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The “Ask Our Economists” podcast is a series where we explore what’s on our clients’ minds, provide timely commentary on what’s happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our Economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today’s economic climate with confidence.

If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#.

Find us on Spotify under WF Ask Our Economists.

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Season three

## Episode 6: Recession Watch: How Will We Know If a Downturn Has Started?

The levying of tariffs could potentially lead to a recession, but how will we know if a downturn in the economy has commenced. Economists Jay Bryson, Tim Quinlan and Shannon Grein discuss economic indicators to watch in the months ahead.

### Listen to episode 6

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### Transcript: Listen to episode 6

>> Intro [00:00:03]
Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients' minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson [00:00:33]
Hello, this is Jay Bryson, Chief Economist of WF's Corporate and Investment Banking. And you're listening to our Ask Our Economist podcast series. Recently there's been some talk about recession due, at least in large part, to some of the tariffs that President Trump is threatening to implement. And a listener recently asked us about you know, what should we look for in terms of recession? So we thought we'd address that in today's podcast. So I'm joined today by senior economist, Tim Quinlan and economist Shannon Grein to talk about this issue. So, Tim, let me ask you this. So recently GDP data for the first quarter showed that GDP contracted an annualized rate of 0.3% in the first quarter. So if the second quarter comes in negative, that's two consecutive negative quarters. And that means we're in recession, right?

>> Tim Quinlan [00:01:21]
Yeah, Jay, I think in the popular imagining of things, that kind of fits most people's definition of recession, two back-to-back quarters of negative GDP growth. But actually, economists look at it more in terms of the definition that we get from the National Bureau of Economic Research and their business cycle dating committee. And those guys look at a number of different monthly indicators to date the business cycle.

>> Jay Bryson [00:01:48]
So Tim, what are these monthly indicators and why does the National Bureau of Economic Research look at them?

>> Tim Quinlan [00:01:54]
Right, so these guys basically say that what they're looking for is a long, sustained decline lasting more than a few months in four key categories, employment, income, sales, and production. So why? Employment, well, as the old expression goes, a recession is when your neighbor loses his job, a depression is when you lose yours. Ultimately, you need a job to kind of sustain economic activity. So that's one. Income, strong labor markets are usually associated with better income growth. You know, income is another key component that they look at. Sales, well, technically it's real retail and wholesale sales. Basically, a proxy for at least the goods side of consumer spending. As it turns out, the services side of consumer spending is less vulnerable to the economic cycle. So if you get a downturn in the good side of consumer's spending, that's usually a good sign that you're headed for a downturn. And finally, production. And this is just kind of industrial production. So this is about three quarters manufacturing outlays, but also the activity that happens in the nation's mines and utility.

>> Jay Bryson [00:02:57]
Okay, great. So we're looking at employment, real income, real sales, and industrial production. So Shannon, let me turn to you here and say, what are each of these indicators showing us at the present time? Are we in a recession right now?

>> Shannon Grein [00:03:09]
Yeah, Jay, so none of these are really flashing recession signals at present. So if we just follow the order that we all just walked through, right? So starting with non-farm employment or payrolls, employers are continuously adding workers, the pace of hiring has stabilized after a slowdown last summer. And ultimately, while firms are maybe not hiring as many workers as they were previously, they're not exactly laying off workers yet either, right. So this is part of the reason I think the Fed has paused their easing cycle, just trying to assess how much of a slowdown we're seeing in terms of the labor market. Now, with hiring remaining in place, the income side is still running at a decent clip. So income continues to flow to workers in this economy. So just on an inflation adjusted basis, income excluding transfer payments, which would capture any unemployment insurance that's flowing through from an income perspective. Income has slowed both on a year over year basis and over the past three months, but it's still consistent with growth coming from a sturdy labor market. So with the labor market holding up, income also. Remaining supportive of overall spending, we've seen sales that are continuing to rise. So we only have that measure that the dating committee looks at through February at this point, but retail sales through March and overall spending were also strong. And that's partially due to potentially a pull forward in purchases of consumers and businesses getting ahead of tariffs, but it's not completely due to that effect as services activity, as Tim mentioned earlier, is pretty stable and remains continuing to grow at a pretty sturdy growth rate. Finally, when we think about industrial production, I think that's probably the most rocky at present. So that's signaled recession over the past few years in terms of the ISM manufacturing index and other metrics, just being more typical bellwethers of recession. But we have seen also a recent pop-in activity there. It remains to be seeing kind of if that's tariff-induced and short-lived, or if it's just continued resiliency potentially in that sector. The bottom line, none of the four main recession indicators are signaling recession at present, again, despite getting that negative GDP growth that we saw in the first quarter.

>> Jay Bryson [00:05:05]
Okay, so that's reassuring to know that we're certainly not in a recession at this time. You know, Shannon, I think it's interesting if you go back, you look at history. The NBER, the National Bureau of Economic Research, often declares a recession has begun when it's actually has ended. And it's just because they wait for data revisions and things of that nature. And if the future shows us anything like the past, it may be a while before the NBER declares that recession has started. In real time though, get back to our listener's question here, in real time, what should we be looking at to try to determine whether the U.S. Economy is in a recession or not?

>> Shannon Grein [00:05:45]
Right, Jay. And while the committee is maybe late to call recession, each cycle is also unique. So I think what we're seeing with tariffs is it's imparting a shock to the system, right? And it almost looks similar to the pandemic in some ways in terms of the initial shoot up in uncertainty and the halting and investment that we're hearing anecdotally from customers so far. But while we think growth is set to slow in the second half of the year, whether we slip into a recession or not is really going to come down to how businesses react on this environment. You know, tariffs in theory are inflationary, but it remains to be seen how inflationary they actually are. So how much do businesses pass on higher costs to consumers? How continuous are those price hikes? And ultimately, can consumers withstand additional price pressure when we think about how much inflation we saw coming out of the pandemic? So with that in mind, the labor market is obviously key. So to what extent does slower consumer spending or increased cost pressure from tariffs or just other sources in today's environment lead businesses to lay off workers. And that's ultimately the question that ourselves and the Fed and everyone's kind of trying to answer at the moment, right? So I think initial jobless claims will obviously be that key first piece of data that will show signs of recession or signs of a slowdown given they're released with a one-week lag. So we do have claims data through the end of April at this point. We did see claims rise to the second highest level in the last six months. So it was a little bit of a pickup. But with about 240,000 workers filing a claim for unemployment insurance in the last week of April, it's still a relatively modest reading. Beyond that, some of the other high-frequency spending data like auto sales could also signal pressure. And just given the unique cycle that we're dealing with here, potentially the import data could give us an initial read as well.

>> Tim Quinlan [00:07:27]
Okay, so recession risk is definitely higher than it was a month ago. That's kind of reflected in the deteriorating sentiment from consumers and from businesses. But this contraction that we've got in first quarter GDP is not recession. When you look at the underlying details, there's this big pull forward in imports, which resulted in a drag from trade of 4.8 percentage points. That's the biggest drag from trade in GDP figures going all the way back to the 1940s. If you look at real final sales to domestic purchasers, which is basically just if you take inventories and trade and government spending out of it, the underlying growth rate for the economy was 3%, essentially unchanged from where it's been for the better part of the last year. So we're not in recession now, but what about the future, Jay?

>> Jay Bryson [00:08:19]
Yeah, that's a really good question, Tim. And so let's start about what we're assuming here. So if you look at where tariffs are right now, there's a minimum 10% tariff applied on most products around the world. Of course, President Trump announced so-called Liberation Day tariffs, reciprocal tariffs, back on April the 2nd. That would have taken the effective tariff rate, think of it as the weighted average, up above. 30%. Now on April 9th the president suspended those tariffs or delayed those tariffs for 90 days But also if you look at where China is right now Most products coming from China are coming in with a hundred and forty five percent tariff. And so the bottom line here is if you look at where the weighted average the effective tariff rate is right. Now. It's about 25 percent what we're assuming is it won't stay there. It'll probably come down somewhat. Now, what we're looking for is I think it's reasonable that you're gonna be looking at a minimum 10% tariff on most countries around the world. China will probably be higher. It's probably not gonna be 145%. We'll have to see where it settles out. But the long and the short here is what we're assuming on our forecast is an effective tariff rate of about 15%. And so what that does is that causes prices to go up. Consumers are gonna be paying more for many products. That causes growth and real income to slow down, if not to weaken significantly. And, therefore, what we have in our forecast is we have consumer spending turning modestly negative in the third quarter. As well as investment spending also being negative. So if you look at GDP growth in the third quarter, we have a negative number and then bouncing back into modestly positive territory in the fourth quarter of the year. When we look at our employment numbers, we talked about that's one of the big recession indicators is what's happening to non-farm payrolls. We do have that turning negative in the fourth quarter. What's happening is the federal workers who accepted the president's offer to retire early. Most of those folks remain on payrolls up until November. At that point, they will roll off the payrolls. And so we should see some sharply negative federal employment numbers come November. And so what we do have in the fourth quarter is we have some negative overall employment numbers. In general, we don't think it's enough for the National Bureau of Economic Research to declare a recession, but... You know, quite frankly, I think we skate dangerously close to a recession, and it really wouldn't take much in terms of another negative shock hitting the economy to potentially push it into a recession. So, you know, in general, when we look at the second half of the year, we have very, very weak growth there, not recession, but weak growth for some companies that may feel like a recession come fourth quarter. And then as you move into 2026, what we have is we think fiscal policy will turn modestly stimulative. At that point, we think there'll probably be some tax cuts that will take effect either later this year or early next year. That should help growth in GDP to strengthen in early 2026. The Trump administration, their regulatory touch is less onerous than what the Biden administration was. That should helped investment spending. And we also have the Fed cutting rates in the second half of the year. Guys. Things really start to slow down as employment growth slows down as the unemployment rate comes up we think the federal be cutting rates and so you know the combination of modestly stimulative fiscal policy, a lighter regulatory touch and fed rate cuts should cause the economy to strengthen again in 2026. When I think about the general contours of our forecast year, I think 2025 is more about tariffs and the effects that that has on the economy, again, weaker growth in the second half of the year, and as you move into 2026, it becomes more of a story at that point of more expansionary fiscal policy, lighter deregulatory touch. But clearly, the story is not going away anytime soon. We've been just buffeted with news about tariffs in the first three or four months of this year that's probably not going to go away. And so we'll be keeping abreast of what's going on in terms of tariffs and how it affects the economy. We'll continue to write about that. And we may record another podcast or two about this story. So thank you to the listener who submitted the question about what we should look for in terms recessions going forward. And thank you all for listening today.

>> Disclosures [00:12:48]
That's all for this episode of the Ask our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share it with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask our Economists is produced by WF.

This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 5: Effects of Tariffs

It is widely recognized that tariffs will raise prices for consumers. But are there any factors that may limit the passthrough of tariffs on consumer prices? Economists Jay Bryson, Sarah House and Nicole Cervi discuss in this podcast.

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### Transcript: Listen to episode 5

>> Introduction
Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients' minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson
This is Jay Bryson, Chief Economist of WF Corporate and Investment Banking, and you're listening to our Ask Our Economist podcast series. There's been a lot of policy changes since the Trump administration took office back in January, but arguably one of the most extraordinary policy changes has been the leveling of tariffs versus many of America's trading partners. Now this has been ongoing since the trump administration came into office in late January, But it kind of came to a head. On April the second when the president announced reciprocal tariffs now at what a tariff is at the end of the day it's a tax it's attacks on imports and somebody has to pay the tax so it's either the foreign suppliers it's the beyond domestic importers or in some cases it's two consumers the empirical literature shows that at least historically A lot has been passed on to domestic consumers. And so recently two of our economists, Sarah House and Nicole Cervi wrote a really interesting paper on the effects of tariffs on prices. And so Sarah, let me turn to you to start off. Can you just kind of level set here and talk about the tariffs that have been implemented so far and also it seems like maybe the concerns about inflation this time around seem to be higher than when they were when president Trump was first in office back a few years ago.

>> Sarah House
That's certainly the case that we do see more concern about the inflationary impact of higher tariffs this go around and there's really two reasons for that. So one is just the sheer magnitude of the tariffs that have been implemented. So you had in the first administration under Trump, you had tariffs applied to about 400 billion of imports. So that was about 14% of what the U.S. imported at the time. Now we're talking universal tariffs of 10%. on all countries. And then for about 60 countries, even higher tariffs than that. So anywhere from 11 to 50 percent with really the only exclusion being USMCA compliant goods. And so the average tariff rate, so essentially that average tax rate paid on imports is going from about 1.4 percent in 2017 to two and a half percent in this first trade or in Trump 1.0. And now we're talking a tenfold increase. So somewhere going from a little over 2% to what we estimate will probably be between 20, 25% effective rates. And then the second aspect of this is just the timing of this. So in the first trade war, it was coming at a time when inflation was really struggling to reach 2%. And so yes, the tariffs added to inflation at the time. So a lot of the estimates point to about, you know, one to three tenths on inflation. that wasn't a big deal just given that we didn't really even have inflation at 2%. Today, of course, it's a very different environment. So it's been four years now where inflation has been above target. Even over the past year, we saw inflation essentially stuck closer to 3% than the Fed's 2%. And so this is more concerning not just in the size, but also that it risks de-anchoring inflation expectations. So making it even more difficult to get inflation back down to a pace that Consumers and businesses don't really have to think about how quickly prices are changing in so much of their day-to-day business

>> Jay Bryson [00:03:50] Okay, well, thanks for the level set there, Sarah. So Nicole, in the paper that you wrote with Sarah, you talked about some foreign factors that may limit some of the inflationary effects and also some domestic ones. So let's start on the foreign side. What sort of foreign factors are there that may limited some of the inflationary effects of the tariffs?

>> Nicole Cervi
Yeah, thanks, Jay. What we learn in our Econ 101 classes is that in theory, a stronger dollar should be able to reduce the cost of imports to US firms who are bringing in some foreign goods. And the logic there is as you need fewer dollars to cover the cost of those imported goods, which are set in a foreign currency. So that's the underlying But what we see in reality is that the dollar's absorption mechanism in terms of inflation is really not that simple, not that automatic. What we see is that 95% of U.S. imports are already invoiced in dollars. So that means that when we're drawing these contracts, we're already setting these contracts in dollars, so your foreign supplier would need to actively adjust their invoice price lower in order for your U. S. importer to realize the gain of a stronger dollar. what we've seen kind of near term here is that the dollar has actually been pretty weak. We've seen a slide since January, so that suggests that this relief valve in terms of the inflationary effects of tariffs is likely not incentivizing your foreign suppliers to lower their invoice prices because the dollar had been weak. Although if we pull back just from the volatility of currencies because we know that that trend could change, what we're seeing kind of fundamentally across the globe is that. manufacturing capacity utilization and some of our biggest trading partners such as Canada and China, that is running below their pre-pandemic averages, which suggests that there's a little bit of slack there in terms of production in those foreign countries. And if there's little bit slack, if they're not seeing as much demand, those foreign suppliers might be more amenable to cutting their prices. But again, you have some of the headwinds here recently with the dollar's weakness. And so if I pull back a little. and square these trends together, what we see is that some of the foreign factors right now look like it's a limited absorption mechanism for the inflationary impulse domestically.

>> Jay Bryson
Okay, thanks, Nicole. So, Sarah, let's bring you back in. So Nicole talked about some of the foreign factors, you know, again, in your report, you discussed some domestic factors. Can you start there and talk about some the domestic factors?

>> Sarah House
Sure, so one option instead of passing the increase in import costs onto the customer dollar for dollar would be for businesses to absorb some of that additional costs via their margins. So essentially accepting lower margins on their goods sold. And we saw this a little bit with the China tariffs in 2018, 2019, the impact on consumer goods. So there's a little of precedent for that. And right now, when we look at where margins are for manufacturers, wholesalers, and retailers, they are higher than 2018,2019. So that gives, I think, some more room for producers to absorb some of the cost via margins today. But the issue is the magnitude of these tariffs really dwarf that of what we saw in the last go around. And so, yes, they're in a little bit better position, but probably not good enough position. And I think there's also the second question of are producers and retailers gonna be willing to absorb that in their margins? So we've seen margins come down while they're higher than 2018, 2019. They're below what they were in recent memory of that 2021, 2023 period. So in some ways, business is already feeling a little bit of a margin squeeze from what's in recent memories. And they've also. I think, re-familiarize themselves with raising prices from time to time, just given the experience of the pandemic. So, I think they're a little bit less fearful of consumers recoiling, especially when there's a clear culprit to point to in terms of why prices are rising. So, and I think there's a behavioral question that we have to grapple with too this time around.

>> Jay Bryson
OK, so we talked about margins, Nicole, and in your report, you also highlighted a few other domestic factors that may limit the inflationary impact on tariff. Can you discuss some of these other factors?

>> Nicole Cervi
Yeah. So I'll start by doing it in terms of kind of the short term and let's go out to the longer term here. So in the short-term, what firms can do, and especially in this scenario where on the campaign trail, President Trump really well televised that he was planning to implement tariffs when he came to office. And so you had firms that were able to kind of set their expectations accordingly. And what we've seen as these tariffs have become a reality is firms stockpiling imported inputs ahead of the official tariff implementation. So we've already seen some evidence of this in January, in February's trade data. If we look back to the first trade war during 2018, 2019, you did see a real strong pickup in real merchandise imports in the fourth quarter of 2017 as firms were kind of front running these tariffs. And what that helps in terms of the inflationary impact is if you can stockpile these non-perishable goods, you can at least temporarily avoid some of those higher input costs and then more gradually adjust some of your other cost components or selling prices. Longer term solution that we definitely saw following the first Trump administration and is likely going to come into play. maybe not to the same magnitude in the coming years here, is actually rerouting some of your supply chains to countries that were either unaffected by the new tariff policy, or perhaps in this instance, countries that are facing relatively low tariff rates. So what we saw during the first Trump administration, if you look at, for instance, the composition of US merchandise imports, in 2016, you saw that 22% of all US goods imports came from China. we've seen a diversion since then. That share today is sitting closer to 13%. So you might see a little bit of rerouting of supply chains. What we saw over these past few years is a lot of those goods that came from China are now coming from other countries in Southeast Asia, such as Vietnam and Cambodia. And so firms could strategically place some of those supply chains in other countries that have, let's say, relatively lower tariff rates. Another workaround is the de minimis exemption. So this was used following the first trade war. And what it is is to ease the administrative burden on US customs agents who are taking in all these imports at the port when they're evaluating goods. The US actually grants duty-free status to pretty much all imports that are valued at $800 or less. They're considered low value de minimus products. What we've seen is that as the cost and the supply chain management across the globe, as the costs burn in of importing low value imports has fallen over these past few decades, there's been more interest in importing low-value goods. And so data from Chinese exporters suggests that low value shipments to the United States increased by at least 50% last year to over 50 billion. So this is a strong growth area. And what we see here is that the Trump administration. has put some scrutiny onto Minimus, because they know that this can be a workaround around some of the tariff policy. Right now, we're seeing scrutiny on low value packages coming from China, Canada, and Mexico, but we have faced some logistical administrative hurdles at the port, because historically, customs has not evaluated these low value packages. So long story short here is there are some workarounds structurally that firms can do in order to limit the inflationary impulse, but those avenues this time around. seem much smaller than they were compared to the first Trump administration.

>> Jay Bryson
Okay, so I'm going to poke fun at economist here. You know, it's the one hand, this the other hand, that sort of thing. It seems like there's been a lot of one hands, this with the other hands that Sarah, what's the bottom line here? What do we think is going to happen to inflation, you know, in coming months and quarters?

>> Sarah House
Sure, so I think just given the scope of what's been announced, inflation is heading higher. It's just a question of degree. So the dollar was never going to be much help, just given how much is already invoiced in dollars. But now I think it's potentially even less help than 2018-2019, just giving some of the recent moves that we've seen. On the margin side, there's some room, but not enough to fully absorb these higher import costs, especially if you consider that maybe the pricing behavior of businesses has changed since the pandemic. And while inventories might bias a little bit of time, I think the degree of tariff rate increases plus the breadth of countries that are facing higher tariffs leave a lot fewer work around. So right now we've seen inflation depending on what metric you're looking at, running about 3%, a little under maybe, but I think it wouldn't be surprising to see that move back towards somewhere around 4% in a year's time.

>> Jay Bryson
Thank you all for listening and for your questions. Ever since the Trump administration has been in office, it seems like we've been living with these tariffs over the last three months or so. And, I don't think the story is going away anytime soon. And we'll continue to track this. We'll be writing reports about it. Perhaps we'll doing more podcasts as well. And so again, thank you all very much for joining us today.

>> Disclosures
That's all for this episode of the Ask our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share it with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask our Economists is produced by WF.

This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2025 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 4: Cuts to the Federal Government Workforce: Implications for the U.S. economy

The Trump administration has undertaken some noted reductions to headcount in some federal government agencies. Economists Jay Bryson, Charlie Dougherty and Michael Pugliese discuss potential implications for the U.S. economy in this podcast.

### Listen to episode 4

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### Transcript: Listen to episode 4

>> Intro [00:00:03]
Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world. All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson [00:00:33]
Hello, this is Jay Bryson, chief economist with WF Corporate and Investment Banking. And you're listening to our Ask Our Economist podcast series. Recently we had a listener submit a question to us about, you know, everything that's going on in Washington, D.C. right now in terms of all the cutbacks to the federal workforce. And this listener was wondering what sort of economic implications this could have. We thought we'd address that today. And so to join me here are senior economist Michael Pugliese and senior economist Charlie Dougherty to talk through some of these implications. So, Mike, can you just level set here for a second. You know how many federal workers are there out there? How big is it in terms of like overall payrolls. And, you know, are they concentrated in any one particular agency or department or are they kind of spread all around?

>> Mike Pugliese [00:01:23]
Right. Jay. So federal employment in the United States is about 2.4 million workers. So that's about 1.5% of total non-farm employment in the United States. And that excludes the Post office. The post office is a self-funding part of the federal government. That's usually treated a little differently. But if you want to throw them in there about 3 million total. So that is federal employment, 2.4 million, then another half a million, 600,000 or so at the post office. And that's actually down a little bit over time. So if you think back to the 1950s, 1960s, post-World War Two period Cold War federal government employment was closer to 3% of total non-farm employment. And in terms of where the sectors are most heavily employed, think things like the military. So Air force, Army, Navy. Now that's somewhere in the ballpark of three quarters of a million total civilian employees. And then you've got another half a million at Veterans Affairs. Homeland security is very large, a couple hundred thousand, particularly with things like the TSA, Department of the Treasury and Justice. And then at the other end of the spectrum, when you think about the Department of Education, HUD, Housing and Urban Development, Department of State, Department of Labor, those are think more like 5000, 10,000 to 20,000, depending on which specific agency we're talking about. So think more single thousands or tens of thousands of employees in contrast to something like the VA, which is hundreds of thousands.

>> Jay Bryson [00:03:01]
Okay. Well, thanks to that level set, and now it seems like every morning when you wake up and you read the paper, there's been some sort of cut back at, you know, some sort of agency somewhere. Do we know about, in terms of total layoffs, how many there have been so far? And, you know, are they concentrated in any particular place?

