Macro Matters: 2026 US Economic Drivers With CFB’s Shulyatyeva

Welcome to FICFocus where Bloomberg intelligence fixed income credit currency and commodity strategists and analysts discuss their short and long-term views on debt markets and issuers. Now here's the Bloomberg intelligence FIC research team. Welcome to this macro matters edition of the FICFocus podcast series. I'm Ira Jersey, the chief interest rate strategist at four Bloomberg intelligence, the research arm of Bloomberg LP, co-hosting with me today is Will Hoffman who covers Canadian and U.S. rates with me here at BI. Will we're now getting finally regular and regular scheduled government data? So I think it's probably a good time to bring in an expert on that. Certainly agree, and it's certainly not myself. So we're going off campus here to the senior U.S. economist at the conference board, Yelena Shulotova, and Yelena, thanks very much for coming on the macro matters podcast. Hi, Ira. Hi Will, so happy to be here. So talk to us about your role at the conference board. What do you do? Who are your clients that you're generally speaking with and some of the work that you do maybe outside of the traditional bank economics kind of role? Absolutely. So I'm a macro economist covering the U.S. economy. That's what I've been doing for the last more than 20 years, I guess, including working with you guys. It was an amazing time. And I keep doing what I've been doing for those years. So I cover the U.S. economy, totally very interesting times. And for our members at the conference board, who are like corporations, large corporations, really seeking answers to a lot of different questions about where interest rates will go, what the economy will do, how tariffs will impact, economic outlook. These are the key questions that we are trying to provide answers to our members. And I guess kind of pivoting off what you had said is, in my admittedly short time doing a similar function, a lot has changed in terms of the relationships between economic data that we look at, how it interacts with the underlying real economy, and those relationships are constantly changing. And I hate to go too far over my skis and say, there's been a few times that it has been this volatile in terms of relationships breaking down and even the government data blackout we just went through. And all of the, I'll call it, distortions that we'll see in terms of CPI and PCE over the next couple of months until things fully rolled our way through. So given all of that, and again, love to use the word uncertainty has started to beat into death, but how do you view, I'll say, the underlying economy and what are some of the anchors or pillars in terms of data you have been looking at to inform your view over the last 18, 24 months? Absolutely. So first of all, I'm so happy to have any data back, right? So that's the best thing. So finally, we're back in business and getting some data. It's still delayed and it's absolutely affected by the government shutdown. I totally agree with that. One example before we discuss, you know, the outlook and all other questions, GDP number for the third quarter, that was really, really interesting because if you think about falling imports, rising inventories and strong consumer spending, these three things don't end up. So when consumer suspending and imports are falling, what should naturally happen to inventories? Inventories should be falling and they are rising in the statistics. And I think that, you know, we are going to have to wait for revisions to the data to really understand what was happening to the economy in the middle of 2025. So that obviously complicates how things evolve and what did we see at the end of the year, what will happen in 2026. I think that our main view is that the economy will slow down. And the reason for that is tariffs. Guess what? We are still talking about tariffs. And though, you know, we didn't see the full pass through just yet, I think. I think that tariffs will impact the consumer, will impact the economy in 2026. I think that it was, the impact was just delayed and the high level of prices is still present. And this is what we hear from our respondents to our conference board consumer confidence survey. So consumers are talking about prices, consumers are talking about inflation and lower affordability. This is what they talk about in the right in responses and it's reflected in the index itself. So if you look at the survey data, it's completely got diverted from the reality that we see in the government statistics. So it will have to converge. And I think unfortunately, that will probably converge to the downside. And this is kind of our main view. We're not expecting a recession just so to say. But I think we will see a meaningful slowdown in consumer spending. And you know, if we get another wrinkle in terms of tariffs and certainty, what happens to that part, that will not stimulate business investment, I think. It's going to be complicated. Well, thank you for that one. And it's something that we are constantly debating on our end as well is not just where the impulses are going to come from, but where they're going to sway the headline figures. Because obviously, it's very well now, there's many pieces that feed into that. And one of the bigger disinflationary forces that many view is relatively baked into the cake in terms of your, your numbers is the shelter