Amy Arnott (3:19)

Yeah, I can imagine.

Ben Johnson (3:21)

Claudia, that timing was I guess maybe ex post fortuitous. What were some of the sort of key lessons learned in that trial by fire moment sort of entering your role right as the global financial crisis, probably the most meaningful moment in markets and in the economy in most people's lifetime?

Claudia Sommers (3:42)

Well, in terms of the analytical lessons, I certainly benefited coming in with, you know, a bit of a clean slate, being a new economist and something that I, you know, I worked a lot on consumers. And particularly the years into the recovery from the Great Recession, consumers were really hit hard and they just weren't coming back. And that perspective of realizing that some of the tried and true relationships, the way the economy snaps back after a recession, that sometimes those don't work and then that's where you really have to go and look at the data and kind of think about what could be happening that's unusual and different. And getting that as a lesson very early on, don't just go with the historical patterns. You gotta dig into the data and understand that things can really shift in the economy, particularly if you get hit with a big enough shock. And the, you know, the financial crisis was definitely one of those. So, you know, there was a good learning in terms of the analytical tools to be really open minded and kind of look at where, where the economy is going. And then there's just the kind of like becoming a young professional realizing that in a crisis, it's really tough, crisis does not bring out the best in people. Right? You're really stressed out, you're trying to deal with a lot of uncertainty. And I know my div. The time he, you know, looked out at the staff, especially during the financial crisis, and he's like, you just gotta put your head down and do your best work. Right? Like there's no. And even in a crisis, there are no benefits from panicking, right? You, you just gotta keep pushing through. And unfortunately those lessons have proved useful a few more times, at least in my career since then. So.

Amy Arnott (5:23)

So in addition to your day job, you've also been active with other writing. You started your Macromom blog back in 2017 and then the stay at home macro substack in 2021. You also are A regular contributor for Bloomberg Opinion. What do you like about writing for those outlets and what's your main goal in your writing?

Claudia Sommers (5:51)

So when I left the Federal Reserve in 2019, you know, I love to work on fiscal policy and think tank and I had an opportunity to do that during the pandemic again, I changed jobs right before the bottom falls out. Right. I left in 2019 and I got to work on the pandemic in 2020 and advising Congress and other members. But over time, you know, and I've continued to work on macroeconomics. I'm now with an investment firm in, in the D.C. area, new century Advisors. So like the kind of analytical work I'm doing, looking at the data, what's happening in the economy, trying to make sense of it, you know, that's really my bread and butter. But another p been so important to me is trying to communicate what's happening in the data to a broader audience. And one thing in particular, since I left the Fed, I've spent a lot of time trying to explain the Fed what it does, how it works, what its mission is, why the institution is important. I mean, that's just been a real, it's been something I've been very dedicated to. It's kind of like trying to pull the curtain back on the Fed and really like help, you know, the general public, even not just investors, but also just the general public understand this institution because it's really important and understanding is the first step towards accountability. Right. You need to. So, you know, the communicating of the economics, the research, the institutions, that's just something that I find important and I enjoyed doing. I enjoyed having those conversations with, you know, the non economists also about what's happening in the world.

Ben Johnson (7:23)

I think as you just described, trying to communicate these complex concepts to lay investors. I mean, oftentimes and even myself included, you hear a lot of Fed speak in the inner machinations of global financial markets. And it's like I feel like I've picked up the operator's manual to a Klingon spaceship and I can't make heads or tails of any of it.

Claudia Sommers (7:46)

Yeah, and that's exactly my ability to read the Fed speak the Klingon the way that the precise wording, I really hope someday that that's not a marketable skill because it really should be generally understood what the Fed's doing, what their views are now. I think some of the way that they speak, there's a precision to the language. And we're, as a Fed economist, you're trained in how to write about the data in a very consistent way. The Fed really, they strive to kind of be consistent in the way that they talk about the economy, they talk about monetary policy. It can make it a little impenetrable to regular people, but there is kind of a logic to it. But I think one thing that I learned at the Fed and I really believe is at the core of the institution is the discussions start with the data and really trying to understand what are the data out there. And I mean, we have a deluge of different statistics and numbers we can go to. So it's also about knowing the quality. Another important thing that I learned as a forecaster at the Fed, it's not just about getting the number right. Like is GDP going to be 2.5% or 2.3%? Is inflation going to be 1.8 or 1.9? You know, like, I mean, it's nice as a forecaster to get the numbers right, but really it's about getting the story right. Like being right for the wrong reason is still wrong. And in terms of, for the policymakers, they need to understand what's happening in the world, where it might be headed. And you really do need to tell a story, an internally consistent, logical story, one that has ties back to theory, are definitely helpful, but that's kind of learning that. It's like taking the data, telling a story and then checking your story as you go along. So I think that's the way that I learned kind of how to support the mission of the Fed as an economist, as a staff person there. And I think it very much is kind of a good starting point for understanding what's the Fed gonna do next or how are they thinking about the world.

