Lots More on Why Neil Dutta Is Sticking With His Recession Call

Summary

Odd Lots Podcast Summary: "Lots More on Why Neil Dutta Is Sticking With His Recession Call"

Podcast Information:

• Title: Odd Lots
• Host/Author: Bloomberg
• Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
• Episode: Lots More on Why Neil Dutta Is Sticking With His Recession Call
• Release Date: April 11, 2025

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Introduction

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve deep into the persistent debate surrounding the U.S. economy's trajectory, with a particular focus on Neil Dutta's steadfast prediction of a recession in 2025. Despite recent shifts in economic policies and market sentiments, Dutta remains convinced that a downturn is imminent. The conversation provides a comprehensive analysis of the factors underpinning this outlook and explores the broader implications for the market and consumer behavior.

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Market Dependence on Political Actions

The discussion kicks off with Tracy Alloway highlighting the significant influence that political figures, particularly former President Donald Trump, have had on market stability.

Tracy Alloway [01:40]: "How much of all the market action, all the economic action, I guess was actually dependent on just one guy, Donald Trump. And that, you know, if he came out and said something, he could end the chaos at any moment in time."

This underscores the precarious nature of markets being tethered to individual political decisions, emphasizing how Trump's recent rollback of tariffs introduced new uncertainties.

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Neil Dutta’s Recession Call

Joe introduces Neil Dutta from Renaissance Macro, focusing on Dutta's unwavering stance on an impending recession.

Joe Weisenthal [02:15]: "We do have the perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now."

Joe Weisenthal [03:03]: "Goldman pulled its recession call. You sent out an email right away. You said, I am sticking with my recession call. Why do you see recession in the cards in 2025 still?"

Dutta elaborates on his perspective, emphasizing that his recession forecast isn't solely based on the National Bureau of Economic Research (NBER) definitions but rather on translating economic indicators into actionable market predictions.

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Factors Supporting the Recession Call

Labor Income Slowdown

Dutta points out that labor incomes are decelerating, a critical factor affecting consumer spending and overall economic growth.

Neil Dutta [03:44]: "We still have a situation where labor incomes are slowing and the Fed's not budging."

High Mortgage Rates and Weak Housing Market

High mortgage rates continue to suppress the housing market, leading to reduced consumer wealth and investment in real estate.

Neil Dutta [03:44]: "We still have a situation where mortgage rates are high and the housing market is weak."

Trade Tensions and Tariffs

The escalation of tariffs, especially those targeting China, has strained trade relations, leading to increased costs for businesses and consumers alike.

Neil Dutta [05:24]: "If you're basically trying to break up the relationship with our third major trading partner, there's no scenario that doesn't create some issues for the marketplace."

Dutta emphasizes that even with the partial rollback of tariffs, the underlying trade tensions remain high, continuing to impede economic growth.

Impact on Investment

Slowing growth and persistent trade tensions are diminishing business investment, as companies become cautious about future economic conditions.

Neil Dutta [05:24]: "Ultimately what drives investment is what's happening with growth. If real growth is slowing, then it's inevitable that investment spending will follow suit."

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Stock Market’s Role in the Economy

A significant portion of the discussion revolves around the interconnectedness of the stock market and the broader economy. Dutta argues that stock prices are not just passive reflections but active indicators influencing corporate behavior and consumer sentiment.

Neil Dutta [07:40]: "The stock market takes on more of a role of an active informant. Business community is looking to the stock market as an aggregator of macro risk."

This perspective highlights the feedback loop where declining stock prices dampen consumer confidence and corporate investment, further exacerbating economic slowdowns.

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Consumer Spending and Stock Market

Tracy and Joe explore the relationship between stock market performance and consumer spending, particularly among higher-end consumers whose spending is closely tied to their investment portfolios.

Tracy Alloway [06:23]: "The S&P 500 trading like that is probably not a good thing. Is that mostly a reflection of the uncertainty or are you implying that it's going to feed into things like funding costs and the capital investment environment?"

Neil Dutta [06:54]: "I think the stock market going down is usually bad. And I think that'll have effects on household psychology for sure."

Dutta explains that declining stock markets can lead to decreased savings rates and reduced consumer spending, as households feel less wealthy and more uncertain about their financial futures.

