NIC Chats Podcast with Eric Winograd

Lisa McCracken (00:03):

Thanks, everyone, for listening in today to the latest NIC Chats podcast. This is Lisa McCracken. I'm the Head of Research and Analytics with NIC, and I'm here to talk about a very important and timely topic with Eric Winograd. He's the Chief Economist with Alliance Bernstein. Eric, I'm gonna let you introduce yourself and maybe give a little background before we dive into the fun stuff of what's happening in the U.S. economy, in the world, and what that means for everybody.

Eric Winograd (00:30):

Sure. Thanks, Lisa. And thanks for having me. I'm Eric Winograd, and as Lisa said, I'm the Chief Economist at Alliance Bernstein, which is a global investment firm. We have about $800 billion in assets under management. We're global, so you and I—I'm sure, Lisa—will touch on the world economy, but I'm based here in the United States, and that's my primary focus within the firm. Frankly, that's the primary focus for most people at this point: the U.S. economy and the U.S. policy outlook, which is shaping so much of what we talk about. We have seven economists around the world, and we try to bring that global insight to bear, but as I said, right now, ground zero is the United States.

Lisa McCracken (01:08):

I bet you are so busy, and you probably love these times, right? Even though the instability is not a whole lot of fun, it's unraveling what it all means and what the implications are. And I mean, the crystal ball—if you've got that one figured out now—I’d be incredibly impressed. But these are sort of interesting times. Maybe a lot of headaches and heartburn, but it's interesting, right?

Eric Winograd (01:31):

It is certainly interesting. And what I've been very encouraged by is, I think that the discussions I've had with investors around the world are sensible. I think everyone understands—to borrow your phrase—I don't have a crystal ball, and none of us do. So none of us have the ability to forecast with the level of precision, or even the level of accuracy, that we might in more settled times. And I think everyone understands that, and that just makes for a better discussion. Because if we're getting hung up on trying to forecast GDP down to the tenth of a percent, we're way off course, and nobody can do that in this environment.

Lisa McCracken (02:04):

The word I'm using right now—the word that I think is the watchword for all of those of us who follow the economy and markets right now—is uncertainty. We don't know how things are going to shake out. That doesn't mean that we can't look into the future at all. I think we have a pretty clear sense of the direction of travel in which we're going. It's a question of magnitude, and of course, that won't be determined until we see what the policy response ends up being—what the policy framework ends up being. But also, as you say, as we get a sense from the data, how households are responding to it. We know a few things. We know that the economy came into this year in good shape. The economy was relatively strong, it was balanced. The labor market was strong, inflation was falling, the Fed was cutting interest rates—all the sorts of things that had supported the strong financial market performance over the last couple of years.

Eric Winograd (02:56):

The word I'm using right now, the word that I think is the, the watch word for all of those of us who follow the economy and markets right now is uncertainty. We don't know how things are going to shake out. That doesn't mean that we can't look into the future at all. I think we have a pretty clear sense of the direction of travel in which we're going. It's a question of magnitude, and of course, that won't be determined until we see what the policy response, ends up being, what the policy framework ends up being. But also, as you say, as we get a sense from the data, how households are responding to it, we know a few things. We know that the economy came into this year in good shape. The economy was relatively strong, it was balanced. The labor market was strong, inflation was falling, the fed was cutting interest rates, all the sorts of things that had supported the strong financial market performance over the last couple of years.

Eric Winograd (03:43):

We also know that since that time, there has been a very dramatic and, in many ways, unprecedented shift in the policy framework that has the potential to knock us out of that equilibrium. To be blunt about it—and the disclaimer I'll give here is that I'm speaking only about economics, not about politics. So, to paraphrase Alan Greenspan, if you hear me to say something political, you have misheard me—I'm simply describing the economic impact of the policy changes that have been discussed, without opining on whether I think they're good or bad. The policies that are under discussion—specifically around trade, whether it's tariffs or other forms of trade restrictions—push the economy in a stagflationary direction. Tariffs are a tax, and they're a tax paid by domestic actors. That pushes up prices, and it pushes down growth.