Amy Arnott (9:56)

We also wanted to spend some time talking about the current macro environment. And there's no shortage of stuff going on at the moment. We're currently taping this in mid April and I think you described kind of the recent environment as the whiplash economy. How should investors think about things that are happening like the war in Iran and supply shocks like the Strait of Hormuz? There's so many unknowns and unknown follow on effects. Is there a reasonable way to kind of think through potential outcomes and what the potential impact might be on the economy?

Claudia Sommers (10:41)

Right, so first, you know, stepping back just from the most recent events in the Middle east, it's been the case now for five or six years really since the pandemic, the US Economy has had a whole series of these supply shocks, cost shocks. So in the pandemic we had disruption to supply chains. And there were certainly some labor force disruptions. People were, you know, afraid of becoming ill or did become ill, you know, so that you had some real disruptions in the labor force from the pandemic. We've had, you know, last year, large increases in tariffs. We've had, you know, the war in Ukraine and now the conflict in the Middle east to push up energy prices. There's just been a whole series and then big swings in immigration, which is also, you know, kind of fundamental to the economy. And so these, what economists refer to as supply shocks, we can think about them as kind of, you know, fundamental to the economy, like the inputs, the costs that businesses face, the costs that consumers face. And it's kind of unusual to have had such a string of these. Often the shocks that say the Fed is trying to think about is we have some big burst of demand, maybe we have a big tax cut, or we have big refunds going out to households, or we have a recession. There's a real collapse in demand. So that's kind of the typical thing that moves around the economy. But we've had this whole series of supply shocks. And one thing that is particularly problematic about them is when they're the bad kind of supply shocks, they can both push up prices, push up inflation, and push down on growth. And they can often do both at the same time. In the 1970s, it's referred to as stagflation. We're not in a space like that, but we're definitely where there's this tension. I will say that sometimes we can have good supply shocks, and they're in the mix right now, too. There's certainly been a push with some deregulation, which we can argue about whether that's, you know, a net good or. Or not. But I mean, that kind of moves in the direction of. Of can push up growth and push down inflation. But another big one that is just at the kind of start is the AI kind of, you know, rollout into the economy that has the potential in pushing up productivity, push up growth, and push down inflation. So, like, we're dealing with these supply shocks, which are not typical. They're not ones that the Fed is really well suited for. Like, moving around interest rates doesn't, you know, affect the labor force, it doesn't affect productivity, you know, and it's not clear whether we're just in a string of bad luck or there have been policy decisions. But it's a really. It's a tough setup. It's certainly a tough setup. For the Fed. But I will say just it's a tough setup for investors or just businesses, regular people trying to navigate these shocks, which are not only kind of these fundamental rewiring of the economy, when I talk about it as a whiplash economy, we've also had them in rapid succession. And many of these have been really big shifts. And so it's hard to know how to respond to them, frankly. And even once you have a response, there's a lot of cost in adapting to the changes. And so I think what you've seen with the Fed, which I think is a pretty broad approach to this environment, is you kind of fall into a risk management mode. It's not just about what you think is the most likely thing to happen in the economy. What's the most likely thing to happen as we move through tariffs, we move through the conflict in the Middle Middle east, or we move through the AI revolution? It's about managing around and staying away from the worst case scenarios, like kind of being ready to pivot as soon as you have enough information. And so then you have to do a lot more scenario analysis. You have to be kind of testing, having a sense of what to look for in the worst case scenarios and responding to that. So it's a little different than just having your what's your base case? And respond to that. You really got to think about the whole distribution of risks and position yourself so you're ready to move when it becomes clear which direction is the right direction to move.

Ben Johnson (14:48)

Claudia, so much great stuff to unpack here. The one thread I wanted to pull on, and I think most recently, and maybe prominently, the impacts of these supply shocks that you've described that your average American consumer is experiencing is when they pull up to the gas pump. And you've made sort of the distinction historically about the data that the Fed is looking at, key data points like CPI and then the data that your average consumer is most concerned about, which is I'm paying on average maybe more than $4 a gallon for gas. How do you think about reconciling those? And how do you think that the Fed has to navigate like this distinction between what shows up in the data, you know, and what shows up in just sort of sentiment and most prominently maybe pain at the pump.

Amy Arnott (15:41)

Right.

