37th Annual Economic Outlook Symposium

LESLIE MCGRANAHAN: OK, so before we get started, I just want to make another pitch for Pigeonhole. So I'm going to ask some questions and I'm going to ask some questions either from participants or we got a bunch of questions from participants in advance as well. So there are not a lot of people logged in to Pigeonhole, so if you want your questions to come up, please submit them that way.

So on to some questions and some conversations. So the first thing really is Tom just highlighted that last year our symposium participants and a lot of other people expected the economy to be much worse than it turned out. So what is your take on why economic performance has been better and kind of where are we?

AUSTAN GOOLSBEE: Yeah, you guys didn't look too good from last year on that chart but it looked like there were about 8% of people that are like I was right all along. But my take is-- I'm going to create arbitrary percentages, two-thirds of that is we started getting good supply shocks counteracting the negative ones that we got before.

You know there was a whole religious war about where did inflation come from? And was it from demand, or was it from supply? And we went back and forth on that for more than a year. It seems undisputable to me that a big component of that was the healing of supply chain, positive supply shocks in the labor market. If you look at labor force participation, there's been some great research done here at Chicago Fed documenting how labor force participation rates, of women, of previously disabled workers, the rise in work-from-home and flexibility look like they kind of opened the door to some improvements on that side.

And I actually still also think that a key component was the residual credibility of the Fed, that inflation expectations basically never went up, when even as CPI inflation exceeded 9%, and unlike previous inflationary episodes when the Fed said we're going to do whatever we need to do to get back to target, fundamentally the market believed that. And as you know, that makes it a lot easier to do it if people believe that.

And I think those are mostly why we've been able to-- I started calling it some time ago the golden path, that this is the softest of all the soft landings, and it looks like we're going to get as I've highlighted, we still got one month to go for 2023 but the biggest drop in inflation, fastest drop ever that wasn't 1946 after World War II or 1951 and Korean War, the fastest drop ever of inflation was 1982, of course, in the Volcker episode, where it fell a little over 4% in a single year.

And to get that we were coming off a federal funds rate that had gone to 22% and the unemployment rate was almost 11%. And it looks like we're for 2023 going to be faster dropping inflation than all the years, including 1982. And the unemployment rate so far is still under 4%, which it wasn't that long ago in this room, we would have all agreed 4% is full employment, you can't even have unemployment under 4%.

So I think a lot of it is from supply shocks, some of it is from Fed credibility. And if we can pull that off, that's going to be remembered as a signal achievement. And as I said, if we succeed at that, we're going to be analyzing and talking about that for years. And if we don't succeed, we're also going to be talking about it for years but let's try to succeed.

LESLIE MCGRANAHAN: So talking about inflation, we got new inflation data yesterday. We got the latest read of the PCE. So what is your-- what are the highlights, what are you looking at for the inflation picture, and do you still think it's on track to get to 2%?

AUSTAN GOOLSBEE: I still think it's on track to get to 2%. I mean, who am I to tell you, you saw it? It was absolutely what we wanted it to be, that inflation is coming down. I've again based on research done by the Chicago Fed, I've been saying for some time that the argument that because we should look at wage growth as an indicator of where inflation was going, I got the dynamics wrong. That wages are stickier than prices so the fact that wages were higher than they were before COVID did not leading indicate that wage inflation was going to stay higher. What happens is prices go up, then wages go up, then prices come down, then wages come down.

And so in that dynamics view, the thing to watch are the prices. And take out food and energy, which drive my mom crazy, why are you taking out food and energy? But you know why, we take it out because it's too variable. So if you got services, housing, and goods, we had 2% inflation, we actually had less than 2% inflation pre-COVID, and that wasn't from everything being 2% inflation. Goods were minus 1% inflation a year, housing was about 3.5% or 4% inflation a year, and services were 2.5% to 3% a year. And that combination is how we were at around 2%. Goods are back to minus 1% inflation a year. They got over 12%. So that was a comment, and I think a lot of that was supply chain problems.

