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- [00:00]
A
Welcome back to the Rundown, one of the top business podcasts in the world today. Kyla Scanlon is back on the show and we both talked to a Harvard economist, Jason Furman. Kyla and I tag teamed this interview with Jason. We talked about everything from the impact that AI is having on the economy, concerns around a weakening labor market, the downfall of Chipotle, and a great discussion about the Federal Reserve and what Jason would do if he was on the Fed board today. I think you guys are going to really enjoy this conversation. All right, let's go. All right, guys, we have Kyla Scanlon back on the show today and joining us is Harvard economist Jason Furman. Thank you guys so much for hopping on the show today.
- [00:47]
B
Thanks.
- [00:48]
C
Thanks for having me.
- [00:49]
A
Of course. Jason, I want to turn it over to you first and I just want to get your overall perspective on what's happening in the economy right now. There's just so much, you know, happening with we got the trade wars still happening, we got a government shutdown with no end in sight. The AI stock market rally sees no end in sight as well. I just want to get your overall perspective on what you think the health of the economy is as we enter into the end of 2025.
- [01:16]
C
Yeah, this may not be an auspicious start to our discussion, but I have no idea. And I have no idea because we have gotten no official government data for a month. And so we don't know anything official about the month of September other than the cpi. And I don't know when we're going to find out anything about October. Now that, of course, is a slight exaggeration, but if we go one level deeper to what we do know, we also have two very contradictory signals about the real economy. GDP growth looks like it's going to be quite strong, mostly based on data that covers through August through the first 2/3 of Q3. Jobs data, though, has been very weak and slowing and the private sector data has been as well. So why is this? It's possible to rationalize them. Maybe we have miraculously high productivity growth. It's also possible one of the numbers is simply wrong. And usually I prefer the jobs data to the GDP data when they send contradictory signals. So just a lot of, lot of uncertainty out there and that seems to be a perennial for the US Economy. But maybe more than ever right now.
- [02:34]
B
You also mentioned in a recent interview that you didn't think the economy would be growing without AI and that AI is potentially crowding out other sectors of the economy. So could you talk to that. Could you just talk to where you think the economy would be without the AI boom? Do you think jobs would be coming back? Back? Like, how do you, how do you envision a future if we didn't have AI?
- [02:55]
C
Yeah, it's amazing the degree to which AI is contributing to the economy right now, but so far it's almost all on the demand side, not the supply side. I am hopeful that it will show up on the supply side and in productivity growth, but right now it's showing up in all the money we're spending building data centers, building energy to go to the data centers and the like. If you measure the direct contribution of just information processing systems and software to GDP, they were responsible for 92% of the growth in the first half of this year. Now, if we didn't have them, different things would have happened. Counterfactually, we would have had less imports because a bunch of that is imported probably would have lower interest rates and more home building. But on the other hand, we also would have had less of a stock market boom and so less consumer spending. So net net. I wouldn't be surprised if right now about half of our growth is coming from that and then the other half, it's basically crowding out, is growth that we wouldn't have had. So it's sort of partly it's crowding out growth that we would have otherwise have, but partly it's generating growth we would not otherwise have had. Hmm.
- [04:12]
B
I think the point about interest rates is really interesting and I definitely want to talk about that later, but you know, there's kind of a bubble and people talking about AI being a bubble. And one thing that's interesting about these companies is that they do make a certain amount of money. Like OpenAI, I think it's like $20 billion in revenue. They're eyeing a $1 trillion IPO, which is a little bit wild. But, you know, these companies are building out a lot of infrastructure. So does that have a cushion to. For the economy? Like, is it potentially different than like the dot com bubble exploding?
- [04:45]
C
Yeah, I mean, this is not pets.com 10% of the world uses chat GPT. Basically everyone with a smartphone either does or will be using generative AI on a daily basis. And so that's the majority of the world now. This isn't all monetizable. And it's not like if OpenAI just doubles or quadruples the number of people it sells $20 a month subscriptions to, that would justify a $1 trillion valuation. Or the. I think nearly one and a half trillion of capital they're planning to expend. They're going to need to figure something out quite different. But might they figure out a device we all wear as a necklace and it's an AI necklace and there's some of those out there already, but this becomes a must have and they sell 500 million of them or 1.5 billion of them and charge you a monthly fee and it's like a smartphone. I wouldn't rule that possibility out at all. But definitely they need something quite different than just doing a better version of what they're doing now.