Claudia Sommers (15:42)

The biggest question right now for the Fed in terms of the effects of the conflict in the Middle east on inflation, it's not so much about where gas prices right now, it's about, you know, will they go higher? How long do they stay at this High level. And actually a big question for the Fed, the big worry that they have, particularly now that inflation has been above the Fed's target for a full five years at this point, even before we had the conflict in the Middle East. And they're worried that people, businesses just kind of take it as given that inflation's now 3%, inflation's just going to be higher. What's really remarkable, I mean, when you talk about the sentiment surveys, sentiment is absolutely abysmal right now. And I think it makes sense also in this context of that whiplash economy of a whole set of supply shocks. The reason sentiment hit an all time low this month is not just about what's happened with gasoline prices going to $4 a gallon. That certainly added to it. That was the latest leg down. But we have seen since really since 2022, Americans in these surveys pointing to prices as the reason that they are falling behind year after year. So this has just been kind of a continual getting hit with these unexpected price shocks. And that's what's weighing on sentiment. What's been really interesting and as far as the Fed's concerned, kind of encouraging, is that when you ask these same households in these surveys to look out five to 10 years, what do you think inflation's going to be? Despite the fact that we have had multiple price shocks that they've dealt with, they're still kind of hanging in there that inflation's going to come back down, because that's the piece. It's not just about where we are right now in terms of gas prices or in terms of inflation. It's just, are we going to get stuck here? And so far, the indications both on the actual what's happening in the Middle east, there are some signs that there's, you know, we're in a temporary ceasefire there. There is some path to getting back to something that would look like normal. And so far, consumers kind of, they're with that. And that's really important for Fed policy going forward. But so I think some of this disconnect between when you look at different pieces of economic data, you look at the sentiment surveys, you look at financial markets, a lot of it's like different horizons. Like, what are you asking? Like what's embedded in those data? So I think they do still all kind of hang together. And in fact, in the sentiment surveys, there is something encouraging in that most people, when they're asked, still see this as a temporary hardship in terms of higher inflation, not a permanent one.

Amy Arnott (18:30)

From the perspective of the Fed, do you think that there is likely a similar view that yes, inflation has been running well above the 2% target for a long time, but it's not necessarily a crisis that needs to lead to another interest rate hike.

Claudia Sommers (18:53)

My read, both in terms of how events are evolving in the Middle east and again looking at some of these inflation expectations, both the surveys of households, businesses and market based inflation compensation, it all points towards a Fed that is going to be patient through this. Like I still see, and Chair Powell has said this recently, I mean like they're still kind of positioned that the next move will probably be a cut as opposed to a hike. And I don't think they're lined up, you know, to start hiking, particularly given, you know, even just events in recent weeks. There's a lot of uncertainty still. Right. Like, you know, but one thing that I suspect both the conflict in the Middle east but also kind of the after effects of the tariffs last year is you really push the Fed into a place where they want to see progress on inflation before they cut again. Because there's a lot of discussion about like oh, the Fed will look through an energy shock or the Fed should look through the tariffs. And what that means is just this is a price increase, it's going to be temporary. And so the Fed shouldn't react to it, they shouldn't increase rates to try and fight it because they're just going to do more damage because they're going to destroy demand, they're going to push down growth and that inflation was going to come down anyways. You didn't need the Fed to be having the cost of the higher unemployment, the lower growth. So they shouldn't respond to it. But you could also argue, well, the tariffs are cost to businesses and consumers, the higher gas price, I mean consumers and diesel is even higher than gasoline in terms of its increase. So that's a cost to consumers and businesses. You could make the argument, well, so thinking about those effects, maybe the Fed should actually be easing up. They should be trying to support it. But given the fact that inflation has been running above the Fed's targets for five years and these shocks, whether it's the tariffs or the Middle east, they are large and unprecedented and uncertain. This Fed, particularly under Powell's leadership, just is not gonna get ahead of the data. It may be very reasonable and they've been saying for almost a year now that, well, the tariff inflation, it'll be a one time effect on prices and then inflation will come down. And they keep saying that, but they want to see it before they cut and we're months away from seeing the tariffs really kind of peak and kind of start to move down inflation. And now we've got another cost shock coming in with the energy prices. I mean, so to me, what the end result of this could be a Fed that's just very slow moving because they want to see the data and we keep getting more bad shocks, which kind of pushes it out. So I see a Fed that's probably more in a holding pattern as opposed to ready to be hiking. But in a holding pattern could come at a cost too.

Ben Johnson (21:53)

Claudia, I wanted to circle back to one of the other items that you had mentioned before and kind of the push and pull and one of the things that I think we actually could get in trouble for not spending at least more than a minute on AI in 2026. But the push and the pole there, I think really whether real or perceived, has a lot to do with future prospects for overall levels of employment and productivity. Curious where you stand. Is that registering in the macro data that we're seeing today? What are the prospects there? Are we all looking ahead to a future where we're all living on UBI and just doom scrolling under a tree each and every day?