>> Mike Pugliese [00:03:17]
There's no official data that we can follow yet in terms of how many layoffs or how big the reduction in federal government employment has been, based on the reporting that we have so far. I think what it's safe to say from a range standpoint is it's probably, you know, measured in tens of thousands. Now you need to be a little bit careful in terms of, you know, what you're talking about when trying to come up with the number. So there was kind of a quote unquote buyout offered to federal government employees who would be able to remain, you know, still receive pay and benefits through September. And then after that would leave. That's probably somewhere around 75,000 or so people. Granted, some of them may have had plans to leave anyway. Right. If you were planning to retire at some point in the next few months, maybe not a half bad deal. So that might not be all reduction that wouldn't have otherwise happened. Above and beyond that 75,000 though, you know, I think a reasonable guess is something like 20, 30, 40,000 based on what we know now. And again, that may rise over time. If you think about probationary employment, which is generally people who've only been in their jobs with the federal government for a year or two or recently promoted, those have borne some of the brunt of the initial layoffs. Those can be upwards of a couple hundred thousand people when it comes to total federal government employment. Not that all of them have been let go yet. There have been exemptions and carve outs. So we're dealing with some uncertainty here where I don't think we can put a hard number on it. But I think something in the tens of thousands in addition to that, 75,000 who took the early leave, I think is probably a best guess based on what we know right now.

>> Jay Bryson [00:05:01]
Something that you just said kind of caught my ear there. You know, you said potentially it could be, you know, a few hundred thousand or something like that. And now we're starting to talk to, you know, maybe some real numbers. And I guess the 64 million or $64 billion question here is, you know, is this something that threatens the economic outlook? Could this potentially these cutbacks, this employment? Could this be something that potentially could lead to a recession in the United States?

>> Mike Pugliese [00:05:27]
Yeah. I don't think it's enough to cause a recession single handedly. So to try to scale that up again, I mentioned earlier, federal government employment is about 1.5% of total employment. If you do the math there, there's about 160 million nonfarm jobs in the United States. So a 1% reduction is 1.6 million people. That would be almost the entire federal workforce, even something like 160,000. Right. Which I think of is it's probably, you know, more of an upper limit than it is a base case, although certainly anything can happen. You know, that would be a point 1% reduction. That alone is probably not enough to cause a recession. The early 1980 recession or the 2001 recession, those were one and a half, 2% declines in non-farm payrolls. So even if there is a little bit of a spill over here into private contractors and people who are quote unquote, off balance sheet employees, not just the people directly employed by the federal government. I don't think that alone would be enough to cause a recession. That being said, if it happens in conjunction with other economic shocks, right. Maybe large scale tariffs are imposed over the course of this year that slow down economic growth. Or maybe the Federal Reserve has to resume tightening monetary policy because inflation proves very sticky. I think those things in conjunction could be enough to cause a recession in the United States, but probably not just federal government layoffs, unless they are several multiples of what's occurred so far. Now, that being said, you know, what I'm talking about is, at the national level, 160 million nonfarm payrolls across the entire United States, not all federal government employment is evenly distributed across the country. So now, just because there's not a sharp downturn at the national level from this doesn't mean there aren't, you know, serious implications at various kind of regional and local economic levels.

>> Jay Bryson [00:07:17]
Okay. Well, that's a good natural segue then, for Charlie. Charlie leads the coverage for regional economics. For us. These are expert on that. So Charlie, let's pass the baton over to you. So are there any local economies that stick out to you that could potentially feel some economic effects of some of these government layoffs?

>> Charlie Dougherty [00:07:35]
I mean, clearly the Washington, D.C. region clearly stands out as one of those areas that could be disproportionately impacted here. Right? So a lot of those agencies that Mike was talking about, most of them are headquartered, if not in the District of Columbia, but also in, you know, Northern Virginia and Maryland. And so that whole region stands to be impacted here. If you look at the numbers that Washington region is home to, about 20% of the entire federal workforce is on top of that. You have a high concentration of vendors and contractors, which are very likely dependent on federal spending, and thus they could be impacted as well. So to me, the big question is, well, how will these cuts sort of impact the local Washington, D.C. economy? And it's really hard to say because, again, we don't know the full extent of these reductions. But what I will say when you see these types of sharp headcount reductions, there are bound to be these secondary effects as the impacted workers slow down spending and those negative effects ripple through other parts of the local economy, such as in the services sector or maybe the real estate sector. So, in fact, one place in the economy that you actually might start to see these effects is in the housing market now. There hasn't been an obvious inflection point yet in the data, but what you're liable to see here is slower demand, increased supply as a result of these cuts. And that could weigh on home price appreciation. Now, again, it's worth pointing out that this isn't the first time that we've seen sharp reductions in the federal workforce. Go back to the 90s or the early 20 tens. And there were pretty severe reductions in federal unemployment in the region. But the Washington, D.C. region actually absorbed those fairly well. And if you look at something like the local unemployment rate, it was actually relatively little impacted. And actually the unemployment rate actually declined throughout those periods. So that's actually a good reminder that the federal government, although large, isn't the only game in town. You have all these other sectors like tourism and technology that are still big growth drivers for the local economy. All that being said, the very large concentration of federal workforce in Washington, D.C., puts the region at risk for an economic slowdown if this rationalization process continues at its current pace.

>> Jay Bryson [00:10:01]
So just to recap there, you said 20% of the federal workforce is in the Washington, D.C. area. That leaves 80% outside of the D.C. area. So are there any, you know, metropolitan areas or any regions that could also be at risk other than the Washington, D.C. area?

>> Charlie Dougherty [00:10:19]
Yeah. Jay, you know, as you mentioned, you know, the federal workforce is dispersed around the United States, and basically every metro area has some number of residents employed by the federal government. So, as an example, you know, over 100,000 residents of New York City are employed by the federal government. And that's actually the second largest number in absolute terms behind Washington, D.C.. But some metros have an outsized number of federal workers as a share of the local employment base, which potentially puts those areas more at risk. So just as an example, you can look at some of the metro areas in close proximity to Washington, D.C., like Baltimore, Maryland or Virginia Beach. And then outside of the sort of Mid-Atlantic region, you have San Diego or San Antonio, Huntsville, Alabama, Ogden, Utah, Honolulu, Oklahoma City. So there's a fairly long list of metro areas that have a disproportionate risk of exposure here. A lot of these areas are, you know, home to major military installations and more directly tied to defense spending. And so that hasn't really been a major focus yet. But a lot of these local economies, nevertheless certainly could be impacted given the large presence of federal workforce.

>> Jay Bryson [00:11:33]
Well, thanks for that, Charlie, and thanks to you, Mike, and thanks to the listener who submitted this question. And we'd like to invite your listeners to continue to submit questions to us that we can answer on these podcasts. These cutbacks in the federal workforce probably aren't going to go away any time soon. It's something that story that we'll continue to follow, and we'll probably be publishing more in terms of our normal economic commentary on this. So again, thank you very much for joining us today.

>> Disclosures [00:12:01]
That's all for this episode of the Ask our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share it with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask our Economists is produced by WF.

This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 3: The Importance of International Trade to the U.S. Economy

President Trump has indicated he is willing to impose tariffs on America’s trading partners. Economists Jay Bryson, Shannon Grein and Nicole Cervi discuss the degree of importance of exports and imports to the U.S. economy and the potential economic implications of tariffs

### Listen to episode 3

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### Transcript: Listen to episode 3

>> Intro [00:00:03]
Welcome to the WF Ask Our Economist podcast series where we explore what's on our clients minds. Provide timely commentary on what's happening in the markets and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world. All of which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson [00:00:33]
Hello, this is Jay Bryson, the chief economist of corporate and investment banking at WF. And you're listening to our Ask Our Economist podcast series. So as of this recording, President Trump has been in office for a little bit more than a week. And, you know, one of the things that Mr. Trump talked about when he was candidate Trump was tariffs. He threatened tariffs on some of our trading partners. And he's made some of those threats. Again, here to talk about tariffs and international trade in general are two of our economists, Shannon Grein and Nicole Cervi, who recently wrote a report about this very topic. So, Shannon, let's start with you. Let's kind of level set here. I mean, you talk about how big trade is for the U.S. economy.

>> Shannon Grein [00:01:19]
Sure. Thanks, Jay. So international trade makes up about a quarter of output in the United States. Now we import more than we export, which results in us running a pretty sizable international trade deficit of around 80 billion per month. And most of our trade is concentrated in goods or merchandise. So our goods deficit is close to 100 billion. And we actually run a surplus in terms of services trade. So we export more than we bring in domestically. But that surplus is significantly smaller at about 25 billion, which results in that overall deficit. In terms of our international trade flows, while goods is a bulk of trade. It means that services trade kind of flies below the radar in the background, if you will. But as we look ahead, we do expect services trade to expand, largely because the global economy is transitioning more to a services or knowledge based economy and just the rise in technology and automation in general. So that's something to just keep an eye on going forward.

>> Jay Bryson [00:02:13]
Okay. Well, so Nicole, turn to you now. So we talked about trade from a 30,000 foot level. You talk about some of our trading partners. I mean, who are our most important trading partners and do we have deficits or surpluses with these different countries or trading blocs?

>> Nicole Cervi [00:02:29]
Yeah. Thanks, Jay. So to Shannon's point, most of our trade as of right now is in the merchandise side on the good side. So if we're looking at U.S. goods imports by trading partner, we have seen a little bit of a change over these past few years. So, for instance, in 2020 for the European Union was our biggest trading partner in terms of goods. Mexico was a close second. And then we have China and Canada in third and fourth. And so that composition is actually different from what we had before the first trade war. So looking at 2017, for instance, China was by far our largest source of imports for the United States, followed by the European Union, Mexico and Canada. So we have seen a little bit of a transition in terms of where the United States is sourcing goods, imports in particular. And then that's just one side, to your point, Jay, of a trading relationship. So if we look at our balances with different trading partners, we've seen that although the level of imports that the United States brings in from China has fallen over these past few years, our trade balance with China is still the largest deficit that we have among our top trading partners, and that is closely followed by a deficit with the European Union and Mexico. We run pretty decent services, surpluses, as Shannon's point earlier, with the European Union and China. But on the goods side, we see some sizable deficits with those trading partners, which overall puts us in a trade deficit.

>> Jay Bryson [00:04:02]
Okay. Well, thanks for that overview. So, Shannon, let's go back to you. So Nicole talked about different trading partners. Can you talk about what sorts of goods do we import and export? What's most important in terms of, you know, these different products?

>> Shannon Grein [00:04:17]
Yeah Jay, so we actually have a really good visual representation of this and that report that you mentioned at the onset. So we break out imports and exports by major category on an end use basis and then by major country or region. And just to summarize it briefly here, the largest share of our imports is in terms of capital goods, which represents nearly 30% of imports. And then consumer goods is about another quarter of our imports. And now we get most of these goods from Asia. And there has been a diversification away from China, as Nicole just mentioned, but also to other Asian economies since that first trade war that kicked off in 2017. But the European Union is also a big source of those imports, again, as Nicole kind of just highlighted. So. That's definitely kind of the source of most of our imports when we think about the industrial supplies sector. Canada is a big player there. So if tariffs were imposed on Canada, I think that would impact that sector the most. When we flip over and think about exports, capital goods is also about 30%. So a sizable portion consistent with the import side. But it's really industrial supplies that makes up our largest source of exports here in the United States. So they go pretty evenly to the EU, Asia, China, Mexico and Canada. And this is partially due to the fact that we've just seen our exports of oil, energy and general natural gas increase over the years. So I think that's also something that's somewhat overlooked in terms of our trading relationships. The fact that the U.S. is now a net exporter of energy today, we export more than we import. And to the extent that we sustain that or ramp up production going forward, I think these energy exports here could help chip away at our trade deficit and even potentially diminish our reliance on foreign providers, mitigating, you know, some of those direct economic impacts from the uncertain geopolitical environment that we're dealing with today.

>> Jay Bryson [00:06:04]
So, Nicole, back to you. So Shannon mentioned something interesting there. She said that if the United States puts tariffs on Canada, it could definitely, you know, hurt that economy. Can you talk about the importance of trade to our trading partners? This flip it around, Right. We talked about at the very beginning the importance of trade to the United States. Let's flip it around and say, you know, the importance of trade to some of our trading partners. If we were to put tariffs on some of these countries, would it be a big deal for them or not?

>> Nicole Cervi [00:06:31]
If we look at Canadian exports to the United States and we take that as a share of Canada's GDP, what we see in 2023 is that Canadian exports to the United States was around 20% of Canada's GDP that year. So that's a sizable exposure, especially relative if you're thinking about just total U.S. trade as a share of U.S. GDP, for instance, that's closer to 20 or 30% for the United States, total trade imports and exports. Whereas in Canada, just exports to the United States alone is 20% of their GDP. If we look at Mexico, which has an actually and higher exposure to Mexico in 2023, 25%, the share there is that Mexican exports to the United States is 25% of Mexican GDP in 2023. So that that is a decent amount of exposure. And so when we thinking about tariffs and the levying process there, that would poses a risk to these export markets specifically for Canada and Mexico, because we're making those exports more relatively expensive for the domestic importers in the United States. So Jay, I brought up tariffs here, so why don't you walk us through a little bit about how tariffs actually get levied? What is the legislation that the Trump administration can use to levy tariffs on some of our trading partners?

>> Jay Bryson [00:07:56]
The first thing to note here would be that over the last number of decades, the US Congress has delegated to the President a significant amount of authority when it comes to trade policy. So whereas fiscal policy, you know, spending and taxes, Congress has obviously a big role in terms of that when it comes to trade policy. The President has, in many cases, unilateral ability to act. So let's start with the Trade Act of 1962. So part of that trade act, other thing called Section 232 of that legislation where the president can impose tariffs for national security reasons. So example here, think steel. You probably want to have a vibrant steel industry for national defense purposes. And so if we're getting flooded by a lot of foreign imports of steel, the president can put tariffs on steel from national security reasons. As a matter of fact, that's what happened in the first Trump administration in the U.S. 232 of the 1962 Trade Act to put tariffs on steel. Another legislation that you could potentially use is Section 301 of the 1974 Trade Act. This is for unfair trade practices. So if you determine that country is dumping products into the United States, they can use Section 301 to put tariffs on them. Now, the drawback to these legislations is that it requires an investigation either by the Commerce Department or by the US Trade representative. And these investigations can take months. So the President says, I want to put tariffs on the country for national security reasons. We're going to start a Section 232 investigation, and that can take months to determine whether that's warranted or not. The president could also potentially use what's called the International Emergency Economic Powers Act. And this allows the president, in the case of an emergency, to put tariffs on countries. So the presidents over the years have used this. For different reasons to sanction different countries. So an example, if you go all the way back to 1979 with the hostage crisis with Iran. President Carter used this act to sanction Iran because of that. And, you know, kind of what's interesting here is the President Trump, when he was a candidate, was talking about putting tariffs on Mexico and Canada to stop migrants from coming across the borders and to stop the flood of fentanyl into the United States. So in theory, the president could potentially use this act and say there's an emergency here in terms of either migrants and or fentanyl and therefore potentially could put tariffs on different sort of countries if he so chose.

>> Shannon Grein [00:10:42]
Okay. So there's obviously a lot of uncertainty around her of policy and what's actually going to come to pass. But what are we assuming in terms of our base case forecast from an economic perspective?

>> Jay Bryson [00:10:52]
What we are assuming here is if you go back to the summer, candidate Trump at that time was talking about a 10% universal tariff and then 60% applied to China. And so there is a risk here. I think it's more than just a tail risk. That is, you know, there's all sorts of things that can happen that can change your forecast around. But a lot of these things that are relatively low probability, like, say, another pandemic or a major war or something like that, with the way we usually handle those sorts of risk is because they're relatively low probability. We assume that they don't happen until they do. If they do happen, then you change your forecast. In this case, because we think the chance of tariff is more than just a tail risk, we had to try to make some sort of assumption about a probability and a timing. And so essentially what we're doing is we're assuming that maybe half of that 10% universal tariff, 60% applied to China gets applied. And we're assuming it's probably more tailored toward or more targeted towards the second half of the year than what it is in terms of the first half of the year. And so what we have in our forecast is we have GDP growth in the second half of the year slowing down and inflation ticking up because if the tariffs go into effect, then what's going to happen is at least some of that will get passed on to consumers in terms of higher prices. And because consumers are facing higher prices, that means they have less real income, they have less purchasing power to spend on goods and services that aren't tariffs. And so therefore, it leads to a we'll call it modest stagflation. Arie hit to the economy. Inflation rate ticks up a little bit. The growth potentially slows down. And so that's the assumption we have in our forecast. Now, if you know, tomorrow President Trump says, okay, we're not going to put any tariffs on and then we've got to take that forecast out and we would push up our real GDP forecast and take down our inflation forecast. But at this point, again, what we're doing is we're assuming at least some of those tariffs go into effect. When I close this podcast, I always say this story isn't going to go away. This is particularly true when it relates to this. I don't think this tariff situation is going to go away any time soon. As we know more and more about how the tariff situation potentially is going to play out here. We'll certainly be keeping people updated with our reports and more podcast of this nature. So thank you all for joining today. And stay tuned. Thank you.

>> Disclosures [00:13:37]
That's all for this episode of the Ask our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share it with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask our Economists is produced by WF.

This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 2: Economic Policy Outlook: Full Plate for Congress and the Trump Administration in 2025

Congress needs to raise the debt limit, pass a FY 2025 budget and decide whether to extend and expand the 2017 tax cuts. At the same time, President Trump is weighing higher tariffs on U.S. imports. Economists Jay Bryson and Michael Pugliese discuss the outlook for economic policy in 2025.

### Listen to episode 2

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### Transcript: Listen to episode 2

Introduction:
Welcome to the WF Ask Our Economist podcast series where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world. All which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>> Jay Bryson:
Hello, this is Jay Bryson, chief economist of corporate and investment banking at WF. And you're listening to the third season of our Ask our Economist podcast series. Today to talk about what Congress and the new administration has on its plate this year, I'm joined by senior economist Michael Pugliese. So Mike, the 119th Congress was recently sworn in. President elect Donald Trump takes office as the 47th president of the United States on January 20th. So let's talk about some of the things that the new government has on its plate this year. I guess the first thing would be the debt ceiling. So can you kind of walk us through that? What is the debt ceiling and where are we in that process right now?

>> Michael Pugliese
Thanks, Jay. So the debt ceiling, which just as a reminder, is a legal limit on how much the federal government can borrow. So as long as the federal government is running a budget deficit, right, its outlays exceed its revenues, then it needs to borrow money and those borrowings can't exceed some specific limit. And the debt ceiling had been suspended for a little while, was suspended back in 2023, and it was reinstated at the start of this year at the start of 2025. Now, that is not a hard deadline for the U.S. government and the U.S. Treasury. The United States Treasury has a variety of kind of quote unquote, extraordinary measures it can use in addition to cash on hand in order to remain solvent for a period of time after the debt ceiling is reached when it was reinstated and how long that cash on hand and those extraordinary measures will last is uncertain and is dependent on cash flows in the future and what tax season looks like in tax receipts, specifically when people file in April. But I think based on what we know now, that deadline is probably going to be sometime in the summer, meaning the debt ceiling will need to be increased or suspended by June or July or something like that. We'll have a much better feel for the exact timeline once we get on the other side of the tax filing deadline in April. But I think based on what we know now, you know, that's going to be a first half of this year debate that Congress and the White House are going to have to have and figure out between now and the summertime.

>> Jay Bryson:
Okay. So that's one thing that they have on their plate. The second would be the fiscal year 2025 budget. And just to bring everybody up to speed here, the fiscal year 2025 started October the 1st. And so far, we don't have a budget. Is that right, Mike? So where are we right now? Where are we in the process of a budget for the federal government for the current fiscal year?

>> Michael Pugliese
Right. So the way I think about that is, you know, every year the federal government has to pass 12 appropriation bills and those 12 bills cover the roughly 25% of the budget that is deemed discretionary, meaning it you know, it has its total spending set each year. This is in contrast to things like interest costs, which are just a function of debt service and mandatory spending. So programs like Social Security, Medicare, Medicaid, where government outlays are dictated by eligibility requirements and formulas. How old are you? What is your income level? You know, that's in contrast to this discretionary funding process where, you know, Congress says the Pentagon gets X amount of dollars and, you know, the Department of Homeland Security gets this amount of money and so on and so forth. Like you mentioned, the fiscal year began on October 1st, and the government has been operating under a series of continuing resolutions that have mostly just maintained funding levels from 2024. There was a big fight there right before the Christmas holidays. Congress was eventually at the last minute able to pass another continuing resolution and that extended that funding through to March 14th. So we've got a little bit more time before another government shutdown deadline looms. But it's close, right? It's a closer deadline than the debt ceiling one. And that'll be here, you know, probably before you know it.

>> Jay Bryson:
Okay. So I guess the good news here is that the government is funded until March 14th. There won't be a government shutdown before March 14th. I guess the bad news is the government is only funded up until March 14th. What happens after that?

>> Michael Pugliese
Yeah. So it's going to be, I think, a challenge because, you know, the 12 appropriation bills are going to be an area where Democrats have some input into the process. They have to clear the de facto 60 vote threshold in the Senate due to the filibuster. And so there might be continued disagreement even in a unified government where Republicans control the House and the Senate and the White House about how to proceed both across the two parties and even intraparty, you know, maybe deficit hawks that want to rein in all spending versus deficit hawks that want to increase spending sharply for the military or for things like border security. And given that slim majorities in the House and the Senate, but particularly in the House, that's probably going to be another big debate and showdown. You know, in terms of what's in our forecast. You know, we're assuming spending levels that look roughly like what was agreed to in the Fiscal Responsibility Act back in 2023, which if you weren't following that or you don't remember it, is to say you're spending that goes up a little bit, but not much on the discretionary side. A percentage point, two percentage points, something like that. Note you might also have other areas layered into this debate. It's possible the debt ceiling gets tied into the fiscal year 2025 deadline on March 14th. Foreign aid - Will there be additional funding for Ukraine in its war against Russia or Israel and the conflicts in the Middle East and and all of those things may get tied in here as well that bogs down that process. But in terms of our forecast implications, you know, we don't have big spending increases for discretionary spending, but neither do we have big cuts. You know, we don't have a big fiscal drag either from large cuts due to again, it's not going to be an area where Republicans can act completely unilaterally. It's it's going to take some Democratic cooperation.

>> Jay Bryson:
All right. Well, so that sounds like, you know, a little bit of uncertainty. So let's layer in a little bit more uncertainty here in terms of fiscal policy. We had some tax cuts back in 2017, the Tax Cuts and Jobs Act of 2017. The way those things were structured is most of the individual tax cuts expire at the end of this year, at the end of 2025, if Congress doesn't do anything. The tax rates that prevailed before the tax cuts. So this is pre 2017 tax rates would come back into effect. In other words, almost all individuals would see a rise in their individual income tax rates at the end of this year. Now, President elect Trump ran on a promise to extend those. Most Republicans in Congress agree with extending those. What's the outlook there? And also some potential other tax cuts that Mr. Trump has talked about?