Services, I always say they're slower, we know they're slower to come down but actually, they've even started coming down. So in my mind, the key thing that we've got to watch is housing. And it's got this mechanical component that the market rents are going to flow through hopefully, and we've started to see that. But that in the short run of all the things that we're watching, that's probably the highlight of what I'm watching is if housing comes down to something like what it was pre-COVID, and some of the market rent variables show inflation growing even less than what it was before COVID, we would be on path to get to 2%, we would definitely be on path.

And that can be derailed by external shocks but the dark cloud which for a long time was the-- if you have job numbers like that, that means we're overheating and inflation can't come down. And we've heard for months the argument it's stalling out at 3%, inflation is 3%, some even saying the Fed should just surrender and declare well fine, 3% is good enough.

I just don't get that. There's no evidence that we stalled at 3%. Look at the one-month, three-month, six-month inflation, it didn't stall at 3% because it's working through in the way that we anticipated.

LESLIE MCGRANAHAN: So Tom, you know, Tom highlighted a lot of people in this room and online are individuals that we rely on for our surveys and our round tables. So I just wanted to ask how you use the boots-on-the-ground intelligence, whether you get it from us or directly through your own.

AUSTAN GOOLSBEE: One, thank you. Thank you. Thank you for sending the survey. That numerical type information is crucially important. Leslie runs a shop where you probably give 40, 50 outlook talks a year and we talk to hundreds of people. I'm forbidden from saying-- from giving you specific examples of I said that in the FOMC meeting but you've got to wait five years and then go read the transcript and you'll see I cited, I cite many times.

And I'm not the only one. Of all the Reserve Banks, that Beige Book information and just getting out and talking to people makes a really big difference because as we all know, the data come out with a lag of a week, a month, a quarter, and when you talk to people, it doesn't have any lag. And at moments of transition like the ones that we've been in this year, that's the most important moment where the lags by the time it comes out, GDP is going to come out for one quarter. It's going to be revised for two more years by the time you get what the official number was, who cares? That was a long time ago.

That said, it's not all positive. We shouldn't just take anecdotal information as being more valuable than the official statistics. And moments like this, where the gap between what the numbers say and what business or consumers are saying has maybe never been bigger, it's hard to figure out what's happening.

And I'll just look over the summer, GDP growth was over 5%. We were there. You were there. We talked to business, nobody when that was happening, I'm not talking about forecasts, I'm talking about when that was happening, nobody was telling us this is a 5% economy. I mean 5, that's fast growth. They were like, I don't think it'll be a recession but maybe this is a recession. So I don't know, we're still trying to balance those out.

LESLIE MCGRANAHAN: But should people who aren't responding to our survey respond to our survey?

AUSTAN GOOLSBEE: Yes please. I would say why don't we dress it up with you could be eligible to win a prize but we're not allowed to do that. That would be gambling. And with the Fed, there's no gambling on Fed grounds.

They're laughing. I'm totally serious. That's written in the thing. One or the other presidents told me that every year he does a March Madness bracket and the winner gets to have lunch with him. I was like that is absolutely violates the Fed ethics code. You cannot do that. I was like you hand out. He's like I hand out the form. I was like it's jail for you, man.

LESLIE MCGRANAHAN: Does he pay for lunch?

AUSTAN GOOLSBEE: He pays for lunch. That's what I said, if you just went to lunch in the cafeteria that'd be fine. But you can't buy them lunch. But I think he gets an exemption because he had a pre-existing relationship or I don't know.

LESLIE MCGRANAHAN: So we've raised interest rates a lot over the past 18 months and growth has been strong. Does this mean that interest rates don't affect economic activity?

AUSTAN GOOLSBEE: I definitely don't think so. And when we talk to the business people they don't say so. They're like you're killing us. Well, you know, this rate is higher. I'm thinking about that. We walked in the Pride Parade this year, the Fed had a group of 40, 50 people, and it was amazing. They line the streets, people are cheering but about every 500 yards somebody be like lower the rates you're killing me. So we had shredded money, I was like have some free money.

I think that the a-- look, a lot of other things of course happen in the economy besides just what the Fed does. So I think interest rates matter. You hear that in decisions about investments, you see that now in decisions about refinancing mortgages and buying autos and things like that. But we've also had a series of positive supply chain developments, labor force participation, which kind of offset that. So I don't think it was that interest rates don't make any difference, I think it was you had restrictiveness coming from the monetary side, you had positive developments coming from the other side and those things have kind of offset each other.