Claudia Sommers (22:37)

Yeah. So I had just mentioned that the Fed under Powell's leadership, they're just really focused in on data. So of course the Fed is getting ready to undergo a leadership change. It's a little bumpy, a little uncertain exactly as how it's going to roll out. But one of the things that Kevin Warsh, who is nominated by the president to be the next Fed chair, he's really focused a lot on AI as a potential boost to productivity. So that's good for growth, but also as a disinflationary because it's a way to be more efficient for businesses and they're producing goods and services and that should then eventually, at least eventually put downward pressure on inflation. Right. Now you did mention there's this other piece of it could push up kind of structural unemployment if people aren't as needed and there are mass layoffs and we don't get people matched up with new jobs right away. So there's on the Fed's employment side mandate, there's also some question marks. But Warshire is really focused on this is going to cut the legs out under inflation. And the Fed and his argument, and he's not the only one that's made this argument, but it's an argument. Well, if the Fed is, you know, they should get ahead of this. Like if they're going to get this help on inflation. The Fed shouldn't be standing in the way because again, that kind of being stuck on interest rates, you know, that does hold back on capital investment, particularly now. We're also seeing in the AI space some of the capital investments, you know, requiring borrowing. And I mean, interest rates become more relevant if you're not just using cash for all of this. So there's this kind of argument that the Fed should be looking into the future. And they always are trying to forecast, look into the future. Right. But they should be looking into the future and responding now in terms of cutting interest rates. And you can tell that story, you can make that case. I mean, I am not as convinced as I think Warsh is when he makes the case, but we are in the current environment, I think it is going to be so hard for the Fed to move ahead of the data because you could have, the timing really matters. You could have a period where big investments in artificial intelligence, say the build out of the data centers, other kinds of the software investments, they could actually boost demand and put upward pressure on inflation for a period of time. And what's going to happen in the labor market is really a wild card in terms of how that transition happens, whether it's smooth or very disruptive. So it's just one of those things where the Fed, again thinking about scenarios, they're going to be watching the data very closely. But given that this is a general purpose technology, I mean, this could be really transformative or not, and it can be very hard to predict how it goes. I think this is one where they're going to be watching the data, which almost certainly puts the Fed behind the curve. But what are your choices? The Fed doesn't know which curve we're headed down. I mean, no one does. Right. So they're going to play much more, I think, defensively and kind of wait on the data as opposed to getting out ahead of this. And I suspect that's going to create some tension as the Fed shifts its leadership. Though war shows one individual, one vote, I think the Fed will still be very data driven. And again, the context of having had all of these shocks the Fed has tried to navigate, I think has put them in a much more show me before I do something kind of attitude.

Ben Johnson (26:04)

Yeah, I'm curious where you net out on the prospect of AI in broad adoption usage is being disinflationary because at least at the onset, like there's early indications that if anything it's had some upward pressure on things like utility prices, electricity prices. Longer term it could drive productivity. But does that, that come out of workers pockets? At the end of the day, the epicenter of any disinflation comes in the form of wages. And what are the second and third, fourth order effects of that?

Claudia Sommers (26:41)

Yeah, no, absolutely. Any discussion of AI especially you've got to think about the time horizon. So over a long time horizon, I'm pretty positive on the technology. Again, it has all the makings of what we call a general purpose technology. Really being transformative, being a push to productivity. I mean productivity, the ability to do more with less or do more with the same. Like that's the key to prosperity, right? Like being able to do more with our resources. It also is a way that, you know, can grow the pie in terms of having more, more growth and then there is a potential for it to come with less inflation. So, and I think over, over the long haul that is probably the right way to think about AI. And I'm also not a deep pessimist in terms of the labor market implications. I think over the long run AI as a technology is going to create new jobs. It is so much easier to think about jobs that will be destroyed by this technology than it is to think about the new jobs it will create. I just don't buy it that this somehow is just different than all the other big technological changes and it's going to leave humans to the side. I don't see that. But in terms of, if you're thinking of what's going to happen over the next year, the next three years, transitions can be very disruptive. And there absolutely are costs even from, I would call AI a positive supply shock because it has the potential over the long run to grow the pie and lower inflation. But in the transition, as we're, you know, making the investments that are necessary, that does put pressure on demand. I mean, the capital expenditures are really pretty notable what's happening. And the energy costs are definitely substantial. I mean, I think any of these times where you have these extra cost pressures, you know, it does create incentives to kind of adapt, to think about how to manage these costs. And we're just, we are very much in the early innings. And so that's where I think it would be particularly thinking in the context of a policymaker like the Fed, for them to go all in on the disinflationary effects and start changing rates this year, lowering rates this year because of it. It just seems we're getting ahead of the benefits, even if that's where we're headed to in the long run, despite

Amy Arnott (29:11)

how much President Trump might be making vocal statements in favor of rate cuts.