side of things. So I'm curious how you guys see the, I'll say the, the dueling forces of pass through picking up on the tariff side, we'll also seeing some of that market rent poll of OER and shelter, kind of lower and lower over the next year or so. So first of all, let's put aside the latest number, right, on shelter. So that was, that was a lot of details that were complicated. So the number was at officially low. So let's just put it aside. But we do know that shelter inflation is subsiding. And that's probably is going to continue into 2026. I think that services inflation, excluding shelter, will also continue to subside, given how expensive goods are. So it's really robbing people to pay poll kind of thing because consumers have to pay higher prices for goods. And the pick up in demand for services that we saw in the middle of 2025, that kind of like, you know, puzzled me a little bit. But I think since then, demand for services has subsided significantly. And I think that's the picture we are going to see this year. So and again, this is simple affordability. You have to pay a lot for goods, for expensive goods, for essentials. And you have to spend a little bit less on vacations and other things of more discretionary nature. So I think that the, not just the shelter part of inflation, but you know, prices for services, good and shelter will continue to subside. And you know, like while we do think that tariffs will continue to pass through into inflation, into goods inflation, in the beginning of this year, I do see it picking in the first half of the year. And after that, we think that it will subside as well. So a couple of questions. So one of the things that I noticed from the conference boards consumer confidence survey is that we're at the second lowest level since 2020, right? The only other time that it was worse in recent times was in April when the tariffs were first announced. Right? So that was pretty bad. How do you use, use the consumer confidence numbers in your thinking about the future of the economy? Because I do look at your numbers. They do go into my, both my mental model and also a couple of other, you know, harder models that we have. And when we think about the relationship between consumer confidence and retail sales and some of the other parts of consumption, I agree with you, right? There are substitution effects that all certainly happen. It worries me maybe a little bit more than it seems to be worrying you at the moment that, you know, you could wind up seeing a shift in consumer, in consumer behavior that winds up going to like slower growth areas effectively and slow and therefore slowing the economy. So let's talk about that. I do want to talk about the job market overall and maybe the effect there because the job market obviously is going to have significant implications for people's sentiment as one would imagine. So we look at the overall index and yes, indeed, it's been pretty depressed. So and it has a significant disconnect with the data that we're getting from the government sources. So where is the truth? So I think it lies somewhere in between. So maybe the actual government numbers are overstating the strengths of the economy at this point and it's just a timing issue. But at the same time, probably consumers are so frustrated with high inflation, with high level of prices that they're just, you know, continuously saying that they are not happy but they continue spending. So having said that, I think that the truth lies somewhere in between and we do expect quite a meaningful slowdown in economic activity in 2026 just looking at the headline number. But we also have a lot of interesting details in that consumer confidence survey. So one of them is the labor differential. We look at it when it comes out and it's been a significant downward trend for a very long time for over the last year, the index really slowed down quite significantly, which tells you what we actually know from other sources as well that jobs are not available. So that labor differential index actually measures jobs availability. And it's at this moment, if you ask people, do you think jobs are plentiful or hard to get? Everybody would tell you that jobs are hard to get and that's the reality. Companies are not laying off workers and masks but they are not hiring either. So is it a good thing or a bad thing? Well, you know, it creates downside risks to the labor market going forward because, you know, if the company freezes hiring, right, they already use that option in case something goes wrong. So when this, and I'm not forecasting that, right, so but if there is a stock market crash or some other financial thing that happens or geopolitically then, so and that slows down consumer spending significantly, what would a company do? They will have to choose that other option of layoffs, right, since they don't have the freezing, the hiring freeze option anymore. So that creates risks down the road and this is what our data from the conference board survey is telling us out of curiosity, Elena, I've heard so many drivers as to that frozen labor market stance of the no hire, no fire scenario and uncertainty around tariffs and future demand tends to be the one folks lean on the most. I'm curious what in your view is the primary driver of that soft patch in the labor market that we're currently seeing? Well, the labor market is pretty healthy, right? So