NIC Chats Podcast with Paul Ashworth

Lisa McCracken (00:01):

Welcome, everyone, to the NIC Chats podcast series. I'm Lisa McCracken, the head of research and analytics with NIC. Glad you are joining us today, and we are very excited to have our guest today, Paul Ashworth. He is the chief North America economist for Capital Economics. Welcome, Paul. We're glad to have you with us today.

Paul Ashworth (00:23):

Thank you, Lisa. Glad to be here.

Lisa McCracken (00:26):

So there's a lot that we can cover. You are very busy these days, I'm sure as an economist there's a lot happening in the US and globally, so we're gonna touch on a number of those different things. But before we do that, would you just mind sharing with folks a little bit about your background and so we have a little sense of the perspective that you bring to the table for today's conversation?

Paul Ashworth (00:50):

Sure. You can probably tell by the accent that I grew up in the UK. I did all my schooling there, including a PhD, and then went to work for various think tanks. I finally ended up in, I guess you'd call it private practice. I started at Capital Economics 20 something years ago in August 2001. I was employee number six, and now we employ close to 200 people in various offices around the world. So it's been a privilege and an honor to be on that journey of growth with the firm. We enjoy working for our clients and sharing our insights with them.

Lisa McCracken (01:37):

We appreciate that. And I think once we get into some of the conversation, most of our focus will obviously be on the US economy and domestic topics. However, clearly, we live in a world that is very global. So your perspective on that will be helpful too. So, as you and I talked in advance of our time here today, I think I threw out a question to you: In one sentence, how would you describe the current state of the US economy for our listeners?

Paul Ashworth (02:18):

Good. And I might even go with very good. I mean, certainly it's performed best among the most large advanced economies since Covid struck, and particularly in the post-Covid period. The economy's been growing at a very rapid pace. The unemployment rate is unusually low and inflation, while for a while it took off, now seems to be coming down to the point where the Federal Reserve is thinking about cutting back interest rates. Uh, so, you know, it's what economists sometimes call the fabled Goldilocks scenario where things are not too hot and not too cold, but just right.

Lisa McCracken (02:59):

Right, well, I'm happy to hear you say that because I will tell you some of the day-to-day in our world doesn't feel good or very good. But I would probably reflect back on that. It sounds like you're from an outlook standpoint and where we stand in moving forward, that it's positive for some movement with some of our pain points. What, without leaving some of that, and I want to go down some of these specific topic areas, but as we look to the US economy for the rest of 2024 and certainly into 2025, I mean, that will be here before we know it, what do you see as the main challenges and then what are some of those opportunities? So again, your macro comment is positive, very positive, but in the months ahead, and as we enter into early 2025, are there things that you see as some primary hurdles or some, again, challenges in the coming months that we need to have on our radar?

Paul Ashworth (03:55):

Yeah, I mean, certainly the labor market has been weakening a little; employment growth has been tailing off. And although the unemployment rate is low, as I mentioned, it has been rising a little bit over the last six months. So that's a slight concern. But GDP growth is still pretty good. And while the Federal Reserve, I guess, is now thinking about cutting interest rates, starting from its September meeting, there is still the impact of higher interest rates feeding through. So, you know, some households will still be struggling with higher interest rates and finding the money to cope with that. And of course, higher prices are still having an impact on many family budgets. So, you know, there are one or two concerns. But now we've reached a point where inflation has come down enough that the Federal Reserve can begin cutting interest rates. Hopefully, those concerns will pass. And I think the outlook's pretty encouraging too.

Lisa McCracken (05:11):

Yeah. And in a moment, I do want to spend some time on the labor side of things; that’s definitely been a pain point in our industry. I was reading some headlines. You know, everyone has their forecasts and projections. I don’t want to answer this for you based on your “good” or “very good” response earlier, but do you think a recession is coming? And I say this ’cause I’m looking at a headline right now. This was on CNBC a week ago: “A recession is coming and few rate cuts won’t prevent it,” says a strategist. Is that just an attention-grabbing headline or do you disagree with that?