Claudia Sommers (29:18)

Yeah, I suspect that the dynamic that we've seen between the White House and the Fed is going to keep going even when a new Fed chair is in place. The Fed is not positioned to be putting ultra low interest rates in place outside of there being a real collapse in the economy in terms of a recession. And so it's like, be careful what you wish for. But this is not a Fed. Even under new leadership, even as the board will probably evolve over time and there'll be more Trump nominees that will probably come, you know, be part of the Fed, it's really hard to see a sharp pivot in terms of the actual interest rates. Right. I mean, the messaging might change when the leadership changes at the Fed, but in terms of actually shifting policy, I don't see that happening. And thus, I suspect the President will still be very frustrated with the Fed as interest rates don't come down substantially.

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Amy Arnott (30:43)

to touch on the issue of tariffs, which you mentioned earlier. And assuming that our next president isn't aligned with President Trump's tariff policies, how long do you think it might take to undo the effects on global trade from the tariffs that have been put into effect under Trump?

Claudia Sommers (31:09)

So we're still learning what the effects of these tariffs have been. We're still watching in the inflation data seeing what are almost certainly clear signs of the tariffs being passed through to consumers. In terms of core goods. Inflation has been pretty elevated over the past year and it really hasn't turned the corner yet. And there's lots of studies that have looked at, say, import prices to try and see the extent to which foreign producers were taking on the cost of the tariffs. And what it looks like from these data is really the cost of the tariffs are being borne by US Businesses and consumers. They're dealing with it in different ways. Not all of it's going straight to consumers, but that cost is sitting in the United States. So one would think, okay, this has been very disruptive. I Mean, we talked about the, the consumer sentiment surveys, the business sentiment surveys have been deeply negative about the tariffs because they were very disruptive. I mean, it's an extra cost and people had to manage their businesses. But then there's this question of, as you asked, so say a Democratic administration comes in, do they undo the tariffs? Well, another difficulty that the US has been facing is, is really substantial deficits, a real shortfall in terms of the revenues coming into the government versus the expenses. And that tension is growing over time. I mean, it comes back to our big entitlement programs, our Social Security, our Medicare. And then, you know, we have an aging population. Right. So there is a real tension in the deficits. The federal debt and tariffs are their revenues. And so I think this is one where the political economy of to what extent are the tariffs rolled back? You could make an argument of maybe tailoring them more. In the second Trump administration, the tariffs have been much more widespread. In the first administration, they're very focused on China, which you could make arguments about trying to shift our trade away from China. In this case, we are tariffing countries all around the world. I mean, it's really, really broad based. And so maybe one could have a more targeted, a more strategic use of tariffs. But any rollback of the tariffs is going to make the deficit problem worse. I suspect the political economy of that may be very difficult. In terms of rolling back, though, I am no, no fan of the tariffs, but I will say by the time we get to that point, you know, we, we have learned something about how the cost of the tariffs are flowing through the economy. The administration has been adamant that part of the tariffs was to bring manufacturing back to the US we are way early in this. I mean, there's no real sign of that at this point, but it could be as this administration goes along, we might see some of those benefits showing up. And then I think that would necessarily fit into any discussion about should the tariffs be rolled back. So again, the politics of this are going to be way more complicated than the economics of where the tariffs go.

Ben Johnson (34:28)

Claudia, I wanted to bring it back to data and specifically a rule that you developed that you're known for that's named after you. I was actually just looking at the time series on Fred's website earlier today, the SAHM rule, if you could tell us a little bit about what is the SAHM rule, what was sort of your inspiration for that and how you think it can be best used or sort of conversely risks being misused in practice.

Claudia Sommers (35:00)