the unemployment rate is pretty low by historical standards. It's not that, you know, we are on a verge of a collapse. It's just that it's a very tricky equilibrium, right? And that's what Chip Powell keeps talking about. So there are risks at that juncture that, you know, if something goes wrong, you know, the low hiring environment is actually not particularly good for the labor market going forward. So I think that we'll have to see and, you know, a lot will depend on other risks to the outlook, you know, take for one the geopolitical situation. So the geopolitical situation does not directly affect the US economy because we are pretty close to the mystically oriented thing. But that could affect markets quite substantially and one of the biggest drivers of consumer spending last year was the wealth effect, right? So wealthier consumers really rely on, you know, gains that they are getting from financial markets on, you know, for their spending needs. And the overall wealth effect empowers the US consumer to spend even more. So I think that that's a big risk for this year. And also like we'll have to see what happens to the Supreme Court decision with respect to tariffs, right? So will the government need to return the tariff, the collected money? Probably not. But, you know, a lot of uncertainty surrounding this issue could also affect business investment going forward. Yeah, let's dig into that a little bit more, right? So you mentioned the wealth effect and obviously there's this, you know, growing debate about the health of the consumer in part because yes, you have wealthier consumers that own equities and the like. But you're only talking about a very small minority of those individuals, whereas you have, you know, lower income folks that maybe, you know, interestingly are actually seeing wages grow faster for a variety of reasons, so things like immigration and some of the things happening in some of the services sectors is actually helping growth and wages there, whereas AI is actually slowing down wages and growth in some other sectors. So talk about how all of that goes into your thinking in terms of, you know, the overall investment, her rise in investment landscape, right? Is there, you know, obviously massive investments in things like AI and, you know, that's been driving the equity market in large part and not only the actual AI stocks, but things around that. So talk a little bit about that and then I would like to get into a little bit more the geopolitical issues, right, surrounding things like, you know, oil prices right now being under 60. And I should mention that you mentioned the Supreme Court decision, we are recording this on January 8th before both payrolls and the Supreme Court coming out with their decision on tariffs. Sure. With respect to AI, I think that, well, it's a good thing. It's probably going to improve productivity. We don't know by how much and don't believe anybody who says they do know, but it looks like directionally that's that's a positive thing that will improve productivity. And probably it, we are not on a verge of that just, you know, this year or next year. It's a, it's a more longer term thing in my view. So we are going to invest in that for quite some time and to read the benefits of that investment will probably take quite a few years to really see the, you know, the gains from total factor productivity driven by AI. So I think that right now it's creating a lot of, you know, inequality in the economy. So wealthier consumers are using the benefits that they're getting from equity market and things like that to really spend on goods and services. That helps the labor market. So, you know, they are hiring other people, hairdresses, whatever not, I don't know, whatever else. And that is driving the economy to certain extent. And I think that 2026 will, will probably bring more inequality and towards the end of the year. Look at what is happening on the policy front, right? So we haven't talked about the fiscal issues just yet, but everybody is talking about how no tips, no tax on tips and overtime will boost economic growth in the first half of the year. And I hear much less discussion from the folks that, you know, the cuts to mitigate and snap benefits will probably weigh on consumer spending at a lower end towards the end of the year. And that's, you know, that will offset some of the benefits that we will see from lower taxes earlier on. So, and that, you know, in itself will probably, you know, may mean that inequality will rise in 2026. So, but overall, I think AI's a positive thing is just that we'll have to wait for some benefits. So, let's go there and finish up on firstly fiscal policy and then monetary policy. Like where you see things going. So, on the fiscal policies or anything, you know, outside of the Supreme Court tariff decision, but from the, you know, general macro backdrop, is there anything on the government fiscal side that you see potentially as a driver or detractor from economic activity over the next 12 months or so? Sure. Like overall, like the direct directionally, fiscal policy should be a boost to economic growth in 2026, we are quite skeptical on the size of it. So we think that the benefit from fiscal policy in 2026 will be smaller than the drag from tariffs. So, that's why in our view, we're going to see a slowdown in economic activity in 2026. I am a little bit worried about