Mickey Levy came into 2025 looking for the U.S. consumer to take a break and pull back on spending after a robust fourth quarter topped off by a robust holiday shopping season. But he now sees all the uncertainties stemming from many of the Trump administration’s new policies accentuating the weaknesses already creeping into the economy. And expects this means we will not only to see consumer spending weakening further, as it did in the January consumer spending report. But also that this “highly uncertain environment” to cause business investment to pull back and companies to pull back on hiring.
And this Hoover Institution Visiting Fellow sees the balance of risks for the Fed, in terms of whether or not it stays on policy pause or looks seriously at starting to cut rates again, to be determined by what happens to unemployment. “Time and time again…the Fed responds much more rapidly to unfavorable labor market data, employment and unemployment than it does to higher inflation.”
So dive in and see what Mickey has to say. Why he says tariffs will turn out to be one time hits to the price level, and the forces like declining costs like shelter prices will help gradually push inflation lower as the year wears on.
Levy sees Growth but has become more pessimistic 00:01:52.990 --> 00:02:16.970
Mickey Levy: Okay, at the beginning of the year, I said, consumers are going to take a break. But now, with all the uncertainties stemming from the trump administration that is going to accentuate the weakness. So we're going to see decided weakness in consumption and business investment. And today's consumption report is absolutely consistent with that.
Consumers take a break after a strong holiday season 00:02:42.610 --> 00:02:52.200
Well. The holiday shopping season was very strong both November and December, and now consumers are taking a break
Forecasts will be coming down after this PCE report00:03:01.840 --> 00:03:29.300
Real consumption in January is at the same level as it was in the 4th quarter. And so you're going to see a lot of people revising down their consumption numbers for January. And once again, Kathleen, what we can expect in this highly uncertain environment is, businesses are going to temper back their hiring
A weaker consumer joins weaker capital spending 00:03:29.300 --> 00:03:35.980
…and their capital spending plans. So the rate of economic growth is slowing. Decidedly.
We are in a soft-patch 00:04:04.460 --> 00:04:18.029
the news just and the way it's reported just breeds uncertainty. And so so the economy is definitely in a soft patch here, and that's going to continue through the spring.
Uncertainty mushrooms 00:04:54.050 --> 00:05:37.289
Sure, I mean, let's add it all up. There's a lot of uncertainty…Trump is raising tariffs and threatening tariffs…The deportations we really don't know that much about. The government layoffs in the long run are going to be positive because the US has a phenomenal track record of the private sector being very resourceful and resilient and absorbing an increased supply of labor. But just this uncertainty leads households and businesses to pause a touch, and that's what that's what we're in for now.
Lower Year-on-year inflation but not month-to-month 00:06:23.460 --> 00:06:37.450
Well, the base effect did play an important role here insofar. As like if you look at both the headline and PCE core. You know, PCE inflation data. They were both 0.3%, which is nothing to write home about. You had a
Still, there was good news 00:06:57.430 --> 00:07:17.789
This was the 1st month and 4 months where we had a year over year decline, and I strongly expect we're going to see further modest declines in year over year inflation.
Housing will drive inflation deceleration 00:07:21.970 --> 00:07:41.009
The biggest component, the shelter component that's going to continue to decelerate gradually and lag response to the slower inflation in house prices. And that's in the cards. The way the Bea calculates it also
Slower growth will add inflation temperance 00:07:41.110 --> 00:08:41.100
From a broader perspective. You've seen a deceleration in aggregate demand in the economy. In Q, 4 nominal GDP grew at a 4.5 percent annualized pace. It's now decelerating further. So Kathleen, think about the following, nominal GDP is the broadest measure of aggregate demand that's current dollar spending in the economy. If you think sustainable potential growth in the next handful of years is, I'm on the high side at least 2 and a quarter. That means, you know, you've got inflation coming down stated differently with slower aggregate demand. Businesses have less flexibility to raise prices, and so inflation is going to be drifting down, which is positive.
Tariffs are a one-time boost to prices 00:09:34.430 --> 00:09:58.530
Well, there's no question but that the imposition of tariffs will put a one-time upward impact on the general price level. It is not inflationary. It is just like the imposition of a tax, is not inflationary. It has a one-time impact. And here, Kathleen, it depends on what businesses do.