Eric Winograd (04:31):

And that's the opposite of what you would wanna see from a financial market perspective. It reduces profit margins, it reduces spending, it has the potential to upend the economy. Now, again, as you say, Lisa, it's important to take this step back. We're starting from a strong position, and that gives the U.S. economy more cushion—more, perhaps, than other countries around the world have—to absorb the shock that is underway. That said, the implications are significant. We're talking about big numbers here, right? The tariffs that are under discussion are likely to raise U.S. prices over the course of this year by at least a percentage point, which means inflation at the end of the year might be close to four, which is pretty high. The Fed's target is two, and we think that they will slow growth. We are not explicitly forecasting a recession at this point, but I'd say what we're doing is we're kind of hedging our bets. Our growth expectation for the year is between zero and half a percent—that's pretty close to recessionary territory. So, I don't wanna downplay the significance of the changes that are underway. These are big, big—this is a big, big deal.

Lisa McCracken (05:41):

That's sort of a midmark, right? That is not the worst-case scenario. Our estimate, based on the 2018 trade war, is that every 10 percentage point increase in the effective tariff rate—so, sort of the average tariff rate on all things—boosts prices by 1%. We are incorporating into our forecast right now an increase of 1.5 percentage points relative to where inflation otherwise would have been. So, around a 15% increase in the effective tariff rate. If all of the tariffs announced on Liberation Day were to go into effect, that would probably roughly double. You would be talking about an effective tariff rate of between 27 and 30%. We don't want to take a heroic view on—or a heroically brave stand on—what the eventual tariff framework will be, because we don't know. I think it's reasonable to look at the Liberation Day announcement as a worst-case scenario. And then something along the lines of a 10% universal tariff, on average, as maybe your best-case scenario. We're probably—our forecast is closer to that best case—but even that is a massive increase in the effective tariff rate. It's much, much larger—by four or five times—than what we saw in 2018.

Eric Winograd (06:09):

That's sort of a midmark, right? That is not the worst case scenario. Our estimate based on the 2018 trade war is that every 10 percentage point increase in the effective tariff rate, so sort of the average tariff rate on all things boosts prices by 1%.we are incorporating into our forecast right now,an increase of 1.5 percentage points relative to where inflation otherwise would have been. So around a 15% increase in the effective tariff rate, if all of the tariffs announced on liberation day were to go into effect, that would probably roughly double,you would be talking about an effective tariff rate of between 27 and 30%. .we don't want to take a heroic view on,or a heroically brave stand on what the eventual tariff framework will be, because we don't know . , I think it's reasonable to look at the liberation day announcement as a worst case scenario. . And then something along the lines of a, a 10% universal tariff,on average as maybe your best case scenario, we're probably,our forecast is closer to that best case, but even that is a massive increase in the effective tariff rate. It's much, much larger by four or five times than what we saw in 2018

Lisa McCracken (07:21):

So, the reality of the situation—so you say your forecasts are not the worst-case scenario—so, are you fairly confident that there will be some off-ramp, some political maneuvering here that's not gonna get us to the worst case? We know hour to hour this changes, so hopefully this is not all moot till then—this—look, I've—but here it's...

Eric Winograd (07:46):

I mean, I have to tell you, I have no idea, right? I think that financial markets have been very eager to believe every headline when it sounds like there might be an off-ramp. I would just observe that over the course of President Trump's business and political career, he has consistently argued that tariffs are good policy. He has consistently argued that running a trade deficit is problematic, going back to the mid-1980s. This isn't something he has come to recently. And so, I do think that he believes that this is good policy. And we can agree or disagree with that, depending on your own economic and political points of view. But because he believes it, I think all economic actors need to accept that there is a wider range of outcomes than they are accustomed to seeing.

