Ellen Zentner, Morgan Stanley Chief U.S. Economist, joins Yahoo Finance Live to discuss how markets are faring amid the pandemic and outlook for the global economy.
- First, let's start with the economy here and what we have seen as the sort of changing perceptions of where we are in this economic cycle and how alarmed, in some cases, investors should be. Ellen Zentner is with us now. She's Morgan Stanley Chief US economist. Ellen, it's always great to see you.
There has been what has seemed to be this changing perception on the part of market participants that, oh, no, we're on the downslope of-- of growth and sort of some alarm being expressed on that point. How are you thinking about post peak? I know you've written about it quite a bit as of late.
ELLEN ZENTNER: Yeah. So I think post peak doesn't have to be a bad thing. I mean, within a business cycle, there are ebbs and flows. There are various turning points within a business cycle. And we've come out of a very rapid, rapid phase of recovery and expansion. And so it's only natural that we would move into the moderate phase.
Now, we've been helped along that path pretty quickly toward moving into the moderate phases. We have shut the door on the second quarter because it's so obvious that we're leaving the peak of fiscal stimulus behind us-- the last round of checks that were received in March on the cusp of the second quarter.
But that's created what we've been talking about, this excess $2 trillion in savings that households can draw upon at any time if they feel things are rough or if there's a hiccup in the labor market. And that's a cushion so that's sort of a tale of earlier stimulus that could still help the consumer along. I mean, buying power is still going to be quite strong this year.
So I don't think the fact that we're moving out of peak growth rates needs-- you know, should alarm anyone. But of course, as you know, markets speak a different language than economists. And for markets, you've got to always, always, always push higher at a faster and faster rate or else investors do get worried.
- And Ellen, of course, on the market side, we've seen, you know, some concerns, at least in some pockets of the market around the Delta variant, spread of the Delta variant. And I've seen some of your peers on Wall Street maybe consider a 1/10, 2/10 of second quarter GDP coming out as a result of that. Are you guys thinking that the spread of-- of COVID-- renewed spread of COVID in the US will have any impact on growth? Or is that savings really going to buoy us here?
ELLEN ZENTNER: So as yet, I feel no need to take down GDP growth forecast on the-- the risks around the Delta variant. I think we've done a good job of self policing all through COVID. And that means that it can dampen some-- some of the effects because there may not-- because of that, there may not be a need to put in reversals of the reopening, you know, renewed restrictions.
Also, if there are renewed restrictions, oftentimes people have already been self policing. Some of the evidence of that could be in the state of Alabama, where here's a state that ended the unemployment benefits early and we've not seen any bump in the labor supply there. It also happens to be a low vaccination rate state, where people are probably-- people and businesses are probably reacting to the rise in cases there on their own.
So I just don't see a need at this early stage to even think that I would have some idea of what kind of impact that could have on GDP. I'm looking at consumers that are telling us that their concerns over COVID have now reached another new low. I'm looking at mobility metrics, which daily metrics continue to rise. I'm looking at data from TSA which shows that air travel in the US is back to 85%.
Now, that doesn't mean that all of that can't bobble, but I think it's-- it's disingenuous of an economist to sit here today and say, I know what kind of effect this variant could have on the US at some future-- future date.
- Ellen, so many of us are now returning to our headquarters. Look, we're back in our studios here. Many other-- the banks certainly are going back to their offices. What does that return to office life mean to productivity in the country?
So we hope that it's a lift to productivity. Now, I think what we saw during the pandemic was because output remained high after that one quarter dip-- dip, that one quarter plummet-- and-- and we lost a lot of employees from the labor market, productivity rates soared. And I can tell you from my perspective in the financial industry, productivity rates absolutely soared.
But I do think the longer work from home remains high, I do think you start to lose some productivity over time, some connectivity over time. And certainly, this varies across sectors. There are some that are going to do work from home very, very well and others that-- that-- that aren't going to work very well.
I do think, though, that there are crosscurrents here that mean that we can't just assume that rates of productivity will be permanently affected negatively after COVID. I like to focus on some of the more positive aspects of it. So one, yes, you're going to have companies with rising wages that tends to pressure companies to seek out efficiencies, capital deepening toward technological advancements that means they need less employees over time. But you also, with increased work from home opportunities, do open up more prospects for women to enter the labor force more fully, for the disabled community to enter the labor force more fully. And so I think there are areas where we can pick up productivity and pick up labor force participation over time.
So I think right now the jury is out. I mean, we are still in the moment of COVID-- very much so. And so I think it's going to take time for the dust to settle in order to see exactly where we end up with productivity, labor force participation, structural impediments.
- Ellen, something I've been really curious about as we come out of COVID is how, if at all, the study of economics is changing or going to change. And I say that because of just sort of the vast uncertainties that we now have. But-- but I don't-- you tell me. You've been at this a while. Was it always like this and it just feels more acute right now that there is just a level of predictability that just becomes that much more difficult? Or was it always this tricky?
ELLEN ZENTNER: So it's a good question, Julie. So I think, you know, we saw in the last cycle, you know, very steady, steady-- at least in the last half of it, very steady growth. And I always joked that I could have just turned in a forecast for $200,000 a month every single month for payrolls, and I probably would have hit it more accurately than consensus. Like, it almost took no effort at all.
But when things aren't steady-- and this is the case in any downturn-- not only do the uncertainty bands widen around anyone's economic outlook, but getting the data right-- those error bands also get quite wide. So of course, when the downturn is extreme, you know, after the financial crisis, during COVID for instance, those error bands just blow so, so wide that we really have to go back to the drawing board.
And so what I think we've learned in the economics community is that economics over time has moved away from being so theory led, you know, steeped in historical models to more statistical based, where statistics, mathematics, econometrics-- you have to be very strong in those to be an economist. And we relied more and more on those models to tell us what the data would be going and doing and where the economy would be going.
Now, when you have these very uncertain downturns, those models are practically obsolete. And we have to go back to being sure that you've got experience on an economics team. And I'm not just touting my own-- I call myself the old salty dog on the economics team, but you need somebody that's lived through downturns that can understand when and what a model cannot pick up and make those adjustments on the back end. And you're going to have to understand how long you need to do that before typical factors fall in place again and those models makes sense.
And so I think that's what it's done to economics, is that we've almost put our sleuthing hat back on and-- and gotten back to the basics in these downturns.
- As the old salty dog on this team, I can appreciate that most definitely. Ellen Zentner, Morgan Stanley Chief US economist. Thank you so much. Appreciate it this morning.
ELLEN ZENTNER: Thanks