Shifts and Conflicts in Today’s Economy – A Conversation with Dr. William Chittenden

Announcer  00:04

Welcome to the Treasury Update Podcast presented by Strategic Treasurer. Your source for interesting treasury news, analysis, and insights in your car, at the gym, or wherever you decide to tune in.

 

Craig Jeffery  00:18

Welcome to the Treasury Update Podcast. This is Craig Jeffery, and today, our episode is called Shifts and Conflicts in Today’s Economy – A Conversation with Dr. William Chittenden. Welcome to the podcast, Bill.

 

William Chittenden  00:31

Thank you very much. I appreciate it.

 

Craig Jeffery  00:33

We’ve had the opportunity to see each other at two treasury conferences in the last month or so. So it was it’s good to be talking with you again after those, this idea of shifts in conflicts in today’s economy, there’s, there’s a lot going on. It’s an election year, but maybe we could start off if you could give us an overview of what’s happening with the economy. There’s inflation, employment, interest rates. Before we started, we started talking about some of the perceptions of some of these items that can sometimes vary quite a bit from what we’re actually seeing.

 

William Chittenden  01:07

Sure. So you know, if we’re talking about what is the economy, we measure that as GDP gross domestic product. And GDP is simply the final value of all the goods and services that are produced in the United States. We do everything on what was called a real basis. So when we talk about, you know, what’s the growth in GDP, we take out the impact of inflation during 2023 the economy grew at a decent pace. The first quarter was 2.2% we had 2.1% in the second quarter. Third quarter was great at 4.9% 3.4% fourth quarter, the first quarter, numbers of 1.6% were a little disappointing in that it’s lower than what was expected. It’s lower than what we’ve been averaging. But one quarter doesn’t make a trend. What we like to see is, is GDP, you know, ballpark around 3% and the reason for that is that means the economy is growing enough to absorb all the new workers that are that are entering the economy. So this is graduation season. We’ve got lots of high school and college graduates that are going to be looking for jobs, and if we’re growing at ballpark 3% the economy is growing fast enough to absorb all of those folks into the workforce. But it’s not so fast that it becomes inflationary, and that was a little bit of concern where you know, we were seeing post COVID, for example, GDP growing at, you know, 4, 5, 6, even 7% is what we saw in the in the fourth quarter of 2021, and the result of that is inflation. And so we saw, of course, two years ago, inflation hit a high at least in recent history, of 9.1% now it’s not quite as high as what it was back in the early 80s, but still, 9.1% that’s a pretty tough inflation rate for people to swallow. Prices are increasing much faster at that time than their wages were, and that means that folks overall were having less buying power. So although your paycheck may have been going up, the cost of the groceries you were buying at the store were going up even, even faster. The point, though, is right now, you know, the economy is doing okay, as we might get to a little bit later, there’s a lot of flashing red lights saying there’s a recession coming. The problem is, is that these have been flashing for the last 12 to 18 months, and the economy has simply refused to cooperate. It hasn’t gone into a recession. Now, you know, predicting recessions is a little bit like predicting rain here in Central Texas, if I go out every day and say it’s going to rain today, eventually I’m going to be right. Doesn’t necessarily mean that I’m a great meteorologist or weather forecaster. It simply means that eventually, yeah, you know that blind squirrel finds his acorn, and I think it’s a little bit like that, trying to predict, at least when this next recession is coming.

 

Craig Jeffery  04:19

Given some of the inflation that we’ve we’ve seen late, there’s sometimes these perceptions that inflation is continuing at the same rate, and it’s not, though, the level has gone down quite a bit in terms of how much it’s increasing.

 

William Chittenden  04:31

Yeah, I do believe there’s a disconnect. And I think some of the polling that that Harris has done goes to this, where there’s a disconnect between what is actually happening in the economy and what folks believe is happening in the economy. So for example, in this poll that Harris did for The Guardian, 72% believe that inflation is increasing. No actually inflation. Is Falling now the the disconnect is that our prices continuing to rise. Yes, they are going up. And so prices do continue to increase, but inflation measures the rate of that increase. So rather than being at that 9.1% that we were in the summer of 2022 the most recent numbers for April were that were growing at prices are growing at 3.4% so yes, they’re still going up, but at a much lower rate than what we saw just a couple of years ago. Now, granted, 3.5 or 3.4% is significantly lower than 9.1 but it’s also significantly higher than the Federal Reserve’s target of 2% prices are still moving or going up faster than what the Fed would like. That will lead into, I think, some of our conversation in terms of where we think interest rates might be going at least over the next six months to year or so?