Eric Winograd (08:33):

It may be the case that there are off-ramps. It also may not be. Also, I said we look at the Liberation Day tariffs as sort of the worst-case scenario—that might not be true. It could get worse. So, that range of outcomes is uncomfortably wide. And again, we wanna be humble when we talk about our economic expectations and forecasts, in recognizing that when I say we're forecasting inflation to be 4% at the end of the year, I would also observe that our confidence around that is probably lower than it is in a normal year, just because the range of outcomes is there. But I wanna—I think it's worth taking a step back from the mechanics of the tariffs and just observing: even if there are off-ramps, as you ask, there's already been damage done here, right?

Eric Winograd (09:16):

The uncertainty alone is weighing on growth. I don't think it is the case that if there are off-ramps, then the genie goes back in the bottle—or the toothpaste back in the tube, depending on your particular metaphor, which one you prefer. We have seen consumer confidence surveys plunge. The Conference Board measure of consumer confidence is now as low as it was during the worst of the COVID pandemic. And future expectations, as measured in that survey, are even lower. So households are aware. And there is a section in that survey where respondents are able to write what they're worried about. And what do you think they wrote about tariffs?

Eric Winograd (09:52):

They said that we're worried about tariffs. We think it's gonna push growth up. Part of the argument in favor of tariffs is that it incentivizes domestic production—that it encourages businesses to invest and to build in the United States. Our estimate—and I think that this is sort of widely shared, I don't wanna claim to have reinvented the wheel here—is that business investment is basically frozen right now. Because businesses don't know what the policy framework will be. How are you supposed to make a one-, a three-, a five-, a ten-year plan if you don't know what policy is going to be 1, 3, 5, 10 days from now, much less 1, 3, 5, 10 months or years from now? So there is already damage being done. I don't wanna say that it's permanent or irreversible. I have no doubt that if there are off-ramps—if the tariff policy is eventually reversed—that that will allow for a sigh of relief and that things will improve. But even if that is the case, we wanna be cognizant—cognizant of the fact—that growth is gonna slow either way.

Lisa McCracken (10:52):

Right, right. And so, the senior housing sector definitely has some tailwinds from a demographic standpoint, and in turn—and candidly—the wealth of the boomers, the wealth accumulation has been pretty significant among that population. So, I think that some of these economic pressures and tariff trickle-down impacts would not derail that to the extent that it might hit some other sectors. But, um, would it maybe cause potential investors coming in to buy certain real estate or engage in certain transactions to, like, just sort of wait and see a little bit till the storm passes? That I can understand. I will tell you the one thing too—and this is definitely the tariffs—I don't wanna say another nail in the coffin, but certainly an additional headwind is the construction development activity. We're at record lows for all the obvious reasons: cost of capital, cost of construction. You can buy, generally, newer properties below replacement costs. I don't think the tariffs are gonna be helping that at all. So, do you have any perspective on the construction market and what—I think a lot of it's probably materials and so forth. Forget the immigration conversation—we don't necessarily, right now, need to go down that labor route—but thoughts on the construction market and tariffs?

Eric Winograd (12:16):

So, look, with tariffs, it is not the case that every sector is gonna be hit equally. That's absolutely right. There are things that are gonna be more insulated or less, and there are demographic tailwinds—obvious ones—when it comes to anything that's being built in the service of senior citizens, whether it's medical care, housing dedicated to them, or anything else. The population is aging, and those needs are going to be there. That said, as you point out, the construction sector does still face some headwinds. Raw materials costs are certainly going to go up as a result of tariffs. That's one of the most obvious places where you would expect to see an impact. The cost of capital and interest rates moving higher or staying higher is another impediment. And I know you said we don't need to go down the immigration route, but we kind of do.

Eric Winograd (12:58):

Well, let's talk about—I mean, you kind of do, right? Construction is one of the sectors where migrant labor and immigrant labor has played a very significant role. And, if you rewind two or three years, talking to almost anyone involved in that sector—as with other sectors of the economy, but particularly that one—the story was that they couldn't find enough workers. And the flip side of the tailwinds, in terms of the population aging, is that the headwind, in terms of the number of people in the workforce who are willing and able to do the type of work required for construction, has declined. We offset that over the last two years because there was a surge in immigrant labor. The numbers—the number of border encounters, the number of people crossing the borders—plummeted late last year.