>> Michael Pugliese:
I think that from the Republican side, you know, there are going to be opportunities and challenges here that are a little different than the appropriations process we were just talking about. You know, the good news from the Republican angle of things is taxes are an area where they can operate a little more unilaterally. So there's a talk of budget reconciliation that Republicans can use to alter tax policy that allows them to circumvent the Senate filibuster, meaning simple majority in the House and a simple majority in the Senate would get the job done. The challenge is that the tax policy side is a lot bigger and a lot more complicated. Just extending the 2017 Tax Cuts and Jobs Act is something like $4 trillion over a decade. And that's before you layer in new tax cuts, say, exempting tip income from taxation or exempting Social Security benefits from income taxation or the many kind of new tax cuts that President Trump ran on. And there are old fights still kind of simmering under the surface from that last tax go round. What to do with the state and local tax deduction and possible changes on the corporate side. The tax cuts going to be paid for with spending cuts or on mandatory spending programs like Medicare or Medicaid elsewhere where the tariffs fit into. That's what we're going to talk about in a couple of minutes. And so this is just a thornier thing for Republicans to unwind. Now, the real deadline for action is the end of the year. As you mentioned, Jay, the Tax Cuts and Jobs Act expires on December 31st, 2025. So there's no real urgency until the real end of the year. And I think an optimistic case is that something gets done maybe by the start of the summer, whereas I think the pessimistic case is it slips till the last minute at the very end of the year. Ultimately, this isn't something you're going to see as an economic impact until 2026, regardless of what happens. I don't think this is going to be felt in 2025, even though that's when the debate happens. In terms of, again, just what's in our forecast, it's still uncertain right now. But just so you know what's in our economic forecast, we're assuming the Tax Cuts and Jobs Act gets extended. So taxes do not go up next year as they're scheduled to do under current law. And then that. Some household taxes are cut additionally. Whether that's tip income being exempt from taxation or just tax rates to fall across the board, I think is more uncertain. But, you know, we've penciled in something like $100 billion annually or $1 trillion over a decade of additional tax cuts above and beyond the Tax Cuts and Jobs Act. But again, I think that debate will play out over at least the first half of the year, and I think maybe even more likely than not over the entirety of the year, just given that there are a lot of micro issues that need to be worked out among Republicans that are not going to be easy even with unified control given those pretty small majorities. Now, i mentioned the tariffs just a moment ago Jay, where do they fit into all this? We've talked debt ceiling. We've talked the annual budget. We've talked tax policy. Some how to tariffs kind of fit into this timeline in your view?

>> Jay Bryson:
Yeah. So, I mean, just the way to connect the two things here in terms of would be, I mean, obviously tariffs raise revenues and the revenues that President Trump has talked about from the tariffs that he's talked about could be quite substantial, could be worth, you know, depending on a bunch of different assumptions, a few hundred billion dollars a year. And so that potentially could pay for some of these things that we have talked about up to this point. The difference between what we've talked up to this point and tariffs is taxes and spending are largely the domain of Congress. And, you know, that can take some time when it comes to trade policy, things like tariffs. And that's really the domain of the executive branch. And over the last 5 or 6 decades, the Congress has delegated to the president a lot of different authority when it comes to tariffs. So if you recall President Trump's first term in office, he put tariffs on many of our trading partners in 2018, 2019, and he used two different mechanisms to do that. The first was called is Section 232 of the 1962 Trade Act, and that's when there was some sort of national security issue at stake to put tariffs on. And so, you know, think of steel. You probably want to have a vibrant steel industry for national security purposes. And so you can potentially put tariffs on for that. The other instrument they used was Section 301 of the 1974 Trade Act, and that's for so-called unfair trade practices. And again, the first Trump administration used both of those laws to be able to do that. The issue there is that requires an investigation by the Commerce Department or by the U.S. trade representative, and that can take months. And that's what we saw back in 2018-19. And we saw investigations that took months and then the tariffs were eventually put on. President Trump has talked about putting tariffs on many of our trading partners on day one. Can he do that? And the answer is yes, he can. And at least in theory, he can declare an emergency. There's a law called the International Economic Emergency Powers Act, and many presidents in the past have used that law to sanction different countries like, you know, what President Carter used in 1979 to sanction Iran, and President Trump could potentially call an emergency fentanyl pouring across the borders. And therefore, we have to put lots of tariffs on to punish countries that are allowing this to happen to the United States. Now, is that going to happen or not? I mean, nobody knows. Mr. Trump is playing this very, very closely to the vest, he's talking a very tough line right now. Maybe it's only a negotiating tactic. But the point here is, whereas a lot of the things that, you know, you might talked about in terms of taxes and spending having to go through Congress again, the White House can do this and can potentially do it pretty quickly. And we'll find out on January 21st what President Trump is thinking at that point, whether or not he does, you know, put tariffs on or whether he starts to call for investigations. And so 2025 is going to be a very interesting year when it comes to changes in economic policy, not only potential changes in terms of taxes and spending, but also potential changes in terms of tariffs. This story is not going to go away. We'll be keeping a very close eye on it and we'll continue to report back on it, not only through know the written work that we do, but through continued podcasts such as this. So thank you all for joining us today. Please keep tuned because again, this story is not going away anytime soon. Thank you very much.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 1: Inflation: Universally Hated, Unevenly Shouldered

While inflation has slowed since its peak a few years ago, it remains frustratingly high. Who is inflation still weighing on the most? Economists Jay Bryson and Sarah House discuss the unique inflation experiences of different consumer groups.

### Listen to episode 1

Audio: Listen to episode 1

### Transcript: Listen to episode 1

>> Intro: Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world - All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence

>>Jay Bryson
Hello, this is Jay Bryson, chief economist for corporate investment banking at WF. And you're listening to our Ask Our Economist podcast series. Inflation has been on a roller coaster over the last few years. And so here to talk about inflation with me today is senior economist Sarah House, who is our inflation guru. So if you go back before the pandemic and CPI inflation year over year was running roughly 2% for, you know, kind of a number of years there. Then you had the economy shutting down. And so in May of 2020, the inflation rate went to zero as economic activity weakened sharply. But then because of all the supply constraints that you had coming out of the pandemic, because of all the excess demand and then because of the Russian Ukraine war, which sent oil prices skyrocketing by summer of 2022, inflation as measured by the CPI was above 9%. And, you know, we haven't been at those sorts of levels since the early 1990s. And since then, though, it has come down and the most recent reading in November of this year was an inflation rate of 2.7%. Now that's kind of an average figure. I mean, when you think about it, not everyone is at the average. People have different - we'll call it consumption baskets. For example, if you're an older person, you're probably not going out to lots of restaurants and things of that nature. So that wouldn't be part of your consumption basket. But you probably have a lot of health care expenses. And conversely, if you're a younger person, you probably don't have a lot of health care expenses, but you are going out to bars and restaurants and things of that nature. So though that would have a higher impact in terms of your overall consumption basket. Now, it's impossible to construct consumption baskets for every household in the United States. But what Sarah and her team has done in a recent report is looked at different demographic profiles, whether it's race and gender or income or age. And so, Sarah, c an you just describe your methodology? How did you construct these different CPI measures for different demographic segments of the US population?

>>Sarah House
Thanks, Jay. So what we did is we took the survey that the Department of Labor uses to create some of the essential weights for the Consumer price Index. So the weights that go into essentially what that average consumer is buying from the Consumer expenditure survey. But we looked at it for different demographic groups and looked at what their different inflation baskets were. And what we did is we matched those different shares to the price data to create inflation measures specific to different consumer groups. So in other words, we reweighted the CPI in accordance with different groups spending baskets. Now, this led to a somewhat more volatile measure of overall inflation. If you did it by this method for the average consumer that comes out of that survey, but it ends up tracking pretty closely and you can see some of the variance in terms of the changes in the cost of living that different groups have been facing over the past couple of years.

>>Jay Bryson
Okay, great. So let's talk about one of the demographics that you looked at is talk about income. What did you find for different income groups and not only where they are like year over year right now, but maybe total change in the Consumer price index for different income groups since early in 2020?

>>Sarah House
Sure. So inflation has been hard on everyone in recent years, but particularly so for lower income consumers. So for example, we've seen for the bottom 20% of households in terms of income, they've actually faced the largest percentage increase in the cost of living over the past year with inflation running a few times higher than what we've seen for the average, but specifically also for your higher income households as well. And the reasons for that is that lower income households, they devote more of their spending to things like housing and health care, utilities, all of which have grown at an above average pace over the past year. And in contrast, they devote less to items like vehicles which have actually declined over the past year. Now, it's not just in the last 12 months where lower income households have faced higher inflation, but this is something that we've really seen when we look at the entire cycle. So essentially since 2020 when we saw the pandemic hit and then inflation subsequently take off, and it comes as necessities have not just risen more over the past year, but over the entire cycle and lower income households, they tend to devote more of their spending towards those essentials. So for example, things like food, housing, electricity have all risen more than the overall CPI this past year. And in contrast, we've seen the overall increase for households in the top 20% of income. That's actually risen the least over the past four and a half years or so.

>>Jay Bryson
Okay. Well, that's great. So that's for income. So but you also pass it out for different races and ethnicities. So what did you find there?

>>Sarah House
So for the last year, we've actually seen the highest rates of inflation for Asian households. That's because they tend to spend less on gasoline, used cars, whose prices have actually declined outright over the past year. Those are items that you tend to see a higher weighting in terms of the inflation basket for black and Hispanic households. And Asian households, they also tend to spend more on food away from home and housing, which have increased at an above average pace over the past year. But for the cycle, as a whole, Asian households have actually seen less eye watering increases in their cost of living. And that ties to the fact that they spend more on things like education, travel, apparel, which haven't increased as much as the average price over the past four and a half years. And they also spend a little bit less on things like food and utilities, which have grown above average since 2020. Now, we've actually seen the reverse for Hispanic and Latino households. So they've seen the smallest increase in prices over the past year. That's been helped by the slowdown we've seen in prices for food at home, declines in gasoline, vehicle prices. But along with black households, Latino and Hispanic households have actually seen the steepest rise in the cost of living this cycle, which again reflects just that their baskets are weighted more towards those necessities which have grown more than some of the more discretionary items that the consumer price index measures.

>>Jay Bryson
Okay. And finally, let's talk a little bit about the third demographic you passed out. You looked at one by age. What did you find there?

>>Sarah House
Yeah, so for the past year, we saw inflation rise most for seniors. So, in other words, households over 65. And that had to do a lot with the fact that medical care costs are outpacing overall inflation in the past 12 months. So we saw through November medical care services, for example, are up about 3.7%, a full point faster than total inflation. And seniors spend about five percentage points more on health care than the average consumer that we see in the inflation statistics. At the same time, we've seen senior households have benefited less from the drop in gasoline and vehicle prices since consumers of that age, they don't drive as much. They're not buying cars as frequently. So that's led to a higher rate of inflation over the past year. But when we look at the cumulative increase in prices since 2020, seniors and your younger boomers have essentially seen less egregious rises in the cost of living. So instead, where we've seen the biggest increases by age has been your millennials and your Gen Z, which have seen larger increases because again, they tend to spend more on necessities given where they are in kind of their income life cycle. Now, real quickly, since Gen X doesn't often get a lot of attention in the economics discourse, as we talk about generations, I just want to flag that they've actually seen relatively mild inflation over the past year and for the cycle as a whole. And that comes as households that are, you know, essentially Gen X, they tend to spend a smaller share on necessities and more on things that have seen less dizzying increases in inflation over the past few years like education, recreation and travel. So Gen X is actually seeing some of the lowest inflation in the past couple of years.

>>Jay Bryson
Well, good for Gen X. Unfortunately, I'm not part of that generation, but good for them. All right. So let's sum up here. How would you sum up all of your findings and are there any other factors that you would point to that maybe would describe different inflation experiences among different sorts of groups?

>>Sarah House
Yeah. So I think the change in the cost of living is essentially how much it costs for a set basket of goods and services is one thing. So that's what a lot of this report looked at. But we also need to consider the ability of different consumers to adjust to higher prices. So lower income households, for example, which also tend to be younger, are more likely to be black or Hispanic Latino. They have less wiggle room in their budgets to essentially deal with rising prices. So, for example, it's harder to either draw on your savings or just save a little bit less if you don't have as much accumulated savings or you're already not saving a very high portion of your income to begin with. It's harder if you have lower income to trade down, if you're essentially already buying some store brand products, for example. And it's also more difficult to just skip discretionary purchases. Maybe skip that vacation if you're already spending most of your income towards necessities. Now, early on in the cycle, we actually saw lower income households see the biggest percentage gains in their income. And so that was coming as we saw a lot of fiscal support. We saw very hot jobs market for some lower skilled jobs. And so that helped lower income households deal with the big hikes in prices that we've seen. But as we've seen over the past couple of years, nominal income growth for lower income households, it hasn't grown that much. And it's actually now having trouble actually keeping pace with overall inflation. So we've actually seen a bigger squeeze on real income for the bottom 40% over the past two years. Once we take into account not just the rate in which prices are rising, but which income is rising as well. And while prices and inflation isn't rising as fast as it was a year or two ago, it does remain particularly challenging for those households at the lower end of the income spectrum, which can put a lot of pressure on spending.

>>Jay Bryson
Well, thanks, Sara. Thank you for describing this really interesting report that you wrote. And I would note that for listeners who want to read this report, it's on our website. WF.com/economics. Go to special reports and you'll be able to find the report in its entirety. This issue about inflation hasn't gone completely away. You know, again, it's come down significantly over the last two years or so, but a 2.7% year over year in November, it's still higher than what it was through most of the last economic expansion. And in 2025, it could be affected by potential economic policy changes that may be occurring. So, again, we'll continue to track it and we'll continue to report on it. But thank you for joining us today. Please keep your questions coming. And again, thank you very much.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

##

Season two

## Episode 12: A new horizon: The economic outlook in a new leadership policy

The spike in inflation that followed the pandemic led many central banks to tighten monetary policy significantly. However, inflation is returning to target, allowing those central banks to reverse course and ease policy. Meanwhile, the United States will have a new president and Congress starting in January. How will the world’s major economies respond to a new era of leadership and economic policy?

### Listen to episode 12

Audio: Episode 12: A new horizon: The economic outlook in a new leadership policy

### Transcript: Episode 12: A new horizon: The economic outlook in a new leadership policy

>> Intro: Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world - All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson
Hello, this is Jay Bryson, chief economist with WF Corporate and Investment Banking. And you're listening to the Ask our Economist podcast series. Recently, there was obviously an election here in the United States in which former President Donald Trump was elected as the 47th president of the United States. And when he takes office in January, he'll have Republicans in the majority in both chambers of Congress. There's lots of implications from this particular election, and we are most interested here in the economic implications. And we're going to be talking about that. And so to talk about the economic implications, I'm joined by my colleagues, senior economist Sarah House, senior economist Michael Pugliese and international economist Brendan McKenna. Now, before we talk about the economic implications, we probably first need to talk about the policy assumptions that we're making. And I'm saying assumptions because candidates, you know, they promise lots of different things on the campaign trail and then when they get into office, not all of those promises are necessarily put into action. So to talk about some of the policy assumptions we're going to make, I'm going to turn first to Michael Plugliese. Mike, as you well know, there's lots of different policies that can be changed here. But let's start with trade policy. What sort of assumptions are we making when it comes to trade policy?

>>Mike Pugliese
Well, thanks, Jay. On the trade policy front, President Trump proposed a variety of different trade policies when it comes to tariffs. But the one he most commonly put out there was a 10% universal tariff on all imports into the United States, which total about $3 trillion annually and a 60% tariff on Chinese imports or goods that the U.S. imports from China. And we're assuming in our forecast that we get about half of that. So not the full amount, but not nothing either. And that would be a pretty substantial increase in tariff rates, much larger than what we got in the first term of Donald Trump's administration when he raised tariffs on a few different countries, mostly China, but nothing near 60% and certainly not a universal tariff on all the goods imported from the 200 and more countries from around the world. And in terms of timing, now, this is an area the president has a lot of unilateral control. The president has the power to raise and implement tariffs relatively quickly and without Congress compared to some of the other policy areas we'll talk about in a bit. So this is one of the policy areas where we assume some faster action. And in fact, we're assuming that these tariffs go into effect in around the third quarter of next year. And of course, there are risks to these forecasts. Maybe it'll be sooner, maybe it'll be later. You know, maybe we won't get tariffs this high. But, you know, in contrast, there's a chance we get the full ten and 60% or maybe even higher than that. So this strikes, I think, a pretty balanced approach of a big and meaningful tariff increase relatively quickly into President Trump's first term, but not necessarily the full amount that he proposed on the campaign trail.

>>Jay Bryson
Okay. That's for trade. Now, President elect Trump also talked about taxes and spending, fiscal policy changes on the campaign trail. What are we assuming there in terms of fiscal policy?

>>Mike Pugliese
This starts in terms of fiscal policy and tax policy with the 2017 tax cuts. So back then, under President Trump and congressional Republicans, those policymakers enacted a series of tax cuts for households and businesses with most of the business tax cuts being permanent. But most of the household tax cuts slated to expire if that expiration happening at the end of 2025, because those tax cuts were not offset with other revenue increases or spending cuts. They had to have an expiration date given the rules of of budget reconciliation, the tool that that Republicans used to pass that bill. And so, as a result, large parts of the household section of the 2017 tax cut bill are set to expire at the end of next year. So if Congress does nothing, taxes will rise across the board on most U.S. households. Now, it's our expectation Republicans will extend those tax cuts. This was a landmark achievement of President Trump and the Republicans last time. It would surprise me if they allowed it to lapse. But it's a tricky question. It took a year just to pass that bill the first time. And I expect there to be a lot of policy discussions about what exactly is going to be kept and extended. In addition to that, it's important to remember that this does not reduce taxes on anyone. It just prevents taxes from going up. So a second discussion Republicans are going to have to have is do they want to make the tax cuts even larger than just extending what is expiring? So our base case is that the 2017 tax cuts will be extended. That's been in our forecast for a while now. That's not a new post-election development, but we're also assuming that we get some new tax cuts on the order of about $100 billion annually, a trillion over a decade, if you prefer that convention, with most of those tax cuts targeted to households. So not as much on the corporate or business side. Think things like expanding the child tax credit, increasing the standard deduction, tax items like that. And that's a 2026 story in our forecast. We think it's going to take the better part of next year before that bill is written and passed and debated and eventually becomes law. So that's really not an impact we're going to see, I think in 25 the debate will happen in 25, but more of a 2026 story for the economy.

>>Jay Bryson
Okay. Well, great. So any other major policy changes as it relates to, say, regulatory policies and immigration policies, what sort of assumptions are we making there?

>>Mike Pugliese
Yeah, there's probably a little bit of upside risk for economic growth in the economy just from a more lenient regulatory environment. Although again, I would caution kind of like the tax cuts. I think that's more of a multiyear story. I don't think that's something you're going to see in first half of next year GDP growth or a CPI print come next May. But over time, I think that provides a little bit of upside risk. Not big numbers, but modest. That being said, there's probably a little bit of downside risk from the immigration side where President Trump has talked about significant deportation of undocumented immigrants, as well as slowing the pace of immigration into the United States pretty sharply. We were already seeing this a little bit. So immigration into the United States looks like it's slowed quite a bit from undocumented immigrants over the past several months. And we've got that continuing into next year. So to put some numbers around it, the labor force grew one and a half, 2% over 2022 and 2023. That's that's pretty robust growth and contributed to some of the strong jobs numbers and stronger economic growth we saw in that period. That's not our base case going forward. We're looking for more like half a percent, three quarters of a percent in the labor force with the story there really being one of much, much slower immigration into the U.S. and not necessarily a whole lot on the mass deportation side, although that is a risk to the forecast. But just, you know, not seeing the 3-ish million pace of new kind of foreign born workers coming into the labor force that we've seen over the past couple of years.

>>Jay Bryson
Okay, great. Well, thanks, Mike, for level setting there in terms of different policy sorts of assumptions. So let's shift gears now and let's start talking about the economic implications of some of those policy changes. So, Sarah, I'm going to bring you in here and ask you, what do you think this does for GDP growth and inflation in 2025 and 2026? You know, in light of these policy assumptions that we have.

>>Sarah House
Sure. Thanks, Jay. So I think ultimately, the policy assumptions that we have, particularly for 2025, it points to slower growth next year. So when you think about tariffs, ultimately, this is a tax. So to the extent that businesses can absorb some of it, it does at least lead to lower profits, which can weigh on hiring and investment. And to the extent that it's passed on to consumers that weighs on their spending power via higher inflation. So we're looking for growth to slow next year, particularly in the second half, led by some softening in consumer spending. So we're looking at about 2% in terms of GDP growth, in inflation adjusted terms for the full year, but probably seeing real GDP growth slow to about 1.5% in the fourth quarter of next year. Now, we do think growth will pick up in 2026 as that initial shock from tariffs fade as well as you get some potential expansion in terms of the tax cuts. And that should lead to activity accelerating over 2026 and getting probably closer to around 3% by the end of that year. But in terms of inflation, we're also looking at a higher pat of inflation than we were before. So we're already looking for more incremental improvement on the inflation front next year. But with tariffs now, we're probably going to see inflation about maybe 3/10 or so higher than our pre tariff baseline. So if you're thinking about this in terms of the Fed's core PC--- deflator, which they like to look at to benchmark policy, we think that'll be up about two. Point 6% in the fourth quarter of next year versus about 2.8% for for the current quarter. So overall, basically getting stuck at roughly two and a half to two closer to 3% next year. Now, we do think that as the effects from tariffs fade over 2026 will begin to see inflation recede again. But with the potential tax expansion improving demand, that it can be pretty slow. So still probably looking at inflation above target through our forecast horizon through 2026.

>>Jay Bryson
So for 2025, we're looking at maybe slower growth, but higher inflation, is that right?

>>Sarah House
Right. So slower growth for 2025, but higher inflation.

>>Jay Bryson
That sounds like to me like a little bit of a conundrum for the Federal Reserve. Slower growth. You want to cut rates, higher inflation, you want to raise rates. What do we think the Fed's going to do with all of that?

>>Sarah House
Yeah, So it is going to be a tough situation for the Federal Reserve. One thing to note is that the labor market so that's part of their mandate. That's in a pretty good place right now. So we've seen the unemployment rate, it's moved up, but at 4.1%, it's within their estimates for where it should be in the long run to be consistent with the inflation side of their mandate. And so the Fed wants to keep that there, even as they're still battling with above target inflation. So we think given where the labor market is, there's probably still some further easing in store over the next year, but probably not much given that it's harder to justify with this inflation backdrop. Now, tariffs, I think, would be a situation where they would try to look through that inflationary shot given as you highlight that it's going to also depress growth. But that's harder to justify now that we've had inflation above target for almost four years now. And then if there's a lot of talk about expanding some of the tax cuts that would boost demand in 2026, it would look like maybe inflation wouldn't be receding as as quickly following that tariff shock. So we think there's still probably some further easing in store over the next year or so. We have the Fed cutting about 100 basis points from where we are today, which would bring the Fed funds rate to a range of 3.5% to 3.75%. So that's about 50 basis points le----ss easing than what we had previously. But that still leaves policy at a rate that we think is is still restrictive in terms of overall economic activity.