 

Craig Jeffery  06:04

Yeah, that’s some good points. So that that distinction between inflation rate and then price levels, you know, one of the areas that I think we look at price levels is the shock in the grocery store, right? It’s a, I can’t remember. It depends on how far back you measure it. But sometimes it’s like, okay, maybe it’s average 25% over the past. I can’t remember if it’s three or four years, but it builds on that. Right? If you get a 4% increase on something that’s gone up 25% that’s the equivalent. I mean, the price levels has has just adjusted. And we can conflate those if we’re not dedicated economist on those two two items.

 

William Chittenden  06:48

Right. And you know, you can’t argue with the perception that prices are higher today than they were again, just a year or two years ago, but the rate at which those prices continue to go up is much, much slower than what it was before, and so there’s a huge difference, just from a practical perspective, in an inflation rate of 9.1% at that inflation rate, prices will double approximately every Eight years, but at an inflation rate of 3.4% which we just saw, prices will double in approximately 21 years. Now, if we get to the Fed’s target of 2% then, on average, prices double about every 36 years. So yeah, you know, prices doubling is still a hard thing to swallow, but if it’s over a 36 year period, that’s a lot easier than if it’s over an eight year period.

 

Craig Jeffery  07:49

On that same poll, I think the question was, are we in a recession? Now, what did that, what did that say?

 

William Chittenden  07:55

So, it said that 55 this is quoting the article here. 55% believe the economy is shrinking, and 56% think the US is experiencing a recession, although the reality is that the economy continues to grow. Now there’s a rough rule of thumb in terms of what is a recession. And the rough rule of thumb is that you have two consecutive quarters, or six straight months of GDP actually shrinking, and so they call it negative GDP growth, and we just don’t see that right now. As I mentioned earlier, we saw pretty strong growth through 2023 Yeah, first quarter of 2024 is a little bit weaker, but the Federal Reserve Bank of Atlanta, they do a forecast where they believe that the current quarter’s GDP will end up, and right now they’re looking at mid 3% so 3.5 3.6% is their forecast as more economic data comes out through the quarter, and of course, the quarter will end at the end of June, you know, then shortly after that is when we get the official numbers. And so their forecast may change, but they’re forecasting right now relatively robust growth for the second quarter, which would give us pretty good growth overall for the first half of the year. So overall, the economy is actually growing, not shrinking, although, you know, for individuals, they may see their portion of that actually going down. You know, if they feel that they’re able to or experiencing that they can only buy less with the current salaries that they have, even though their salaries have going been going up, in their mind, that is a recession. You know, they’re able to consume less as compared to the way that we, quote, unquote, officially define a recession, is when we got a shrinking economy, not a growing economy.

 

Craig Jeffery  09:51

So for the first half of this year, it looks like we’re going to what average at an annualized rate of around two and a half, 2.6.

 

William Chittenden  09:59

It’ll be somewhere in that general area, yeah.

 

Craig Jeffery  10:01

Yeah, and the expectations for the full year are certainly positive. In the US for the reign of the year is that much different in Europe. I know there’s some European countries where it’s closer to flat, but any thoughts on on that?

 

William Chittenden  10:17

Well, you do have some of the other central banks, the Bank of England, for example, that are looking at cutting their short term borrowing rates, so kind of the equivalent of what the Fed does with the Fed funds rate here in the US. And that’s, again, generally, the first step that they take to try to combat or prevent a recession from occurring. But we do, for all practical purposes, still have the strongest economy in the developed world. And I mean, we’re chugging along pretty good. If we start to go down, then that actually impacts those other economies significantly, given that, you know, we have a significant amount of international trade. And so if we’re buying less, then we’re buying less from not only our domestic producers, but from foreign producers also. And so that doesn’t help Great Britain. It doesn’t help Japan. It doesn’t help China. If we have a recession, and if we do, then that often leads to recessions in these other countries, where we have a lot of trade with them.

 

Craig Jeffery  11:18

So the economy, certainly in the US and in most areas, it seems it’s continuing to grow. It’s positive. We’re not in a recession. It doesn’t look like we’ll be in a recession this year. The US economy is around 28 trillion, maybe a little bit more. Is that right, Bill?

 

William Chittenden  11:35

Yeah, it’s right in that general area. And so the US makes up approximately 25% of the world economy. And so that’s why, if we go down, unfortunately, lots of other economies go down with us, same token. If we go up, then lots and lots of other economies across the world benefit significantly.