Eric Winograd (13:42):

So even before the election, the numbers had collapsed. And certainly aren't gonna go up anytime soon based on what we expect policy to be. That's another headwind too. If you do see mass deportations, that could make the situation even more challenging from a labor perspective. So here again, we don't know how that shakes out, and—but—but there are those secular, or those secular headwinds. There is, of course, the tailwind of the—the screaming need for this sort of stuff. It isn't just senior housing—there's a broader need for housing in general—and you would think that in time, supply would rise to meet that, but the next few months are gonna be very choppy, for sure.

Lisa McCracken (14:20):

Right. I had the pleasure of listening to a labor economist recently. It was a very sobering presentation. And, and candidly, it was interesting to unbundle the history of really how this has unfolded, really over a number of decades. Sort of this perfect storm that just—declining birth rates, more women in the workforce, a lot of different things that are really telling that story of where we are today. And it's, I sarcastically sometimes say to people, I'm like, these could be the good old days—not to be doom and gloom—but we're gonna need to think differently, whether it's on the construction side of things, the caregiving side of things—35% of our sector is immigrant workers—on the caregiving side of things. So, that labor piece is gonna be a very interesting thing. And the US is in better shape than other countries on that front.

Eric Winograd (15:14):

, I think that's right.we talked about some of the other countries in the world being vulnerable, more vulnerable to trade disruptions, but it isn't just on trade where other countries are vulnerable demographically. If you look at Europe, the,the growth rate of their working age population is even lower than ours.their demographics are even worse than ours. And of course, China's demographics are the worst of all,where the number of people working within the next few years is likely to decline relative to the number of people aging out. So you're gonna flip it,in the US we talk about bad demographics. We still have a working age population that is growing more than the number of retirees. That's not gonna be the case in China very soon. So the, this demographic challenge is one that faces the entirety of the developed world.

Eric Winograd (15:55):

The places in the world where you have young, willing-to-work populations are largely the countries from which the developed world has drawn immigrants over the course of the last couple years. It's South America, it's South Asia, it's Africa. In the current environment, it seems unlikely that you will see enough inflow to the labor force from those regions to offset the outflow as the local-born populations age out. But we'll see, right? Politics aren't forever, policies aren't forever. And there may be offsets in time.

Lisa McCracken (16:28):

I do wanna talk a little bit about some of the international stuff—from investments in, sort of, the U.S. international dollars. And we've definitely seen some of that on the broader commercial real estate side of things. But on the senior housing front too, is the current environment impacting any of those international funds and potentially private investors? You have sovereign wealth funds behind some stuff too—backing away from the U.S.? Do we see them pulling out?

Eric Winograd (16:56):

So that is a very real concern. It's been a hot topic in financial markets during the month of April because what we have seen in financial markets has been unusual. We've seen a synchronized sell-off in the exchange value of the dollar, U.S. equity markets, and U.S. sovereign bonds—Treasuries—which means the yields have gone up as the price has gone down. And it's unusual to see all three of them sell off simultaneously, to see them all do so in the immediate aftermath of a dramatic policy change like the ones that have been announced in this administration. That suggests that there is some diminished appetite for U.S. assets. What I would say from an economics perspective is, we can't prove that. We don't get very good real-time data on investor flow—particularly from the types of investors that matter in this discussion.

Eric Winograd (17:42):

So, sovereign wealth funds, global reserve managers—I can make a good case that we have seen a decrease in demand for dollar assets, but it's a circumstantial case, not one that I could prove in a court of law, to put it that way. This is not entirely a new phenomenon. There's been a desire among reserve managers to diversify away from the dollar for a long time. The dollar has been the reserve currency largely by default, because there hasn't been a plausible alternative to it. Just to plug briefly something that we've done internally—we published last year a series of articles and a video blog, a podcast, similar to this one, discussing the reserve status of the dollar that you can probably locate on our website. But the basic idea is that the dollar was the only currency that satisfied all the needs of reserve managers.

