Let's start with some of the big news on the economy this week which is consumer spending United States it is softening
clearly. Also consumer confidence is down. There are those who say that means maybe the Fed doesn't need to hike as much maybe
even may get the cuts sooner than we thought. What do you think about consumer spending right now.
Look I think we're seeing that inflation which has eroded people's purchasing power. The end of fiscal stimulus that gave
people a lot of cash last year. Higher interest rates that are discouraging housing and housing allied kinds of spending
generalised increases in uncertainty and just a bit more feeling of insecurity.
All of that is taking a toll on spending. My guess is that that's going to continue for some time. And I think you'd have
to say that whatever you thought about recession risks a month ago the recession risks through the year 2020 to have to have
gone up in a quite material way. I felt for a long time as you know
David that we're not going to have inflation return near Target without a significant economic downturn. But that downturn could
happen either because interest rates set by the Fed rise very very sharply or it could happen
because of a kind of self-fulfilling process coming out of the high inflation and reductions in people's incomes. And the
latter possibility is looking like it's looking more likely today than it was. And of course if the economy did go into
recession in the next six to nine months I then you'd probably see a reduction in inflationary pressures and you'd see the Fed
probably feel that it had to push rates up less than it would if the economy was continuing to grow strongly. And labor was and
there was very very strong demand pushing up wages and prices. So Laura I just want to be very precise here because you and I
have talked quite a bit about the likelihood of recession this year and next. And you said next year you think it's much more
likely than not. But thus far you said this year maybe not so much. Are you saying given the data coming in perhaps a
recession or a significant downturn whether it's a technical recession that may be coming faster than you thought. Yeah I
think the risks of a 20 22 recession are significantly higher than I would have judged
six or nine weeks ago. Look David we've got the first quarter numbers in the bank. They are negative for GDP. There are many
forecasters who believe that the second quarter which ended yesterday also had negative GDP growth. It's not really the
formal definition of recession but people often say it's a recession when you have two quarters of negative GDP growth
in a row. And there's I think it probably close to a 50/50 chance. Maybe it's a bit less than that that we've had two
negative quarters in a row. So I think you have to say that the chance that a recession is ultimately dated is having begun
during 2022 has gone up going up significantly. We've got time yet the
structure of the economy's changed. So I'm not at all confident about it. But I would say the nearer term risks have certainly
go on up. You know you saw something in reports it used to be just target. Now there are reports coming out of other retailers
reports coming out of semiconductors suggesting fairly drastic reductions in demand and fairly substantial buildups in excess
inventories which will then lead to things on sale and will lead to reduced production demand. So those kinds of downturn
dynamics are certainly things that are more in evidence than they were. Larry one of things that got us here is obviously
inflation and the question of supply chain problems. And you've been emphatic that they are not so transitory whether transitory
or not. Why are they lasting as long as they are. Why aren't we getting more employees in airports and more people flying
airplanes and all the things we're seeing around the country by the way in here in New York. We're having to shut some public
pools because we can't find lifeguards. It's a combination of things. We've restricted immigration in various ways relative to
where it was. That means fewer people here and here and working. We've got a variety of problems in terms of reliable production
and transportation coming out of China. We have
a non-trivial number of people with long Covid and unable to work. There are a larger number of people who want to do jobs
where you can work at home. Employers are reluctant to pay what it takes to fill those vacancies quickly because
they think it's more profitable to ultimately have some vacancies and turn some people away than it is to raise we raise
wages across the board. I think all of these things are contributing factors and I think with respect to airlines. While
a lot of it is on the labor side. There are also some very substantial infrastructure issues that the country is under
invested in for a long time. And finally Larry we had NATO meetings many historic meetings and they really changed the
strategy this week. And I wonder as we look at the war in Ukraine that Russia has perpetrated there. Do you think there
may be long term really long term effects on the global economy. Certainly in the short term. What about longer term. Well
historians will debate whether the Russia Ukraine war was a cause of big changes or was a consequence of tectonic forces
that have been operating for some time. But I was very struck when you had a NATO meeting that for the first time invited a
number of countries in Asia to participate in it and identified China as a security risk that had to be prepared for alongside
Russia. It did very much have the feeling of a world that was forming blocs and choosing up teams not unlike or in some ways
not unlike the alignment that existed in the 50s and the 60s when Russia and China were allied. And there was a mobilization
of Western countries along with some Asian countries against them. And that seemed to be a way in which things things were
moving. And that's going to be a quite different world than the world we've had for the last 25 or 35 years or. And just to
follow up on that you're a great macro economist. I am not. But I sort of had I thought was received wisdom that not having
blocks was conducive to more growth more efficiency in the way economies work. And there's a big difference I think between the
Soviet Union after World War 2 and China because Soviet Union was never that large a player. I don't think economic on the
world stage. China's the number two economy trying to be number one. What does that world look like. Does that really interfere
with growth overall. I think a world a world in which there are blocks a world in which countries are kind of forced to choose
whose team they are on is likely to be a world that is both less prosperous. It's a world that's more inflationary because it's
going to be harder to find the cheapest products. And it's a world where there's going to be less cooperation on global
challenges like climate change or pandemic.