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Where is the economy likely to go next?


Gas prices are falling and are likely to continue to do so, but not fast enough for Linda Varnes-Walker.

LINDA VARNES-WALKER: Between the gas and the food prices rising constantly, it's just awful for me.

RASCOE: She's 69, retired, and inflation is forcing her to sacrifice.

VARNES-WALKER: I'm diabetic. I have high blood pressure and cancer. I had to leave medicine in the pharmacy just now because I couldn't afford to get it. It's a choice between whether you're going to eat or take your meds.

RASCOE: And that's just one slice of the economic scene in the aisles of a pharmacy not far from where I sit here in Washington. Will things get better? Is that something we can even know? Austan Goolsbee joins us now. He chaired the Council of Economic Advisers in the Obama administration and now teaches at the University of Chicago Booth School of Business. Austan Goolsbee, welcome.

AUSTAN GOOLSBEE: Thank you for having me.

RASCOE: And we've also got NPR chief economics correspondent Scott Horsley with us. Scott, thanks for joining us.

SCOTT HORSLEY, BYLINE: Good to be with you, Ayesha.

RASCOE: Austan, I wanted to begin by getting your sense of what's on everybody's mind lately. How likely or unlikely is it that the U.S. is going to be in a recession in the next year or two?

GOOLSBEE: Well, it's definitely a risk. Prices are up so much that the Federal Reserve is getting close to feeling like they have no other choice but to raise rates a lot to try to cool down the economy. And if they do that - you know, we've had 13 or 14 recessions since World War II, and more than two-thirds of those recessions were caused by the Fed raising the interest rate faster than the economy can handle.

HORSLEY: And the Fed is trying to navigate here with these kind of conflicting signals, right? The labor market is still really strong. The private sector's now replaced all the jobs that were lost in the pandemic. And yet GDP growth appears to have slowed substantially, maybe even gone backwards since last year's boom. What do you make of these kind of mixed indicators?

GOOLSBEE: One of the roots of the problem is that this COVID recession really wasn't a recession. It looked nothing like a recession. It was a big downturn, but demand for housing, demand for TVs, demand for cars - a bunch of the stuff that usually goes down first - that stuff went up. And the thing that led the recession was not going to the dentist, not going out to eat - services which normally are recession-proof. And so one of the problems facing the Fed is that they got decades of data to compare - demand for housing, demand for cars, demand for durable goods.

There's nothing that says, how fast does elective surgery come back after a downturn? - because we never had a downturn in that. And how interest-rate-sensitive is going to the dentist? Maybe not at all. So the Fed's - has only one tool, which is it can slow or speed up the demand of interest-rate-sensitive parts of the economy. And so they're trying to figure out, well, how hard should we tighten this one screw we have? And you can hear the people in housing saying, whoa, whoa, wait a minute. Don't tighten the screw on us.

HORSLEY: Former Treasury Secretary Larry Summers has said that we're going to have to put up with somewhat higher unemployment in order to get inflation down. He suggested unemployment might have to go from 3.6% now up to something like 5% and stay there for a number of years to get inflation under control. Do you think that is the tradeoff that has to happen here?

GOOLSBEE: Now you're getting at almost a religious battle that's taking place among economists. There's certainly one reputable view that Larry Summers has been a big proponent of, which says this inflation came from overheating - too much monetary stimulus, too much fiscal stimulus - so we must cool the economy in the conventional way, and that means driving up the unemployment rate.

Now, the only thing that I will raise - the fact that, worldwide, you've got virtually everyone facing the fastest inflation they've faced in 40 years. And you can see with your own eyes the impact of the war in Ukraine and fuel prices and things like that. All of those suggest that there is some supply component that's driving up inflation. And one of the lessons of past inflation episodes is that if your inflation comes from supply shocks, just raising the interest rate to reduce demand will not make the inflation go away.

RASCOE: I mean, it's easy to say, well, oh, yeah, you know, have unemployment go up. But when you are the person who loses your job and your livelihood, that is not easy to deal with.

GOOLSBEE: Yeah. Right.

RASCOE: I want to play something from Devin Simms. He's 32, drives for a ride-hailing app and just had to use his credit card to get his electricity turned back on in the Atlanta heat. And it is very hot in Atlanta.

DEVIN SIMMS: I'm doing a lot of hard work to barely make ends meet, and I don't feel like my hard work is paying off in the way that people tell me it should. You know, when I think of, like, the American dream, it's just work hard, work every day, you know, live within your means. And you can do all those things and still - it just becomes more apparent that it's just an illusion.