Eric Winograd (18:30):

One of those is that Treasury bonds are still considered risk-free, and they are the risk-free asset that underpins the financial system. My expectation is that that is still the case, but the incentive for investors to diversify has increased. What reserve managers look for is policies that are—they're looking for an economy that is rules-based, that is process-based, that is predictable. And right now, our economy is none of those three things. And so, if you are a reserve manager, it makes sense to look for other alternatives. I'm not convinced that they really exist yet. And certainly, things have settled down later in the month. But these are the sorts of risks that we run around times when we make big policy changes—especially when they aren't predictable, process-based, and when they indicate a willingness to change the rules of the game, if you will.

Lisa McCracken (19:23):

So, let's spend a minute talking about the Fed. Talk about interesting times—using all the words we talked about: unpredictable, uncertain, and so forth. And clearly there's been some friction between Chairman Powell—or expressed from the administration—on that side of things. So, what's the Fed thinking right now? What do you think their stance is? Then I wanna talk a little bit about the tenure of Chairman Powell, 'cause he's here to point it through ’26. So, what's their stance? What's in their mind right now?

Eric Winograd (20:00):

So, look, the Fed is an admirably transparent institution. They tell you what they think. You could argue that they talk too much, in fact—and I think that's a very reasonable argument to make—but in a general sense, what they have told us, and what I believe to be the case, is that they are in wait-and-see mode. The Fed is not a proactive institution. They're not going to move policy around based on the way that they think the economy is going to evolve. They're going to wait for the data to tell them how it is evolving. And if that means that they're going to be a little late around turning points, that's a risk that they're willing to take. And I think that's the right stance. It minimizes the magnitude of whatever mistakes you might make over time.

Eric Winograd (20:40):

You get to change policy every six to eight weeks if you want to. So it isn't the case that if they do something wrong at one meeting, it's an irreversible error. And that argues in favor of patience, and that's what they're going to exercise here. They don't know any better than we do what the balance is going to be in terms of slower growth, higher prices, and inflation expectations around tariffs. So they're gonna wait and see. To us, what that means is that they are not likely to cut rates at least until the summer. I do think that they will cut rates because I'm pretty confident that growth is gonna slow. I am equally confident that they will not cut rates as far or as fast as the administration would like. But whatever the administration wants—or doesn't—won't impact their thinking one way or another. Right.

Lisa McCracken (21:23):

So you think Chairman Powell sticks it out, despite some of the—again—the pressures, until next May?

Eric Winograd (21:28):

Absolutely. His tenure expires at the end of May. It would do immense damage to the institution were he to leave the Fed before that time. Unless his health were to decline or something, I cannot come up with a scenario where he would voluntarily depart.

Lisa McCracken (21:42):

Right. Okay. I do wanna come back. One thing I wanted to ask—and it just popped into my mind here—and again, I have not studied this. You're gonna know the data better than I do, but there's been an idea floated in terms of offsetting some of the downsides of the trade war and the tariff pressures by making some changes on the income tax side of things viable? Numbers don't make sense? What are your thoughts on that?

Eric Winograd (22:11):

I don't think the numbers make sense, just to be blunt about it, for a couple of reasons. One is that cutting the income tax is unlikely to significantly boost growth, in that the people who pay the most in income taxes are also the people least likely to spend additional money. It's the nature of our tax code that the people with the highest bills are the people who need the money the least. If you give someone who has millions in savings a few extra thousand dollars, they're not gonna spend it—or at least they're not gonna spend all of it. That's one part of it. The other part of it is, there are consequences here. If you cut taxes too deeply, the budget deficit, which is already extraordinarily large, will get even bigger. And if the budget deficit gets bigger, it's a good bet that interest rates will go up. And if that happens, that slows growth. So if I were to try to offset the impact of slower growth from tariffs, it wouldn't be by cutting taxes. I just don't think that that's gonna be particularly effective.