>>Jay Bryson
Up to this point, we've been very, very high level talking about overall GDP growth, the overall inflation. Are there any particular sectors of the economy that you may feel may be impacted by some of these policy changes? Briefly, walk through some of those different sectors of the economy.

>>Sarah House
Right. So I think given that you're going to see higher inflation coming from the tariffs, that we expect some of this to be passed on to consumers. So that's an area where we're looking for activity to soften over the course of next year. So looking for for somewhat softer consumer spending. So still growing in real terms, but just not as fast as the roughly 3% pace that we saw over the past year. Other areas that we're thinking are also going to contribute to the slower pace of GDP growth next year. Are some of the more interest rate sensitive areas, given that we're not expecting a big, big drop in rates and rates are likely to remain elevated from at least the standards of of recent history. When we look at the housing market, for example, our expectation is that mortgage rates, which are currently about 6.8% and if you're looking at a 30 year fixed rate mortgage, that's still probably going to be above 6% next year. So still well above what's the prevailing effective rate for current mortgages outstanding. And so I think you're going to see a lot of the same challenges that we've had over the past couple of years continue to linger. So things like low inventory of existing homes for sale as current mortgage owners just don't want to give up their significantly lower rate than what the current rate is. That limited inventory is likely to continue to put some upward pressure on prices and ultimately with with mortgage rates still above 6%, affordability is still going to be a big challenge for a lot of buyers and with it still very challenging from an affordability perspective to get in homes, that's going to be tough on new construction as well. So when you also layer in the fact of potentially higher material costs coming from tariffs, maybe higher labor costs, if you see a big crackdown on immigration, we're looking at probably new housing starts decreasing 2 to 3% next year. So essentially a drag from from residential investment and probably also a drag in terms of nonresidential outlays, too, as we see really just some of the lingering effects from the tighter policy. So a lot of commercial construction projects. They require a long lead time in terms of planning. And so we're still really feeling the impact of the higher rate environment and the tighter credit environment of the past couple of years. So that's another area that we look to be a drag on growth. But I will think you'll see at least some improvement in other areas of business investment like equipment, for example, which doesn't have quite the same long lead time that you see in nonresidential structures. And so getting at least a little bit of a reduction in borrowing rates, we think will help equipment spending next year.

>>Jay Bryson
Okay. Well, thank you for that, Sarah. So, Brendan, let's bring you in here now and talk about the effects that these policy changes and, you know, the economic implications the United States may have on some of our major trading partners, particularly if, as Mike talked about, the U.S. ends up enacting some tariffs. So let's talk about, you know, the so-called G10 economies of the world, some of the other advanced economies of the world. What sort of effects do you see this happening on those economies?

>>Brendan McKenna
Yeah. Thanks, Jay. And this is a topic that we made a point of highlighting in the Outlook publication. And basically, we made the point that in a scenario where new U.S. tariffs are imposed, trade linkages to the U.S. and overall exposure to tariffs will be a rather determining factor for which economies are most impacted, but also the economies that can be a bit more resilient. And for the G10 economies specifically, most of those economies maintain a degree of trade linkage to the U.S. But trade relationships with the United States are relatively modest in nature. So in the case of the eurozone and the United Kingdom, trade with the U.S. is really not all that sizable. So there is some insulation there. I would also note that economies such as the Eurozone, the United Kingdom and even Japan are large enough and diversified enough to the point where tariffs may not have a material impact. So for most of the G10 economies, their respective central banks are also going to be easing monetary policy in 2025. So lower interest rates can also support economic activity despite any tariffs that may be imposed going forward. The one G10 economy that maybe is a bit more exposed would be Canada. Canada has a really strong trade connection with the United States. And tariffs on Canada could be a bit more consequential. I would just caveat that by saying that Canada's economy has become more service oriented rather than reliant on goods exports. So maybe that vulnerability has come down over the last couple of years or so. And then we also have the Bank of Canada that's probably going to be easing monetary policy rather quickly as well. So maybe the negative impact on Canada could also be somewhat mitigated. So all in Jay, we really haven't made that material of adjustments to our outlook for G10 economies as a result of the new administration.

>>Jay Bryson
So let's just broaden our lens now and let's look at some of the emerging economies of the world. Obviously, there's a lot more emerging economies out there than there are advanced economies. Any effects on emerging economies? And if so, any any particular economies you think about here?

>>Brendan McKenna
Yeah. As far as the emerging economies and even the developing economies, the takeaway is actually pretty similar in the sense that tariff exposure can be an influence on growth prospects. But I would say that emerging market economies at a relatively high level are more vulnerable relative to the G10 economies. Emerging economies tend to be less diversified, a little bit more reliant on trade. So tariffs can impact developing economies a bit more acutely. But to your question, Jay, on economies that may be particularly sensitive, it seems like China and Mexico are particularly vulnerable in this type of environment. I'll start with China. In the case of China, you know, we don't think tariffs will materially disrupt the Chinese economy. There could be a greater impact this time around relative to Trump's first term and first batch of tariffs. But China has some pretty unique policy responses that it can deploy to mitigate the impacts. Those policy options include allowing for a weaker currency just to maintain a degree of trade competitiveness, but also using circumvention to avoid tariffs. So essentially using proxy nations to reroute exports into the United States. Those are policy tools that China used in 2018 and 2019, and we would expect them to be used again. So while we revised our 2025 GDP forecast lower, we really didn't make all that material of changes to the growth outlook for China. In the case of Mexico, Mexico is very reliant on trade with the US and does not have those same types of policy mechanisms that China has. Sure, the central bank can lower interest rates more aggressively, but that risks a sharply weaker currency, which in turn risks financial stability and also generates potential inflationary pressures as well. And then on the fiscal side, Mexico is running a very large fiscal deficit. We also have seen the sovereign debt burden trend higher over time. If fiscal policy loosens to support activity, Mexico's investment grade credit rating could also be at risk there. And maybe there is broader capital outflows and renewed downward pressure on the economy. So really, the combination of strong trade linkages, limited policy space means Mexico is significantly more vulnerable within the emerging market space. And it's probably a scenario that pushes Mexico's economy into recession in 2025. Okay, So let's talk finally about about the effects on the US dollar. So President elect Trump on the campaign trail was talking about he was going to have a weaker dollar to help U.S. exports. Is that how you see things developing here? Yeah, good question, Jay. We actually see things a little bit differently for for the U.S. dollar. And at a very high level, we do believe that the dollar can strengthen very broadly and very significantly going forward. As Sarah mentioned a little bit earlier, it looks like the Fed is likely to become a little bit less dovish going forward. And at the same time, maybe some foreign central banks have actually hinted at turning a bit more dovish in 2025. So purely from a divergent monetary policy path, it looks like the interest rate differentials will favor the United States and the U.S. dollar in 2025. And that'll be a key pillar of support for the dollar. But tariffs can also have a bit of a benefit for the dollar as well. And I say benefit in the sense that tariffs will likely negatively impact imports and that should actually improve the U.S. current account deficit and the trade deficit. That's a dynamic that can support the dollar. We're also looking at a scenario where if tariffs do come on, there's a decent chance that financial market volatility will ensue and market participants may actually be enticed to seek out the safe haven qualities of the dollar, despite the source of uncertainty coming from U.S. policy. So for the dollar index, we're actually looking at a scenario where the external and maybe also the domestic backdrop evolves in a way where the U.S. dollar rallies to levels that were last seen in 2002. But to your question, Jay, about, you know, President Trump having a preference for a weaker dollar, we actually believe he'll face multiple challenges to kind of manufacturing dollar depreciation, at least unilaterally. And we think that if dollar depreciation were to kind of be manufactured, he would really need the support of the Fed in order for the dollar to weaken rather meaningfully. But with that said, we have our doubts that the Fed would really ignore its inflation and employment mandate and set monetary policy in a way that's purely designed to artificially weaken the dollar. Setting monetary policy to appease the president's agenda would likely risk its independence and credibility as an institution. And we have our doubts that that's a tradeoff the Fed would be willing to entertain.

>>Jay Bryson
Okay. Well, thank you, Brandon, and thank you, Sara. And thank you, Mike, for joining us today. So remember, a lot of these policy assumptions that we're making right now are just that they're assumptions. And, you know, once the new administration takes office in January, once new Congress gets seated, some of these policy assumptions will actually turn into real policies. And we'll know more as time goes on. And we may need to make some adjustments to our forecast depending on how those policies evolve going forward. So this story clearly is not over. And as we continue to think about our forecasts, as we make any changes to that, we'll be sending those out in written communication. And we also may revisit it as well in some of these podcasts. So again, thank you all very much for for joining us today.

>>Outro:
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## Episode 11: Congressional To-Do List in 2025: Extend Tax Cuts?

The Tax Cuts & Jobs Act of 2017 expires at the end of next year. Will Congress extend the legislation or allow the tax cuts of 2017 to lapse? Economists Jay Bryson and Michael Pugliese discuss the economic implications of Congress’ decision in this podcast.

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>> Intro: Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world - All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.
>>Jay Bryson Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at WF. And you're listening to our Ask Our Economist podcast series. I'm joined here today by senior economist Michael Pugliesi to talk about a report we recently wrote on the expiration of the Tax Cuts and Jobs Act of 2017. So, Mike, let's level set here. Just kind of walk through it for us. What's going on here with this legislation and what's the outlook?
>>Mike Pugliese Yeah. Thanks, Jay. So the Tax Cuts and Jobs Act or the TCJA, as we'll say for short for the rest of the podcast for brevity sake, it was the tax cut bill that was enacted under President Trump and congressional Republicans in 2017. And that bill did a lot of different things, but primarily it reduced taxes on households and businesses. So on the business side, it produced the corporate income tax rate from 35 to 21%. And on the household side, it reduced marginal income tax rates across the board. It doubled the standard deduction, expanded the child tax credit and made a whole bunch of changes. But in order to comply with congressional budget rules, large parts of that law were set to expire when it was passed. And that sunset date is coming up. So it occurs at the end of 2025 at year end. Now, most of the corporate changes and those were not given a sunset date. So, for example, I mentioned the corporate income tax reduction earlier from 35 to 21%. That's not scheduled to change next year, but most of the household changes will expire, meaning that under current law, if Congress does nothing, then tax rates on households, generally speaking, would increase across the board in January 2026. So now this is going to be a big focus of Congress and the next president, regardless of who wins the election, because we're talking about... call it one and a half percent of GDP is about the size of this expiration. So it's meaningful. It's a pretty sizable bill. Let me take it back to you, Jay, for a moment and just kind of thinking through a lot of different scenarios depending on what happens with the election? Will it be extended? Will it not? Maybe. Let's just start very simply, what happens if Congress extends the TCJA in full?
>>Jay Bryson Right. So the Congressional Budget Office took a look at this and they estimated that over a ten year period, it would cost roughly $4.6 trillion. Now, some of that is because of higher debt service cost. What happens is, you know, you're not getting the same revenue in so that increases the size of the deficits. You have to borrow more and increase the overall cost in terms of debt service. But still, we're looking at about $4.6 trillion over ten years. And assuming it expires, it goes away. Still, you're looking at deficits over the next ten years on the order of roughly 6% of GDP or so. And if we extend it, if we don't have as much revenue coming in as expected, then we're looking at deficits on the order of 8% or so of GDP. And --keep in mind, if we extend it, it's not going to have any meaningful effect on the economy. It's not like your taxes are going to go down. They're just not going to go up. It's not like you're going to see any more money in your take home pay because of that. So back to you now, Mike. So I guess it really depends on politics here. What happens after the election? Who gets elected? So talk through some of the potential scenarios here.
>>Mike Pugliese Yeah. So I kind of break it down into three different buckets. You know, there's the prospect of divided government where one party controls the White House or, you know, the other party controls at least one chamber of Congress. And then on a sweep scenario where, you know, the Republicans control all three, the House, the Senate, the White House or the Democrats have the same. You're going to get much different outcomes, right, when it comes to the Tax Cuts and Jobs Act at a very high level. No Republican support fully extending it. It was their bill originally, of course, passed under Donald Trump and congressional Republicans. Democrats did not support it, didn't vote for it. And so Republicans are the most gung ho about extending it. And on the Democratic side, views differ a little bit depending on who specifically is talking about the policies. But I would say at a high level, there is support for extending the tax cuts for people making below a certain income threshold. So both Joe Biden and Kamala Harris have expressed support for extending tax cuts for people making less than $400,000 per year and having taxes go up or expire. The tax cuts expire for people above an income threshold around there. So those are I would say, at a very high level, some of the stakes and guidelines depending on what shakes out of the election.
>>Jay Bryson So might this zero in on what happens if former President Trump becomes president again and, you know, let's assume that there is some sort of Republican sweep. What's going to happen there under that sort of scenario? And is there any attempt to potentially maybe raise some revenue to try to pay for this? I mean, after all, a simple extension is $4.6 trillion. If we expand that, it's going to be even more so, is there even going to be an attempt to pay for some of that?
>>Mike Pugliese Well, I think it's an open question, Jay. And I think where we want to start is President Trump supports extending the TCJA, of course, which is quite costly, like you just mentioned. But he's also expressed some support for additional tax cuts. And there's a long list of them. You know, we won't go through all of them right now. But just as a few examples, he's expressed interest in reducing the corporate income tax rate further to 15%. He's talked about exempting Social Security benefits from income taxation and exempting tip income from taxation. And those things, of course, are costly as well. I think the two biggest potential pay-fors are increa sing tariffs on U.S. imports and potentially repealing some green energy subsidies that were enacted under the Biden administration. On the tariffs side, Donald Trump has proposed a 10% tariff on all imports into the United States and a 60% import tariff on goods coming from China. If those were implemented in full, it would raise quite a bit of money. Estimates vary a little bit, but I think something in the ballpark of three, maybe three and a half trillion dollars over a decade, if that were implemented in full. Now, that would also have a counter kind of drag on economic growth. You know, if you extend the TCJA, we've already talked about how, you know, that wouldn't boost economic growth a whole lot. And so paying for it would say higher tariffs would probably be a drag on the economy. Now, if those higher tariff duties were used to pay for new tax cuts, right, the lower corporate income tax rate or expanded child tax credit or something like that, in addition to an extension, now that might be a little more of a wash on economic growth, but of course, it would also be a lot more costly to both extend and expand the TCJA. One other kind of pay for that I think is lingering out there that doesn't raise as much money, but Republicans have expressed some interest in, is repealing the green energy tax credits and subsidies in President Biden's Inflation Reduction Act. So, the IRA was passed. It did a whole bunch of things. But one of the things it did was both initiate and expand some tax credits for producing clean energy, consuming clean energy, stuff like that. And, you know, repealing those could probably raise another six or $700 billion over a decade. So if we got much higher tariffs and repealing those green energy tax credits, that might be, you know, close to enough to pay for a TCJA expansion, but it wouldn't come close to covering the full cost of both extending the TCJA and expanding to all these other kind of tax cut proposals that are on the table and that have been suggested by the former president. So kicking it over to you again, Jay, How about Vice President Kamala Harris? What are some of her stances and how does the election potentially factor into that?
>>Jay Bryson Yeah I think you mentioned it earlier. You know, she supports what the Biden administration has suggested, and that is extending it for people who make $400,000 a year or less. You know, people above that threshold would see their taxes go back up. We had a precedent of this. If you think back to the Bush tax cuts of the early part of this century, they expired at the end of 2012. Some listeners may remember the so-called fiscal cliff. This was about that, those expiration of those tax cuts. And what ultimately Congress decided to do there was extend the tax cuts for people who make less than $400,000 a year. And so, you know, again, there's precedent here. You know, if you do that and you allow taxes for the upper income individuals to rise, it doesn't it doesn't save you a whole heck of a lot of money. We talk about $4.6 trillion of full extension. If you do it for just people who are making less than $400,000 a year, it's still going to cost on the order of 4 trillion or so. So it's still, again, pretty expensive. Now, she would also try to raise some revenue. One of the things she's talked about is raising the corporate income tax rate from 21% up to 28%, raising capital gains taxes on the most wealthiest Americans. But, you know, on the other hand, she's also talked about some other spending prerogatives as well. That is significant expansion of the child tax credit and, you know, a $25,000 subsidy for first time homebuyers. And what I would note here and Mike, you talked about this earlier, is that the possibility of a Democratic sweep seems to be relatively low. And so even if Vice President Harris becomes president, all her wish list, if you will, may not happen if Republicans control one or both houses of Congress. So, Mike, let's kind of wrap it up here and let's talk about this now in a broad sort of perspective. What does this all mean for the long-term fiscal outlook for the US economy?
>>Mike Pugliese Yeah, well, I think there's a few different ways we can pull this all together. First, just to level set, U.S. deficits are likely going to remain historically large under pretty much all scenarios. You mentioned earlier, Jay, the US budget deficit over the next decade probably averaged something like 6% of GDP, and that assumes the tax cuts expire as scheduled and there are no new tax cuts or spending programs put in place. 6% of GDP, to put that in a little bit of context, the average deficit over the past half a century is about three and a half percent. So not double, but close. So I think deficits are probably going to remain pretty big regardless. But the delta between scenarios can be pretty big. In a divided government scenario, say it's Vice President Harris becomes the president, but Republicans take the Senate where the Senate map is pretty favorable for them this year. I think that's probably going to, on the margin, give you the most fiscal tightening. Maybe you get higher taxes on higher income individuals. And, you know, most of the TCJA is extended, but not all of it and probably not a whole lot of new initiatives. I think it's in the sweep scenarios where deficits increase the most and just kind of stacking up the two plans and looking at the political outlook. The Republicans have the potential to gain, I think, the biggest majorities in the Senate, just given what the map looks like and when you stack on just kind of the pretty sizeable tax cuts that Donald Trump has proposed in addition to the TCJA, you know, that's probably your biggest deficit increasing scenario, but it's up for debate. It will depend a lot on how Republicans feel about historically large tariffs. It'll depend a lot on their majorities and kind of how they structure things. So definitely a topic we're still keeping an eye on. The range of outcomes here are still pretty broad, even as deficits remain large going into the future. But I think it's that Republican sweep scenario where they have a really good night that opens up the widest range of possibilities in terms of changes to U.S. tax policy going forward.
>>Jay Bryson Okay. Well, thanks, Mike. Thanks for those insights. And thank you all for listening. You know, this story obviously is not going to go away. Election Day, as you know, a few weeks out from here. And once we know more about how all the dust settles out from the election, we'll have a better sense of what may be going on here. And we'll be writing follow up reports on that and perhaps even another podcast or two on that topic. So again, thank you all for listening today. Please keep the questions that you've been submitting, please keep them coming and we wish you all a good day. Thank you.
>>Outro: That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.
>>Disclosures: This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.
This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.
Important Information for Non-U.S. Recipients
For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 10: Housing affordability: Why has it deteriorated so much?

Housing is the least affordable it has been in decades. In this podcast, economists Jay Bryson, Charlie Dougherty, and Jackie Benson discuss the reasons behind the deterioration in housing affordability and our outlook.

