Unemployment Rate To Surge? | Bloomberg's Anna Wong

"It Will Feel Like A Recession" When Unemployment Hits 4.5% By Year-End

The US economy appears to be slowing down.

Final Q1 GDP growth came in at just 1.4% and, as of this recording, Q2 GDP is currently estimated to be little better, at 1.5%.

Retail sales for May, the most recent data we have, only grew at 0.1%.

And unemployment is starting to tick up, too, rising last week to 4.1%.

Now, none of these stats are particularly worrisome on their own.

But together, are they signaling rockier economic times could like ahead?

To find out, we have the good fortunate to talk today with Dr Anna Wong, Chief U.S. Economist for Bloomberg Economics.

Prior to her current role, Anna also worked at the Federal Reserve Board, the White House Council of Economics Advisers, and the U.S. Treasury.

Anna’s team is predicting the unemployment rate will surge to 4.5% by December.

Should that indeed happen, whatever the headline economic data says then, “it will feel like a recession” to regular people, she warns.

For her full economic outlook, click here or on the image below:

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Adam’s Notes: Anna Wong (recorded 7.9.24)

EXECUTIVE SUMMARY

• Anna underscores significant geopolitical risks, particularly between the US and China. With the upcoming US presidential election, the potential re-election of Donald Trump could lead to heightened tensions. Trump’s administration might impose more tariffs on China, disrupting the supply chain, especially for companies like Nvidia, which relies heavily on suppliers from Taiwan and Israel—regions central to global geopolitical tensions. This could destabilize the stock market, which has been buoyed significantly by Nvidia’s performance.

• Anna highlights that the market is not currently accounting for potential interest rate hikes by the Federal Reserve, which may respond to increased tariffs proposed by Trump. A 10% tariff on global imports could raise the PCE deflator by at least 1%, prompting the Fed to consider rate hikes in 2025 or 2026. This scenario presents a risk that is not currently priced into the market, potentially threatening the recent stock market gains.

• There is a notable tension between fiscal and monetary policy. While fiscal policy remains expansionary, with significant government spending, the Federal Reserve is implementing tighter monetary policy to curb inflation. This divergence is causing friction, as expansive fiscal policies can counteract the Fed’s efforts to manage inflation through higher interest rates. Jay Powell has indicated that the current fiscal trajectory is unsustainable, especially given the large deficit during a period of supposed economic strength.

• The Paycheck Protection Program (PPP) was successful in preventing immediate bankruptcies during the pandemic, evidenced by significantly lower bankruptcy rates. However, the program also faced significant fraud and inefficiency issues. The expansion of unemployment benefits was also generous, covering beyond the existing income for about 50% of the population, which led to higher inflation as people opted for benefits over working. Subsequent fiscal stimulus packages further fueled inflation.

• The lag effects of monetary policy are significant, with real-time data often not accurately reflecting the economic state. Anna suggests that