LESLIE MCGRANAHAN: So one of the things we think about are sort of external shocks derailing the economy. Are there specific things you're looking for, specific risks or is it like they're so hard to predict that?

AUSTAN GOOLSBEE: I mean, I feel like our job is to always prepare for all of them. As you may know, I was close with Paul Volcker. Was a dear friend and mentor of mine. And he used to say I'd say ah, this thing happened, that's great. And he would say there is no silver lining bright enough that I cannot think of the dark cloud that will block it out.

And that idea that the central banker's got to think through every dark cloud, we do, we take that seriously. We should do that. We've had a series of ones that we were prepared for and didn't happen. The most public of which is the bank collapses of March, we thought that growth was going to be a lot slower for this year at the least from the credit crunch induced by the collapse of business.

And there were a bunch of people saying that might spiral into something worse. It definitely had the stench of 2008 to it, when they're forming facilities and it was like where might this go? But that largely hasn't happened. Yes, there's contracted credit but it's basically what you would expect from the rates being up as much as they are and not more than that.

Where there was a strange moment where it was like maybe the US government will default on the debt and that we got to think that one through. That would have been bad. We avoided it so far. It could be back, we revisit them but for 2023 we didn't face that one.

The auto strike, we anticipated. We got a lot of auto expertise, so many in the Fed system and outside were asking us what does it mean for the economy. We said from the outset if the strike doesn't last a really long time, it doesn't spread to a whole bunch of other stuff, the overall impact might not be that big, and fortunately, that one worked.

We don't know what's to be from China. We don't know what's to be from might there be big extended government shutdowns. So there are all sorts of things that can go wrong and previous soft landings that were easier than this, like 1990 or 2001, were derailed by external shocks. So I'm not saying they couldn't but like I always say, our Midwest thing is there's no bad weather, there's only bad clothing. You tell us the conditions, and that's what we respond to. So if the external shocks come, then we'll figure that out.

LESLIE MCGRANAHAN: Yeah. There was definitely bad weather today and we all made it. And so what's your assessment of where the labor market is right now, unemployment rate at 3.9%?

AUSTAN GOOLSBEE: Strong. Very strong. And I think a component of that is like I say the labor supply coming back but I think it's getting-- it's gotten into better balance. Maybe you call it, that historic ratios like the vacancies to the unemployed are getting closer to just normal expansion times.

We're still I think, as a society sorting through these issues like is working in the office two or three days a week, is that permanent? If we come back in five years, is it going to look more like it did before? What does that mean for downtowns? What does that mean for residential offices? We haven't sorted that part out but it's looking more like a conventional strong labor market as opposed to just some weird third thing which was kind of a COVID labor market.

LESLIE MCGRANAHAN: So I'm going to turn to a couple of the questions that we got from the audience and keep them coming in. And one of them is somebody asked in advance has being the Chicago Fed president been what you expected? And I think what has surprised you the most?

AUSTAN GOOLSBEE: Of the job?

LESLIE MCGRANAHAN: Yeah.

AUSTAN GOOLSBEE: It's been awesome. I mean, as you may know, I worked in the White House, and that was a very meaningful purpose-driven thing. And I kind of had written off that there could never be anything that was more mission-driven than that. Though the Fed is in this lane, narrow lane, it's absolutely mission-driven. I've been just struck, everyone said the Fed is a family but it really is. And people take the mission extremely seriously.

I wasn't surprised by the FOMC but if you're econ nerd, it's just as about as great as like you come in, a big room, the shades come down so they can't be spied on and, the FOMC has a debate and they take it really seriously. That's been wonderful.

The biggest surprise I guess is with the Fed has like I'm not supposed to say the exact number, in the order of $40-some billion of cash in the vaults down there. And we run a lot of money out, in and out each day. So I go down and at the end of the year summary, the cash department was like we gave-- I can't remember what the number was, 53 cash tours of the department.

And I was like, I was personally like one-third of all the tours of the cash department. I brought my mom down there, I brought the kids. It's really-- it's been exciting. The operational aspect of the bank and the job I didn't know as much about but that's been exciting for me.

LESLIE MCGRANAHAN: So this is a question that came in on Pigeonhole, and I think I can-- so somebody wrote--

AUSTAN GOOLSBEE: You love this Pigeonhole. It works good, doesn't it?

LESLIE MCGRANAHAN: It's super cool. It's super cool because it allows the people who are virtual.

AUSTAN GOOLSBEE: Yeah, yeah. To participate.

LESLIE MCGRANAHAN: To fully participate. So I don't if this is a virtual or in-person person. At what point does the Federal deficit start to kill the economy? And I think to broaden that question a little bit is how does the unsustainable fiscal path go into Fed thinking?

AUSTAN GOOLSBEE: When I became a Fed man I got out of the fiscal policy business. So I lump that into the external shocks and the weather conditions. Congress's job is to decide that, and Congress is the boss and we respond, you know what I mean?

So the impact of the debt is a very-- what is the impact of deficits and debt on the economic performance, both inflation and the job market is a very controversial subject in research economics as you know. And I don't really have an opinion about that. There's a long way of saying I'm not going to answer that.

LESLIE MCGRANAHAN: So one of the things that Tom highlighted and has come up in a couple of the questions, this sort of disjoint between what people say about how their business is doing and also a disjoint between like sentiment and the reality of the economic situation. How do you view that?

AUSTAN GOOLSBEE: And like why? Look, A, I note that. It's never been bigger. This isn't the first time that's happened though, this has kind of been a trend since at least the great financial crisis. If you remember, in 2009, '10, '11, we had a bunch of-- we started to see big discrepancies A, between different measures of sentiment, and B, between the measures of how do you think of the economy versus how is your personal situation?

The Fed's mandate is about the real numbers. It's about inflation. It's about unemployment/employment. So we care, I care mostly about those sentiments as they indicate something on the real economy because that's the job, is to look at the real economy.

And we always cared a lot about consumer sentiment because it was a decent indicator of how people or consumer spending going to be. And business investment was tied to business sentiment. The first thing I'll observe is that's really started breaking down. That relationship between what consumer sentiment says and what they're about to do with consumer spending, that's broken down a lot. Business sentiment to business investment, again broken down a lot.

So while it's intriguing how big this discrepancy has been, it maybe matters less than it did before, just as in your bucket of indicators which one you pick out. We know from the research on this also that consumer sentiment, especially tends to lag actual conditions. So it's not a great leading indicator, tends to have an outsized contribution of very public prices like gasoline and groceries, and is heavily influenced by what people see in the media.

And that's not new, now, if you're old enough, some of you may be old enough, you'll remember 1992 in which the entire election of 1992 was about the mishandling of the recession. And George Bush the father, he doesn't-- mishandled the recession, and Bill Clinton was running, he could handle it better. Go back and look at the data, there was no recession in 1992. It ended in 1991. But as the stories were all about the how are they handling the recession, that's pretty strong evidence that how the media portray it does influence people's behavior.

So I kind of think in that cluster is what I'm alleging in my mind. And I would be prepared to say that view is wrong if, over the next six months, we see a deterioration of consumer spending and business investment that reflects this-- sentiment conditions, then I'd say, hey, maybe the old rules are back.

If the lag thing is an issue, is an indicator, maybe this performance would start to show up as improvements in the sentiment. I'm not sure but that's why I'm paying a little less attention to it than I might have 10 years ago.

LESLIE MCGRANAHAN: So sort of switching gears, and this is a question that came, somebody submitted in advance. The unemployment rate has been increasing. Is there a point in which the full employment piece of the dual mandate starts to come into play even if the inflation objective hasn't been met?

AUSTAN GOOLSBEE: Yes, but then well, what is that number? And I'm not going to tell you that because it's not a cliff and it doesn't work like that. It feels like we can all agree yes, the unemployment rate is up from whatever, it's 3.4 To 3.9. We're still doing great on the employment side of the mandate. And where we have needs improvement, what are the categories, satisfying needs improvement, has been on inflation.