So in 2019, I participated in a policy volume at the Brookings Institution, and it was about preparing for the next recession. The theme of it was automatic stabilizers. So these are policies that turn on and off based on economic conditions. So you don't need Congress to come in and enact a law in the recession. They just. They get started. And we have some of these in the United States. Our tax system, which is progressive, though tariffs are regressive. But in general, the US Tax system is progressive. In a recession, when people's income drops, their taxes drop even more because we tend to the tax rates go up as you are higher income. So that's kind of a stabilizer. Or like our unemployment insurance system, the whole system gets bigger in a recession just because there's more unemployed people. Right. So it's another way that the programs that kind of move, like, kind of shift with the economy to support the economy. So the argument was, well, there's more of these. There's a whole set of policies that Congress routinely puts in place during a recession. And so it's like, let's figure it out. What's the best way to do these? Have Congress decide on them ahead of time and then figure out what are the economic triggers for the programs. And so we're all ready to go. That's a way to prepare for the next recession. And so my chapter was talking about my work at the Fed, and also I'd done a lot of research through the Great Recession and the recovery, that the stimulus checks were a very effective way to support households and support spending, and that it'd be a good way to get money into the economy quickly in a recession, and kind of talked about what would be ideal in terms of how long you would do them if it was a particularly severe recession. And so really it was about having automatic stimulus checks. Put them on autopilot, use them in a recession, hit go. But for the volume, they wanted us to be very practical, like the kind of thing that a member of Congress could pull off the shelf and really put into action. And so they're like, well, we need a trigger. You want to send out checks automatically in a recession. When would you do that? And so I developed an indicator of a recession. So it's not a forecast. It's like we're in a recession using changes in the unemployment rate. And historically it had been the case that. And I kind of knew this coming into it, relatively small changes in the unemployment rate are bad news. It's not about the level of the unemployment rate. We've gone into recessions with the unemployment rate around 4%, the unemployment rate around 8%. Right. Like it's, it's not about the level, it's about changes. And so specifically what the SOMME rule shows is take a three month average of the unemployment rate so you don't get thrown off by a bumper wiggle in one month. You compare the current value of that series to its low over the prior 12 months. If it's a half a percentage point increase or more, you're in the early months of a recession. That historically had been the case. It is not perfect, but it has been very accurate over time. And it's, you know, again, the whole goal was to put this in legislation. So it's simple by design. It's very focused on why we fight recessions. Unemployment, I mean, you know, and also in part of the proposals and other places where this has been used is kind of thinking about ways to shut off programs that are in recessions. I say extra unemployment benefits by looking at the unemployment rate has come down relative to before the recession. So I think it's important, you know, not just to turn things on automatically, but also think about how to turn them off. So that was the idea behind the SOM rule. Now I will say in recent years it's really pushed me in terms of thinking about the rules of thumb for recessions. So in 2024, the SAHM rule did trigger for months ahead of that. I had said this may trigger, this is not a recession. The economy was still growing, things looked good in general. But what had happened, and I mentioned this as one of our supply shocks earlier on, we had a really pretty dramatic surge in immigration. Also had a lot of people joining the labor force. And what that was doing was pushing up the unemployment rate, but in a good way. Like if you have an inflow of workers, well, sometimes it takes them a little while to catch up, like with the businesses and get more jobs. And so that rise in the unemployment rate is actually a good sign because once they get jobs, you're going to have more growth, you're not going to have a recession. And so what was happening is kind of getting up to that half a percent increase. The labor supply, because we had this big burst of immigration, was pushing it up. And actually right now we are having the opposite effect because immigration has really cratered and we've had decreases in labor force participation in general, which is actually pulling down on the unemployment rate. So it's kind of, you know, I always knew that labor supply was kind of the Achilles heel of the SOM rule. Generally, it doesn't move around, like, as dramatically as we've seen in recent years. But, you know, I'm still very much in favor of the automatic stabilizers trying to design policies, turn on, turn off. I think the pandemic kind of underscored how the politics can get pretty tricky when that's what's driving economic policy. But I've also been really pretty sobering in recent years. These kind of rules of thumb have really been strained. And not just the SOM rule, the yield curve inversion. I mean, there's just a lot of, like, rules of thumb we use for diagnosing or like a recession's right around the corner that haven't captured what's going on. A lot of our indicators have looked pretty gloomy and the economy keeps chugging along.

Amy Arnott (40:51)

So related to that, over the past months, we've seen some stretches of pretty weak job growth, as you mentioned, without an official recession. How should policymakers and investors interpret that kind of gray zone economy?

Claudia Sommers (41:11)

It really is part of thinking about this whiplash economy, thinking about the supply shocks. Because what's happening is these supply shocks have the ability to rewire the fundamentals of the economy. If the fundamentals of the economy get rewired, well, then this whole the recession boom bust. Those are the cycles. They're kind of the movements around the fundamentals. And so what I think can be really tricky is if the fundamentals have shifted a lot, we gotta take that into account. So I think a good example that I certainly have felt in terms of looking at data, what felt like whiplash is Since January of 2025, in 40% of the months, so not quite half, but a sizable fraction of the months, we have seen declines in monthly payrolls, so the jobs day and the Friday. And since the middle of last year, we've really settled into a pattern of payrolls decline. The next month, they increase, then they decline. And early this year, these have been like big movements in terms of increases and declines and increases. And so you start to look at it and a couple of things happen. One, typically declines in monthly payrolls are a sign that something is very wrong in the economy. Like during a recession, about 80% of the months hit that kind of the decline. So I mean, that's like in the recession, but even in like a year before recession, it's more like 10% historically. Like, it's elevated, but nothing like. I mean, what we have seen in the last year is just really dramatic. And so normally, like, the alarm bells would go off and you're like, oh, the labor market's falling off a cliff. Like we're going into a recession or there's just some real weakness. But what looks like has actually happened is because we've had such a sharp decline in immigration and also we have an aging population. So we've got labor force participation general. Our labor supply is basically not growing. We're not creating new workers, which means for the labor market to be doing okay and keep the unemployment rate relatively stable, we don't need to create a lot of jobs. So kind of a good jobs number, which often gets referred to as a break even. You know, the idea of how many jobs have to be created to keep that employment rate constant. The estimates of the break even right now are really close to zero. So that means that in any given month, you know, we have weather, we have seasonal adjustment, Easter moves around like things, something happens and then just the measurement isn't totally precise. So if a good number is pretty close to zero, well, we're going to be in a world where just from month to month we're going to go positive, negative, we're going to bounce around. And it is not a sign that the data are broken. It is not a sign that things are just off kilter or that we're falling off a cliff. It's a sign that the fundamentals of the labor market are just slower growth. And it has a lot of implications, implications for gdp. This goes in a lot of directions, but it's just one of those things where you have to really understand that some of the shocks that are hitting us are just, they're rewiring the economy, they're changing the fundamentals. Which means any intuition about, like, is a recession coming is like, we gotta be really careful because the fundamentals are so different at this point.