Health care costs loom larger in the PCE 00:10:38.480 --> 00:11:04.380
I would note, as far as the PCE price index goes. It is significantly overweighted in health care which doesn't have that much direct exposure to tariffs. So you're going to see a divergence between the CPI and PCE. And Pce.
Beware the Trump-haters interpretation 00:11:10.340 --> 00:12:19.399
People who detest trump are highlighting and accentuating everything bad that can happen. And so they said, Oh, inflation is going to go through the roof. It could bounce up a touch, but only temporarily. but the broader area to look at is aggregate demand when Trump imposed tariffs in mid-2018, and then ramped up his trade war with China in 2019... Guess what? Inflation actually came down. And it came down because the tariffs had a negative impact on aggregate demand through the uncertainty. So the aggregate demand impact more than offset the one time rise in the general price level the businesses passing on their costs to consumers. So, stay, stay tuned here. I think the biggest negative impact now is the uncertainty.
Worried about the Fed hiking rates are shifting 00:15:14.600 --> 00:15:33.590
Early January <markets> expected the Fed on pause for a long time, with inflation going up, and some people thought the fed could even hike rates. Now that's shifting toward moving up expectations of when the Fed's going to ease. You see that reflected in the Fed Funds futures. You see it reflected. In 2-year Treasury Notes, and 10 Year Treasury bonds, all of which have rallied about 30 basis points. Now, importantly, the fed doesn't know how to forecast inflation.
Fed still has 2% target 00:16:57.760 --> 00:17:04.270
The fed remains committed to its to reducing inflation to 2%. But it's… it's… just winging it.
Jobs and inflation drive the Fed not GDP 00:17:51.270 --> 00:19:14.700
The fed has this dual mandate. And it has to keep an eye on employment. And so the fed has to face this. Okay, inflation may be drifting a touch lower, and it gets within a stone's throw of 2%. But we could see a deterioration in labor markets. Keep in mind the fed doesn't really care about GDP. It cares about employment and unemployment, and what history shows. Time and time again, is, is, the fed historically responds much more rapidly to unfavorable labor market data, employment and unemployment than it does to higher inflation. So let's see how the fed deals<with this> in the next couple months.
The balance of risks is shifting 00:23:00.223 --> 00:23:16.440
Here's the balance of risks. Up until recently, as the fed perceived it, were decidedly concerns about excess concerns, about inflation which I think were valid. Now, I think they're absorbing the data to the employment, the consumption data, the data on, you know, the surveys on consumer confidence, and they're about neutral, I think, within as the spring unfolds, you're going to see this balance of risk as perceived by the fed to be shifting toward employment. the balance of risks are going to be about. How weak does the economy get now from the Fed's perspective?
Dr. Mickey D. Levy
Mickey Levy is a macroeconomist who uniquely analyzes economic and financial market performance and how they are affected by monetary and fiscal policies. Dr. Levy started his career conducting research at the Congressional Budget Office and American Enterprise Institute, and for many years was Chief Economist at Bank of America, followed by Berenberg Capital Markets. He is a long-standing member of the Shadow Open Market Committee and is also a Visiting Scholar at the Hoover Institution at Stanford University.
Dr. Levy is a leading expert on the Federal Reserve’s monetary policy, with a deep understanding of fiscal policy and how they interact. He has researched and spoken extensively on financial market behavior, and has a strong track record in forecasting. Dr. Levy’s early research was on the Fed’s debt monetization and different aspects of the government’s public finances. He has written hundreds of articles and papers for leading economic journals on U.S. and global economic conditions, and has been an active voice on how financial markets are influenced by monetary policy. He has testified frequently before the U.S. Congress on monetary and fiscal policies, banking and credit conditions, regulations, and global trade, and is a frequent contributor to the Wall Street Journal, Bloomberg, and other media.
He is a member of the Council on Foreign Relations and the Economic Club of New York, and has previously served on the Panel of Economic Advisors to the Federal Reserve of New York, as well as the Advisory Panel of the Office of Financial Research.
Dr. Levy holds a Ph.D. in Economics from University of Maryland, a Master’s in Public Policy from U.C. Berkeley, and a B.A. in Economics from U.C. Santa Barbara.
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