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Fed’s Policy and Inflation

The Federal Reserve's approach to monetary policy is scrutinized, with Dutta critiquing the Fed for being reactive rather than proactive in addressing growth and inflation concerns.

Neil Dutta [13:17]: "The Fed's policy at the moment is to be behind the curve, proceed accordingly. They're waiting for growth conditions to deteriorate before they cut."

Dutta suggests that this lagging response could lead to prolonged economic weakness, as the Fed delays necessary interventions until signs of significant downturns emerge.

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Current Market Indicators

The episode also touches on current market performance indicators, highlighting significant drops in major indices and rising bond yields, which collectively signal investor anxiety.

Joe Weisenthal [13:44]: "Nasdaq down 6%, rapidly melting S&P 500 down 5.24%, US 10-year yields up on the day. Not a cocktail you want to see."

These indicators reinforce the narrative of a fragile economic environment, supporting Dutta's recession outlook.

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Conclusion

The episode concludes with a reflection on the interconnectedness of various economic factors and the importance of understanding the broader implications of market movements. Joe and Tracy reiterate the significance of Neil Dutta's insights, emphasizing that his recession call is grounded in a comprehensive analysis of persistent economic challenges.

Joe Weisenthal [09:02]: "Most painful thing is Tracy has to acknowledge I get some credit for something."

Tracy Alloway [09:14]: "That's a good quote."

Their light-hearted exchange underscores the depth and seriousness of the discussions, leaving listeners with a nuanced understanding of the current economic landscape and the reasons behind the persistent recession forecast.

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Notable Quotes:

• Neil Dutta [03:44]: "We still have a situation where labor incomes are slowing and the Fed's not budging."

• Neil Dutta [05:24]: "If you're basically trying to break up the relationship with our third major trading partner, there's no scenario that doesn't create some issues for the marketplace."

• Neil Dutta [07:40]: "The stock market takes on more of a role of an active informant. Business community is looking to the stock market as an aggregator of macro risk."

• Neil Dutta [06:54]: "I think the stock market going down is usually bad. And I think that'll have effects on household psychology for sure."

• Neil Dutta [13:17]: "The Fed's policy at the moment is to be behind the curve, proceed accordingly. They're waiting for growth conditions to deteriorate before they cut."

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This episode of Odd Lots provides a thorough examination of why Neil Dutta remains convinced of a looming recession in 2025, despite recent policy changes and market fluctuations. The hosts effectively bridge complex economic concepts with real-world implications, offering listeners valuable insights into the fragile state of the current U.S. economy.

Transcript

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[KPMG Representative]

Bloomberg Audio Studios Podcasts Radio News what do you think?

[Joe Weisenthal]

Recession or no recession?

[Tracy Alloway]

I mean, you had a really good piece.

[Joe Weisenthal]

Thank you.

[Tracy Alloway]

Out this week in the newsletter where you made the point and I had made a similar point the day earlier. So maybe I'm not being so nice, but like how much of all the market action, all the economic action, I guess was actually dependent on just one guy, Donald Trump. And that, you know, if he came out and said something, he could end the chaos at any moment in time. And then on Wednesday he actually came out and did that and then kind of, kind of, kind of. Well, your point was if he does that, we can all go back to worrying about like a slowdown in the labor market or deep seek threatening AI, which so much capital investment in the US Actually depends on.

[Joe Weisenthal]

There's a lot I did a dead list.

[Tracy Alloway]

I am both the most popular trader and most successful trader at Citadel. FEDA's going viral barges.

[Joe Weisenthal]

This is an after school special.

[Tracy Alloway]

Except I've decided I'm gonna base my entire personality going forward on campaigning for a strategic pork reserve in the US Black gold. These are the important questions. Is it robots taking over the world?

[Joe Weisenthal]

No. I think that like in a couple years the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of heaven.

[Tracy Alloway]

How do I get more popular and successful?

[Joe Weisenthal]

We do have the perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now.

[Tracy Alloway]

Because even when Odd Lots is over, there's always Lots More.