Ben Johnson (44:49)

Claudia, I wanna come back to, in part your early career as a creator aggregator and now more recently, sort of avid consumer of data. And as I mentioned before, looking at your own indicator in the plot thereof on the Fred website, there's a notable sort of gap in that data that coincided with the government shutdown late in 2025. And that's brought to the surface a lot of questions and growing sort of skepticism about maybe undue influence of other corners of markets and government on official statistics. I'm curious whether or not we should rightly be worried about that or if there are other things that in the process we might be overlooking, in your opinion, that might be fundamentally more concerning. And one of the things you flagged is Just sort of the level of investment and participation in some of these key surveys in particular that this data emanates from.

Claudia Sommers (45:56)

Unfortunately, it is the case that we need to have a watchful eye at this point for any kind of political manipulation of the economic statistics. I'm going to be very clear, I have seen no signs of that. I mean, the sign that people watch for would be mass resignations from the statistical agencies. These individuals take their job very seriously and if they were asked to doctor numbers like, like they would be leaving. So there's no sign that that's happening right now. Unfortunately. The watchful eye piece is the president did fire the commissioner of the Bureau of Labor Statistics after a jobs release last year that wasn't good. I mean, they had big downward revisions and I mean, there's discussion about why the fire. But this was unprecedented and it did really call kind of a suspicion that, well, if the numbers aren't good, people are going to be punished. Now, again, it seems the current commissioner, the acting commissioner, is a lifelong Bureau of Labor Statistics employee. The person who has been nominated has also come from the staff. So it doesn't look like things have really spiraled off in terms of political manipulation. What I'm really worried about, and I think there are clear signs of at this point, is neglect of the agencies and in particular not putting investments in to the agencies and actually going in the opposite direction. For many decades, this does not start with the Trump administration, but for many years, the budgets of the statistical agencies have not kept up with inflation. They haven't in some cases have even fallen in nominal terms. And we talked about there's an explosion of data. There's all kinds of methods for our statistical agencies to stay cutting edge. They need to be able to purchase data, they need to be able to have the best staff, and they need to be able to go out and run the large surveys that they use for a lot of the data collection. And you need to keep innovating. We have an over $30 trillion economy, over 100 million workers, tens of millions of businesses. I mean, this is a real challenge to measure. It's a great challenge to have to have such dynamic economy and new developments like AI and you know, like. So you want a statistical agency that is really up to the task and that requires investments. You know, you get what you pay for. So. And that's just not been happening for several years and in this administration, particularly like as part of the DOGE efforts across the federal government and you have really substantial staff cutbacks at the Statistical agencies. And often it's. I mean, the. Because many of these were voluntary resignations, you know, because there were big kind of buyout programs. And it hit hardest among some of the older leadership positions at the agency. So you're strapped in terms of the staff resources. And we've seen, in terms of budget cuts, the consumer price index. So the survey they use for the cpi, they've had to drop certain geographic areas to try to cut costs. And there's been discussions about with the household survey having a smaller survey, and we've seen response rates decline. And the data, in terms of, for the users of the data, like, what's happening is not manipulation in terms of pushing down inflation or pushing down unemployment. We're just getting data that are noisier. And especially for anybody who wants to, like, look at the latest monthly reading and get a sense of where the economy's headed, it's getting harder to pull the signal out of the noise because when you make the survey smaller, you cut back, you cut corners. It's just going to make things less precise. And the US has really, I mean, we've been very spoiled in the sense that we have the statistical agencies that are the envy of the world. We can look at our monthly data and read something out of it. And that could be slipping away. And I. And again, it's slipping away because we're not putting the investments in. And I feel very strongly also that, you know, private sector data can be a great complement to the government statistics. They can't be a substitute. They just don't have the comprehensiveness. They don't have the transparency. So there's no, you know, private sector shortcut here. But you just, you got to make investments. You got to have like a, a strategy for improving the statistics.

Ben Johnson (50:38)

I can't help but be struck by what feels like a tragic irony that the individuals responsible for measuring CPI have a budget that cannot keep pace with cpi.

Claudia Sommers (50:49)

Nope.