- [05:51]
A
I'm going to pass on the, the AI necklace. I don't know about you guys, but that's not going to be for me. I'm in the, the, the camp that obviously this is, this is a bubble, right? And I think the question is how big of a, of a fallout is there going to be when and if the bubble bursts? So if we were to look back on it, you know, in three, four, five years, what do you think is going to, what do you think we're going to point to as like, as the top? I guess, put another way, what is Michael Lewis going to be writing a book about in 2031?
- [06:25]
C
If I knew, I'd know the day to sell all my stocks and I'm going to be buying and holding all my stocks under almost any circumstance. But I don't know. In terms of the consequence, though, the last two bubbles that burst, one was the NASDAQ bubble in 2000. The other was the real estate bubble in 2007. One of those almost caused another Great Depression. Instead it was just a great recession. The other was a mild recession. And this one right now appears to have more the hallmarks of a mild recession that the thing that would be popping is, you know, stock market values that are held by a lot of investors, they haven't really consumed all the increase in their stock, so they don't need to reduce their consumption by a dramatic amount. When it goes down, we lose the economic activity associated with this. But there's a lot of room for the Fed to cut interest rates and generate other types of economic activity. So I'm a little bit less worried. And moreover, you could have a bubble and still have lots and lots of productivity growth coming out of this. And that would be my central bet if conditional on having a bubble burst.
- [07:41]
B
And to the point of the Fed, they cut rates this week. And part of the reason they cut rates was the concern over the labor market market so Jerome Powell seems to think that the labor market is stabilizing, but it does seem like we have had a prolonged slowdown in the labor market. There's a chart going around that a lot of people have a quibble with where it's like the stock market is up 75%, job openings down 33% since November 2022. So some people think that the job slowdown might be caused by AI, other people think it might be over hiring due to the pandemic. People are starting to cut jobs now. But what do you see the job market slowdown as being caused by?
- [08:20]
C
Yeah, I don't think it's likely to be AI because you have a big slowdown in hiring, but you also have a big slowdown in job separations and firings as well. So it is less churn in the labor market overall. There are unusually high amounts of churn a couple years ago around Covid. So maybe we sort of pulled forward some of the job transitions that were going to happen. Steady state job growth just doesn't need to be that high in the low net immigration world we're in. So we probably need, you know, 50 ish thousand jobs a month. And so the fact that the hiring and separations rate are roughly the same is what you get in a world where you're not adding a lot of new people. If you look at the pattern of where the jobs are being lost, the timing, the relationship between them and different measures of what is automatable. And like, I just don't think it's that. I mean, and the last thing I say is I would just caution people, there were all these layoff stories, I can't remember when, maybe it was a year and a half ago, didn't show up in the aggregate job data just because Amazon has a flashy headline. There's a lot, a lot of other parts of the economy that are not Amazon. And if anything, the surprising thing in the US labor market right now is how few layoffs there are, not how many there are.
- [09:40]
B
Yeah, slow firing, slow hiring. And Amazon has like a million and a half employees. So like, you know, 30,000 corporate job cuts is small. It's sad as it's sad, but it's small as a percentage. And another point of concern is like young people at the labor market. So there was a paper canaries in the coal mine that was talking about how I was causing layoffs for entry level workers. So could you talk about, you know, how you're seeing young people? Are they the most vulnerable group with this new labor market that we're dealing with.
- [10:10]
C
I would be more worried for them in one respect because it's easier to not hire someone than to fire someone. I would be less worried in another respect, which is historically, most transitions have stranded older workers who couldn't get retrained and lose a job at age 53 and can't find another job, but still have a while before Social Security and the like. So historically, we haven't seen these dislocations being primarily problems for younger workers. I agree with you. Right now, that's what there's a lot of discussion of and there's a certain amount of evidence for. So I am nervous, but I think I'm even more nervous for, you know, what happens when we have people in their 50s that lose jobs and it's not clear where their next job will come from.