 

Craig Jeffery  11:56

And China’s around 18 or 19% they’re the number two. And then we go down to Japan. So that makes that makes good sense. Bill, what have you been doing recently, for for a job, and how has your role, you know, what’s your role been of late?

 

William Chittenden  12:10

Well, for the last 24 years, I was a full time faculty member and administrator at Texas State University, but since the first of the year, I was appointed the next President and CEO of the Southwestern Graduate School of Banking that’s housed in the Cox School of Business at Southern Methodist University in Dallas, Texas. So right now, I think it’s a week away from officially being retired from Texas State, but not retired from work, taking over what we refer to as swigsby, the acronym against Southwestern Graduate School of Banking. But I teaching in that school for over 20 years, and so had been associated with it for a long time. And then when the previous president, Jeff Schmid, came in, he asked for me to serve as the school’s chief academic officer. And then last year, Jeff was tapped to be the new president of the Kansas City Federal Reserve Bank. And so then the board did a national search, and still ended up selecting me to be the eighth president for swigby. We’re in our 67th year this year, and on Tuesday, I’ll be welcoming all the the bankers. We’ll have over 300 bankers on campus from across the country. Then these folks have been identified as the future leaders of their bank. Our program is a three year program where bankers are on campus for two weeks for three straight years, we have projects for them to work on that are basically reports that they if they’ve done them correctly, they’ll have recommendations for management on how they can improve, and then at the end of it, they hopefully have a much better understanding on how All the parts of a community bank fit together. The idea is that you might have a lender that comes to us that’s got, you know, 10 years experience, and they know how to make loans, but if you ask a lender, where does the money come from for the loans that you make, they’ll shrug their shoulders and, ah, magic. I don’t know. Our job is to get them to understand that, yeah, there’s a whole section of the bank that’s concerned with deposits, that’s concerned with raising capital, that’s looking at, how do we get the money to grow those loans? And so by the end of it, overly simplistic is they understand now, if that we want to grow loans by 7% next year, then by golly, we need to have a plan to increase funding by 7% next year, and that way they again, they have the idea is, at the end of the three years, they’ve got a well established understanding of how all the pieces the bank fit together and work. We also have other programming that we do for bank directors. We have other organizations that we work with. To deliver education to and continue the education to bankers. And so we’re, you know that’s, that’s our mission is to educate community bankers across the country.

 

Craig Jeffery  15:11

Excellent. Well, congratulations on completing a storied career at Texas State University and and thank you for not dropping the dropping out of the workforce and keeping the number of workers up to keep the economy going.

 

William Chittenden  15:28

That’s right. I wanted to make sure do my part to keep that participation right out.

 

Craig Jeffery  15:33

That’s excellent. The other factor that we were chatting about earlier was unemployment, perceptions on unemployment, what’s the what’s, what are the perceptions and what’s what’s the reality?

 

William Chittenden  15:43

Well, nearly half of those surveyed believe that unemployment is at a 50 year high, although the unemployment that we’ve been seeing is the exact opposite. It’s at pretty much a 50 year low, where we’re looking at, you know, 3.9% for our most recent unemployment numbers. You know why there’s a perception that we’ve got this high unemployment again? I don’t understand. You know, we hit right after the financial crisis. You know, 2008 2009 we hit 10% unemployment. Back in the early 80s, we were, you know, at 11, 12% unemployment. Historically, anything under 5% had been considered pretty good in terms of unemployment numbers. And here we’ve been under 4% for a very long time. So again, it’s unclear to me why there’s this disconnect between, you know where unemployment actually is, and at least what those that replied to this survey believe.

 

Craig Jeffery  16:46

How about, how about labor participation rates still pretty, pretty strong. How does that fit?

 

