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We need to see 'consumers confident enough in their future income levels' to spend money ahead of the end of the year: Economist

Paul Donovan, Chief Economist at UBS Global Wealth Management, joined Yahoo Finance live to discuss the Fed's decision to hold rates steady and what that signals for his economic outlook heading into the end of the year.

Video Transcript

SEANA SMITH: We want to bring back in Paul Donovan. He's the chief economist at UBS Global Wealth Management. And Paul, just going back to what you were saying to Adam there in the last block, because when we heard from the Fed today, we heard the Fed say that there's considerable risks when it comes to the economic recovery.

I'm curious just your take about whether or not this is a crisis that the Fed has a-- that the Fed is in a position to solve or if it's really all about fiscal policy. And then to that note, what is really needed in order for people to feel confident to spend this holiday season?

PAUL DONOVAN: So the Fed is very, very much the junior partner. All central banks are junior partners in this crisis. And that's something very unusual because for most of the last 40 years, the economic crises that we've had have either been about liquidity or they've been about credit. What are central banks designed to do? Central banks' whole raison d'etre is to deal with liquidity crisis and credit crisis.

So every crisis we've had up until now we automatically turn to the central bank. But that's not what's happening this time. What happened this time is essentially, around the world, governments took your money. Governments took money away from business, and they took money away from consumers for the very best of reasons, because they didn't want people out interacting in the streets, in the economy.

They were deliberately trying to slow the economy down. Well, if the government's taken away your money, the government's got to give it back. That's basically what we're talking about here. So no, this is very much a fiscal crisis. The central bank is there to facilitate. It can help, it can make sure markets are orderly. It can make sure that we don't run into a liquidity crisis.

But cutting interest rates when, as Powell was saying, there isn't huge demand for loans. It's not going to make a blind bit of difference in this circumstance. This is all about giving people confidence. Now, that really is the essence of the whole virus situation. The virus isn't the economic problem. Fear of the virus is the problem. Fear of the consequence of the virus is the problem.

What we need to see is American consumers confident enough in their future income levels that they are willing to go out and spend ahead of the end of the year. And in the six weeks before the Christmas holiday, typically 18% of retail sales takes place. It is the big, big period for retail sales. So that's why we're getting so much of a fuss about making sure that the people can go out ahead of Christmas and at least spend money on goods, even if they're not necessarily going out to bars and restaurants.

ADAM SHAPIRO: Paul, I'm curious. It's a two-part question because I know you have a book, which is coming out tomorrow, you know, "Profit and Prejudice: Three Luddites of the Fourth industrial Revolution." When we talk about government and whether those of us who consume are going to spend, because we're afraid, we heard Jay Powell say, you know, I couldn't be any more vocal in the question about whether Congress should do more.

I quote, "I don't know how much more vocal we can be than we have been." So if Congress gets on the ball and gives us the stimulus, is it going to be different for, as your book addresses, different peoples, different races?

PAUL DONOVAN: So I think that the issue here is a bit more complicated. Because what the pandemic has done is accelerate structural change in the economy, the Fourth Industrial Revolution, we call it. And it's happening faster. You're working from home. As you can see, I'm working from home. I haven't been in the London office since early March.

And so that changes my consumption patterns, it changes how I operate, it changes what I'm doing. It's a big upheaval. Now, the problem with structural change is some people's social status goes up, and some people's social status goes down. And that creates an environment in which prejudice, political polarization very, very easily accelerates.

And the real damage of that is that when we get prejudice, we stop the labor market functioning properly. And that undermines the economy in a very, very severe way. It's a hugely corrosive problem. In fact, prejudice is probably the biggest single economic challenge we face over the next 10 to 15 years.

Not about technology, not about the virus, prejudice is going to be the big problem. So with this fiscal stimulus, what does that do? Well, here, I'm afraid, there is a further problem. It's about social status, it's not about income. Income matters on a day-to-day basis. But if you see your social status falling, that's when you get seduced by the forces of prejudice. That's where the problems really come in.

So there's only so much that Congress can do in terms of helping people out with unemployment benefit and things like that. What we really need is a coherent plan to make sure that people who are in declining industries, industries which have no future, are able to transfer through to the growing industries of the economy, create education systems, create retraining. It's a far, far bigger problem than, how much is the next unemployment benefit check going to be?

SEANA SMITH: Then Paul, to that, and how much does need-- how much focus, then, do we need to put on reskilling our workforce? Because when we talk about the changing economy and the fact that so many people could be left behind in this, I mean, this has to be an issue that many companies are taking up and really tackling on their own.

PAUL DONOVAN: Well, they are, absolutely. And it's very interesting. I mean, the whole concept of education has shifted. The whole concept of learning skills. You used to think about, you go to school or maybe you go to university, or to college, in America. And that's your education. Well, that's not true anymore.

Companies are constantly retraining, you're learning on the job all the time. Your job is going to change. Economists are expecting at least 50% of jobs will change over the next 10 years. They don't disappear, but they change. And You got to be retrained for that.

But there are other ways now that we are retraining. So, you know, when I was here in the UK during lockdown, I learned how to repoint a brick wall with a lime mortar repoint. And I learned that watching YouTube videos. So that's a new form of education.

If demand for economists suddenly collapses, I have got a promising career as a bricklayer, maybe. So there's ways in which we're adapting how we learn. And the government, I think, has got to encourage this. You can't-- the government can't sit out from this process. But it is also companies and individuals that will need to take the initiative on retraining.