the Supreme Court decision in a sense that if the government somehow will have to return the collected money, so how will they finance deficit and what will it mean for the longer end of the yield curve? And you guys know better than me all these things, but, you know, this would be against the backdrop of very low affordability in the housing market. How will that affect, you know, mortgage rates and things like that and affect the consumer going forward at the time when, you know, they have a lot of student debt, a lot of credit card that it keeps rising and we do see rising delinquency rates on all kinds of consumer credit. So that's what worries me and that's what I will be monitoring this year. At the same time, I think we should be aware of things that could boost economic growth in the midterm election year, right? So certain perks like $2,000 checks send directly to consumers. I'm not saying I'm expecting that, but something of that nature, you know, we have heard a lot of discussion about improving housing affordability from the administration. So those are the things that could potentially support growth in the short run. As far as monetary policy, well, that's that's our favorite topic. All of us love to talk about the cuts and the hikes and all of that. I think we will continue to see cuts this year. It's just that the timing of the cuts will probably shift relative to our early expectations. So we were thinking that the Fed will just continue cutting until they reach that kind of equilibrium rate of around 3%, but I think that they really indicated quite well recently in public communication that they're willing to wait a little bit to see how previous cutting, previous easing helped the economy or not. And I think they will resume cuts towards the end of the year, like probably as soon as the new Fed chair is appointed. Yeah, so a couple of comments from me on that. So firstly, you know, we think that if tariffs do have to be repaid, they're just going to issue more tea bills and it probably won't affect the long end of the curve very much at all. And they're able to do that in part because the Federal Reserve is at the moment buying a whole lot of tea bills for its reserve management program, buy more actually than we thought that they were going to ourselves and then further out, it's probably more in line with our expectations as to the natural growth of the balance sheet, you know, talk a little bit here about the composition of the Fed, right? So you mentioned when the new Fed chair comes in, presumably President Trump will nominate someone who's relatively or very dovish when the new Fed chair, so you, it sounds like to me that you're expecting a pause now until potentially June, right? Correct. So, okay. So that is a little bit different than our view. We actually think that they'll skip January and probably go at March, right? Just a slower cadence than what they recently had been, but of course, you know, they could take a longer pause, which obviously they did for almost all of 2025 for it. So talk a little bit about the composition of the Federal Reserve. How much do you think that the politics is going to weigh on the Federal Reserve Open Mark Committee? And if that's going to affect monetary policy at all, and that'll be my last question to you. Well, I think that Fed independence is at risk with all that is happening right now. I think, you know, the front runners, we all know who they are and whoever gets appointed, maybe with an exception of some other people will probably raise questions about the Fed independence. So, but having said that, I think that, you know, it's still a committee, FOMC is a committee and there are a lot of very smart independent thing independently thinking people on the committee who will still be there and it's still going to have to be a collective decision reaching a consensus. I think we'll probably see a lot more decents going forward and that's going to be a new nature of the Fed. But, you know, if you ask me, is it completely compromised, I don't think so. You know, again, because there are so many well-respected people on the FOMC and they will continue to be there. And eventually, you know, like whoever gets appointed will have to accept this, you know, this kind of policy and they will probably be thinking in the same vein. So, on that optimistic note, that's, that's pretty, I think that's kind of summarizes what I think about it. Yeah, thanks. I mean, always interesting to talk about if there's going to be more dissents. I mean, you look at a central bank like the Bank of England and they always have five to four votes, right, so it's not unusual for other central banks to have that. It's just something that we're not used to here in the United States, so not that big video. So, with that, I want to say that that was the conference board's senior U.S. economist Galena Shulateva. And Galena, thanks very much for coming on the FICFocus podcast. It was really my pleasure. Thank you so much. I read. Thank you, Will. On behalf of Will Hoffman, I'm Ira Jersey. We appreciate your listening. Please subscribe, rate, and review us on your preferred podcast platform. Contact us on the Bloomberg terminal, and I'll just know what you think about the topics we discussed today. If there's anything you'd like us to cover or any guests you'd like to hear from, thanks again for listening. And until next time, be well.