William Chittenden  16:52

The labor participation rate, and so just to real quick on what that is, is the labor force, the civilian labor force in the US is considered everybody that’s 16 years old and above, and so you are participating in the labor force if you are either working or actively looking for work. So the corollary to that is you are not participating if you’re not working or actively looking for work. So who falls into that category? Well, you’ve got three major groups. There’s others, but three major groups, one is retirees, because they’ve already put in a lifetime of work, so they’re not looking for work anymore. At the other end of the spectrum, you have folks that are still going to school full time. So again, it’s 16 and above. So you’ve got 16, 1718, year olds in high school that may not have a job, they’re concentrating on being students. You have some college students that aren’t working, and so all of them are not participating in the labor force. And then the other very large group that you have are stay at home, mom and moms and dads, so they’re not actively working for pay. I’m not going to say, and I know better than to say that that stay at home parents aren’t working. They’re working extremely hard, but from a employment perspective, they’re not getting paid, so therefore they’re not participating in the labor force. So back in 2000 is where we’d hit kind of our high, and a little over 67% of those 16 and older were either working or actively looking for work. But from 2000 until about 2013 2014 that participation rate had continued to fall, and then it flattened out right around 2014 and I’ll talk about why I think it did that in a moment. But the biggest reason that it was falling was because in 2000 is when we had the beginning of the baby boomers retiring en masse. And so, as I mentioned earlier, if you’re retired, you’re not participating anymore. So as a larger and larger proportion of the labor force retires, that’s a larger proportion that’s not participating. And we see that go down now. It flattened out again from about 2012 2013 until the pandemic. And so it fallen from about again, little over 67% to 63% and I believe that it flattened out, because during that time is when interest rates had gone at least. Short term rates had gone almost to zero. Long term rates had also fallen, and for all of those retirees, they’re relying on interest income that’s generated from their retirement portfolios. Now you have some that are just receiving Social Security, but for lots and lots of folks, they’ve got a retirement plan, a 401, K or something of that nature. Again, generally speaking, as folks get older and closer to retirement, they move out of stocks and more into bonds. Well, bonds are their compensation is interest, so. Interest went to zero. All of a sudden. These investment portfolios, these retirement portfolios, the income that they were earning fell dramatically. You know, if you go from 5% to point 1% it’s like, all of a sudden, you know, your check going to zero. Now, granted, it wasn’t zero. You know, you were making a whopping, you know, 10 cents for every $100 you had invested for a full year. So what do those folks have to do? They were forced to go, forced to go back to work. And so they might have been working part time. And then all of a sudden, boom, we had COVID. And then folks decided, You know what, these jobs aren’t worth our lives. And the participation rate fell from about 63% down to 60% the lowest we’d ever seen. Since then, it’s it’s increased and gone up to the most recent reading, 62.7% we’re not anywhere near where we were, you know, the 2000 levels, and we haven’t even gotten back to where we were pre COVID. Now, why is that important? Well, there’s only two things that will allow the economy to grow. One is increases in productivity, and the other is increases in the number of workers that are participating in the labor force. So if we don’t have workers, the only way to increase economic growth, increase GDP, is through increases in productivity. And so where do we see that? Well, you see it at you go to a fast food restaurant. I was in Midway Airport yesterday, walked up, and there’s a little screen for me to place my order. Now, they did have a person that was physically taking orders, and there was a nice long line for that, and there was nobody in front of the screen, so I go to the screen, place my order. A few minutes later, I get my food. Why do they have that screen there? That way they don’t have to pay two people to be at the registers or three people to be at the registers. So the good part about increases in productivity is it allows the economy to grow. The bad part about increases in productivity, it means we need fewer workers. And if we look over the last 40 plus years, the bigger contributor between those two more workers or productivity to increases in economic growth has been increases in productivity. Of course, today, the big conversation on how is this going to increase productivity and potentially, again, cut into the number of jobs that are going to be needed. Is artificial intelligence. I would say that’s probably a completely one or two or more shows that you could do with folks. But the idea is, you know, if some of our jobs can be automated by what’s happening in terms of with AI, then we’re going to see those big increases in productivity. I’m just going to assume that that you’re of the age like myself that remembers what things were like pre internet. And so if we think of productivity in terms of, you know, pre and post, widespread use of the Internet. This conversation right now is a perfect example of that. You know, we’re doing it where I’m in New Braunfels, Texas. You’re in where?

 

Craig Jeffery  23:11

Peachtree City, Georgia, just outside of Atlanta.

 

William Chittenden  23:14

Okay, and so both of us just had to go to our offices today to do this interview, as compared to one of us traveling. I’m guessing, yeah, probably 1000, 1500 miles to do this interview in person, pre internet. So again, increases in productivity are nice. So then again, the question is going to be, how big of an impact is AI really going to be on that? What kind of jobs are going to go away? If you’d asked somebody 10 years ago talked to a truck driver, how’s your job security? They’re going to do great computers. They’ll never replace us. And now, what are we starting to see? We’re starting to see some of the big guys come out with semis that are autonomous. So it’ll be interesting to see where those changes are in terms of productivity, you know, maybe they won’t meet need folks like me. Maybe artificial intelligence will will get smart enough that it can figure out what the economy is doing and explain it to people.

 

Craig Jeffery  24:10

That is another couple of podcasts we could cover on that. You talked about in rates of interest down to almost zero. What about the interest rates by the Fed? We keep having the decreases that keeps getting pushed out further and further in the year.