Paul Ashworth (05:47):

Well, economists are notoriously bad at forecasting recessions, unfortunately, so I certainly wouldn't rule one out. But, you know, most of the indicators we look at don't seem to suggest one is coming. As I said, the unemployment rate has risen very modestly. We look at things like initial jobless claims, and they’re still pretty low. Consumer spending is still kicking on pretty strongly. Motor vehicle sales show people are still making big-ticket purchases. Businesses are still investing. So, across a wide range of indicators, things look okay. I certainly wouldn't rule out a recession entirely because often you can't quite see these things coming, and sometimes they include another shock, like financial markets. But in this case, there's nothing obvious out there.

Lisa McCracken (06:55):

Yeah, I appreciate your perspective on that. It’s one of those headlines I often follow, and I think for as many people who say they think one is coming, others do not. So, we will see how the coming months unfold. I do want to spend time on labor. The senior housing and care, or senior living sector here in the US, really took a big hit, as did other sectors, obviously when the pandemic struck. Various parts of our healthcare ecosystem have recovered to differing degrees. Many operators in our space today would say that while the labor markets have healed a little in terms of wage escalation, growth has not gone backwards, of course. The big surprises month over month, year over year are not what we were experiencing, but it’s not great. It’s a very intensive service industry on that front. So, when you look at those types of related sectors, healthcare, which is probably the umbrella we fall into loosely, and senior housing, which can be labor-intensive, are there any specific observations you have on the labor front that we need to think about or better understand from your perspective?

Paul Ashworth (08:13):

Yeah, I mean, obviously coming out of the pandemic, we had a very tight labor market economy-wide. A lot of people were still out of the labor force and staying out for various reasons—maybe health concerns, maybe childcare issues. A lot of older workers decided to retire and didn't come back. But that situation gradually turned around, with help from some strong immigration numbers too. Now we are reaching what I'd call the tipping point, where the balance is maybe favoring employers, whereas it was very much in favor of employees a couple of years ago. I mean, as I said, if we look at the unemployment rate, it is now beginning to rise a bit. At one point, we had massive numbers of job openings, but they’ve come down. If you look at survey responses, like the NFIB small business survey that asks small business employers whether they're finding it difficult to find workers.

Paul Ashworth (09:32):

I mean, those responses have normalized after looking really out of balance with real problems finding workers at one point. So things do appear to have come into a much better balance across all sorts of skill sectors. But certainly within your industry, I don’t see relief now. Healthcare has been on a complete roll. The economy over the last 12 months has added 2.5 million jobs, with almost 1 million of those jobs in healthcare alone. We've seen massive growth in healthcare, but nursing and residential care facilities have seen strong growth over the last year, with an increase of 130,000 jobs. However, looking back to the pre-Covid peak, we're still 84,000 jobs below that, which is very unusual. If we look at the healthcare sector as a whole, it’s up close to 2 million jobs, while the economy as a whole is up 6.4 million jobs. It’s one of the few sectors where employment is still below its pre-pandemic peak.

Lisa McCracken (10:49):

Yeah, and I think that's probably some of what we're feeling day to day. I appreciate your comments about sort of the flip in terms of sort of who, I don’t know if you use the term, who’s in the driver's seat in terms of the power—the employer or the employee. I would observe that it has probably shifted back to an employer position of strength. As it relates to a bigger long-term thing, I think about it and I'd be curious to know your thoughts too. Because I think this will impact, I mean, we're going to see the trickle-down of this from the workforce at a time when we have a significant aging demographic here in the US. So, you look at the labor gap a little bit and also the booming demographic. There’s a conversation needed about who’s going to be there to provide that support. We have this aging demographic and we also have a dropping fertility rate here in the US. Is that anything that bothers you or concerns you as an economist, or do you think it’s sort of overblown and far down the road? What’s your take on that?

