow... if that is not growing, it's very worrisome."
• Diane Swonk [40:33]: "The adoption of AI places extraordinary energy demands... it's the first time we've had a technological innovation where the scaling costs are so high."
• Diane Swonk [17:29]: "Trust allows us to go beyond our doubts and move forward."

Conclusion

This episode provides a comprehensive analysis of the current economic challenges facing the United States, offering valuable insights from an experienced economist. Diane Swonk articulates the intricate balance between controlling inflation and maintaining employment, the tangible impacts of tariffs, and the critical role of immigration and technological advancements in shaping future economic growth. Listeners gain a nuanced understanding of the multifaceted factors influencing the U.S. economy and the potential pathways forward amidst uncertainty.

For more information and to engage with future discussions, visit jillonmoney.com.