Amy Arnott (50:51)

So, Claudia, you've been very vocal about the cultural problems in economics, most notably in a 2020 blog post titled Economics is a Disgrace, which got a huge amount of attention, both positive and negative. What do you think it is about economics that makes it uniquely bad, as opposed to other fields in academia that might also have toxic or unhealthy cultures?

Claudia Sommers (51:24)

So having been an economist, I mean, I really can best assess my own part of the profession, you know, So I don't want to necessarily say that economics is worse than anything else, but the one thing I'd say with economics as a disgrace post is what I was trying to point to was just what I had seen and experienced as a culture that was hyper competitive, which, I mean, competition is great. Like, I'm an economist, I have this great for efficiency, but to a point that there were a lot of exclusions. Right. And it's not. I mean, I certainly talked about race and gender. There's representation issues. You know, there are fewer women, there are very few black Hispanic people of color in economics, but also has a very high fraction of PhD economists have parents who have PhDs. Like, it's very few first generation colleges. So there's like aspects of class, there's aspects of, you know, what institution you're from. Again, economics is not the only profession that suffers from some of this. But I definitely felt, as someone who'd worked at the Fed, very dedicated to economic policy, that representation to a point, really does matter in terms of policy, getting the voices in the room. And also, one thing that certainly motivated the post was just having interacted with a lot of the graduate students, the people who were early in their careers that we just weren't. The economics was again, that hyper competitive or just really, you know, we're all going to be square pegs in a round hole that it was just a real detriment to our next generation and kind of how we create new ideas, how we create better policies. So it, it was more about the culture as opposed to like trying to, you know, I did give examples, which it got a lot of attention, but I mean, it could have pulled lots of different examples of things, but it was more just trying to kind of create, have an environment that is more supportive of different viewpoints, different perspectives. And it's really funny like it did. The post got probably the thing that I've written that's been most read, but when I wrote it, I kind of didn't think anybody would care because it's not like it's nothing that was in the post was news to people who are in economics, right? So I had spent a lot of time having, you know, had conversations about how I thought this was not a good setup. And people were like, ah, this is just the way it is. You know. So I actually was a little surprised that anybody cared because up until that point I hadn't gotten the sense that anybody cared.

Ben Johnson (54:09)

Claudia, I want to finish on the topic of new ideas, different viewpoints, different perspectives. I'm curious if, for the benefit of our listeners, you have any sort of sources, be it must read books, people that you follow, podcasts that you listen to that you Might recommend to our listeners that are interested in sort of expanding their horizons, exposing themselves to new ideas.

Claudia Sommers (54:36)

Yeah, it's like, I don't have any one particular podcast to point to or book to point to, but I personally have benefited from, on a pretty regular basis, kind of sitting down with all of the different media and writing and voices that I listen to and really pushing myself to bring in a voice that, like, I know I disagree with or has a different point of view. I mean, I think anytime this is true for investors, true for a comment, like, if you're trying to think about what's happening in the world and we've talked about, like, the kind of scenario analysis, like, you need to kind of think about, like, this could happen or that could happen. And I mean, frankly, it is really hard for any one individual to do all of that in their own head. Right. Because, like, we do have a viewpoint of, like, this is what I think is most likely. And as much as I can argue with myself, I still think, like, that's most likely. So a great way to do the scenario analysis, which can be kind of fun, is to find people who feel very strongly about something totally different being the most likely. So then you don't have to, like, kind of argue with yourself. You can go listen to another perspective. And it's very personal, like, being able to find that individual who you're able to listen to. Right. Because, I mean, you can't. Like, you want to get out of your comfort zone, but we have to be realistic about how much we can absorb. So I think it's just the exercise of kind of sitting down on a pretty regular basis and pushing yourself to add somebody in to your mix. And it is so easy now between the various podcasts or, I mean, substack is just an explosion of. Of various voices. And there's plenty of other platforms, so I guess I don't. I won't point to any one source because I think it's very personal. Like, each of us need to bring something else in. Like, it depends what you already have in your space. But I think it's a really worthy exercise, and it's one that you do have to. You have to put some time into it. Right? Like to go find a voice or find a perspective that isn't necessarily there. And again, like, it's good to fill in your blind spots.

Ben Johnson (56:40)

I think that's a terrific recommendation. Escaping our echo chamber, which, you know, I think sometimes I know for myself personally, requires every bit the amount of forces it took to put Artemis 2 around the moon and back.

Claudia Sommers (56:54)

So but it can be done.

Ben Johnson (56:56)

We need the energy. It can be done.

Amy Arnott (56:59)

Well, thank you so much Claudia. This has been a great discussion.

Claudia Sommers (57:03)

Thanks so much. I I appreciate it. It was a lot of fun.

Ben Johnson (57:06)

Really appreciate your time.

Amy Arnott (57:12)

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