- [11:06]
A
I want to stick with the topic of job loss and layoffs. You're saying that it's not a concern as of yet. Is there a certain metric that you look at where you're going to start becoming concerned about the overall health of the labor market? Is it consumer spending? When do layoffs start impacting consumer spending? What kind of delay is there?
- [11:25]
C
Typically there actually is a decent sized delay because people not just get unemployment insurance, but they do a lot of smoothing families that you'd think were really strapped, you know, just did not have a lot of money that lose a job, actually continue, don't reduce their spending very much in the wake of it. So there's definitely a big lag. But, you know, the thing I'm most looking at is the, is the unemployment rate. I mean, it's not, not any sort of fancy indicator. But if we have an unemployment rate that stays forever at 4.3%, that would be perfectly fine. You know, maybe we could do a little bit better, but it wouldn't be so bad. And then once you have that unemployment rate, would I rather have 4.3 with low firing and low hiring or with high firing and high hiring? You know, I'm not totally sure. I mean, that's not like I have a, you know, I like a lower unemployment rate rather than a higher unemployment rate, but conditional on the unemployment rate, do I like more churn or less churn? I. I could tell that second story either way.
- [12:29]
A
Yeah, that makes sense. Just zooming out a bit and talking about the overall health of the economy. I want to talk about Chipotle real quick because their earnings were making a lot of headlines this week where they reported weak earnings and they were blaming the health of the economy and, and young people spending less money. That might be because they were having a harder time getting jobs. But as someone who's gone to Chipotle for 15 years and used to go eat Chipotle twice a week, I, I feel like they need to look in the mirror a little bit as well. Maybe it's the fact that their burritos cost like 18 bucks and are half the size as they used to be. I'm just curious to get Yalls. Take both of you guys. Like, what do you think? What do you make of the Chipotle earnings? Do you, do you see it as a sign of a weakening economy or just a brand that probably, you know, made their products too expensive?
- [13:15]
C
I mean, my own perspective on Chipotle is there used to be one in Harvard Square. There's not. There's three other places that serve something quite similar to what Chipotle used to serve. And they're much better than Chipotle was. And so that largely goes in your direction. But to be slightly sympathetic to them for a moment, this is where I really wish we did have regular distributional national account data. We look at aggregates. Here's how much people are spending in total. A lot of the good consumer spending numbers we've seen over the last quarter or two are probably driven by very high income people. Maybe they're spending because they got a lot of money in the stock market. And so I would not be shocked if we're seeing more consumption spending growth in some segments of the economy, much less in other segments of the economy. And Chipotle is suffering from being in the wrong segment. But unfortunately we just don't have high frequency data that breaks down income spending and other aspects of the economy by income levels.
- [14:21]
B
Yeah, I definitely agree with that. And it's interesting to the point of like people being in the market and that influencing how they spend. Because the Wall Street Journal had this interesting article talking about how over half of people who make between 30 to 80k a year are invested in the stock market, which is an all time high. And half of the those have been invested in the market within the past five years. So they entered very recently. And so I do think some people are, you know, bathing in riches from the market and that might be impacting what they consume. But yeah, I definitely agree with Zade's point that like perhaps the product has degraded an element of shrinkflation and then yeah, it seems like people have just been pretty upset with them for, for a long time. But Jason, I want to ask about the Fed again. So, like I said, they cut rates. You know, they're stopping quantitative tightening. Like, it's definitely a macroeconomic regime change of sorts. More and more Fed members are coming out and saying that they would have not cut rates. Lori Logan being the most recent one. So how do you rate the Fed's handling of the very difficult current macroeconomic environment while also weighing the pressure from the White House to cut? Like, what are you seeing within these decisions that the Fed is making?