 

William Chittenden  24:25

I think the financial markets have been extremely optimistic, and I would venture to say overly optimistic in terms of how quickly the Fed is going to cut rates. I believe the Fed has been pretty transparent. They’ve said, Look, until inflation gets under control, until we’re on a clear path to 2% inflation, we’re not going to cut rates. Now, it doesn’t mean that inflation has to be at 2% for them to cut again. The idea is, if they see us on a glide path. To 2% then rates might get cut, but inflation, again, hasn’t been cooperating. So we saw, you know, a slight decrease in inflation. The previous month. We went from 3.5% to 3.4% what I thought was a little humorous were two Wall Street Journal headlines based on a 3.5% inflation number and a 3.4% inflation number. So in March, the numbers were 3.5% for inflation. Hot inflation report derails case for fed June rate cut. So 3.5% there’s no way we’re going to be seeing the Fed cut rates the next month, when we’ve got 3.4% inflation. Inflation eases as core prices post smallest increase since 2021 results are in line with expectations. Investors cheer, sending stocks higher a whopping point 1% change somehow completely changes the outlook of at least those that write the headlines for The Wall Street Journal. I think the Feds a little bit further out looking than than just that one month. So again, if we’re on a clear path to 2% then, as they said, they’ll start cautiously reducing rates. But again, we’re at 3.4 3.5 that we’re still not there. You know, we’re significantly higher than the two, and we don’t seem to be on a glide path to it. If we look at the last several months, we’ve been bouncing around in that three and a half to, you know, 3.2% so the financial markets, if you look at what they call the 10 year break even rate. So they look at the 10 year treasury versus the 10 year tips. The 10 year treasury inflation protected security. And so the financial markets, at least as of May 2, forecast that the average inflation rate for the next 10 years is going to be 2.37% even the markets don’t think we’re going to average 2% over the next 10 years, but 2.37 is pretty close to 2% it’s a heck of a lot closer than the 3.4% that we see today. So given that the markets have dramatically changed their minds, so prior to the January meeting of the Federal Open Market Committee that when the quote, unquote fed met about, let’s see if I do that math in my head, real quick, 69% so over two thirds chance investors were saying that rates by the end of the Year at the December meeting would be somewhere between 3.75% and 4.25% so that was before the January meeting. They’re extremely optimistic. They think things are going to go great. Today. You’ve got about 66% of the folks thinking that rates are going to be somewhere between 4.75 and 5.25% so markets have adjusted over these last five months or so that rates are going to be a full 100 basis points higher by the end of the year again, and there’s still a handful that think that rates are going to be at 4% I don’t see that personally again, at least with the information that we have as of today, I don’t see inflation on a straight glide path for the rest of the year, showing that we’re going to hit 2% or be on the way to 2% and so I don’t see the Fed doing anything. If they do, it will be late in the year, and we may see a 25 basis point increase. But the Fed’s actually been saying, Look, if inflation gets stubborn and it stays right at these levels that it is right now, doesn’t really start to come down, we may actually have to do the opposite and start to raise rates. And so I don’t think anybody’s forecasting that today, but, you know, Jerome Powell has had broadcast that that that is a possibility. It might not be a high probability, but it is a possibility.

 

Craig Jeffery  24:53

So if you were to wait what things are at the end of the year, fed rates decline, 25 basis points. Fed rates stay the same, or remain the same, or the Fed funds rate goes up 25 basis points. What would you what would you put your percentiles on those just for fun?

 

William Chittenden  29:23

If I had to put all my chips in, I would say there’s going to be no cut. I would hedge really, or maybe put half my chips on no cut, and half of them on a 25% or 25 basis point decrease in rates. I don’t think they’ll increase rates by the end of the year, unless we see some crazy stuff with inflation, I think the holiday season will be interesting. So when you get the December, January, February, inflation numbers after the first of the year, if those come in really high, then you might be seeing at that time when the Fed might, if they’re going to that’s when they would raise rates. But if. So inflation stays where it’s at, even with it staying with where it’s at. Again, they’ve sent the signal that they’re going to at least increasing rates is going to be on the table. I’m not sure how patient they’re going to be if rate, if inflation rates, stay at their current level, because if they don’t change, then it means that monetary policy is not doing anything to slow inflation and therefore, well, we better turn the knob a little bit and increase rates a little bit more.

 

Craig Jeffery  30:29

This is a two part session. We’re going to continue in another episode of the Treasury Update Podcast. Bill, thanks so much for your comments on this episode of the podcast.

 

William Chittenden  30:41

Thanks for having me.

 

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