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>>Intro
Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world. All which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.
>>Jay Bryson
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at WF. And you're listening to our Ask Our Economist podcast series. Recently, we had a listener who submitted a question that revolves around housing affordability. Here to answer the question are Charlie Daugherty and Jackie Benson. Both Charlie and Jackie cover real estate for us, as well as regional economics.
So Charlie, let me start with you. Just to kind of level set here. I mean, can you kind of just describe what's happened to home prices and more broadly, home affordability over the last few years?
>>Charlie Dougherty
Sure. I would say that housing affordability is the worst it's been in quite a long time in the United States, certainly this century. And you'd probably have to go back to the early 1980s to find a less affordable housing market. So just to put some numbers there, you know, if you look at the average monthly mortgage payment, it's essentially doubled since 2020.
So going from almost $1,000 per month to just over $2,000 per month in about a four year span. So what's going on here? Well, home prices have skyrocketed, right? Since 2020. Home prices have risen by about 50%. Meanwhile, households have only seen about a 25% rise in income over that same time period. So, home price appreciation has far exceeded income growth.
The other part of this, of course, is restricted monetary policy from the Federal Reserve. So a higher Fed funds rate has put significant upward pressure on mortgage rates. So if you go back to 2021, the average 30 year mortgage rate was about 3%. It rose to almost 8% at last year's peak. Yeah, mortgage rates have come back down a little bit. Right. Right now, they're sitting comfortably below 7%, but mortgage rates are still relatively high.
>>Jay Bryson
Okay. Well, thanks for that depressing news there, Charlie. That's very edifying there. So our listener pointed out that he thinks that there's been like a shortage of housing over the past, say, 15 years or so. That's helped push up home prices. You know, is there any truth to that about being a shortage out there in terms of housing?
Are we under building in any sense? Is that helping to push up house prices?
>>Charlie Dougherty
So, the short answer there, Jay, is yes, there does appear to be a significant housing shortage. I think it would be unusual for home prices to go up as fast as they have without a housing shortage. So I think we haven't built enough homes. And I think the question is, well, how much are we undersupplied? So if you did a quick back of the envelope calculation, you know, if you compared the amount of new construction that we've had since 2000 and compared it with the average pace of construction the 25 years before that, you end up with somewhere around a shortage of about 3 million single family homes.
Now, on top of that, there's this growing body of literature that takes a little bit more of a sophisticated approach and that 3 million deficit number I just said is consistent with all of those findings. So low supply, I think, is one major reason why home prices have shot up so much. Now, on top of there being, you know, an undersupply in terms of new construction, there is also very low supply in the resale market. Existing supply has come up recently. But overall, you know, if you zoom out, inventories still not far from the record low that we saw last year in 2023. So scarce resale supply, that's due to a number of factors. But that mortgage rate lock in effect, meaning most homeowners have a mortgage with a rate well below the prevailing rates that we have currently that's clearly held down. Supply demand is also playing a role, right? So you have demographics with large cohorts of millennials were getting married and having kids and wanting a single family house. Remote work is also, I think, pushing up on demand a little bit. More people are spending more time at home and as a result, people are willing to spend more for extra space for things like a home office. So ultimately, demand is outrunning supply, and that's the reason for the rapid home price appreciation that we've seen recently.
>>Jay Bryson
Okay. Well, thanks, Charlie. And so up to this point, we've kind of talked just about national sort of patterns here. Jackie, let me bring you in here. And is there any regional sorts of stories here, any sort of the regions of the different countries where house prices, you know, stand out? Well, well above average or well below average? You know, what's the regional picture look like?
>>Jackie Benson
Sure. First, CoreLogic tracks selling prices from transactions in about 950 markets around the country. As of June, selling prices were up year over year and 90% of those markets. So this home price appreciation that we're seeing is pretty pervasive. You know, of course, there's varying degrees of price growth, though. For example, markets in the Northeast are generally experiencing faster price appreciation, and that coincides with weaker supply. Chicago, Philadelphia, Boston, the area surrounding New York City, those all come to mind as markets are experiencing more significant home price growth than the U.S. average. Meanwhile, price growth is somewhat softer down south, especially places like Florida and Texas, where builders have focused most of their efforts in the single family, supply picture is somewhat healthier. Those two states are actually responsible for over one third of the overall increase in listings over the past year. That's according to Realtor.com. So in addition to that, greater supply, you know, Charlie noted that demand is solid overall, but it relatively weaker in some of those markets down south. So, for example, my parents, they actually live in the Gulf Coast of Florida and their case you have home insurance providers raising the cost of home insurance quite dramatically, especially in areas more subject to flooding risk. And then you have places in Texas like Austin, which are high tech worker populations. And the Fed's interest rate hiking has caused outright declines in tech jobs, which has softened incomes and put downward pressure on housing demand. In Austin specifically, we've actually seen year over year declines in home prices versus the appreciation that is evident elsewhere. So, Jay, you know, Charlie just talked about how high mortgage rates have kind of kept the housing market in a lull. But he mentioned that, you know, although mortgage rates have come down, they're still more than double what they were in 2021. How does our Fed outlook influence our expectation for where mortgage rates might go?
>>Jay Bryson
Yeah, that's a good question, Jackie. And so in terms of the Fed right now, just to step back, you know, the Fed hiked rates by 525 basis points in the course of about a year. Now. They've been on hold now for this whole year. But looking forward, we expect that the Fed will be cutting rates pretty substantially in coming months. So, you know, if you look between this fall and, say, mid-part of 2025, we're looking for the Fed to bring rates down by about 200 basis points or so. You know, what we're seeing is inflation's coming down. The labor market is starting to soften somewhat and by any measure, monetary policy is very restrictive right now. And so the Fed has to be bringing rates down. They have to probably bring them down pretty significantly in order to avoid a recession. Now, some of this is already priced into markets right now. You know, Charlie had talked about a 30 year fixed rate mortgage before, and that's usually priced off some spread over the ten year Treasury security. And so, you know, at the back end of the yield curve, those expectations for Fed easing are already priced in right now. And so as we go forward, as the Fed cuts, we do expect to see the yield on the ten year Treasury security come down a little bit more from where it is right now. It's just under 4% as we talk. And what that should do is that should help to bring the 30 year fixed rate mortgage rate down somewhat as well, again, to levels that if you go back to what Charlie was saying four years ago, that mortgage rate was around 3% or so.
It's currently somewhere around six and a half percent. You know, we expect that to drift back down to maybe 6%. And so it's coming down. But again, we think it's very unlikely that the interest rate on a 30 year mortgage, you know, comes back down to 3%. Jackie, let me turn back to you and Charlie mentioned earlier about house prices being up 50% or so and house affordability, the worst it's been in this century. I'm starting to wonder, you know, is there like signs of a house price bubble out there? I mean, do we have to start worrying about what we saw back in 2000, 6 to 2012 when we saw house prices on a, you know, on a nationwide basis come down by 30%?
>>Jackie Benson
I don’t think so. Home prices have risen quite sharply compared to before the pandemic, but we've already had a bit of a correction in the last half of 2022. So at that point, home prices were up about 40% relative to January 2020 before the pandemic. But even then, from start to finish, prices on average only fell about 2%. So the big difference between today's housing market and the market of 2000 6008 is the supply picture. Back in 2006, there were nearly 4 million homes for resale. But today that's down to just over 1 million. Limited supply is putting a floor under prices and that's going to prevent some of the drastic declines like we saw during the housing bust.
Thanks for that, Jackie.
>>Jay Bryson
That certainly is reassuring news. Hopefully, we're not looking at what we saw, you know, just 15 years ago. Hopefully we don't have to go through that whole thing again. So, Charlie, let me come back to you to kind of wrap it up here. So what is our outlook for house prices and residential real estate more broadly over the next few years?
>>Charlie Dougherty
First thing, mortgage rates are likely to come down a little bit more and that should eventually help lift the overall pace of home buying and selling, which again, is still running at a really sluggish pace of really energetic rebound. Though, does not seem likely and it doesn't seem likely for a few different reasons. For one. You know, affordability is still going to be a major headwind.
Lower rates will help around the margin. But as you alluded to, mortgage rates probably won't fall back to the lows that we saw back in 2021. As Jackie said, home prices likely are going to remain elevated and you're going to see some slowdown in terms of income growth. And that's sort of a reminder that another potential challenge that lays ahead for buyers will be a slowing economy, which I think itself will limit homebuying. So overall, you're likely to see a little bit better balance in the housing market over the next few years, but demand probably still runs ahead of supply with a tilt towards it being a seller's market. So that should lead to a more quote unquote normal pace of home price appreciation, likely somewhere in the 4 to 5% range.
>>Jay Bryson
Okay. Thank you, Charlie, for that. And thank you, Jacki. As well. And thank everyone for listening today. And thank you for the questions that you continue to submit to us. Please keep those questions coming. And we will be back with more podcast to answer those questions and to also talk about other issues in terms of the economy. So again, thank you for joining us today.
>>Outro
That's all for this episode of the Ask Our Economist podcast. And we thank you for joining us. If you enjoyed today's episode, please share with colleagues, family, friends and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at Ask our Economists at WF dot com Ask our Economists.
>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.
This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.
Important Information for Non-U.S. Recipients
For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 9: Did the Fed Overdo It?: The Outlook for U.S. Monetary Policy

Softening labor market indicators have raised the risk of recession. Is U.S. monetary policy too tight? Economists Jay Bryson and Michael Pugliese discuss our outlook for interest rates in this podcast.

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>> Intro: Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends. Insights on the demographics, social issues and challenges that impact our world. All which helps you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.
>>Jay Bryson: Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at WF, and you're listening to our Ask Our Economist podcast series. Recently, we've made some pretty major changes to our outlook for Federal Reserve policy. And here to talk about those changes, Senior Eonomist Michael Pugliese. So Mike, can you just outline some of the changes that we've made recently.
>>Mike Pugliese: Yeah. Jay. So the changes we've made have been pretty substantial. We've both added monetary policy easing to our forecast and also sped it up. So our previous forecast from early to mid-July looked for two 25 basis point rate cuts from the FOMC by the end of this year. So one in September, one in December, with another 100 basis points of easing next year, so 150 cumulatively. What we're looking for now is 50 basis points of easing in September. Another 50 basis points in November and then 25 basis points of rate cuts by the end of this year. So 125 total and then 75 basis points more in 2025. So cumulatively, it's gone from 150 basis points of cuts to 200 and also faster with those 50 basis points back to back early in the easing cycle. Now maybe I'll kick it back to you, Jay. What led us to both add easing and speed up the process?
>>Jay Bryson: Yeah. Great question Mike. So let's step back for a second and just ask, you know, what's the Fed trying to accomplish. So the F ed has two objectives. It's called its quote dual mandate. And so one of its objective is what's called price stability. And the way the Fed defines that is a rate of change of consumer prices of 2% a year, at least over the medium term horizon. The other objective is what they call full employment. And nobody really knows exactly what that is. That's kind of a concept that's kind of hard to measure. But when the labor market is strong, it's really what they're trying to achieve. And so up until recently, what the fed is really been focused on is that price stability part of their mandate, making sure inflation comes back down to 2%. And the labor market has really been strong. Well, in recent months we've seen some signs of some softening there. We're just not getting the same amount of job growth that we had before. The unemployment rate has moved up above 4%. And so we're starting to see some softening there. And the most recent jobs market report, which we got in early August, show that the unemployment rate actually moved up to 4.3%. And that was, I think, for us, the catalyst that really made us bring about this more aggressive pace of Fed easing. And Federal Reserve officials have been saying we've been focused on the inflation part of our mandate. Now, we've really got a focus on the labor market part of that as well. So that's really what's brought about that change is that we're starting to see some real softening in the labor market. And at the same time, in terms of inflation, we're just seeing inflationary pressures continue to subside. So if you look at the Fed's preferred measure, the way they measure consumer prices, if you look at the rate of change of that between March and June, and if you annualize that rate of change, that's only 2.3%. I mean, you're essentially back down to 2% right now. And so now it's really time to start focusing in on the labor market. And that's what brought about that change. So let me kick it back to you now. There's been some talk about the Fed having to do an emergency rate cut to mean their next FOMC meeting is on September the 18th, seven weeks away at this point. And some folks are saying the Fed's going to have to cut rates even before then a so-called emergency cut. What do you make of talk of an emergency rate cut?
>>Mike Pugliese: I'm skeptical. Of course. Never say never. But they're, I think, two reasons I'm skeptical that inner meeting or emergency rate cut is coming between now and the September FOMC meeting. The first is the economic data have deteriorated to the point you just made a moment ago, but they haven't completely collapsed. A job growth was still positive. Last month's GDP growth is pretty good in Q2. We got, you know, a bounce back in the ISM services recently just as another example. And so I don't think the economic data warrant an emergency rate cut just a week or two after the Fed last met and held rate steady. The second reason I'm skeptical is that, while financial markets have been volatile and have clearly adopted a more risk off tone, we're not in a full blown financial crisis or credit crunch or seeing major funding markets stress. Of course, that could happen, right? It could evolve in a much more negative way in the coming weeks. But between now and that September meeting. But some pain is a natural reflection of an economic outlook that looks like it's dark in recent weeks based on the data. And so sure stocks selling off of credit spreads widening is not what the Fed ever wants to see. But I don't think we've seen anywhere near the degree of financial market chaos or pain that would be necessary to push the Fed to do an emergency rate cut.
>>Jay Bryson: Okay, so let's say they make it to September 18th and they don't cut rates. So next meeting September 18th. The presidential election is only 6 or 7 weeks after that. Can the Fed really be cutting rates six weeks before a presidential election? Don't they want to be seen as, "apolitical"? And could it rate cut September 18th be interpreted as a political move?
>>Mike Pugliese: Well, it certainly could be interpreted that way, but I don't think that that's going to stop the FOMC from acting. And the reason I think that is because they're going to follow the data. And Chair Powell has made this very clear. Other Federal Reserve officials have made it very clear. And the evidence backs that up. When you look at the historical record in past elections or even just look more recently, there was an instance earlier this year where people thought the Fed might cut, and their read on the data was a little more hawkish, and they held. There have been instances over the course of the last few years, just more broadly, when the Fed has done their best to kind of react and do what they think is appropriate in order to best meet their dual mandate. And given what's happened in recent weeks and months, the case for a rate cut has very clearly been built at that September meeting. And so to me, I don't think the election precludes them from it because as a final point, they're likely going to be criticized no matter what they do, whether they cut at the meeting before the election, or they sit tight and do a rate cut, maybe at the November meeting right after the election or even December. So it's probably going to be hard for them to avoid the political pressure, no matter what they do and their best path forward, at least in my view, and I suspect in theirs as well, is to just craft monetary policy as best they can, given the uncertainties and given the data they have in hand. And and that's what I think they'll do. And that argues for a rate cut. So pivoting back to the economy, Jay, I think something we've been dancing around a little bit is the prospect of recession just hanging over our heads. Right. The Sahm rule has been violated, right. With this rising unemployment rate, stocks not doing well. It seems like some of the signs are there. How are you thinking about the recession outlook going forward?
>>Jay Bryson: So let's level set here, if you go back to the end of the Second World War to today, the U.S. economy has been in recession roughly 15% of the time. So think of that as your underlying run rate. You know, at any point in time or the probability of a recession in the next call it years, probably at least 15%. We've been saying for some time, we thought the probability of recession, although not above 15%, is elevated. Call it 30%, maybe 40%. Right now we have seen some cracks in terms of the economy. We've seen delinquencies on auto loans, and we've seen delinquencies on credit cards all move higher. Job growth is softening here. The unemployment rate is moving higher. So we're seeing cracks there. That said, you know, as you said earlier, Mike, it's not like the economy's falling apart. We are continuing to hire. But I look at the financial health of the household sector in aggregate, it remains pretty good. There's no reason to expect a massive pullback on spending there. When I look at the financial health of the business sector in general, that remains pretty good as well. There's no necessary reason to expect businesses are just going to let people go en masse. Our base case is we don't have a recession. We think we're going to be growing at rates between, you know, let's call it one, maybe 1.5%, which is slow in the next few quarters. And to the level set, if you go back and you look at 2010 to 2019 economic expansion, the economy grew on average 2.5% per year. So if you're only growing 1 to 1.5%, you're still growing, but it's relatively slow. It's not our base case. Risk of recession, I think is elevated. But, you know, again, it's not our base case. We do believe we will continue to see a soft landing.
>>Mike Pugliese: Let's say for argument's sake, a recession does materialize and growth slips negative. The unemployment rate rises more. Do we have enough Fed easing in the forecast, or do you think a lot more easing would be in store above and beyond what we already have forecast?
>>Jay Bryson: Yeah, Mike, we probably don't have enough Fed easing. You know, if there is a recession are rates going to bottom out at roughly three and a quarter to 3.5% next year where we have it, my answer to that is probably no. And the reason why is we measure the stance of monetary policy, what's what's called the "the real fed funds rate". And so that nominal interest rate minus the inflation rate. If we get to let's call it 3.25% for argument's sake, and the inflation rate is roughly two, the real fed funds rate is 1% positive. If you have a recession, typically you need to have the fed funds rate go to negative territory, at least marginally. So you need to have the nominal interest rate below the inflation rate to get a negative real interest rate to bring the economy back. And so if you're inflation rates roughly 2%, then you need a fed funds rate of below 2%, maybe as low as 1% to bring that about. And obviously it would depend if you were to have a recession, how deep it was. You know, if you think at the last two recessions, the pandemic and then the aftermath of the financial crisis, the fed took interest rates down to essentially 0%. For us to go back to down to zero, I think you would need to have a very, very deep recession. But even if we have just a modest sort of recession, that our guess rates are going to go below the 3.5% which we're penciling in right now. But obviously all that remains in the future. There's a lot of things that could happen between now and then. We're keeping a close eye on it, and as we continue to make changes to our forecast, we will keep you updated. So again, thank you very much for listening to these podcasts. Thank you for participating in this series. Please keep the questions coming. And again, thank you very much for listening today.
>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.
>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.
This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.
Important Information for Non-U.S. Recipients
For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 8: Updates to our Global Economic Outlook

Economists Jay Bryson, Nick Bennenbroek, and Brendan McKenna discuss our most recent views on the economic outlooks for the United States and some major foreign economies.

### Listen to episode 8

Audio: Listen to episode 8

### Transcript: Listen to episode 8

>>Intro
Welcome to the WF Ask Our Economist podcast series, where we explore what's on our clients minds, provide timely commentary on what's happening in the markets, and discuss our outlook for the ever changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues, and challenges that impact our world. All which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at WF, and you're listening to our Ask Our Economists podcast series. We recently released our International Economic Outlook, where we talk about our outlook for foreign economies and for the global economy. And so, to talk about that in detail today, are our international economists Nick Bennenbroek and Brendan McKenna. So global GDP not only includes major foreign economies such as, you know, the Eurozone or China, Japan, etc., but obviously it also includes the United States. So let me just briefly talk about our forecast for the United States. In general, if you look at the U.S. economy right now, today, it continues to chug along at a fairly decent clip. Last year, U.S. GDP on an annual average basis expanded 2.5%. We have seen some signs of slowing this year, and that's in our forecast. We're looking for 2.3% growth this year and then next year, 2025, shifting down to roughly a 2% or so sort of range. So some slowing growth. But you know, we don't have a recession in the forecast. And one of the benefits that comes about by slower economic growth is it helps to bring inflation down. So last year inflation as measured is what's called the PCE deflator. And I know you've all heard of CPI before. The PCE inflation is very similar to that. I'm not going to get into the technical differences. Just suffice it to say most economists, including those at the Fed, think it's probably the best way to measure consumer price inflation. Last year, PCE inflation was running at 3.7%. This year we're looking for it to shift down to about 2.5%, and next year 2.2%. And so, what that allows is inflation comes down as the economy slows, is for the Fed to start cutting rates. And so, we look for the Fed to cut rates by 50 basis points this year and then 100 basis points next year. So, you know that's in a nutshell is kind of the US economy. So, Nick let's talk about the rest of the world starting with Europe. And Europe is obviously a big entity. And for our purposes here in this discussion, that's going to include the Eurozone and the United Kingdom. So, Nick, can you briefly talk about our views on the Eurozone and the UK?

>> Nick Bennenbroek:
Thanks, Joe. So yeah, as you mentioned, Europe, obviously a key part of the global economy. I'll talk about the Eurozone, which essentially you could argue is much of continental Europe, and then the United Kingdom. And there's quite a lot of similarities in terms of what we see going on there. Now, both of these regions struggled quite a bit in the second half of 2023. The Eurozone stagnated. And actually there was a small contraction in the United Kingdom in the economy, but they had a lot of inflationary pressures, energy price spikes, and that really hurt the consumer. As we've been going through 2024, though, the outlook is improving. We've seen in terms of some of these so-called sentiment surveys, the purchasing managers indices, they have generally been improving over the early part of this year. And in particular, what we're seeing in both the Eurozone and the United Kingdom is some improvement as the inflation outlook has sort of receded, real household incomes have improved, and that's a function of both ongoing employment, but also these households are able to stretch the euro or the pound a little further with the inflationary pressures. Not quite as much as they were previously. So they are both regions. We are seeing a gradual upswing in terms of GDP growth for the Eurozone. In the United Kingdom this year, we're looking at 0.8% GDP growth. Now that doesn't sound great, but it's still an improvement from what we saw last year for the Eurozone. We were at 0.6%. And for the United Kingdom we're at 0.1%. So pretty much on an overall upswing. And actually, if anything, we expect that economy to keep on strengthening as we go into 2025. We're looking at GDP growth for both the Eurozone and the United Kingdom at around about 1.5% next year. So a gradual upswing with those household incomes improving. And that's a function of the ongoing increases in wages and employment. And while higher wages are certainly helping, I think the consumer and households, it's not quite as good as news from an inflation perspective. Wage growth is still somewhat elevated in both countries. Now, to be fair, with the relatively slow growth, we're not seeing a lot of inflationary pressures. And in fact, if anything, especially in the Eurozone, inflation has been actually improving more quickly than here in the United States. And that allowed the European Central Bank to actually start its interest rate reduction cycle. In June, they lowered their policy interest rate from 4% down to three and three quarters. We do think that the European Central Bank is going to be a little bit careful as we move forward, with the wages still running around about 5% and their core inflation measure right now, still at 2.9%. Over the rest of this year, would look for another half percentage point in reduction in terms of the ECB interest rates. And then as we go through next year, another percentage point. And that would bring the policy rate in Europe down to two and a quarter. You know, as far as the United Kingdom is concerned I mentioned some similarities. They just haven't made as much progress yet. On the inflation front, their core CPI measure, the one that excludes food and energy, is still running at around about 3.5%. And that's a little bit above the target. And so they haven't lowered interest rates yet. In fact we think they're only going to lower interest rates a couple of times this year in August and November, which would bring that policy rate down from five and a quarter currently all the way down to four and four and a quarter, and then continuing to lower policy rates gradually through 2025.

>> Jay Bryson:
Okay. Let's shift our view now and go to the other side of the world. What do you see in there in Japan?

>> Nick Bennenbroek:
Yeah, I mean, in Japan, it's kind of interesting as well because unlike most countries that have been dealing with rather high inflation and wanting to get inflation a little bit lower. In Japan, they have had a temporary bout of inflation. But historically they've really been more concerned about inflation being too low or even negative. That is deflation for quite some time. And so if anything, at this point, they're actually welcoming or would welcome a little bit more on the inflationary side. But before we get there, let's very briefly talk about what's happening in terms of the economy. The recovery is still a little bit uneven. In fact, GDP in Japan contracted in the first quarter. And if you looked at both consumer spending as well as business investment, they were both down in the first quarter as well. A hopeful sign for the economy, though, is that if you look at the largest trade union federation in Japan, they announced that this year in the spring in Japan, they secured an average wage increase for the workers of 5.25%. That's the largest wage gain that we have seen since the early 1990s. And so coming back to that favorable household income trend that that we were mentioning in Europe, we would hope to see that as we go through the course of this year, those larger wage increases start to get reflected in the pay packets of, you know, Japanese workers. That growth becomes a little bit more steady. And as that occurs, the types of inflation rates that we're seeing now. And in the case of Japan, I think the last inflation reading we saw was in the range of two and a half to 3%. We can actually hope to see those inflation readings remain above the 2% inflation target for a little while longer. So at this point, I think the central bank, the Bank of Japan, is hoping to see more solid economic growth and is also hoping to see that inflation rate remain above that 2% level for a little while. They're one of the last major economies around the world, too, shall we say, remove their emergency monetary policy settings and in particular these negative policy interest rates. They just brought their policy interest rates out of zero territory in March of this year. And if we continue to see sort of some more stability and growth over the course of this year, sort of zero growth this year and next year, we're looking at GDP growth of 1.5%. Again, as long as we continue on that improving track, we do think that the Bank of Japan can gradually raise interest rates. And I really highlight the word gradually. I would be looking for a 15 basis point increase in October in the policy interest rate in Japan, and then maybe all the way until April next year, 25 basis points, or a quarter percent increase in the Bank of Japan's policy rate, that is still leave the policy rate in Japan very, very low at just a half a percentage point.

>>Jay Bryson:
Up to this point, we've been talking about advanced economies around the world. It's time now to look at some of the larger developing economies. So let's bring in Brendan to talk about that. So Brendan, start off by talking about the Chinese economy. What do you see going on there and what's our outlook for the Chinese economy?

>> Brendan McKenna:
Thanks, Jay. China is obviously very important for the overall health of the global economy. So gauging the state of China's economy is pretty crucial. But as far as the health of China's economy, growth actually held up pretty well over the first half of this year. But going forward, we think China's economy will probably soften and structural issues start to dampen growth prospects over time. You know, China has demographic problems, geopolitical issues that they're in the center of that are challenging China's export driven growth model, deflation, weak consumption, but also just a really persistent deterioration in the local real estate sector. We continue to see home prices fall, construction and investment activity contract, and the risk of an overall China financial crisis remaining quite elevated for the time being. So given that mix, we're forecasting growth of around 5% this year. And for a more material slowdown in China's economy next year, forecasting growth closer to 4% in 2025.

>>Jay Bryson:
Okay. So let's also then talk about another very large economy, India. India is now the most populous country in the world by many measures, and it's been in the news recently because of the election there they had recently. So what are we seeing in India? Same thing that we seen in China or is a little bit different there, Brendan.

