We have a lot of questions surrounding this economic
climate and what that means for companies bottom lines.
Today I'm speaking with chief economist at Moody's,
Mark Zandi. Will AI transform the way companies
do business? And what does that mean for workers and
what does it mean for employers?
AI has the potential for really changing a lot of
business practices.
It's coming on very rapidly. Businesses are
already aggressively investing in these new
technologies. History is a guide.
It does take time for those technologies to be
incorporated into business practices and to have a big
impact. You know, we tend to see the technology, we
can see it, we can feel it, we can taste it.
We know it's coming.
Therefore, it should happen immediately.
It doesn't happen that way.
Generally, it happens over periods of several years or
even a couple decades.
I think all businesses will benefit and also be
challenged by artificial intelligence.
I know a lot of employees are worried they're going to
be replaced by AI, and maybe employers are
thinking, "great, I can not pay workers and I can have
them work 24/7." Do you think that that will happen
anytime soon? I mean, you kind of alluded that maybe
not, but you tell me.
I think AI will have differential impacts,
challenges and opportunities for both
workers and employers.
I mean, obviously for workers, the challenge is
that their job will be eliminated or replaced or
significantly changed in some way.
That will require the worker to get other skills
and and experiences to be able to navigate in a world
with AI.
Opportunity, because if you're able to harness the
power of artificial intelligence in your work,
you should be able to command a higher wage.
And the fact that AI is lifting everyone's
productivity. For businesses, the challenge is
it could change the competitive landscape quite
dramatically. A company's comparative advantage may be
significantly disrupted by the fact that AI has come on
and allowed other businesses to enter into the
marketplace with this new technology that allows them
to compete. And of course, the benefit is productivity
gains. I mean, businesses are scrambling to try to
figure out how to raise the productivity of their labor
force. They know that it's going to be hard to find
workers in the future, given demographic trends
aging out of the workforce by boomers and weaker
immigration. So that is a benefit.
So there's challenges and benefits to workers and
employers.
What would you say is the biggest risk that companies
are facing right now?
The biggest threat that businesses face, I think at
this point is just high interest rates and a lack of
credit because of the banking crisis and because
of the Federal Reserve's aggressive policy of raising
interest rates over the past year, businesses are
struggling. And that, I think, is particularly
difficult for smaller, mid-sized companies that
don't have access to a lot of sources of funding.
The big guys, they can go into the capital markets and
raise funds if they need to and probably have a bigger
cash cushion anyway. But for smaller and mid-sized
companies, that's a problem.
I think at this point, the biggest threat to their
business.
All right. Inflation. It's hitting all of us
individually. But what does it mean for companies and
how they're changing their investments?
The high inflation is creating a lot of
crosscurrents for businesses. I mean,
obviously, it's raising costs, the cost of labor,
the cost of materials.
So businesses are struggling, trying to figure
out how to manage those higher costs and maintain
their margins and their bottom line.
But it's also allowing some businesses to raise prices
more aggressively. We've seen since the pandemic has
hit, inflation took off, that overall economy wide
margins are wider than they were prior to the pandemic.
So that would suggest that businesses, at least on net
across all industries, have been able to pass through
and then some, those increases actually helped to
lift the bottom line and make earnings even stronger.
I suspect that's not going to continue going forward as
inflation moderates I mean, the Fed is working really
hard through higher interest rates to cool off
the economy and get inflation back in.
We'll start to see competitive pressures
intensify in those margins, come back down to something
that was more consistent with pre-pandemic.
But for the time being, businesses are enjoying
wider margins and better profitability.
Will we see a recession in the next year or why do you
think a recession has stalled?
Recession risks are high and we're in a world of high
inflation. And the Federal Reserve that's been raising
rates very aggressively to try to quell that inflation.
So historically, in that kind of world, recessions
often follow not always, but more often than not.
We have a fighting chance to get through this current
period without an economic downturn.
And it's going to, I don't want to be Pollyannaish,
it's going to be a tough 12, 18, 24 months.
But I think we could avoid a recession because
inflation is moderating.
We are past the worst of the fallout from the Russian
war and the pandemic.
The Federal Reserve's higher interest rates are
beginning to slow the economy.
Wage growth is slowing, price pressures are starting
to abate. Probably even more importantly, the
economy is amazingly resilient due to factors
that are kind of unique to this period.
For example, the excess savings that consumers built
up during the pandemic, that's the extra savings
that they wouldn't have done without the pandemic
because they were sheltering in place.
So particularly high income households in low and middle
income households have a lot of cash that they've
been using to supplement their income and maintain
their spending even in the face of high inflation.
And then business people have done a really good job
maintaining their payrolls.
They're not laying off workers to any significant
degree. And that, I think, goes to the fact that
business people have been struggling with labor
shortages even before the pandemic, realized that
they're not going away any time soon, given
demographics, given the aging out of the workforce
by boomers, you know, my cohort, given weak
immigration. And so I think businesses are loath to lay
off. And if they don't lay off, businesses don't lay
off. I don't think we go into recession.
It's the lay offs that spook consumers that then
stop spending and push the economy into an economic
downturn. And right now, that doesn't feel like
that's going to happen.
Makes sense. All right. A little bit of a pivot.
Is global warming changing any of your economic models?
How are economists and investors adapting to the
changing environment?
We are incorporating climate risk into our modeling and
into our forecasting, and it is starting to impact our
longer term economic projections.
When I say long term, more than a year or two over the
next 10, 20 years, the biggest economic cost is
going to be related to so-called physical risks.
Those are the damage created by hurricanes and
flooding and wildfires which are occurring with
greater frequency and causing increased economic
loss that we're all going to have to struggle with.
The other cost is so-called transition costs, the cost
of moving from an economy that's dominated by fossil
fuels to one that's driven by clean energy and green
energy. And that's a cost.
You can see that the Inflation Reduction Act is
an effort to provide tax credits to promote that
transition, but that's a cost to taxpayers.
So that's going to be borne by all of us for a long
time. It's not like something that's going to
drive the economy off the rails at any given point in
time. It's more like a weight on the economy, kind
of like a corrosive on the economy.
It's weakening underlying productivity growth, adding
to the cost structure of businesses and financial
institutions and just kind of throwing sand in the
gears and making it more difficult to navigate.
It's a problem for a lot of businesses, but it's not in
general, an existential one for businesses.
Last question. Will the U.S .
remain the world's leading economy?
The U.S. will indeed remain the world's leading economy,
at least in my lifetime.
I'm not worried about it.
You know, lots of challenges, but at the end
of the day, we're still the AAA credit on the planet.
You know, we're working hard to get that credit
rating down, I'll have to say.
But when push comes to shove, you know, we figure
out how to get it together and get the job done.
Where the best and the brightest of the world want
to come to go to school and to live and to work.
And that's because you have opportunities here that you
can't get anywhere else.
As a result, if you can continue to attract the best
and the brightest, we'll be just fine.
We'll continue to drive the the global economic train
for as far as the eye can see.