- [15:39]
C
Right. Well, the first thing is there just isn't an obvious answer to this question. It is a tough choice. Committees function better when they have different perspectives and people lay out where they're coming from. And so I love that there are people dissenting on both sides because there's a case for not cutting rates, there's a case for a larger rate cut. I wish the person who was dissenting for the larger rate cut wasn't also on leave from a political job in the White House so that we were 100% sure it was based on his conviction. So I don't think that's a crazy view. I think it's not the ideal messenger for that view. But regardless, it's healthy in a committee to have that. If I were on the committee, I don't think I would have voted for a cut at this last meeting, and I certainly would would set a higher bar for a cut at the next one, because the real side of the economy, the signals are mixed and confusing, but it might be really strong. We might get a Q3 growth number if we ever do get a Q3 growth number, if we ever get one, you know, it might be 3, 4%. Why is the Fed cutting rates in that environment, Inflation is still a percentage point above where the Fed would want it to be. There's some good excuses and reasons for that, but you don't want to give excuses and reasons every year for four or five years and the rest of time. And then finally, there's a whole bubble conversation that we were just having, which enters in two respects. One is financial conditions are easier because the stock market's going up, so you don't need to help the economy by cutting rates. And two, maybe the Fed shouldn't prick bubbles, but it probably shouldn't add rocket fuel to them either. And every one of these is just a little bit of extra fuel for that bubble.
- [17:22]
B
Yeah, no, it's tough. Like the push and pull of their dual mandate inflation. You know, they had to bring the BLS back in to get this recent inflation number. Inflation still 3% year over year. The labor market, as we've been talking about, is definitely showing some signs of weakness. And as you said, like, financial conditions are really easy. And so it was really interesting that the stock market sold off when Jerome Powell was like, hey, a December rate cut might not be in the bag. And the market was like, no, we super need another. Another rate cut. And I'm curious, like, how you think, as you mentioned, like, this disconnect between the real economy and the stock market. Like, have you ever seen a disconnect this large? Are you surprised by how the real economy is moving relative to the stock market?
- [18:07]
C
So there's often disconnects. So in that sense, I'm not that surprised. The stock market's a pretty volatile thing, and sometimes it does terribly well. The real economy is doing fine, and sometimes it is vice versa. The way I measure the magnitude of the disconnect, though, is less the growth this year and more how much the growth has built up over time there. We do have quite a large disconnect in that. You can look at a Cape Shiller price earnings ratio, and it's around 40, which is around the highest it's ever been in the last 150 years, with one notable exception, which was the year 2000, when it was even higher just before the bubble burst. So PE ratios, yes, that to me is surprising. But the idea that you have slowing job market and rising stock market, and the stock market's all about the future. And by the way, things probably have changed about the future based on inventions over the last couple of years, that's not. I don't know, it's not that mystifying.
- [19:12]
A
To me, sticking with the Fed. I'm actually curious, how often is there dissent in a Fed decision? I think we usually see a pretty consensus decision, historically speaking. How often is there a dissent even going back to take it back as far as you want? Is it common for that to happen?
- [19:32]
C
Right. So for governors to dissent, that hadn't happened for decades, and it happened a few months ago when you saw Bowman and Waller, both of whom were appointed by Trump, dissent. And now you've seen it with Mirren. For Reserve bank presidents, it's been relatively uncommon, but not totally rare. And I think that actually is a problem, the rarity of it. I think committees are healthier when you have more dissent. The bank of England, for example, has a monetary policy committee, and they often have relatively close split votes. And that's healthier both for the public to understand what the committee actually thinks and for the committee to function better where it's not group think and conformity. So I welcome more dissents.
- [20:22]
A
This December meeting is going to probably be a very interesting one then because we're probably going to have dissents on. I mean, it's going to be a bigger number of dissents than this, the November meeting given on the unpredictability of cutting or not cutting. I mean, it should make for a good debate.
- [20:38]
C
Yeah. I mean, you don't want to be like the Supreme Court where sometimes there's more dissents than there are justices.
- [20:42]
A
Six, three.
- [20:44]
C
I might be miscounting and I'd love the dissents to not follow predictable party lines in terms of who appointed who, but in the way that the discussions inside the Fed actually don't follow party lines. People. You know, Janet Yellen in the 1990s wanted to raise interest rates at a time when Alan Greenspan wanted to hold off and she had been appointed by Clinton, you know, so. So historically these debates have not been like Supreme Court ones. I don't want to be quite like that, but I want. Yeah, more dissents would be good.