>> Brendan McKenna
It's a little bit different than what's going on in China. And you're absolutely right. India's general election was a surprise. And a surprise in the sense that Prime Minister Modi's party lost its parliamentary majority. But despite the political surprise, India is still one of the only success stories, or not only for this year, but also maybe in the post Covid era. But actually, India's story is almost the exact opposite of the China story that we just spoke about. India is becoming more integrated into the global economy through improved manufacturing capabilities. It's replacing China in the global supply chain. The demographic trends are actually very encouraging. And it also looks like India is set to receive a pretty sizable amount of new capital inflows from having local securities set to be included in local bond indices. So, you know, China also, India has maintained neutrality and just about all the world's major geopolitical conflicts, which could actually act as a net positive for the economy, even in a world that's slowly fragmenting along geopolitical lines. So despite the political surprise, we’re relatively optimistic on India's economy, the forecast calendar year growth of about 7% this year and actually a very similar growth profile in 2025 as well.

>>Jay Bryson
Well, thank you, Brendan. So it certainly sounds like India is doing a lot better than China right now. So Nick, can you sum it all up? I mean, we've talked about some of the major economies around the world. I mean, what does this all mean for global GDP growth right now and as we go forward.

>> Nick Bennenbroek:
Yeah sure. So we're looking for a very respectable pace of growth for the global economy in 2024. We're looking for GDP growth of 2.9% this year. Now that would be a modest slowdown from what we saw in 2023, which was 3.2%. You know what's going on there. Well, just to recap very quickly, you know, some countries we're seeing a slowdown. The United States and China, for example, some areas we're seeing improving like in across Europe and for example India remaining very very strong. So different economies are moving in different directions. But overall we're seeing only a gentle deceleration. So that's 2.9% growth this year, 2.8% GDP growth the year after in 2025. And to give that some sort of context, historically, the global economy has grown on average by 3.25%. So that slowdown to 2.9%, yes, it's a little below average, but it really is still a respectable performance. And we've heard in the United States about a soft landing for the US economy. I think I would tend to typify what we're seeing happening in the global scenario or the global backdrop, as well as also, you know, a generally a relatively soft landing for the global economy, just a little bit like below average.

>>Jay Bryson:
I'm glad you noted that. Soft landing. That's certainly I think what we're looking for. You're looking for a slowdown, but it's certainly not a disaster by any stretch of the imagination. Brendan, let me turn it back to you. One of the things that we do in our international economic outlook was we forecast major dollar exchange rates. So in general, what are we looking for in terms of the value of the dollar versus major currencies?

>> Brendan McKenna:
Yeah, So I would say our outlook for the dollar's maybe a little bifurcated. And I say bifurcated in the sense that at least in the short term, we think the dollar can continue to broadly strengthen against most foreign currencies. You know, as we kind of mentioned, the U.S. economy is showing signs of slowing down. But U.S. economic trends are still relatively favorable for the time being. And also, the Federal Reserve continues to be patient when approaching rate cuts. So we believe the dollar can strengthen through the end of Q3 of this year. But longer term, call it through the end of 2025. We believe the dollar can enter this period of prolonged depreciation, and that prolonged depreciation should really stem from a Federal Reserve that's ultimately going to lower interest rates and ease monetary policy. And also as foreign economy growth starts to converge towards the growth that we expect in the United States. Also, we believe the Fed easing monetary policy can really create a backdrop of easier global financial conditions, which can be a supportive environment for foreign currencies, but also maybe not so supportive for the traditional safe haven currencies such as the US dollar. So at least in the short term, Jay, we're looking for some dollar strength against many of the world's major foreign currencies. But longer term, call it Q4 of this year and to the end of 2025, we do expect a cycle of U.S. dollar depreciation.

>>Jay Bryson:
Thank you, Brendan, and thank you, Nick, for joining us today. And I'd like to remind listeners that they can find our international economic outlook and any of the reports that we write, and it's on our website. wells.fargo.com/economics. And so if you want to get more details of our outlooks certainly go there for those reports. So again, thank you for joining us today to listen in to this podcast. We'll have more of these podcasts going forward. Again, thank you for your questions. Keep them coming and we thank you for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 7: Do we have potential? An analysis of U.S. potential economic growth

The potential economic growth rate of the United States, the rate at which the economy can grow on a sustained basis, has downshifted over the past few decades. In this podcast, economists Jay Bryson, Sarah House and Shannon Seery Grein discuss the outlook for the potential growth rate of the American economy in coming years.

### Listen to episode 7

Audio: Listen to episode 7

### Transcript: Listen to episode 7

>>Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at WF. And you're listening to our Ask Our Economists podcast series. Recently, we wrote a five-piece special report on potential economic growth here in the United States. And joining me today to discuss the findings of that series of reports are economists Sarah House and Shannon Seery Grein. Before we turn it over to them, though, let's just kind of level set and talk about what potential economic growth is. Essentially what it is, it's the rate at which an economy can grow over a long period of time without generating either higher rates of inflation or lower rates of inflation and potentially deflation. So think of, of it’s the long term sustainable growth rate of the economy. Now, any quarter, an economy can grow, you know, whatever. I mean, it just so happened that in the first quarter of the year, the economy expanded 1.3% at an annualized rate and it bounces around on a quarter by quarter basis depending on what's happening to demand in the economy, depending on what's happening to, you know, different shocks and etc.. So if you go back to the second quarter of 2020, the economy contracted roughly 25% at an annualized rate and the following quarter it actually expanded 35%. Now, it's not like, you know, long term economic growth is bouncing around. That's just the shock of the pandemic closing down and then reopening the economy. So, again, it's long run potential growth rates. And it really boils down to two things. It boils down to the growth rate of the labor force. So the more people you have who potentially can work, the more goods and services the economy can make. And even if you don't have labor force growth, the economy can still grow at a positive rate over a long period of time if it has positive productivity growth that is, each worker can make more and more. And so if you go back and you look at history, so back in the 1950s and the 1960s, kind of what people may refer to as the halcyon days of the US economy, the potential growth rate at the time was 4% and even higher. And what was happening back then is we look at the labor force. There was two big demographic shifts that happened. One was the baby boomers were entering the workforce for the first time. And then the second thing was a lot of women started to join the workforce for the first time as well. That demographic lift lasted from the late 1950s up into the early 1970s. And also back then, you had still pretty strong productivity growth because of transistors and television and other inventions like that of the mid 20th century were still playing a big role. Over time, we kind of downshifted. We got a burst again of productivity growth in the late 1990s because of the Internet and the networking of computers. But more recently, things have slowed down not only in terms of the labor force but in terms of productivity growth. And so right now, most estimates of the long run potential growth rate of the US economy is somewhere around 2% or so. And again, that's down significantly over the last few decades. So, you know, again, we talked about growth in the labor force, growth in productivity. So, Sarah, let me turn to you. You're our labor force guru. What's happened recently in terms of the labor force growth rate?

>>Sarah House:
Yeah. Thanks, Jay. So we did see the labor force downshift pretty significantly in the 2010s. So the average annual rate of labor force growth was about 0.6% compared to 1% or more over each of the prior five decades. But we have seen labor force growth pick up over the past couple of years. So, for example, it rose almost 2% in 2022 and then another 1.7% in 2023, which marks the strongest growth rates we've seen since 2000. Now, part of that is stronger population growth. So the past couple of years we saw lower mortality since the first few years that COVID was on the scene, but also robust immigration. But this is also a function of higher participation. So, for example, we've seen the labor force participation rate among primary age workers. It's hovering near its highest level in about two decades. And among women, it's actually reached a record high thanks to, in large part, some of the flexibility afforded by remote work that we've seen over the past couple of years.

>>Jay Bryson:
Thanks for that. It's happened recently, but what we're talking about here in this series of reports is what we think potential economic growth is going to be going forward. So what's our expectation there when you look at labor force growth going forward?

>>Sarah House:
I think there are reasons to be optimistic, but there's also a lot of uncertainty here. So I think whether the faster pace of labor force growth that we saw over the past few years can be sustained will depend a lot on what happens with immigration. So when you look at the CBO's projections for population growth over the next decade, so they’re expecting that the native born population is going to grow about half the pace over the next ten years that it did over the 2010s. And immigration is going to be an important offset to that. But the outlook there is very uncertain, and it's going to depend a lot on economic conditions as well as political decisions, both here in the United States and abroad. Now, when we look at the labor force participation side of the labor force growth. I think you could see some, some tailwinds there that could, if not raise overall participation, at least limit the decline caused by population aging. And that could happen through, I think, further penetration of remote work. You’ve also seeing a lot of fiscal efforts to support infrastructure or strategic industries that have helped particularly male dominated industries, and see male participation rise. But I think even just avoiding the shock of another major downturn like we saw around COVID that pushed a lot of older workers out of the workforce could also raise participation rates by just seeing fewer exits. Now, it's not all upside risk. I think there are some downside risks as well, such as the possibility that we have seen essentially the big lift from remote work and we may be won't get further prevalence of remote work. We could also see immigration maybe fall faster than some expect and that would be notable for participation since foreign born workers do have a higher propensity to participate in the labor market. And there's also the risk of maybe further fiscal policy tightening just given the debt situation, which maybe amid higher taxes, you don't see as big of an increase in participation. So when you put it all together, I think there is a case for somewhat stronger labor force growth versus the 2010s. But at the end of the day, this isn't going to be a huge game changer. So maybe it adds 0.1 to 0.3 points more towards potential growth. So not a ton, but at least directionally helpful.

>>Jay Bryson:
Okay. Well, thanks for that. And now, Shannon, let's turn to you now for the second part of this productivity growth. And before we do that, productivity growth itself is comprised of three different components. Okay. So the first would be changes in the net capital stock. So if you give workers more capital, they can be more productive. So think of a worker who's making, say, a baseball bat. Okay. And initially this worker had just a pocketknife to be able to do that. You give them a lathe and they could be very, very productive and make more baseball bats per hour. So one is the net increase in the capital stock. The second would be what's called total factor productivity. I'll ask Shannon to define that in just a minute. And then the third would be changes in labor composition. So changes in the age structure of the workforce, education levels, things of that nature. When you go back and you look at it over the last, say, 50 years, on balance, that labor composition has had very little effect on overall productivity. The big contributors have been this total factor productivity and changes in the net capital stock. So what we did is we just didn't talk about labor composition in terms of our reports here. So Shannon, let's focus on the first one there changes the net capital stock. What are we seeing there and what do you expect kind of going forward?

>>Shannon Seery Grein:
Thanks, Jay. I know you just described net capital stock. And really just when we think about it, I think it's really just comes down to the value of the economy's capital assets. Right. So as you use that example, if you give workers more assets, they can produce more with that. It's really defined as structures, equipment and intellectual property products. It's defined by business fixed investment spending, less depreciation. And when we think of what's happened with capital stock and where it's headed. Capital stock growth did downshift after the tech build out of the 1990s. So leading up to the 2000s, we saw manufacturing capital stock running close to a 3% annual rate for the services sector. It was north of 4% and it obviously downshifted after that bubble in terms of the tech situation. But there's also reason to believe we'll see some acceleration going forward here as well. So the best example I'd say is there has been a surge in the construction of manufacturing facilities recently. And while the factory sector is only a small slice of the economy today, we're also seeing business spending on hardware and software accelerate and outpace broader investment spending, which I think is a positive as we think about capital stock growth going forward. The development of automation, artificial intelligence will likely also require further investment than we've seen. So when we just think about where the economy is headed. I think you'd see some continued build out that would be supportive of capital stock. So somewhat as a thought exercise, we looked at if investment growth resembles the tech build out of the 1990s, then net capital stock growth in the business sector could rise at an annual rate between two and a half and 3% per year by the end of the current decade, which is above the more recent run rate of an average rate of of 1.8% over the past decade.

>>Jay Bryson:
So let's set the net capital stock aside for just a second and then turn to the second thing, this mouthful total factor productivity. So first, Shannon can you describe what the heck that is? Put that in lay terms and then talk about a little bit what's happened there and again, what we think going forward.

>>Shannon Seery Grein:
So total factor productivity, it goes by many names, TFP multi-factor productivity, but it seeks to measure the portion of output growth that is not attributable to capital or labor inputs, right? So not attributable to the things we've previously discussed, such as efficiency improvements and process improvements and things of that nature. So there's also implications I think, for total factor productivity going forward, which also slumped in the wake of the global financial crisis and remained lackluster over the past expansion. When we think of TFP growth going forward, I think you could see a lift from both remote work, which Sara touched on in terms of its labor force implications. I think it could give individuals the ability to focus more closely. A lot of studies do suggest that remote worker work from home has raised the quality of workers output, which could translate to TFP gains. We could also see a rise in TFP amid automation and artificial intelligence. Generally, though, we'd acknowledge that the technological advancements made in the past have generally affected productivity with a long lag, which just makes it incredibly uncertain, just kind of how quickly those gains would translate to TFP. So while it's ultimately, I think, very, very uncertain from a TFP perspective, we do expect any gains to translate at a slower pace than the net capital stock. And we think it's somewhat reasonable to expect TFP growth could reach about a 1.2% annual rate by 2029, given current trends, which would basically put it in line with its long run annual average.

>>Jay Bryson:
All right, great. So let's put it all together here. So what does all this mean? So, you know, again, if you look at most estimates of what potential growth in the United States is today, its long run sustainable growth rate, most folks would say it's somewhere probably or most economists who estimate these things would say it's probably somewhere around 2%. The Congressional Budget Office, Sarah, had mentioned them before. They peg it at roughly 2.2%. But, you know, keep in mind, there's uncertainty around these. These are only estimates. You have to estimate these things. Statistically, it's not observed. So that's where we are right now. So, you know, we did a bunch of math here to try to back out all these sorts of estimates and our best guess is, and I think we feel comfortable saying by the end of the decade we think it could be up to two and a half percent per year and we certainly wouldn't rule out 3%. Now, both Shannon and Sarah mentioned uncertainty here and that certainly, you know, could play a role. But, you know, all this may sound a little bit academic to some of you listeners, but at the end of the day, it really makes a big difference. So if we grow at 2.2% between now and the end of the decade, then compare that to a situation where we grow at 3% between now and the end of the decade. The difference at the end of the decade is roughly $1,000,000,000,000 of real GDP. Right now, the size of the economy is roughly in real terms. It's roughly $23 trillion or so. And so, I mean, you're talking a material increase in terms of the size of the economy. If we can just ramp it up by 0.8 percentage points by the end of the decade. So it really has some real implications. As I noted at the very, very start here, this is a five-part series. And so those of you who are really interested in this, I would invite you to go to our Web site, #/economics. All the reports are posted there. And you can really get down deeper into the analysis that we did here. Sarah, thanks for joining us today. Shannon, thank you for joining us to describe this. And thank you for listening today and thank you for all the questions that you continue to submit for this podcast series. And again, thank you for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 6: Recent supply chain developments and implications for inflation

Earlier in this cycle global supply chain disruption contributed to the sharpest rise in inflation in decades. In this episode of our podcast, Chief Economist Jay Bryson and Senior Economist Tim Quinlan discuss the implications of the Baltimore bridge collapse in the context of broader supply chains and what it means for inflation and Fed policy.

### Listen to episode 6

Audio: Episode 6

### Transcript: Episode 6

>>Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at WF. And you're listening to our Ask Our Economists podcast series. So recently a listener was at the grocery store and noticed that some of the shelves there were bare and question popped into his head that he submitted to us about what's happening with supply chains. And so to talk about it, joined today by senior economist Tim Quinlan. So, Tim, you know, if you go back to the pandemic, all that just wreaked havoc on the nation's supply chains and kind of faded out of the consciousness for a while. But then there was this ship that hit this bridge in Baltimore about a month or so ago and caused that to collapse. And it closed down the harbor there in Baltimore. So, you know, can you describe just in general where we are in terms of supply chains? You know, when you think about supply chains, you know, what sort of metrics are you looking at? And, you know, do these metrics suggest that we're back to, we'll call it, quote, normal?

>>Tim Quinlan:
Sure, Jay. So at the height of the supply chain difficulties we were having during the pandemic, you might recall, we built a tool called the pressure gauge at the time, and it looked at various measures of volume, time, price, inventory and labor to try to get our finger on the pulse of where we were with respect to supply chains. And so in preparation for our discussion today, updated that. And most of these guys are still kind of flashing green, in other words, signaling there's not much to worry about with respect to supply chains, with one notable exception. We've seen some hot spots with respect to shipping, particularly shipping costs. So to use one widely followed measure, the Shanghai Containerized Freight index that jumped almost 20% last week alone, which puts the May 10th reading as high as it's been at any point since it's pandemic driven boom. And that's the fifth straight weekly increase. So what's going on here? Well, a lot of the shipping liners have successfully pushed through some rate increases. I think they generally feel like they've got a little bit of leverage right now because there's a worsening situation with respect to port congestion. They've had to reroute some ships around the Red Sea because of the Houthi rebels there. And then finally, just you talked about the bridge situation in Baltimore. Firms have kind of brought forward demand to kind of mitigate some of those cargo delays.

>>Jay Bryson:
Let me ask you this, then. Know, we talked about Baltimore. I mean, is Baltimore an issue? You know, is Baltimore another pandemic sort of dislocation when it comes to supply chains?

>>Tim Quinlan:
You know Jay, there's plenty to worry about these days, but the collapse of the Francis Scott Key Bridge is not near the top of the list, at least not in our view. It's tested the supply chains, but for the most part, supply chains really passed the test. Since the March 26th collapse, four channels, none of them as deep as the main one, but four kind of side channels have opened up there that have allowed some of the trade to continue passing through the port. The salvage efforts of the old bridge are being led by the Army Corps of Engineers, and they plan to safely take down the remaining parts of the bridge, refloat the dolly. That's the cargo ship that lost power and struck the bridge and reopened the main channel all by the end of the month of May. And kind of similar to Superstorm Sandy or the dockworkers strikes in Los Angeles and Long Beach, both of which have occurred in the past decade or so. Shippers have learned to kind of reroute and adjust things pretty quickly. And they've got a lot of options on the East Coast. There’s the Port of New York, Hampton Roads, Savannah and Charleston. And, you know, it may take years to rebuild the new bridge, but the port itself should be operational again by this summer.

>>Jay Bryson:
That certainly is good news. So, you know, when you think about the supply chains disruptions that we saw, you know, a few years ago in conjunction with the all the different stimulus measures that we got with the pandemic, we just saw a surge in good prices back then. What's happened to good prices more recently?

>>Tim Quinlan:
Yeah, you're right, Jay. We did have really strong growth in goods prices during the pandemic. In fact, it was well into double digit territory with year over year prices at the height of those supply chain difficulties in 2021, topping out at north of 20%. But they've really cooled pretty substantially since then. Price growth is, you know, we talked about inflation more broadly. We talk about just the rate of growth in prices coming down. In the case of goods, it's been actual outright declines in prices. But, you know, we've talked about this before. You know, core goods only account for about 20% or so of consumer prices. Services account for a much larger share, more than 60% of CPI. So what are we seeing in terms of the growth of price of services?

>>Jay Bryson:
If you look at services, as you just noted, Tim, they account for 60%, more than 60% of the CPI. And whereas we've gotten significant disinflation in terms of goods prices and in some cases, as you noted, some outright price declines in terms of goods. When you look at services, not so much. At its peak, the core services index was running six and a half percent on a year over year basis. It's come down a little bit, but it's down to only five and a half percent. And recently it's kind of has stalled out at five and a half percent. And so if you’re just doing the math. You know, if 60% of the CPI is services and you want to get back down to 2% as the Fed does, then you really need to have some more disinflation coming out of the service sector. Now, as we look forward in terms of services, you know, a big component of services is shelter. So that would be rent of apartments and also the way they measure housing in the CPI measures as kind of a rent sort of calculation. And when you look at what's really going on in real time in terms of rents, we've seen significant price slowing in terms of rents. Now, the problem is it comes into the CPI with a relatively long lag. And so the point here is as we go forward, those measures in the CPI should be catching up with the rent that we see out there in the real economy. And so that's going to continue to come down as we go forward. The second thing is we think about most service providers, the biggest cost of them of doing business is wages and salaries. And so if you want to have service price disinflation, you kind of need to have some moderation in wages and salaries. And in fact, that's what we have seen in recent months. The labor market is getting into better balance. And so just most recently, a very widely followed measure of wage growth has slowed to about 4% or so on a year over year basis. And so that's moving back down as well. And so the bottom line here of all of this is we should see service prices continue to disinflate and bringing the overall rate of CPI inflation continue to come down.

>>Tim Quinlan:
Okay. So for the sake of our reader who sees these empty spaces in the grocery store and the context of all this stuff about services, inflation, what are the implications of all that stuff for the Fed?

>>Jay Bryson:
Yeah, so I mentioned the Fed before, right? You know, the Fed, once it has an inflation target of roughly 2% and it is dead serious about getting back to 2%. We're not at 2% right now. If you look at the overall rate of CPI inflation, it's roughly three and a half percent or so. And so we need to see signs that we're moving back towards 2% on a sustained basis. Now, as I just pointed out, we think we’re, that's happening now, it may be two steps forward and one step back in coming months. But we do think we're going to be trending lower. And once the Fed is confident that we are starting to move back towards 2%, then that raises the likelihood of rate cuts. Now, I should warn our listeners here that we don't think the Fed's going to be cutting rates any time soon. It seems to us that the earliest that would happen would be sometime this fall. It's maybe at the September FOMC meeting. If I'd have to say, you know, which way is the risk skewed to that? I would say maybe later November, even December or rather than September. You know, again, the Fed needs to see evidence that inflation is coming back down to 2% on a sustained basis. We're moving there, but it's not real, real fast. And so until the Fed is confident that inflation's going back to 2%, they're probably going to keep rates on hold. But that wraps up our podcast here for today. I'd like to thank our listener for submitting that question. And please all of you who are listening, please feel free to submit more questions to us. This issue is not going to go away any time soon. We'll keep following it and we'll keep writing about it and speaking about it on coming podcasts. So thank you very much for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 5: Strong U.S. labor force growth: Reasons, implications, and sustainability

Growth in the U.S. labor force, which is a primary determinant of potential economic growth, has been strong over the past two years. Is this robust rate of labor force growth sustainable? Economists Jay Bryson and Sarah House discuss in this podcast.

### Listen to episode 5

Audio: Listen to episode 5

### Transcript: Listen to episode 5

>>Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist for the Corporate and Investment Bank at WF. And you're listening to our Ask our Economist podcast series. So recently we received a question from a listener about the labor market, recent dynamics in the labor market. So, we thought we would delve into that. And so here to join me today is senior economist Sarah House, who is our labor market expert. So, Sarah, when we talk about what's happening in the labor market, that's a really broad question. So, let's just start in terms of employment. And there's two surveys. The Bureau of Labor Statistics does two surveys every month. One is where they send the survey out to individuals, asking them about the labor market. And then the other survey goes out to businesses, asking them about the amount of payroll. So, level set for us here. Just tell us, you know, what's happened to both of those surveys in recent years.

>>Sarah House:
Overall, we've seen employment by both of those surveys more than recover from the pandemic job losses. So, if you're looking at the payroll survey, we've seen an additional 5.8 million jobs since February 2020, but we haven't seen quite as impressive of a recovery if we're looking at that household measure of people employed. So that's up only about 2.8 million. And really, when you look at the dynamics of employment growth over the past year or so, you are seeing a weaker picture coming out of that household survey. So, by that measure, we've only added about 1.2 million workers versus nearly 3 million jobs, according to the payroll survey. Now, the household survey, it does tend to be more volatile. It's based on only a sample of about 60,000 households, whereas the establishment survey covers work sites that capture about 30% of all employed workers. So, we do put more weight in the payroll numbers, which show that hiring continues on at a pretty brisk clip here. But I think the household numbers are worth keeping an eye on as we are in an environment where the Fed is still trying to tamp down overall activity.

>>Jay Bryson:
So, it's broadening out now a little bit. So, the good thing about the household survey is that's where we get data on labor supply, our labor force and unemployment rates and a few other things. So, focusing on that household survey, can you talk a little bit what's happened to the labor force and labor supply in recent years?

>>Sarah House:
When we look at the overall labor supply and also just the general tightness of the labor market, so we continue to see a labor market that's very tight. So, we saw the unemployment rate fall to about 3.4% early in 2023. So that was about a 50-year low, and it has crept slowly higher. So right now, we're at an unemployment rate of 3.8%. But a big part of that has been because you have seen a rebound in terms of labor supply. So, if you look at just growth in the labor force over the past two years, the labor force has grown close to 2% on average. And so that's the best two year run we've seen since 1980 and 1981. Now, the participation rate is still not back to where it was before COVID, and we don't think it's going to get there just due to the aging profile of the U.S. population. But if you look at within cohorts like prime age workers, so those 25 to 54 where you don't see those numbers heavily influenced by demographics, we've seen participation in that group has actually surpassed its pre-COVID peak. And in fact, when you just look at the sheer share of those 25 to 54 that are employed, it's hovering at its highest since 2001. So overall, still seeing some pretty strong dynamics in terms of both unemployment and certainly the labor supply in recent years.

>>Jay Bryson:
That's good news. I mean, obviously employment is growing. We're creating jobs. I mean, I guess, you know, the question is, or a skeptic could say, yeah, we're creating jobs, but they're not good jobs. They're all part time jobs or they're low paying jobs. You know. So, what do you think about that, that criticism, Sarah.

>>Sarah House:
Over the cycle, I think by and large, these have been disproportionately good jobs. So, we look at this by detailed industries and what the jobs in those industries pay on an average weekly basis. So, factoring in not just the wages and salaries, but just how many hours these workers are getting. And what we've seen is over the cycle that jobs in the highest two paying quintiles have grown about 7% versus just 2% in your two lowest quintiles. And that reflects the fact that we've seen a lot more jobs in professions like professional business, services, finance information over the past couple of years, whereas leisure and hospitality jobs have only recently gotten back to where they were before. COVID and retail jobs are up only 1% or so since February 2020. Now, over the past year or so, it's been a little bit more, even though in terms of job growth, we've actually seen jobs in the very lowest quintile increase the fastest. And that does relate to the fact that we have seen part time jobs grow faster than full time jobs over the past year. So, part time jobs are up about 3.5% versus 1%. But I will note that many of these part time jobs are for people who want to work part time. And we see that in terms of the share of people who would like to work full time but can only find part time work, that's the lowest share of part time employment that we’ve seen basically since the end of the last cycle and around the lows that we saw in the prior cycle. So, it's not all bad, but from an income perspective, it does mean that we are seeing somewhat lower quality of jobs when we think about what the increase in headcount that we see in the non-farm payroll numbers can really pack in terms of a punch for income and spending growth.

>>Jay Bryson:
Okay, great. So, let's drill down a little bit more on that. You talked about, you know, the labor supply being a labor force being up 2%. So, you know, there's a number of ways that that can happen, right? One would be we'll just call it natural demographics, right? You know, the population grows over time and kids graduate from high school and they move into the labor force. You know, another one and you touched on this would be labor force participation. So you could have the same number of people out in the population often. But not everyone's working for different reasons. But, you know, if they start to participate more, that's another way to get it. And then there's the immigration sort of thing. People coming into the country either legally or illegally, who can also join the labor force. So can you tell us a little bit more about, you know, these different three channels there? How much have they contributed to the, you know, the labor supply increasing in recent years?

>>Sarah House:
Yes. When I think about growth in the labor force, I like to break it up into the bucket of population growth. So essentially growth in the pool of potential workers and then participation. So maybe just starting with growth in the population. So, if you look at the civilian, non-institutionalized populations, working age over 16 and so this is really that pool of potential labor that employers have. It's up about 3% since 2019, but it hasn't been a through line in terms of how quickly we've gotten there. So, we saw population growth up about only just half a percent per year in 2020 and 2021, as we did see mortality rise with the pandemic. But we've seen civilian age population pick up over the past two years growing about 1% each year. And a big part of that has been growth in the foreign-born population. So, in other words, immigration. So, if you look at the BLS numbers for growth in the foreign-born civilian, non-institutionalized population, that's up about 4% per year on average over the past two years, whereas your native-born population that's 16 and over, that's increased only about half a percent. So, seeing much faster growth in terms of the foreign-born population. Now in terms of the participation rate, so we have seen that that's partially recovered again, held down by just the aging demographics. But if you look across different younger age cohorts, so basically all those under 65, you have seen participation recover. But we've really seen that the outside growth in the foreign-born population has been a big part of that. So foreign born workers, they tend to be younger and therefore they have higher rates of labor force participation. And among foreign born workers, we've actually seen the labor force participation rate rise this cycle. So that's providing a lift. But we've also seen participation rates surpass for prior cycle peaks for other demographic groups. If you look at Blacks, for example, or Hispanic women, we've seen participation more than recover in those groups. And then also just highlight that Prime age women, so 25 to 54 participation rates among them are the highest we've seen on record, as that group has really benefited from increased remote work, flexible policies, as well as just secular trends in terms of women getting married later, having children later, which leaves them more time to form attachment with the labor force. It's really a mix of factors that's contributed to the upward trend in participation that we've seen.

>>Jay Bryson:
So just to sum up, I don't want to necessarily put words in your mouth, so correct me if I'm wrong here, but it sounds like a lot of the increase in the labor supply in recent years has been due to immigration and also higher rates of participation among minorities and women. And so, looking forward, do you think those trends will continue? Will minorities and immigration and women be a big driver in terms of the labor supply in coming years?

>>Sarah House:
Well, I think we'll certainly be important factors for where labor force growth goes from here. So, if you look at just the natural increase in the U.S. population projection, so those are pretty underwhelming. So, for example, you have the CBO projecting that the natural rate of population growth essentially births minus deaths. That's only going to grow about half the pace over the next decade that we're currently at. And when you think about what those dynamic means for the labor force, so we really saw fertility rates begin to plummet in 2007. So that means we're right at those years where you're starting to see those smaller inflows into the labor force from our native population. But you're also at a time when your youngest baby boomers are only about age 60. So, you're still in a period where you're likely to see pretty large outflows at the same time. So that's going to keep immigration a key swing factor, especially in terms of what happens with the labor supply in the short term. So, we saw the CBO recently revised up its labor force projections over the next couple of years and even just between now and 2026, they're expecting the labor force to be almost 5 million workers larger than what they're projecting a year or so ago. With most of that increase, they say, due to recent immigration trends. So that's certainly going to be important factors to keep an eye on. And then also whether we see the ongoing secular rise in participation among other groups like women and other racial and ethnic minorities. So, Jay, maybe I can turn this back to you. So why do these labor force dynamics matter for the broader macro outlook?

>>Jay Bryson:
Yeah, it's a good question, right? I mean, why do we care? Is this just like an academic exercise or does it have real consequences? And the answer is it has real consequences. I mean, when you look at what's called the potential growth rate of an economy, so that's the growth that the economy can grow at a long run, sustained sort of pace without either generating inflation or deflation. There's really two factors there. One would be the growth of the labor force. So, the more workers you have, the more goods and services you can make everything else equal. And then the other thing is productivity growth. You have the same number of workers, but each worker can make more goods and services. So, what we focused on here in this podcast is growth in the labor supply. And so, if the labor supply is growing faster than what we saw before and if it continues to grow faster, then what that means is the US economy can grow at a faster pace over a long period of time without generating inflation or necessarily deflation as well. And that has some real-world consequences right. You know, an economy that grows 2% versus an economy that grows 3%. I mean, just because of the power of compounding, that turns out to be big differences over a period of, you know, just even a few years. And so, you know, if the US economy continues to grow at a relatively fast pace, then we all can have more goods and services. It gives the ability of the US to project geopolitical, economic, military, whatever you want to say, power as well. And so, these, you know, labor force dynamics do have a very important role in terms of long run economic growth. So, thanks Sarah for joining us today. So, to go through some of this, thank you to our listener who submitted that question. And just by the way, we are working on a series of reports I talked about potential GDP growth, potential economic growth. We're working on a series of reports that we hope to publish in coming weeks about the outlook for potential economic growth here in the United States. So, keep your eyes open for those reports as we publish those. And again, thank you for listening today and thank you for your questions. Please keep them coming in and thank you very much again for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 4: U.S. trade policy and implications of the 2024 presidential election

The Trump administration imposed tariffs on many of America’s major trading partners, and the Biden administration has kept many of those tariff barriers in place. Economists Shannon Grein and Nicole Cervi discuss U.S. trade policy amid the 2024 presidential election in this podcast.

### Listen to episode 4

Audio: Listen to episode 4

### Transcript: Listen to episode 4

>> Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist at the Corporate Investment Bank of WF. And you're listening to our Ask Our Economists podcast series. So earlier this year, the first podcast of the season, we recorded a podcast on the upcoming election in November and its implications for fiscal policy. But there's also other implications for other sorts of policies, specifically for trade policy. And so recently two of our economists, Shannon Grein and Nicole Cervi wrote a paper on its effects on trade policy. So we're here today with the podcast to talk about that paper and some of the findings. So, Shannon, let me start with you. Why don't you kind of level set, you know, back in 2018, 2019, the U.S. had a bit of a trade war with China. You know, we're four years out from that, four or five years out from that now. What's the status of U.S. trade policy right now? And has anything changed since those years?

>>Shannon Grein:
Sure, Jay. So there actually hasn't been much change to trade policy in recent years. The last major trade war overhaul actually came with that phase one trade agreement between the U.S. and China that was enacted in December of 2019. And since then, there hasn't been any new tariffs enacted, but there has been slight changes to existing policy. So since the Biden administration took office, for instance, they've made minor tweaks to policy like excluding some European allies from specific tariffs or importing quotas that have to be matched for it for a tariff to be enacted. But overall, the tariff policy that was enacted under the Trump administration largely remains in place today. And when we think of total U.S. tariff revenue, it only represents about 2.2% of total import value today. So in general, tariffs remain low, but they're still higher than they were prior to the trade war in 2018, when revenue represented less than 1.5% of import value. Now when we think of China, which has obviously the largest exposure still to tariffs. That tariff revenue as a share of import value is closer to 9%. So it's still a sizable share of U.S. imports that are exposed to tariffs today.

>>Jay Bryson:
Wow. So, I mean, that's like, you know, 4X you know, the tariffs that we have on China is kind of like four times what it is on our other trading partners. So you would think that that might move around trade flows just because Chinese imports now are much more expensive. So, you know. So, Nicole, have we seen any effects on on terms of import allocation?

>>Nicole Cervi:
Yeah. So we saw some evidence of substitution actually pretty soon after the trade policies took effect in 2018 and 2019. So if you're looking before the pandemic struck, we actually saw the US imports of Chinese goods were declining while over that same period, imports from the European Union and other countries in Asia were picking up. But then, of course, you had the pandemic, which kind of threw a wrench in that whole process. Imports slowed to a crawl, but after the initial lockdown period kind of faded in the United States, we saw U.S. consumer demand really ramp up, which led to an aggressive drawdown in inventories and left many domestic businesses with little flexibility to kind of pivot away from their tariff impacted suppliers if they hadn't done so already. So if you're looking at U.S. trade flows with China between 2021 and 2022, we actually saw U.S. imports of Chinese merchandise goods gradually ramp up over that period. So now more recently, bring you closer to today, we've actually seen that U.S. imports from China have retrenched. And so if we're looking at the end of 2023 relative to the end of 2019, U.S. imports from China on a value basis actually ended 2023, down 3% relative to 2019, compared to above 50% growth in countries such as Singapore, Taiwan and Vietnam.

>>Jay Bryson:
So just to make sure I understand you correctly then, it seems like those tariffs have had a pretty dramatic effect on this kind of trade reallocation, right?

>>Nicole Cervi:
Yes.

>>Jay Bryson:
Ok, good. So, you know, big reallocation in terms of trade flows. Shannon, what about economic impacts of that? You know, is there anything that we can see from the economy that's being affected by this reallocation of trade flows?

>>Shannon Grein:
Yeah. So now that we're over five years out from the initial round of tariffs, as you mentioned on the onset, Jay, we're able to parse out some of those economic effects. But as Nicole just hinted at, it's sometimes difficult to disentangle these effects from the pandemic that we just experienced in recent years. So when we sit back and think of just the tariff period, the initial tariff period, we did see some increased domestic costs. So there was little evidence of Chinese exporters, for example, lowering their prices to spur demand for U.S. imports, which led to what we can call a complete pass through rate of the tariff. So that translated to higher costs for U.S. businesses and consumers who didn't diversify away from Chinese tariffed products. That said, the overall hit to consumer prices was relatively contained. Given that most of the tariffs do target intermediate inputs and capital equipment. So the consumer impact wasn't as large, especially in comparison to that recent bout of inflation we've experienced obviously, due to the pandemic and the supply chain issues that we experienced then. But the federal government's overarching objective when enacting tariffs tends to be to protect domestic industries from foreign competition and support or spur domestic production. And there was some instance of production increases. So the US International Trade Commission, for example, estimated that the steel tariffs increased domestic production of steel and aluminum in 2021, but it also increased the selling price, which led to negative effects for industries who use steel as a key input in their production. So at the end of the day, I think broad manufacturing production has been essentially flat since the onset of the trade war, and we've seen the U.S. importing more goods from countries outside of China. So I think overall it really suggests one of the largest effects has been a shift in global supply chains rather than a large on-shoring of operations.

>>Jay Bryson:
Okay. So not huge effects economically so far, it sounds like. But, Nicole, is that going to be the same for the 2024 elections? Anything, do you think may differ this time around?

>>Nicole Cervi:
Yes. So in this upcoming election cycle, we ultimately expect more pronounced changes to trade policy should the Republicans secure the White House instead of the Democrats. So if former President Trump is reelected, we could see a significant re-escalation in the trade war. He's recently stated that he's in favor of a 10% baseline tariff on all US imports, for example, and increasing current tariffs on Chinese imports to 60% or higher. Although no formal proposals have been released by his administration quite yet. But if we do take these as fact and consider that these policies are enacted to the proposed degree, it would be a significant escalation in existing trade policy that we would suspect further increased cost pressures facing U.S. importers. That said, if you're looking at corporate profit margins at the moment, they're pretty elevated relative to the 2010s, so your past business cycle, especially among manufacturers and wholesalers. So this suggests that suppliers do have some room to absorb additional tariff costs, especially if those tariffs are enacted on industrial inputs and capital equipment, like Shannon said previously, which the previous rounds were. But on the other hand, if you're looking at retailers, they comparatively have thinner profit margins, which leaves that sector a little bit less nimble in a rising cost environment. So if new tariffs are enacted, let's say they're targeting finished goods, we suspect that the pass through to consumer prices will be greater then. And then, so that's kind of our expectation for if the Republicans secure the White House. Now, if President Biden were to be reelected, we’d essentially expect trade policy to stay the course. We don't look for much change.

>>Shannon Grein:
Yeah, I’d agree with that, Nicole. I think if a Biden administration is reelected, they may revisit tariffs enacted on key US allies such as the European Union or the United Kingdom. But it's unlikely to in part as much of an escalation in trade policy as a Republican administration would, in our view. But I think, you know, maintaining that status quo is notable in itself because the continuation of trade policy enacted under the Trump administration suggests both presidents have somewhat of a similar objective for the country's trade relations with China, which just makes this, I think, a key topic headed into the election.

>>Jay Bryson:
Thanks for the recap and just FYI for listeners out there. The report that this podcast is based on is on our website www.#/economics. It's up there if you want to read further about our thoughts here and in general we'll continue with this podcast series. Thank you for the questions that you're submitting. Please keep submitting those. And as things evolve, as we get closer to the election, we will continue to produce more podcasts on topical sort of issues. So again, thank you for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 3: Housing market 2024: An early spring or longer winter?

There are some green shoots appearing as the spring selling season gets underway, but is a full recovery in the housing market really at hand? Chief Economist Jay Bryson and Senior Economist Charlie Dougherty discuss the outlook for the housing market in this podcast.

### Listen to episode 3

Audio: Listen to episode 3

### Transcript: Listen to episode 3

>> Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, Chief Economist of the Corporate and Investment Bank at WF. And you're listening to season two of Ask Our Economists Podcast series. Today, I'm joined by senior economist Charlie Dougherty to talk about the outlook for the housing market. So, Charlie, over the last few years, the run up in mortgage rates has really done quite a number on the housing market. And just to kind of level set here, you know, if you go back to the end of 2021, the interest rate on the 30 year fixed rate mortgage, which is kind of the benchmark, was down around 3%. Late last year, we made a run at almost 8%, which would be the highest in probably 30 some years there. That said, you know, it's it's kind of retreated recently. We're just a tad below 7% on the 30 year fixed rate mortgage. So could you talk a little bit about what's going on there in terms of interest rates coming down?

>>Charlie Dougherty:
Yeah, you know, mortgage rates have dropped a bit over the past few months. You mentioned, you know, we're down from almost 8% currently, a little bit below seven. But I think what's interesting is, you know, why are mortgage rates down? And what I think it all boils down to is that really inflation is subsiding. So the big reason why interest rates really across the board shot up over the past several years is that the Fed, the Federal Reserve, has tightened monetary policy and raised the federal funds target rate pretty aggressively in response to inflation, picking up significantly. So as you may recall, at one point, the CPI or the Consumer Price Index was up over 9% on a year to year basis. Now, we're looking a lot better in terms of the trend there. And the CPI is running closer to 3%. So still on the hot side of what I think the Fed would prefer, but substantially improved. And the point here is that now that price pressures have eased, the Fed can begin to think about cutting interest rates. Now, they don't directly control mortgage rates, but if the Fed does begin to lower rates this summer, as we currently anticipate, then mortgage rates should follow that same general trajectory downward. And so as the FOMC makes monetary policy less restrictive, and then we can expect a gradual decline in mortgage rates over the next few years. So right now, we have penciled in mortgage rates closer to 6% at the end of 2024, and then the high 5% range at the end of 2025.

>>Jay Bryson:
Okay, good. So it sounds like rates are coming down, although not back to where they were post-pandemic down around 3%. But still, rates coming down is certainly good. So I would think that that would be, quote, good for the housing market. So talk a little bit about our expectations for the housing market and we'll get to home prices in just a minute. But what does it mean for like transaction volumes or housing starts, things of that nature in terms of the housing market?

>>Charlie Dougherty:
Yes. So, you know, generally speaking, I think lower mortgage rates should help slightly improve affordability for buyers and that should promote a slightly stronger pace of housing activity, especially compared to what we've seen recently. Now, keep in mind, you know, the pace of existing home sales, for example, has contracted pretty sharply over the past two years and it’s still running at a pretty slow pace. In fact, the 4 million or so unit pace that we've been averaging over the past six months is the slowest since 2010. And remember, that was in the aftermath of the housing bust and the Great Recession. But if mortgage rates do continue to fall, I think that will certainly help pull more buyers off the sidelines and allow sales to gradually improve a little bit. You know, one thing, if you look at mortgage demand over the past few months, mortgage purchase applications have risen from those really low levels that we saw throughout last year. And that tells me that demand is already starting to pick up a little bit. That being said, I think a full rebound doesn't seem all too likely at this point. You know, just given that affordability conditions are likely to remain as a significant hurdle for most homebuyers. So, of course, mortgage rates are just one factor in that affordability equation. So you look at home prices, home prices have risen at a much faster rate than household incomes over the past years. And just to kind of put some numbers behind that on a cumulative basis, home prices have risen by about 45%, while household income has increased by less than 20%. So mortgage rates, you know, moving lower may help, but unless there's a significant correction in home prices or maybe a substantial rise in income, then affordability is not likely to meaningfully improve and home sales very likely remain sluggish. Now, this is especially an issue for younger age cohorts, most notably the millennial generation who are coming down the pike and buying homes. So the sheer number of these individuals rival the baby boom generation and they're getting married. They’re having kids. Now, in one sense, the millennials represent a pretty strong source of underlying demand and should continue to be a support factor over the next few years. The problem is this demographic wave is crashing into a highly unaffordable housing market. Now, one sort of encouraging development has been on the supply front. So if you look at for sale, inventories, still pretty low, but they are starting to increase. Part of the slowdown in demand, I think, is helping inventories rise a little bit. But there is some sign that more owners are listing their homes for sale. So remember, one effect of the higher mortgage rate environment is that kind of remove the incentive to sell your home because who wants to give up that low monthly mortgage payment? But eventually, I think what's kind of happening now is that, you know, life is in a sense happening. And, you know, economic factors aside, you know, life events, whether it's births, deaths, retirements, marriage, some of the things that got disrupted by the pandemic perhaps. But these are happening and sort of contributing to more folks listing their homes for sale. And that's why you're seeing an increase in supply.

>>Jay Bryson:
Thanks for that. You know, in your answer. You touched on it a few times, didn't really deal with it to directly and that is home prices. Right. You did mention it's one part of the equation of affordability, the other being the mortgage rates. Can you talk a little bit about what our expectation is for home prices going forward? I mean, are we going to see a retreat at all in home prices? Are they going to remain elevated? Are they going to shoot higher from here? I mean, what's your expectation there, Charlie?

>>Charlie Dougherty:
You know, home prices still look like they're rising. So if you looked at the median existing sale price during January, for example, it is up about 5% on a year to year basis. So that trend of rising prices should continue, you know, from a supply and demand perspective. Again, demand is still running pretty slow, but you're likely to see a gradual improvement as mortgage rates tick down over the next few years. And you have that strong underlying source of demand from the millennials. Overall, I think the value proposition of single family homes has changed post-pandemic and that, you know, I think people who work from home might be willing to spend a little bit more money on a larger residence. So I think those demand factors are likely to push up on prices. And in terms of supply, you know, as I mentioned, supply is starting to rise as more inventory comes to market. And I think that puts some downward pressure on prices. But absent a significant rise in the unemployment rate, which would presumably bring about a wave of forced sales, I don't really foresee a huge increase in supply. Besides, now it's pretty easy to become a landlord and rent out your home instead of selling. So sellers increasingly have that as an option. Then there's that lock in effect, which likely stays mostly in place, since rates again are not likely to drop enough, whereas it would really unleash supply in a meaningful way. So at the end of the day, I think demand still outpaces supply and that allows home prices to continue to rise at a modest pace. Now, of course, real estate is all local, so there may be some regions which see faster home price appreciation and some that see weaker. For example, the largest inventory additions that we're seeing right now are happening in the south and the west regions. Generally speaking, I think that mostly reflects sort of low base effect of supply coming off of really low levels. That's also indicating that some regions are slowing down in terms of their economies, which is something to keep in mind. But overall, nationally, home prices should continue to rise so long as the economy continues to expand. So, Jay, that brings us to another question. One thing that we didn't really cover is our expectation for the macro economy and the outlook for the labor market and income growth, which are really important factors that drive the housing market. So what do we think about economic growth over the next few years?

