NIC Chats
NIC Chats
NIC Chats Podcast with Paul Ashworth
Has the labor market reached a tipping point? And, why is healthcare one of the few sectors with employment numbers still below pre-pandemic peaks? Listen in as Paul Ashworth, Chief North America Economist for Capital Economics joins Lisa McCracken on the NIC Chats podcast to answer these questions and more. As they discuss current economic trends, learn why Ashworth thinks the U.S. economy is in a Goldilocks period, but what challenges might be looming as we head into 2025. You’ll also hear Ashworth’s prediction of the size of potential rate cuts in September and beyond.
Want to join the conversation? Follow NIC on LinkedIn.
We want to hear from you! Let us know what you think of our podcast by giving us a review on Apple Podcasts, Google Podcasts or wherever you listen.
Welcome, everyone to the Nick 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 who is Paul Ashworth. He is the chief , uh, north America economist for Capital Economics. Uh, welcome Paul. We're glad to have you with us today.
Speaker 2:Thank you, Lisa. Glad to be here.
Speaker 1:So there's a lot that we can cover. Um , 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?
Speaker 2:Uh, sure. You can probably tell by the accent that I grew up in the uk. Uh, I did all my schooling there, including a PhD , uh, and then went to work for various think tanks. Uh , and then finally ended up in, I guess you'd call it private practice. I started at Capital Economics 20 something years ago in August, 2001. Uh , and 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, you know, be on that journey of growth with the firm. Uh , and we enjoy working for our clients and sharing our insights for them .
Speaker 1:Yeah, no, 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, and domestic , um, you know, topics. However, clearly we, we live in a <laugh> a world that is very global. So your perspective on that will be helpful too. So I , as you and I talked in advance of our time here today, I think I'd thrown out a question to you . Okay. If in one sentence, which is probably difficult, but to our credit, it's easier than one word, <laugh> In one sentence, how would you describe the current state of the US economy for our listeners?
Speaker 2:Uh, good. And I might even go with very good. I mean, certainly it's performed best among the most, a large advanced economies since Covid struck, and particularly in the post covid period. Uh, 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 why economies sometimes call the Fable goldlock scenario where things are not too hot and not too cold, but just Right ,
Speaker 1:Right, 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, I would probably reflect back on that. It sounds like you're from an outlook standpoint and where we stand in moving forward, that, that it's positive for some movement with some of our, our pain points. What , um, without leaving some of that, and I wanna go down some of these specific topic areas, but , but as think 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, some primary hurdles or, or some , um, again, challenges in the coming months that we need to have on our radar?
Speaker 2: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. Um, but GDP growth is still pretty good. Uh, and while the Federal Reserve, I guess, is now thinking about cutting interest rates , you know, starting from , uh, it's September meeting , uh, there is still the impact of higher interest rates feeding through. So, you know , household, some households will still be struggling with higher interest rates and finding the money to cope with that. Uh , and of course, higher prices are still having an impact on many family budgets. So, you know, there are one or two concerns. Um, but now we've reached a point where inflation has come down enough that the Federal Reserve can be , think , begin cutting interest rates. Hopefully those concerns will pass. And you know , I think the outlook's pretty encouraging too. Right?
Speaker 1:Yeah. And in a moment, I, I do wanna spend some time on , on the labor side of things that , that's definitely been a pain point in our industry. Uh, so I was reading some headlines. You know, everyone has their forecasts and their projections that I, I don't wanna answer this for you based on your good or very good response earlier, but , um, do you think a recession is coming? And I say this 'cause I'm looking at a headline right now. This was on C-N-B-C-A week ago, A recession is coming and few weight rate cuts won't prevent. It says a strategist. Is that just the attention grabbing headline or , um, do you disagree with that?
Speaker 2: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, they're still pretty low. Consumer spending is still kicking on pretty strongly. Uh , motor vehicle sales, you know, people still are still making big ticket purchases. Um, uh, businesses are still investing. Uh , so, you know, across a wide range of indicators, know things look okay. Uh, so I certainly wouldn't rule out entirely. 'cause often you can't quite see these things coming and sometimes they include another shot , something like financial markets. Um, but in this case, there's nothing obvious out there.
Speaker 1:Yeah, no, I appreciate your perspective on that. It's just one of those headlines I often follow and I think for as many people that say, Hey, we think one's coming, others do not. So we will see how the, the coming months un unfold. I do wanna spend time on labor. So 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 , um, various parts of our healthcare ecosystem have recovered to differing degrees. Um, and many of the operators in our space today would say that while the labor markets have maybe healed a little bit in terms of wage escalation, growth, growth has not gone backwards, of course. But, you know, that's the, the big surprises month over month, year over year are not what we were experiencing. But it's not great. So , um, you know, it's, it's a very intensive service industry on that front. So, you know, when you look at those types of related sectors, healthcare, which is probably the umbrella that we fall into loosely , um, you know, in senior housing that can be labor intensive. Are there any specific observations you have on the labor front that we need to, to think about or just better understand from your perspective?
Speaker 2:Yeah, I mean, obviously coming out of the pandemic, we had a very tight labor market , economy wide . Uh, a lot of people were still out of the labor force and staying out for various reasons. Maybe health concerns, maybe childcare issues. Uh , a lot of older workers took the decision to retire and didn't come back. Um , but that situation gradually turned around , uh, with help from some strong immigration numbers too . Uh , and now we are reaching, I think what I'd call the tipping point where the balance is now maybe favoring employers rather , whereas certainly it was very much in favor of employees a couple of years ago. Uh, I mean, if we look at, as I said, the unemployment rate is now beginning to rise a bit. At one point we had a massive numbers of job openings. Uh , they've come down in the economy to look at sort of survey responses where , uh, the NFIB small business survey asks small business employers , uh, whether they're finding it difficult to, to find workers. I mean, those responses have normalized after looking really out of , you know, real problems finding workers at one point. So things do appear to have come into a much better balance , um, across all sorts of skill sectors. But certainly within your industry, I don't relief now, I mean, healthcare has been on a complete role . So healthcare , I mean, the economy over the last 12 months has a two and a half million jobs. Almost 1 million of those jobs are in healthcare alone . So we've seen massive growth in healthcare , uh, but nursing and residential care facilities , uh, some strong growth over the last year growth of 130,000 . But looking back to that pre covid peak, we're still 84,000 below that, that that's very, very unusual. But because if we look at the healthcare sector as a whole, that's close to 2 million higher , uh, the economy as a whole is 6.4 million more jobs. It's one of the few sectors now where employment is still below its pre pandemic peak.
Speaker 1:Yeah, and I think that's probably some of what we're feeling day to day . And I appreciate your comments about sort of the, the , um, the, the flip in terms of sort of who, I don't know if you use the term the the who's in the, the driver's seat in terms of the, the power, the employer or the employer. 'cause I do, I would observe that that that has probably shifted , um, you know, back to a , an employer sort of , um, position of strength with that. I i as it relates to , um, and this is a bigger long term thing, but I think about it and I , I'd be curious to know your thoughts too. So, 'cause I think this will impact, I mean , we're gonna 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 , you look at the labor gap a little bit and also the booming demographic. So we're , there's a conversation in need and who's gonna be there to provide that support. You know , we have this aging demographic and we also have a dropping fertility rate here in the us . Is that anything that, that bothers you or concerns you as an economist, or do you think that that's sort of overblown that's, you know, far down the road? What do you, what's your take on that?
Speaker 2: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 , uh, because of the one child policy that was in place for a long time and other 10 years, they'll have worse or more adverse demographics than we have in in the us Yeah, of course, as the baby human generation retires , uh, and, you know, there'll be fewer people working and , 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 , um, and maybe even finding, you know, because demand for your facilities is gonna rise quite literally. Um, but you've also gotta find the workers to staff those facilities. Uh , now the only alternative is you can make your existing workforce more productive somehow.
Speaker 1: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 gonna need to have all of those , um, cards, you know , in our hands to try to , to remedy this. And it's, it's good to hear maybe we're not as in such bad shape as some other countries in this regard, but it, you know, it's still a pressure point. We actually have a number of, of, you know, us senior housing folks that are also international players. So we, we certainly have observed that as well. So, you know, I know most of the focus here and , and we'll spend most of our time on the domestic um, 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 ?
Speaker 2:Well, obviously I think the biggest issue is possibly , uh, US and China trade relations. Obviously the US became very dependent on China for imports of all sorts of goods , uh, over the last couple of decades has now started to shift away from that. Uh, Donald Trump has president obviously introduced a number of tariffs on Chinese imports. Um, the Biden administration's added to those a little bit. And if Donald Trump is reelected this November, he's been talking about , uh, increasing tariffs, not just on China but also other countries. You know , that sort of isolationist shift , uh, could have pretty dramatic impact on the US economy. Uh , we've got used to a supply of very cheap goods coming from overseas. Uh , obviously we'll throw things up in the air if those to be made more expensive. Uh , of course that could introduce opportunities for more domestic production. But of course, you know, if you've got manufacturers competing to produce domestically, that for your industry just creates a competitor looking for the same type of labor.
Speaker 1:Right, right. Yeah. And you know, and our sector definitely felt some of those supply chain issues , um, without a doubt. I mean, the healthcare space, senior housing is during the pandemic and um, you know, receiving some of the different things from, you know, the, obviously the global economy. I do wanna spend a few minutes , um, during our time here talking about capital. So, you know, we are , you know, our sector, if you break it down, we've got a combination of you've got government, you know , um, run properties. You've got not-for-profits, you've got , um, private capital that's in our space . We've got some REITs, you know, that certainly , um, own the , the senior housing properties. But we're very heavily dependent on debt capital and the bank market's been a challenge in recent years. You know, obviously a lot of that's spawned by the trickle down of the, some of the bank failures and so forth. So how would you, how do you see the current environment from the, 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.
Speaker 2: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 , um, 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 of <inaudible> .
Speaker 1:Right, which are grabbing the headlines. They're sort of defining the commercial real estate sort of space in many respects.
Speaker 2: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 , uh, but we haven't seen an awful lot of bank losses . Uh , and certainly there was a tightening in credit conditions post the sort of initial SVB collapse. But since then things have turned around. Uh , and 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. 'cause 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. So that's positive for bank profitability. And of course that's happening because all of the yield curve is coming down now quite considerably. 'cause the Federal Reserve seems to have seen enough to begin a potentially quite significant rate loosening cycle reduction cycle. Uh , so I think hopefully over the next few years, you know, capital markets, debt markets should benefit from lower rates. Uh , 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, you know, where we've been over the last 18 months, even two years , uh, conditions should begin to ease.
Speaker 1:Yeah, that's good to hear. And and I would say that's probably similar to generally anecdotally what we're hearing from some of the lenders. I mean, we, we've still got a ways to go and , 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 <laugh> being a, a normal and , and um, environment where it , you know, if you look back, you know, you know , 20 years, 30 or 1520 whatever , um, longer term it , it wasn't , uh, and probably it's a , you know, not something that can be assumed to be, you know , a normal course , um, or level moving forward. And um, so , uh, we appreciate that. 'cause again, I , as I mentioned, the , the debt markets are incredibly important to the senior housing and and care space for sure. So , um, we'll continue to watch that and watch the bank performance, which we too have been seeing those , um, you know, positive reports. So you mentioned the Fed, so obviously we're gonna go there. Um, and we're just a few weeks away from the September meeting and 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 , and the Fed even is affirming that there, there's probably gonna be some action here at, 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 , what do you, what do you see happening in September and , and uh, what's gonna come out of the Fed from comments and and actions?
Speaker 2:Yeah , I mean obviously from comments we've had, we've had a pretty strong steer from the fed's chair during Powell that they're about to begin cutting interest rates , um, the , you know, the balance of risk of shift. They're worried a bit about the downside risks with the leg 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. Uh, 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, you know, we've still got another inflation CPI inflation report, we've still got another important employment report , um, for August to come before that September meeting. So either of those, if they were , uh, particularly surprising, could shift the balance of risks on what size rate up we're gonna get. But I , I think the odds probably at this stage still favor a 25 basis point up for September. But then the question is what we get after that , uh, I think we get a very controlled series of 25 basis point cuts, taking the federal funds rate down from about five and a half down to somewhere in the low three, 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% now down to 3.9%. Uh , 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 rate cut, this series of rate cuts coming, rate cuts from the Fed.
Speaker 1:Right, right. Yeah, it's, 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 then that frees up capital or capital that's maybe much more , um, 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, 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, and that demand dynamic that we do now. So it's gonna be interesting to watch that. So you mentioned already some, some comments about November in the presidential election. Um, any key economic headlines you see coming out of November based on the, the candidate , um, that , that walks away with our, our presidential candidacy or, or election win?
Speaker 2:Uh, well, obviously we think that Kamala Harris is probably, you know, best thought of as the continuity candidate represents the status quo , um, is looking for a series of potentially problematic increases in business taxes and, and taxes on high income earn. 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 , uh, Donald Trump's policies , uh, obviously a bit more , uh, other 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 last next couple of years. And the other risk I suspect for your business is Donald Trump's plans to cut down, crack down very hard on immigration , not just, not just unauthorized immigration, but you know , uh, immigration through official channels too. '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 risk , uh, 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 crackdown on immigration, not just unauthorized, but through official channels too , uh, which could have obviously a knock on adverse impact on the leg market.
Speaker 1: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> , um, and don't stress about things that related to work and then the economic conditions. So, you know, what keeps you up at night? Maybe what, 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.
Speaker 2:Uh, I think obviously we haven't really touched on geopolitical concerns, but obviously there's the war in Ukraine, there's the war in , uh, Gaza, which obviously risks spiraling, you know, at the moment they're quite contained, but could spiral out of control , uh, pulling other countries. Uh , certainly those will be concerned. 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 can have a whole host of benefits automating all sorts of tasks and knowledge based tasks. Uh , and we've already seen, although it might not be linked to that , uh, 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 two thousands 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 capital wealth within the economy.
Speaker 1:Well, fantastic. Yeah, I was a keep a couple things that we didn't have time to touch on here today. It's, it's all related to the economic conditions, sort of what, what lies ahead for us. So I, 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 Nick Fall conference coming up in September and that will be the week following the, the Federal Reserve meetings. So it'll be interesting to see the , the chatter there. And we'll be diving into some of these economic conversations. We have Diane Sw , 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 Nick Chats podcast. And you can access this podcast and others on the Nick website@www.nick.org. Thank you so much.