- [21:14]
A
That's interesting. Yeah, I'm looking forward to that. I did want to switch gears a little bit and talk about something that's interesting that that people are talking about is the rise of socialism, specifically amongst younger people, you know, growing up, you know, I'm 34. I feel like growing up, I feel like politicians in the US would use socialism almost like a slur. It was just, it was just, it just wasn't really embraced. But these days, you know, you have Zoran Mamdani who's, who's likely the he's the odds on favorite to be elected mayor of New York City next week. And I think there's a more embrace of socialism these days. Jason, I'm kind of curious to get your take on that. Do you think this is more of a short term trend or something long term to watch for?
- [21:57]
C
I don't know. I think partly it's happened for a perfectly fine reason that the word has been redefined and partly it's happened for a quite troubling reason that people just don't understand basic economics. Redefining the word. If you want to call socialism what the Scandinavian countries do, which is basically market economies with reasonably high level of tax and reasonably high universal benefits, then I'm reasonably sympathetic to socialism myself. If you want to define socialism as the government does stuff instead of markets doing stuff, whether that is grocery stores or directing what prices are in important segments of the economy, like setting house prices or, you know, making companies give people free stuff. Then count me out. That is, I think, largely a way of thinking that the evidence and experience has discredited, but I agree with you, is making a bit of a comeback. And what the people call themselves socialists are a bit of both of those.
- [23:03]
A
Well, it's not just like the Democrats. I mean, even like what Trump was doing with investing directly in companies like intel and rare earth companies like MP Materials, like, I mean, that's, you wouldn't, I couldn't imagine Republican president do that 10 years ago, 20 years ago.
- [23:20]
C
Yeah, absolutely. I expect the socialist label will stick politically much more to the Democrats as an epithet than to the Republicans. But Donald Trump deserves it just as much as any Democrat deserves it. In fact, the equity stakes he's taking in major corporations are probably a bigger deal and closer to socialism than a couple grocery stores would be in New York City.
- [23:42]
A
I agree. Kyla, I'm curious to get your take.
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B
Yeah, I mean, I'm not surprised. I think, I agree with Jason that like the term has changed and people are just the pendulum swinging. People are trying to find a solution to what's going on. I think it's part of a cost of living where it's like, okay, it seems like socialism might have some answers. A lot of young people are attracted to that. But yeah, I think it's just sort of people searching for something different.
- [24:08]
A
Yeah, Yeah, I agree.
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B
Jason. So this will be our final question. You know, we don't have government data right now and it's making it very difficult to figure out what's going on in the economy for everybody. So what are you watching during this time of uncertainty? What should people be paying attention to to try to figure out what's happening?
- [24:30]
C
Mostly I was just sort of taking more time off and enjoying myself because there's less government data to obsess over.
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B
But that's one way to do it.
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C
But I don't know. I mean, I think I'm doing, frankly more anecdotes than data at this point. Reading more business coverage, reading corporate decisions about investment, about layoffs. And in some ways that's good. And I probably do too little of that. Normally I look at the aggregate data more than I read the stories about business, but partly it can be distracting. The Amazon case that we were talking about being, you know, it's a rather large employer, but it's still 1% of employment in the United States.
- [25:11]
A
Wow.
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B
Yeah, that's, I think That's a pretty good answer. Either take a vacation or read earnings calls. Maybe do.
- [25:17]
A
Yeah, absolutely. This was, this was awesome. Jason, thank you so much for, for your time. Kyla, you as well. And hopefully we'll be, we'll have you back on again when we have more government data to talk about and we can kind of dig into the specifics.
- [25:30]
C
Great, great to be with you.
- [25:31]
A
Appreciate you guys. Well, all right, guys, hope you enjoyed that conversation with Jason Furman. Also, a huge shout out to Kyla for co hosting that one. Let us know in the comments on what you guys thought about this interview and what questions you think we should have asked so we can ask Jason next time he comes on the pod. By the way, if this is your first time listening to the show, just a heads up, we also post daily 10 minute episodes throughout the week recapping everything happening in the markets. And right now with all the earnings coming out, it's a great time to get subscribed to the podcast if you haven't already. Thank you guys again for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow.