Blinder, Baseball, and Business Cycles

Episode Summary

Executive Summary: Moody’s Analytics economists interview Alan Blinder about the 2022 macro outlook, emphasizing that the economy looks weak but not yet in recession. They argue inflation is being driven mainly by supply shocks, oil and food prices, and pandemic-era spending shifts, while the Fed is likely on a path to around 3.5%-4% funds rates. A recession in late 2022 or early 2023 is seen as likely, but probably mild if it occurs.

Main Topics: Career and policy background of Alan Blinder (Priority: 3/5): The hosts discuss Blinder’s Princeton/MIT background, his work in academia and government, his Fed vice chair role, and his influence on macroeconomic policy thinking. Second-quarter GDP and recession debate (Priority: 5/5): They review weak Q2 GDP, with negative growth, inventory drag, and soft domestic final sales, then debate whether two negative quarters necessarily mean a recession given strong labor data. Inflation causes and the “Team Transitory” view (Priority: 5/5): Blinder explains that inflation stems from multiple forces: excess demand, post-pandemic supply-demand shifts, oil shocks, and food shocks, arguing the transitory framework was directionally right even if timing was wrong. Federal Reserve policy and soft landing prospects (Priority: 5/5): The group discusses the Fed’s rapid tightening, the possibility of rates topping out around 3.5%-4%, and whether policy can still deliver a soft or softish landing. Market-based inflation expectations (Priority: 4/5): They focus on inflation expectations, especially TIPS break-evens, as evidence that inflation expectations have come back down and are now closer to where the Fed wants them. Fiscal policy limits and risks (Priority: 4/5): Blinder argues fiscal policy has only limited near-term power over inflation and should avoid repeating the post-2010 contraction that worsened recovery after the financial crisis. Consumer balance sheets and recession severity (Priority: 4/5): They discuss excess household savings, strong nominal incomes, and the likelihood that any recession would be mild rather than severe because consumers and policymakers still have buffers.

Key Arguments: The economy’s Q2 GDP report was weak, but strong job creation and low unemployment make an immediate recession label questionable. Two consecutive quarters of negative GDP can be misleading; NBER recession dating may lag or differ from media shorthand. Inflation is best explained by a mix of excess demand, supply-chain rebalancing, oil, and food shocks; the “transitory” thesis was right on the forces, wrong on the timing. Oil and food prices are the key variables to watch because they can either prolong or relieve stagflationary pressure. The Fed appears to be moving toward an appropriate terminal rate, likely around 3.5%-4%, with data dependence becoming more important later in the year. Inflation expectations have improved; market measures are near levels consistent with the Fed’s objective, which should reduce pressure for even more aggressive tightening. Fiscal policy can only nibble at the edges of inflation; its larger role is to avoid repeating premature austerity. If recession comes, it is likely to be garden-variety or milder because consumers have excess savings and the Fed is unlikely to tolerate a major rise in unemployment.

Data Points: Q2 2022 GDP growth: -0.9% - Moody’s Analytics review of the second-quarter GDP report Q1 2022 GDP growth: -1.6% - Referenced as the prior quarter’s decline Inventory contribution to GDP: -2.0 percentage points - Biggest drag on Q2 GDP Residential investment growth: -0.7% - Part of the weakness in fixed investment Domestic final sales: -0.3% - Blinder identified this as the most worrisome GDP detail Unemployment rate: 3.6% - Used to argue the economy does not look like a recession now Monthly payroll growth: 300K+ - Compared with the roughly 100K needed to keep unemployment stable Consumer price inflation (CPI): About 9% year over year - Referenced as the current high inflation rate through June TIPS break-even inflation: 2.61% - Chris’s statistic; daily five-year break-even measure Break-even level in late March: 3.6% - Shows inflation expectations have moved down Employment Cost Index (ECI): 5.1% year over year - Marked as an important gauge of underlying wage growth Personal saving rate: 5.1% - Saving rate discussed as evidence of declining pandemic-era excess savings Estimated excess savings: About $2.5 trillion - Household buffer built during the pandemic Fed funds target range: 2.25%-2.50% after the July hike - Current range discussed during the interview Expected Fed terminal rate: 3.5%-4.0% - Blinder’s estimate of where tightening may end Current 5-year, 5-year forward break-even: Noted as near Fed’s target - Used to show longer-term inflation expectations are anchored Potential recession probability: About 60% - Blinder’s estimate for recession starting in late 2022 or early 2023 Potential recession timing: Q4 2022 or Q1 2023 - Blinder’s most likely recession window if one occurs Possible recession severity: GDP down 2.5%-3%, 3-4 million jobs lost, unemployment near 6% - Scenario described as a garden-variety upper bound

Pivotal Quotes: "“I think probably a recession starting in the fourth quarter of this year or the first quarter of next year is the most likely scenario.”" — Alan Blinder: Blinder’s base case on recession timing and likelihood "“The short answer is probably the only quote perfect soft landing.”" — Alan Blinder: On the mid-1990s Fed tightening episode he helped manage "“The two things that I’m watching like a hawk, so to speak, are oil prices and food prices.”" — Alan Blinder: On the biggest near-term risks for inflation and growth

Implications: Listeners should expect continued Fed tightening, easing inflation only if oil and food shocks fade, and recession risk concentrated in late 2022/early 2023. If a downturn occurs, it is more likely to be mild than severe thanks to consumer savings and policy buffers.