Paul Ashworth (11:57):

I mean, the aging of the population is a problem that faces a lot of, not just advanced economies, but strangely, even some countries like China, where, because of the one-child policy that was in place for a long time and other factors, they'll have worse or more adverse demographics than we have in the US. Yeah, of course, as the baby boom generation retires, there will be fewer people working and basically paying for a greater number of older people. And the US, even among advanced countries, isn't in as bad a situation as Japan or Italy or some of the European countries. But it will put stresses on, for instance, government finances, and maybe even finding workers because demand for your facilities is going to rise quite literally. But you've also got to find the workers to staff those facilities. Now, the only alternative is you can make your existing workforce more productive somehow.

Lisa McCracken (13:04):

Right, right. Yeah, there's a lot of conversations around business models, approaches, what's the role of technology and so forth. I think we're going to need to have all of those cards in our hands to try to remedy this. And it's good to hear maybe we're not in such bad shape as some other countries in this regard, but it’s still a pressure point. We actually have a number of US senior housing folks that are also international players, so we certainly have observed that as well. So, you know, I know most of the focus here and we'll spend most of our time on the domestic economy, but we do live in a global environment. So what do you see as the biggest influencers on the US economy here, short term and let's say into 2025, as it relates to some of those global dynamics? What do we need to be thinking about?

Paul Ashworth (13:56):

Well, obviously, I think the biggest issue is possibly US and China trade relations. Obviously, the US became very dependent on China for imports of all sorts of goods over the last couple of decades and has now started to shift away from that. Donald Trump, as president, introduced a number of tariffs on Chinese imports. The Biden administration has added to those a little bit. And if Donald Trump is reelected this November, he's been talking about increasing tariffs, not just on China but also other countries. That sort of isolationist shift could have a pretty dramatic impact on the US economy. We've gotten used to a supply of very cheap goods coming from overseas. Obviously, things will be up in the air if those goods become more expensive. Of course, that could introduce opportunities for more domestic production. But if you've got manufacturers competing to produce domestically, that just creates a competitor looking for the same type of labor.

Lisa McCracken (15:17):

Right, right. Yeah. And you know, our sector definitely felt some of those supply chain issues, without a doubt. I mean, the healthcare space, senior housing, during the pandemic, and receiving some of the different things from the global economy. I do want to spend a few minutes during our time here talking about capital. So, you know, our sector, if you break it down, we've got a combination of government-run properties, not-for-profits, private capital in our space, and some REITs that certainly own the senior housing properties. But we're very heavily dependent on debt capital, and the bank market has been a challenge in recent years. Obviously, a lot of that’s spawned by the trickle-down of some of the bank failures and so forth. So how do you see the current environment from the bank marketplace? Are there going to be some potential future failures? Are you seeing some healing on that? What does the sort of the next several months and into 2025 look like on that front? I'd be curious to know your thoughts.

Paul Ashworth (16:27):

I mean, obviously, a year ago, back in March, we had a couple of very notable bank failures, small regional banks, but most of those failures were because, principally, the banks in question had made errors in terms of holding treasury securities, which had dropped in value as interest rates and treasury bond yields went up very, very significantly. Of course, what we're seeing now is those yields come down. So a lot of that pressure has eased. There's still some pressure because smaller regional banks are very big lenders to commercial property, and commercial property valuations, particularly in the office sector <inaudible>.

Lisa McCracken (17:15):

Right, which are grabbing the headlines. They're sort of defining the commercial real estate space in many respects.

Paul Ashworth (17:21):

That's certainly, that's a dog that hasn't necessarily barked there. A lot of lenders and borrowers have managed to work out, you know, stick a bandaid over it and keep going. Extended pretend is the term. But we haven't seen an awful lot of bank losses. And certainly there was a tightening in credit conditions post the sort of initial SVB collapse. But since then, things have turned around. I think banks stand willing to lend again. I mean, it also helps that at one point the yield curve, so the difference between short rates and long rates in the market, was actually inverted, where short rates were higher than long rates, which is more good for bank profitability because their biggest model is basically borrowing short and lending long. But now that seems to have shifted around again, and the yield curve is at least flat.