RASCOE: What do you say about that and that experience of many Americans? Does that explain why U.S. consumer sentiment is so low?

GOOLSBEE: The basic thing making people sour about the economy is likely that wages are going up slower than prices are going up. So their real income is going down. You can see why people don't like that. And if the Fed creates a recession to try to get rid of the inflation - in the short run, that problem's going to get worse because incomes are not going to rise, people are going to lose their jobs and the unemployment rate's going to go up. So the one strongest part of the economy right now is a massively robust job market where you're able to get a job.

RASCOE: So the June jobs report was positive, and that was a surprise. Here's some coverage of it.


MARIA BARTIROMO: Three hundred and seventy-two thousand jobs - much better than the expectations. In fact, so many people are questioning how it is possible that we can generate 372,000 jobs even in, potentially, a recession.

RASCOE: That's from Fox News. It does make me wonder, for economics, if it's kind of like meteorology. You know, sometimes you have the weather people, and they tell you it's going to snow and it don't snow that much. And sometimes they say it's not going to rain and it rain.


RASCOE: You know, is it a situation where, yes, you have a lot of information and maybe you have a lot of context, but there are just things that you just can't know or there are variables you can't anticipate? Like, do we know what's going on?

GOOLSBEE: Well, look, there's no and there's no. I think rather than meteorology, maybe the right way to think of it is your doctor. And your doctor is telling you, you don't keep eating pie every day and you should go out and exercise or else something bad is going to happen. Now, that doesn't mean that the doctor can predict you're going to have a heart attack next week. But if you kept eating the pie and you never went and exercised and then you had a heart attack, you should kind of give credit to the doctor that predicted what was going on.

In a way, that's the type of knowledge that the economists bring, though the economists don't all agree. And when you get in moments like this, where there's a lot going on that people haven't really seen before, those disagreements get even bigger. And so then people say, well, what am I supposed to do? You guys don't even agree amongst yourselves.

RASCOE: So the average person should pay attention. But what should they do - like, but not too much attention? Like, what should they do, trust economists?

GOOLSBEE: Look, a normal business cycle is pretty predictable. And when the economists are able to say this looks very much like what's happened before and here's what happened the last time, I put more weight on stuff like that. If it's something that's really nothing like what we've seen before, then I think you look - you've got to come to your own opinions. And nobody's an expert in that.

HORSLEY: For a while now, a lot of Americans have viewed the economy like they view so many other things - through these partisan lenses. If there's a Democrat in the White House, Democrats tend to feel better about the economy. When the GOP is in charge, Republicans say everything's looking good. Lately, though, it seems as if sour feelings about the economy are cutting across party lines. Is that just because inflation's such a wet blanket for everybody?

GOOLSBEE: Probably. I mean, the thing you're raising about the partisanization (ph) of everything extending to the economic data in a way that we, like - we never would have thought. That is undeniable. That is 100% correct. And in a way, that's made economists less attuned to measures like consumer confidence. In the past, we always looked to consumer confidence because it was a good indicator of what consumer spending was going to do. Now a lot of the measures of consumer confidence really track politics - even factual questions like, has the unemployment rate come down over the last year? And so the use of confidence measures as an indicator - a leading indicator - of consumer spending of the economy has broken down.

HORSLEY: And as down in the dumps as a lot of the sentiment measures would have you think things are, spending has actually been pretty steady.

GOOLSBEE: If you ask people, how is the economy? They say awful. If you ask them, how's your situation? They say, oh, it's pretty good actually. You know, my income is up. My bank account is up. And the difference between your personal situation and how you think the economy is doing has never been bigger. So a lot of these measures have stopped being as good of predictors as they were in the old days.

RASCOE: That's Austan Goolsbee. He chaired the Council of Economic Advisers and is now with the University of Chicago Booth School of Business. Thank you so much for being with us.

GOOLSBEE: Thank you.

RASCOE: And thanks also to our own chief economics correspondent, Scott Horsley.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
Ayesha Rascoe is a White House correspondent for NPR. She is currently covering her third presidential administration. Rascoe's White House coverage has included a number of high profile foreign trips, including President Trump's 2019 summit with North Korean leader Kim Jong Un in Hanoi, Vietnam, and President Obama's final NATO summit in Warsaw, Poland in 2016. As a part of the White House team, she's also a regular on the NPR Politics Podcast.

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