>>Jay Bryson:
Yes. So, you know, right now, the economy as we speak here in March of 2024, the economy is actually holding up pretty well. Right now, we're growing somewhere in terms of real GDP at, you know, roughly 3% or something like that. That's a pretty decent sort of growth number. I mean, many folks would think that don't really think in terms of GDP, they think, more in terms of the unemployment rate. The unemployment rate right now is less than 4%. Generally, the economy is pretty good and we think that's probably going to likely continue. Now, we do think things are going to downshift a little bit. We've talked about interest rates. Interest rates remain elevated. The Fed's probably done at this point raising rates, but they're probably not going to be cutting, you know, in the next month or two either. And when they do, it's probably going to be relatively slowly. And so we think that that continues to add some headwinds on growth in general, we think we're going to downshift to probably something under 2% in terms of real GDP growth in coming quarters. But we're not looking for a recession at this point. It certainly doesn't seem like businesses want to get rid of people at this point. You know, if you look at initial jobless claims, people who are filing for unemployment insurance, for the first time, those claims, we get that data on a weekly basis. They remain low, trendless, at a very, very low level. We talked to most businesses still, they would say that getting good qualified people is one of the most challenging things that they face and they don't want to get rid of people right now. And so in general, you know, we think the labor market's going to continue to hold in there. That leads to halfway decent growth in terms of real income. And so, you know, that's something that would help homebuyers continue as we go forward. And so that should be one thing that would probably keep demand pretty high. So, Charlie, back to you. Just to sum everything up briefly, kind of give us your view on the housing market here in 2024 and going into 2025?

>>Charlie Dougherty:
Yes. So I think lower mortgage rates really should help bring some improvement to the housing market over the next few years. I think, you know, affordability is going to remain as a major constraint. So I don't foresee a really forceful recovery in terms of home sales and things like that. But overall, it looks like 2024 is setting up to be a year of modest improvement for the residential sector.

>>Jay Bryson:
Well, thanks, Charlie, and thank you all for listening to this Ask Our Economists podcast series. Thank you for your questions. Please keep them coming in and we'll be back with more episodes in our series here. Again, thank you very much for joining us today.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 2: Can’t grow old without her

The growing need for eldercare represents a potential boon for certain types of employment, but it also threatens to drive more workers out of the labor force. Women stand in the middle of these crosscurrents given their outsized roles in both paid and unpaid caregiving. Join Economists Sarah House, Shannon Grein, and Nicole Cervi as they discuss women’s central role in the growing eldercare community.

### Listen to episode 2

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### Transcript: Listen to episode 2

>> Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Sarah House:
Hello, I'm Sarah House senior economist with WF's Corporate and Investment Bank. You're listening to Ask Our Economists Podcast Series. In recent years to commemorate Women's History Month. We have looked at some of the ways women are stacking up in the US economy. We've looked at the role of childcare and how that's hampering women's labor force participation. Last year we took a look at single women, how they’re a growing segment of the US population and labor force. This year we looked at growing elder care needs and how that’s shaping the US economy and how that need is likely to be disproportionally met by women. Today I'm joined by two of my colleagues, Shannon Grein and Nicole Cervi to discuss the findings of our analysis. Shannon, let's start with you. You start by level setting in terms of the growing need for elder care in the United States?

>> Shannon Grein:
Sure. Thanks, Sarah. So most people, I think are awake to this idea that the US population is getting older, but I think to your point, you know, walking through some of these stats, is probably helpful to level set the conversation. So about 22% of the population today is aged 65 and older and this group is set to reach a quarter of the total US population by 2032. The oldest group of Americans, those age 75 or older, are driving most of the gain in population growth rate, so they're accounting for more than half of the total population being over the next decade. Now, by our estimates this should translate to about 1.7 million more seniors needing elder care in the next decade, which all told is probably more of a conservative estimate. It’s just as the oldest Americans get older and more people generally may require care, but this aging demographic is generally going to shape the economy in many ways, but specifically it'll have large implications for the labor market. So in a direct sense the aging population poses a challenge through diminished labor supply. In other words, there will simply be less people of traditional working age. But there's also an under appreciated indirect challenge here. So as the population ages, unpaid elder care responsibilities rise. I think that could drive working age Americans out of the workforce generally, particularly women. So in other words, the aging of the population and larger need for elder care generally will act as a hurdle for people to participate in the labor market.

>>Sarah House:
Now, Nicole, a lot of the elder care need is traditionally met by informal or unpaid care, which Shannon just alluded to. About 37 million Americans provided unpaid care last year. Can you walk us through how this is disproportionately shouldered by women and potentially why that's the case?

>> Nicole Cervi:
Yeah, so you're right, Sarah. 59% of all unpaid caregivers were women in 2022. And when we dig deeper, we can see that older women or those ages 55 and older are a major resource of this group. They account for 30% of all informal or unpaid caregivers. If we look into the degree of care provided so in terms of the intensity, there really isn't a discernible difference in the number of hours that men and women dedicate to unpaid elder care. But since women are more likely to be caregivers in the first place, they account for the bulk of the caregiving burden in terms of unpaid hours. And so this, of course, is a challenge for labor force participation generally, because balancing caregiving responsibilities, any type of caregiving responsibilities, whether it be child care or elder care, is difficult when balancing that with employment. And so these family obligations have been found to drive women in particular out of the labor force or into part time work more than men. And so in terms of the elder care case, some of this is partially due to the fact that care needs can arise suddenly, especially when a family member falls ill unexpectedly. And so when we're thinking about these cases, it can make more financial sense for women to step back to care for elderly parents or relatives than men because of the persistent gender pay gap. As we know, the pay gap between full time working men and women has been stuck around 83%. And so since older women account for an outsized share of unpaid elder care providers, these care responsibilities is a prominent factor in their lower labor force participation. So to put some numbers around that, in 2023, 1.9 million women aged 55 and older were not in the labor force due to family obligations. So that is actually seven times the number of men in the comparable group. So not only does this labor force exit dent women's financial well-being, but it also exasperates some of the labor force challenges that we've had in terms of businesses who are struggling to find workers. And if we lowered the number of older women who are out of the labor force due to these family obligations to match that of men in the same situation, it would actually lift the labor force participation rate by 0.6 percentage points. So that's a pretty sizable group that are out of the labor force on the sidelines due to these unpaid elder care responsibilities.

>>Sarah House:
The aging of the population will also likely come with increased need for paid elder care, though which actually relies on women even more than unpaid care. Shannon, can you tell us more about the landscape for paid care.

>>Shannon Grein:
Sure. So there's likely actually some opportunities here particularly for women. And as you say, Sarah, paid elder care relies even more on women than unpaid care. So about 82% of home health and personal care aides, for example, are women today. And giving the aging of the US population. This occupation is set to increase dramatically over the next decade. So out of more than 800 occupations, the U.S. Department of Labor projects personal care aides to add the most jobs over the next decade, which will result in home health and personal care aides becoming the most widely held occupation in the U.S. by 2032. So notably, this will come at a time when traditionally female dominated jobs are projected to decline due to automation such as financial clerks, secretaries, assistants. So this will provide a necessary offset and support women's employment prospects generally. But these jobs are traditionally lower pay, right? Despite seeing above average pay growth in recent years, which exacerbates that persistent wage gap that Nicole just referenced. And paid care work also disproportionately relies on women ages 55 and older who recall themselves in the midst of their own, you know, tug of war between unpaid carers possibilities and paid employment. So if we think about, you know, some numbers around that specifically, while women ages 55 and older account for nearly 11% of the total labor force, they represent 27% of workers in health care support occupations, which is compared to just 3% of men the same age. So while demand for elder care may translate to increased employment opportunities, it also somewhat dents women's financial position in that the relatively low pay of these growing occupations may exacerbate those financial challenges that we've referenced.

>>Sarah House:
Thank you both for your insights. I'll add that ultimately growing elder care needs will be felt by all of us as it reshapes our economy, even as these are likely to be disproportionately met by women. For women, this is another challenge or hurdle in their financial well-being. We’ve seen care responsibilities at both end of the age spectrum. So child care and elder care. It can strong arm women into career breaks or entering lower paying positions that offer flexibility in the first place, while also leading to labor market exits that can lower lifetime earnings. So these are one of the many factors that contribute to the pay gap and weighs on the retirement finances and eventually for a lot of women their Social Security payments. So ultimately, we're dealing with, I think, somewhat of a unvirtuous circle here where you have these lower earnings tend to lead women to take on more of the caregiving responsibilities. But that can in turn weigh on their earnings and they need to take breaks, or are put in jobs that need more flexibility, making it harder to save and build wealth and overall prepare for retirement. But the sheer numbers of family impacted by growing elder care needs means that the care crunch will be felt whether through the need to find and afford paid care or juggle employment with unpaid responsibilities. And this is coming at a time when the traditional working age population growth is already set to slow. So the BLS projects that workers ages 16 to 64 will grow just about a quarter of a percent over the next decade versus about 1% in the early 2000s. So employers are facing a picture of anemic labor force growth at a time of these growing care responsibilities, which we think will likely lead to employers needing to provide more flexibility in what could be a structurally tighter labor market. Well, Nicole and Shannon, thank you so much for joining me and discussing this recent research. And thanks to all of our listeners for joining this episode of Ask Our Economists.

>>Outro:
That’s all for this episode of the Ask Our Economists podcast and we thank you for joining us. If you enjoyed today’s episode, please share with colleagues, family, friends, and anyone who listens to podcasts. If you have any economic related questions or topics you would like to hear about in an upcoming episode, please email us at askoureconomists@#. Ask Our Economists is produced by WF.

>>Disclosures:
This report is produced by the Economics Group of WF Bank, N.A. (“WFBNA”). This report is not a product of WF Global Research and the information contained in this report is not financial research. This report should not be copied, distributed, published or reproduced, in whole or in part. WFBNA distributes this report directly and through affiliates including, but not limited to, WF Securities, LLC, WF & Company, WF Clearing Services, LLC, WF Securities International Limited, WF Securities Europe S.A., and WF Securities Canada, Ltd. WF Securities, LLC is registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. WFBNA is registered with the Commodity Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WF Securities, LLC and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this report.

This publication has been prepared for informational purposes only and is not intended as a recommendation, offer or solicitation with respect to the purchase or sale of any security or other financial product, nor does it constitute professional advice. The information in this report has been obtained or derived from sources believed by WFBNA to be reliable, but has not been independently verified by WFBNA, may not be current, and WFBNA has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of the report or such earlier date as may be indicated for a particular price or forecast. The views and opinions expressed in this report are those of its named author(s) or, where no author is indicated, the Economics Group; such views and opinions are not necessarily those of WFBNA and may differ from the views and opinions of other departments or divisions of WFBNA and its affiliates. WFBNA is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this report, neither WFBNA nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this report, and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. WFBNA is a separate legal entity and distinct from affiliated banks, and is a wholly-owned subsidiary of WF & Company. © 2024 WF Bank, N.A.

Important Information for Non-U.S. Recipients

For recipients in the United Kingdom, this report is distributed by WF Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the “Act”), the content of this report has been approved by WFSIL, an authorized person under the Act. WFSIL does not deal with retail clients as defined in the Directive 2014/65/EU (“MiFID2”). The FCA rules made under the Act for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. For recipients in the EFTA, this report is distributed by WFSIL. For recipients in the EU, it is distributed by WF Securities Europe S.A. (“WFSE”). WFSE is a French incorporated investment firm authorized and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des marchés financiers. WFSE does not deal with retail clients as defined in MiFID2. This report is not intended for, and should not be relied upon by, retail clients.

## Episode 1: What’s at stake for the U.S. economy in the 2024 elections?

Americans go to the polls on November 5 to elect the next President and Congress. Economists Jay Bryson and Michael Pugliese discuss the current outlook for the elections and their effects on the U.S. economy in this podcast.

### Listen to episode 1

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### Transcript: Listen to episode 1

>> Intro:
Welcome to the WF, Ask Our Economists podcast series, where we explore what's on our clients’ minds, provide timely commentary on what's happening in the markets and discuss our outlook for the ever-changing investment landscape. Our economists provide their views on the latest domestic and global trends, insights on the demographics, social issues and challenges that impact our world, all which help you manage risk and capture opportunities. Join us as we take you down the road of navigating today's economic climate with confidence.

>>Jay Bryson:
Hello, this is Jay Bryson, chief economist of the Corporate and Investment Bank at WF. And you're listening to the second season of Ask Our Economists podcast. Today, I'm joined by senior economist Michael Pugliese. So, Mike, it's 2024 now. Welcome to 2024, and it's an election year. And so we're going to talk a little bit about the elections and its potential effects on the economy, etc.. And so so Mike, let me start out by asking, you know, knowing what you know right now and obviously the election is still months ahead of us, but knowing about what you know right now, what do you make out about the outlook for not only the presidential election but the congressional elections as well?

>>Mike Pugliese:
Yeah, well, that's exactly right Jay. It's not just an election year, but a presidential election year. So, you know, of course, the natural place to start is control of the White House. So you have an incumbent President, Joe Biden, who's running for reelection and then the Republicans are going through the primary and caucus process right now. So far, we're only through one Iowa, but the frontrunner certainly seems to be Donald Trump, the president before Joe Biden and and this in and of itself is a little bit unusual. You know, it's been a very long time. And there's only been a couple of instances of two main candidates for president, both having either, you know, being the existing president or or a former one. Normally you have an incumbent against a challenger or you have two newcomers. In this case, we've got Joe Biden and likely Donald Trump, both of whom have been president at some point before. And like you said, Jay it’s still many months out and we’ve got a long time to kind of analyze what the race will be there. But so far, I think, you know, fair to say that there's not one clear frontrunner on that front. And that leaves us with. What about the outlook for Congress? On the House of Representatives side, Republicans control that right now, but with a very small majority of just a few seats. And I think in all likelihood, that's going to blow whichever way the president goes. So if Democrats hold on to the White House, I think that conditional on that, they should probably be favorites in the House and vice versa. If Republicans take back the White House, I think they should probably be treated as favorites in the House of Representatives with all 435 seats in the House up every two years. The Senate's a little bit different. You only get one third of the Senate in any one given race. It's six year terms in the Senate, so they rotate every two years, one third each. And the Senate map in this particular election is a little more favorable to the Republicans. So the current makeup of the Senate is 51 Democrats or Independents who caucus with the Democrats and 49 Republicans. So once again, a very small majority there for the Democrats. But there are a lot more pickup opportunities for the Republicans. So there's a retiring Democratic senator, Joe Manchin, in West Virginia, a prime spot for Republicans to pick up a seat. There are incumbents facing challenging reelection cycles in Montana, Ohio, Arizona, Michigan, Nevada, many seats there where Democrats are going to have to play defense. Whereas on the Republican side, you've got Texas, Florida, you know, some states that traditionally lean red, you know, by most political analysts forecasts, but are, I think, going to be a little bit of tougher pickups for Democrats. And again, the math here is just a little challenging because it's not like Republicans need eight seats to take a majority if they can capture just two on a net basis and they could be in a position to take a majority in the Senate. So, again, a long way away, still still going through the primary caucus process for many of these seats and for the White House itself. But when you look at most political forecasters and betting markets, I think it's a little more of a coin flip for the White House and the House, whereas Republicans at this stage are, I think, clearly favored to retake the Senate.

>>Jay Bryson:
Okay. Well, thanks for that. And so let's move on then to we talked about kind of presidents there in Congress, let’s talk about Congress in terms of legislation. I think there's a common perception that during election years, nothing gets done. Is that going to be true in 2024? Are we looking at nothing getting done this year or could potentially some big pieces of legislation get moved?

>>Mike Pugliese:
I think there could be a little bit here and there, but but probably not big legislation. And by big, I think for our purposes, the way I define that is are we going to make major changes to our economic forecast and revising growth up or down a lot or making big changes to our Fed call? The two things sort of lingering out there on the horizon right now: one has been this ongoing concern about a government shutdown. There have been a series of short term continuing resolutions that have averted government shutdowns. It's looking like we'll be coming up on another one here in early March. And I think eventually we get a full year budget that looks something like the spending levels that were agreed to in the Fiscal Responsibility Act passed last year. But that's just really not a huge needle mover. That keeps discretionary spending more or less flat relative to 2023. So you know really not getting a big fiscal tailwind there, but neither are we talking about big draconian cuts on that front. So the shutdown, the lingering out there is a risk, but I think we'll avoid one. And when we do get a full year budget, I wouldn't expect any big changes to our economic forecast. And then the second thing was there was recently announced a bipartisan agreement to make some tax changes between a lead member of the Republican side in the House and a Democratic senator in the Senate on the tax writing committees. And what they're talking about doing is expanding the child tax credit a little bit and revising and extending some expired business tax credits related to investment in R&D and those kinds of things. And it's about an $80 billion package over a two year period. So call it about $40 billion a year. But in the grand scheme of the $28 trillion economy, that's really only about 0.1 percent of GDP. And furthermore, the proposal is is offset in part due to scaling back a COVID era tax credit that's still being utilized. So kind of net net, even if it does become law, which it's not clear at all, it will be there's still some uncertainty there. But even if it does become law, that sort of bipartisan tax proposal, I, I don't envision us making really big changes to our 2024 forecast for the Fed or economic growth or inflation or anything along those lines. Now, maybe taking a step back, Jay, from those specific areas of the shutdown and the tax legislation. Like I said, I really think beyond that, we're probably not going to see big fiscal policy changes this year. What about just the effects of an election on an economy more broadly when thinking about the uncertainty effects? And, you know, I've gotten some questions about will businesses delay hiring or investment plans to the other side of the election? How do you think about that sort of linkage between election years and the economy?

>>Jay Bryson:
That's a good question, Mike. And, you know, you do often hear, again, I'll call it a common perception that things could weaken in an election year. Right. You know, you could have businesses who decide to hold off on investment spending just for the uncertainty to clear maybe consumers hold off making a big purchase in terms of cars or whatever. Again, because of some uncertainty and we've looked at this before. We've gone back and we've looked at every presidential election year since 1948 and in those 18 presidential elections and I must note we didn't include 2020 in this analysis just because 2020 that was the pandemic year, and it was just so distorted by that. But, you know, if you look at all the other elections between 1948 and 2016, quite frankly, we just can't detect any signs that an election year is different than in non-election years. If anything, it appears in at least those 18 instances that growth actually strengthens a little bit during an election year. Now, I wouldn't put a lot of weight on that. Again, we're only looking at 18 here. That's a relatively small sort of sample. But I think the bigger thing is two things. One would be that businesses and consumers are going to go about doing what they need to do. Yes, maybe they're watching the election out of the corner dry, but for many folks, it doesn't really become a reality for them until like September or so when they really start to focus on it. So they'll continue to do kind of what they need to do. The other thing is there's so many other things that go on. Obviously, it's election year, but there's so many other things that are going on right now, whether it's geopolitical uncertainty, whether it's the Fed, you know, yada, yada, yada, and all these sorts of things in any election year can move the needle much more than any sort of uncertainty as it relates to the election year. So, you know, again, when we think about 2024, we're not making our forecast based on what we think may or may not happen in terms of the election. We're looking at the general macroeconomic backdrop, making forecast, you know, kind of based on that. But Mike, once we get past 2024, I mean, obviously we’ll have another president, whether Mr. Biden gets reelected or Mr. Trump is elected or maybe something completely, you know, none of us know about right now have a new Congress in there. There are some things that need to be done next year. So can you talk a little bit about what needs to be done in terms of legislation in 2025?

>>Mike Pugliese:
Yeah. So on the other side of the presidential election, there's going to be quite a lot going on on the economic policy front. So there's a couple of things that are relatively standard for a new president. So the debt ceiling is going to be reinstated at the beginning of the year. The actual hard deadline for action on that is probably closer to mid 2025. Well, we'll dial that in when we get closer, but the debt ceiling is going to come back into the news at the beginning of 2025 of course, there's the annual budget process and the appropriations process that's related to government shutdowns. Again, that's a pretty annual thing that we're all used to. But there is something a little more the new front with fiscal policy, and that's the expiration of the 2017 Tax Cuts and Jobs Act. So if you think back to the beginning of President Trump's presidential term, one of the major pieces of legislation that came out of that was a large tax cut and tax reform bill. And in that bill, there were some big changes to both corporate taxes and individual taxes. And on the corporate side and the business side, most of those changes were made permanent. So reducing the corporate tax rate to 21%, as an example, I know, that was a permanent change. But on the individual tax side, the reduction in rates, changes to the standard deduction, the child tax credits, the SALT cap, many, many things on the individual side, those tax changes were made to sunset. And so they're set to expire at the end of 2025, meaning absent any congressional action, the law will revert back to what it was in 2017, which would be a fairly material tax increase. So it would be about 1%, 1.5% percent of GDP. So again, compare and contrast that to the the legislation that was proposed more recently. We were talking about a few minutes ago that was 0.1% of GDP. So we're talking ten acts, at least in terms of the magnitude or the scale here. So that’ll be a very large expiring piece of legislation that the next president has to deal with and the next Congress will have to deal with, regardless of what the makeup is. And then you add in, it's not just on the tax policy side. There are some other provisions that line up with that as well. So, for example, under the American Rescue plan and the Inflation Reduction Act enacted under President Biden, there were some premium subsidies for individuals purchasing health insurance through the Affordable Care Act. And those subsidies that were made more generous under President Biden are also set to expire at the end of 2025. And extending them or keeping them in some form I’m sure will be a Democratic priority, just like Republicans will be striving to protect and extend the Republican tax plan that was enacted in 2017. So this is going to be a big piece of of discussion point around 2025. We'll certainly be talking about it more when it gets a lot closer, the implications for the economy next year and beyond. And then finally, you also have the Fed. Don't forget about the Fed. So you have Chair Powell, whose term will be up in 2026, vice chair of supervision, Michael Barr's term. That will be up in 2026. So the appointments there and of course, you know, standard appointments to the Treasury and other important economic policy positions will be once again changing as we roll over into the 2025 year under a new president or under a continuation of President Joe Biden. So a lot on the policy front that will have implications for the economy in 2025 and beyond. Once we get a little closer to that point.

>>Jay Bryson:
Well, thanks, Mike. Thanks for your insights today. And, you know, clearly this story isn't going away. We're still 11 months out from the election. So as our thinking continues to evolve on this I mean, we'll all be writing a lot about this this year. I'm sure we're going to follow up with another podcast or two about the election and the economy. So thank you for joining us today and please keep your questions coming that we can address in this podcast series, Ask our Economist podcast. Thank you very much for joining us today.

>>Outro:
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