Paul Ashworth (18:14):

So that's positive for bank profitability. And of course, that's happening because the yield curve is coming down now quite considerably because the Federal Reserve seems to have seen enough to begin a potentially quite significant rate loosening cycle or reduction cycle. So I think hopefully over the next few years, capital markets and debt markets should benefit from lower rates. And with that, an increased willingness among banks to lend. Now, that doesn't mean we are going back to the near-zero rate environment that we had in the 2010s. I think that's probably longer at this stage. That's certainly, I think, where we've been over the last 18 months, even two years. Conditions should begin to ease.

Lisa McCracken (19:05):

Yeah, that's good to hear. And I would say that's probably similar to generally anecdotally what we're hearing from some of the lenders. I mean, we've still got a ways to go and I appreciate also you mentioning the near-zero rates. I think that it was just so low for so long that people got used to that being a normal and environment where it, you know, if you look back 20 years, 30 years, or whatever, longer term, it wasn't. And probably it's not something that can be assumed to be a normal course or level moving forward. And so, we appreciate that. 'Cause again, as I mentioned, the debt markets are incredibly important to the senior housing and care space for sure. So, we'll continue to watch that and watch the bank performance, which we too have been seeing those positive reports.

Lisa McCracken (20:00):

So you mentioned the Fed, so obviously we're gonna go there. And we're just a few weeks away from the September meeting. At the end of 2023, you know, the headlines were looking at March and then at, no, not gonna be March, it's gonna be June, it's not gonna be June. Now we're looking at September, and I think this is probably the most consistent data forecast we've been seeing that the Fed even is affirming that there's probably gonna be some action here at the September meeting in terms of some rate cuts. The big question is, you know, if they do, which I think most agree that they will, what's gonna be the degree of the rate cut. So what do you see happening in September and what's gonna come out of the Fed from comments and actions?

Paul Ashworth (20:48):

Yeah, I mean, obviously from comments we've had, we've had a pretty strong steer from the Fed's Chair, Jerome Powell, that they're about to begin cutting interest rates. The balance of risk has shifted. They're worried a bit about the downside risks with the labor market. Obviously less worried with the upside risk to inflation. So it's not a question of whether they'll cut rates now, it's a question of how big those rate cuts will be. I think they'd probably start with a 25 basis point reduction in September. But obviously a lot of that depends on the incoming data as well, because we've still got another inflation CPI inflation report, we've still got another important employment report for August to come before that September meeting. So either of those, if they were particularly surprising, could shift the balance of risks on what size rate cut we're gonna get.

Paul Ashworth (21:51):

But I think the odds probably at this stage still favor a 25 basis point cut for September. But then the question is what we get after that. I think we get a very controlled series of 25 basis point cuts, taking the federal funds rate down from about 5.5% to somewhere in the low 3s, something like that, which is roughly what is already priced into financial markets. And that's why you've seen, you know, the 10-year Treasury yield was as high as 4.7% in April and has now come down to 3.8%. If we're looking at two-year yields, they were 5% and are now down to 3.9%. So we've already seen a lot of this reflected in longer-term yields coming down over the last three or four months as that economic data has come out and set the stage really for this series of rate cuts from the Fed.

Lisa McCracken (22:54):

Right, right. Yeah, it’ll be interesting to see within a lot of our constituent groups, you know, where we start to see some behavior change as those rates come down. So obviously, again, that frees up capital or capital that’s maybe much more affordable, less costly. Then how does that translate into some of the new development activity and growth? So the growth has really been stifled because of that capital being locked up in our sector. So at the same time, when the demographics are booming, we have very minimal new inventory coming on the market. So it’s a very interesting dynamic, which is very different than the Great Financial Crisis, which again, you know, there wasn’t a whole lot of new development back then as well, but we didn’t have the demographic growth and that demand dynamic that we do now. So it’s gonna be interesting to watch that. So you mentioned already some comments about November in the presidential election. Any key economic headlines you see coming out of November based on the candidate that walks away with our presidential candidacy or election win?