[Joe Weisenthal]

And we really do have the perfect guest. You know who had a really good contribution to the odd lots newsletter February 2024. Basically, the market top Neil Dutta sees rising risks to the labor market, calling recession risks right there and essentially at the market top, we got him back on Neil yesterday after Trump walked it back. By the way, we're talking to Neil Dutta of Renaissance Macro. Trump walked back some of the tariffs. Goldman pulled its Recession call. You sent out an email right away. You said, I am sticking with my recession call. Why do you see recession in the cards in 2025 still?

[Neil Dutta]

So remember that for me, it's not really about an nber defined recession. That to me is not the name of the game. The name of the game is trying to translate an economic view into a market call. And even if it's not technically a recession, it might as well be because the underlying problem for the market is not going away. And that's the issue. All the things I mentioned in that newsletter you highlighted in February, that's all here. That's still here. We still have a situation where labor incomes are slowing and the Fed's not budging. We still have a situation where mortgage rates are high and the housing market is weak and we still have state and local governments cutting back and we still have a pretty high volume on trade. I mean, in terms of tensions, just because we dialed it back a little bit yesterday doesn't mean that the tensions are not still high. And I think it's what we've basically done is traded. You basically spread the distribution of costs, I guess, I mean, away from everyone, just to. Towards China. But that's still pretty bad in and of itself. I don't think it takes a rocket science to figure it out, Joe. I mean, if you're basically trying to break up the relationship with us and our third major trading partner, there's no scenario or that doesn't create some issues for the marketplace.

[Tracy Alloway]

It is true we've ratcheted down tariffs for countries ex China, but as you say, we've basically gone back to what we were worried about before. Right. And the funny thing I gotta say about that Goldman note, and it just underscores how quickly things are changing in the current environment. You know, they published that, they published the recession call basically an hour before Trump did his big Wednesday announcement. And then right after that, like within. I didn't realize that within 60 minutes they had to come out and say, actually we're rescinding it.

[Joe Weisenthal]

As Lennon said, there are hours where nothing happens and minutes where days happen. And we've had two minutes. You know, we're seeing a lot of that right now.

[Tracy Alloway]

Do you have like a little book of Lenin quotes that you keep with you? Where are you getting those from?

[Joe Weisenthal]

I also might be mangling the quote a little bit. I mean, Neil, you said trade tensions are high, but tariffs are really high right now. I mean, that's really like the core thing.

[Neil Dutta]

Well, that's the other thing, right, Joe? I mean, it's not just tensions, it's reality 100%. And I kind of sympathize with it. Right. Like it's the uncertainty that he's creating. No, no, no. It's also what he's actually doing. And that is going to weigh on investment by itself. Right. Because if you introduce tariffs and you actually follow through with the tariffs, the uncertainty around what you're doing is going down. The reality of what you're doing is what businesses will respond to through growth expectations and they'll pull back. Right. Because ultimately what drives investment is what's happening with growth. If real growth is slowing, then it's inevitable that investment spending will follow suit. Because largely what investment responds to is sort of an accelerator effect. Right. That's basically the idea that as growth picks up, investment tends to rise more. So the fact that growth is slowing and expectations around growth are coming down, that's ultimately, ultimately what's going to pull down investment. So it's not so much the uncertainty, although that's probably not good. It's also what he's actually doing.

[Tracy Alloway]

Wait, just on that note, so you sent an email earlier this week where you said the S&P 500 trading, like fart coin, is probably not a good thing. There's a sentence I never thought I would necessarily read out loud. But The S&P 500 trading, like that, is that mostly a reflection of the uncertainty aspect of all of this or are you implying that it's going to feed into things like funding costs and the capital investment environment and I guess the wealth effect for the US Economy as well?

[Neil Dutta]

Yeah, I think so. I mean, I think the stock market going down is usually bad. And I think that'll have, that'll have effects on household psychology for sure. And remember, like a lot of the, a lot of the reason why consumer spending ran so much more rapidly than real income growth last year was because the savings rate was going down. And one of the reasons why the savings rate was going down was probably because stock prices were going up. And that was juicing the, you know, enthusiasm for the high end consumer.

[Tracy Alloway]

Yeah, I think this is really important. Like if you think that consumer spending was driving a lot of the surprising growth in some respects that we've seen recently, then you should really focus on what the higher end consumer was doing. And most of those higher end consumers have stock portfolios.