And the point at which we should start thinking harder about the employment side of the mandate is for sure if we got inflation on a path clearly to target then we'd want to think about how do you-- what's the most you can maximize employment while keeping prices in a stable position. And in the short run, the answer to that kind of is no. Inflation is what we have to get down to target.

So if in that question somebody's asking if the unemployment rate starts going up but inflation is not on a path to 2% will you stop tightening because the unemployment rate is going up? No, we have to get inflation back to target. That's the whole essence of the thing I described, that we had an inflation target, which helped us through the period of high inflation, the credibility that we promise to get this thing back to target, that was crucial, and you can't back out now. That's the bad news.

The good news is that's not the situation we're in. The employment side is still looking really excellent and inflation is coming down very rapidly. And that's exactly what we promised and what we want to happen. And so I kind of think this-- getting the labor market back to balance to something like the natural rate and steady while inflation comes down, that's what you want the central bank to be doing. So I'm not as nervous about this hypothetical trade-off.

LESLIE MCGRANAHAN: So from Pigeonhole, so what are your thoughts with the commercial real estate situation? And we're going to discuss that a little bit this afternoon but that's--

AUSTAN GOOLSBEE: Yeah. And I've got my spies. I want to hear what you say about that. Commercial real estate is not one thing, as you know, it's a lot of different things. And some in commercial real estate are doing very well. Multifamily has been strong, warehouses doing very well. Downtown office in big cities doing less well but as you might imagine, there are many parts of this bank and of the Fed system, as well as private forecasters trying to figure out what are the implications for banks, what are the implications for the economy.

The refinancings are not all spaced out. If you take how many offices are there, that's a big number. How many need to refinance in the next 12 months, that's a smaller fraction. And so in a way, how rapidly this works its way through the system kind of depends on that.

The way it's been described to me, and Leslie, it sounded like when your folks talk to people, class A, class B, class C-type buildings have different prospects. And partly we still got to wait to figure out this work-from-home question. If we come back in five years is the share of are they office person days whatever, if right now people are working from home two or three days a week on average is that still going to be true or is it going to be smaller than that. Those are the things we've got to work through for commercial real estate. When Silicon Valley Bank collapsed it felt like, whoa, this could be the sign of something bigger and it hasn't turned into something bigger but it's definitely a concern.

LESLIE MCGRANAHAN: So a last question as our time is almost up, what risk worries you most about the outlook and the coming year, and what makes you the most optimistic? And this was also a question that was submitted in advance.

AUSTAN GOOLSBEE: OK, things to be paranoid about, there are international ones that if there were a meltdown in China, there is one mechanical view that says, hey, China's not-- the US is mostly domestic-driven. Trade isn't that important. China is only one portion of US trade, so in some kind of mechanical way, it can't add up to a recession. I think that's, you're kidding yourself if you think that. If the second biggest economy in the world had a meltdown I think there'd be a lot of freak out, and it'd be hard for us to navigate away from a somewhat serious downturn.

I guess my nightmare, I try to get enough sleep, so I won't say it's keeping me up at night but just keep watching the inflation. Thus far, we've made great progress on inflation but if that stops, starts going the wrong way, the Fed mandate we must, we have made a solemn vow and promise that we're going to do what it takes to get inflation back to target. So if you don't see improvement on housing, and if you see goods inflation start going the wrong way because of overheating, then you know that the Fed is not-- we can convince ourselves of what we are, but the Fed's mandate requires in my opinion, that we get inflation down. So we should be sobered by history that every previous time you've gotten inflation down a lot, it has required a recession to do so. And sometimes a very serious one.

On the optimistic side, I guess it's that look out the window, in 2023 we got the inflation rate down a lot. We continued to work through positive supply developments. We find it's not that team transitory was there but team supply shock I think that was a big component of what was happening. And there's still some of that to work through in the economy. And that's the-- that plus the labor market, those are the best things we got going, inflation has been the worst thing but we're making progress hopefully.

LESLIE MCGRANAHAN: OK, great. So we are at time.

AUSTAN GOOLSBEE: We're at time, OK.

LESLIE MCGRANAHAN: So thanks, everybody. And thank you for joining.

AUSTAN GOOLSBEE: Thank you for your participation. All right.