Paul Ashworth (24:01):

Well, obviously we think that Kamala Harris is probably, you know, best thought of as the continuity candidate, represents the status quo, is looking for a series of potentially problematic increases in business taxes and taxes on high income earners. But I think it’ll be quite hard to push those through Congress, even if the Democrats end up in the unlikely event really, they end up with small majorities in both the House and the Senate. Donald Trump’s policies, obviously a bit more of a departure from what we’ve had over the last four years. Tariffs have the potential to be inflationary, which could force the Federal Reserve to limit its rate cuts over the next couple of years. And the other risk I suspect for your business is Donald Trump’s plans to crack down very hard on immigration, not just unauthorized immigration, but, you know, immigration through official channels too.

Paul Ashworth (25:07):

'Cause that would risk, I mean obviously it’s the immigration that’s helped solve the problems we’ve had with labor markets over the last couple of years. So that could throw a lot of us businesses, I think, back into the fire there. Uh, and you know, we’ve talked about who’s holding the winning hand. It would very much go back to the employees again, I think, risking labor shortages, wage increases, those sorts of things. But again, it doesn’t mean necessarily if he’s elected, he would follow through on all those promises. Um, but I think that would be the risk of a Trump presidency. It might be a crackdown on immigration, not just unauthorized, but through official channels too, uh, which could have obviously a knock-on adverse impact on the labor market.

Lisa McCracken (25:59):

So, I want to wrap up with, uh, we’ll give a two-sided question here, Paul. So, uh, as an economist, I’d be curious to know what keeps you up at night, if anything, maybe you are gifted with a good night’s sleep <laugh>, and don’t stress about things related to work and then the economic conditions. So, you know, what keeps you up at night? Maybe what’s the stressor and what are you most optimistic about as we sit here in the summer of 2024? And look ahead to the sort of the, the end or the next several months here, and as we wrap up 2024. So both sides of the coin here is a final question for you.

Paul Ashworth (26:36):

I think obviously we haven’t really touched on geopolitical concerns, but obviously there’s the war in Ukraine, there’s the war in Gaza, which obviously risks spiraling, you know, at the moment they’re quite contained, but could spiral out of control, pulling other countries. Certainly those will be concerns. The long-term China’s threat to Taiwan would be a risk and the global economy. So probably geopolitical concerns would be the biggest single worry. On optimism, I mean, certainly I think AI we haven’t touched on is a potentially transformative technology that can have a whole host of benefits, automating all sorts of tasks and knowledge-based tasks. And we’ve already seen, although it might not be linked to that, a very strong productivity performance for the economy in the last couple of years. So productivity growth was particularly strong during the mid-1990s, nearly 2000s in response to the introduction of desktop computers and the internet. But since then it tailed off and we’d had a period of weak productivity growth for a decade or two. It looks like it could be bouncing back. And I think that if it’s sustained would be very important because that’s really the ultimate source of gains in per capita wealth within the economy.

Lisa McCracken (28:05):

Well, fantastic. Yeah, I was to keep a couple of things that we didn’t have time to touch on here today. It’s all related to the economic conditions, sort of what lies ahead for us. So, I appreciate your time with us today. I know you have a busy schedule, so thank you for that. And for those listening, we have our NIC Fall conference coming up in September and that will be the week following the Federal Reserve meetings. So it’ll be interesting to see the chatter there. And we’ll be diving into some of these economic conversations. We have Diane Swonk, who’s the chief economist for KPMG, who will be on stage talking through some of these similar topics. And I think a few weeks from now we’ll have some greater insights into some of these. Appreciate your time, Paul. Thank you very much. Thank you to our listeners for the NIC Chats podcast. And you can access this podcast and others on the NIC website at www.nic.org. Thank you so much.