[Neil Dutta]

Yeah, I think that's right. And I guess the other thing I would say is, you know, there's a whole literature I think about, you Know the stock market as a passive informant or an active informant. Right. So is there anything about the share price of a company that tells the CEO of that company something about their firm they don't already know? Usually it's probably not. But if you get this sort of macro type environment, which is kind of where we are right now, then the stock market takes more. Takes on more of a role of an active informant. And then you kind of have business, the business community kind of looking to the stock market as a aggregator of macro risk. And right now the fact is that stock prices are down quite a bit from their February highs. And that's probably creating a cautionary mood for most of corporate America.

[Joe Weisenthal]

I'm a big fan of the stocks matter hypothesis. I've been banging the drum. Stocks matter. Don't just dismiss the stock market as this thing that us Wall street elites, which we are, are obsessed with. They actually matter in this family. I do not believe in Wall street versus Main Street. I only believe in one constant contiguous street that connects all roads in America. Neil.

[Tracy Alloway]

Wait, wait. Isn't that Neil saying the, you know, people say that the stock market got the economy, but it's not. Not the economy.

[Joe Weisenthal]

Where did you get that, Neil? Where'd you get that?

[Tracy Alloway]

Oh, we're going to settle this, Neil.

[Neil Dutta]

I got it from Joe Weisenthal. Yeah. All right.

[Tracy Alloway]

Okay.

[Joe Weisenthal]

Most painful thing is Tracy has to acknowledge I get some credit for something.

[Tracy Alloway]

It's a good quote.

[Joe Weisenthal]

Thank you.

[Tracy Alloway]

That's why I thought Neil had it.

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[Joe Weisenthal]

Care do you feel confident that there is a single major sector of the US economy right now that's adding headcount and elder care and healthcare?

[Neil Dutta]

Not really, no. I mean most of the growth in employment has been in sort of what you would call like acyclical industries, private education and health care. You know, when you look at the more cyclically sensitive areas of the job market, I mean that's clearly slowing down. You look at residential construction employment, I mean that's actually down against last year. You know, I mean service sector. I mean the other thing of course is that if the tariff, as the tariffs come on, that's likely to push up goods prices, right? Given the fact that the labor markets are slowing down to the extent that people have to allocate more of their household budgets towards goods, that'll leave less leftover for everything else, which means they'll ultimately have to start cutting back on services consumption and that'll drive down the prices for services. So that to me is a bigger concern because obviously service sector employment is huge in the U.S. that's where most of the meat is. So you know, leisure and hospitality, you know, things like that. I mean that's going to come under pressure I would think as the quarters go on.

[Tracy Alloway]

We are recording this on Thursday, April 10th and we did just see CPI actually come in lower than expected. But everyone's talking about imminent tariffs impact. And I guess my question on inflation is like a lot of people seem to be debating between well, most people agree the tariffs will immediately push up prices. The big question is at what point will enough demand destruction actually kick in to reduce demand for consumer goods and potentially lower prices. But it's really interesting that you're saying that we could have the impact feed into services and then if you get higher unemployment, that would certainly add to the demand destruction dynamic.

[Neil Dutta]

The Fed's policy at the moment is to be behind the curve, proceed accordingly. That's all I can tell you. I mean they're basically telling you that they're waiting for growth conditions to deteriorate before they cut. That's all that really matters. They're not changing the nominal anchor just yet. I mean, so that basically tells you that their solution to the inflationary consequences of tariffs is disinflation as of right now.

[Joe Weisenthal]

Nasdaq down 6% that big green candle we got yesterday? Rapidly melting S&P 500 down 5.24% US 10 year yields up on the day. Not a cocktail you want to see.

[Tracy Alloway]

What if this just keeps going for the next four years?

[Joe Weisenthal]

It might be.

[Tracy Alloway]

Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Ondahm and Kale Brooks.

[Joe Weisenthal]

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

[Tracy Alloway]

Please rate, review and subscribe to odd lots and lots more on your favorite podcast platforms.

[Joe Weisenthal]

And remember that Bloomberg subscribers can listen to all of our podcasts ad free by connecting through Apple Podcasts. Thanks for listening.

[KPMG Representative]

KPMG makes the difference by creating value like developing strategic insights that help drive M and a success or embedding AI solutions into your business to sustain competitive advantage. KPMG make the Difference. Learn more at www.kpmg.us insights.