Lisa McCracken (23:05):

Are there other things that you have on your radar that have been maybe planted or mentioned by the administration that they just haven't gotten to yet on the agenda, that you feel are gonna have some direct economic impacts? And just to—once we get—I’ll just say, once we get past the tariff turbulence and whatever gets worked out or doesn't, sort of, I'll say, what's next? What's on your radar?

Eric Winograd (23:30):

So this is gonna happen? Look, I am a little bit cynical about the tariff thing, in the sense that I don't think we're ever gonna really get past it. I think that this is gonna be something that's gonna persist for months and quarters. The level of uncertainty will certainly decline, but I don't think there's gonna be a day where you can sort of wipe your hand and say, "Okay, that's done and dusted. We don't have to—there's no more uncertainty there." I hope I am wrong about that. But we'll see. But it's a good time to ask what's next, because what's next is gonna start very soon, and that's the debate around fiscal policy. And we touched on it a minute ago. Congress is in the process of preparing a budget, and there are a lot of moving parts there.

Eric Winograd (24:07):

But they're going to be required to come up with some sort of budget, and they have a variety of, I would say, mutually incompatible objectives. And that isn't unusual—every Congress has that. So I don't wanna give the impression that that's something specific to this scenario. It's just that the objectives are perhaps more difficult to reconcile this time than usual. And what do I mean by that? One is that they wish to reduce the budget deficit. Two is that they wish to cut taxes. Three is that they don't wish to cut spending on any sort of core Social Security, Medicare, Medicaid programs. And I don't think that the math works to accomplish all three of those things simultaneously. They can try some workarounds there. There's already some talk that the Senate may attempt to change the rules around budget scoring, which, if they did that, I think runs the risk of financial markets responding poorly because it suggests that, rather than actually doing the work of making a budget, you're changing the rules. And that's not what you would want to see from a long-term perspective.

Eric Winograd (25:13):

But basically, the priority one for Congress appears to be extending the 2017 tax cuts, which means that in order to satisfy the rules by which they have to pass this budget, they have to come up with at least a couple trillion—and probably more—dollars’ worth of spending cuts. And it's very difficult to see how you're gonna do that without cutting into core programs. So I don't know how those discussions are gonna resolve themselves, but I suspect the process is gonna be just as bumpy and just as messy as the tariff discussion has been. Because you're gonna have, in addition to the administration, both parties in Congress involved, plus a bunch of people we've never heard of. The Senate parliamentarian, whose name I don't know, is going to have a significant role in determining whether the legislation that they eventually get to passes the rules that allow them to pass it. So, it is going to be complicated. It's gonna be messy. It's gonna, at times, dominate sentiment for the course of the next few months.

Lisa McCracken (26:13):

One final quick question—and I feel like we could go on forever—but the agencies, Fannie and Fred, are very active in our space. Do you think they go fully private? What do you think that outlook is for that restructuring?

Eric Winograd (26:30):

What I would say is, right now, all I can say about that is it seems to be on the back burner, right? It seems like there's a lot of other wood to chop. And it just seems like there's a lot of wood to chop before we get to that point. And any presidential administration is sort of running a race. You figure that you have a couple years to really implement the majority of your agenda, after which history tells you that it's very rare for a president to have undivided control of Congress after their first two years. Plus, at that point, the presidential campaign kicks off, and as far as we know, President Trump will not be running again, which means that he will be something of a lame duck, and his political capital will start to erode. So, with the agencies, as with a variety of other issues, there's a sense in which if they don't get to it fairly soon, the chance of something significant happening probably diminishes. You can't rule it out. Again, this administration is nothing if not unpredictable. They are nothing if not willing to experiment, to widen the range of outcomes. So you can't rule anything in or out. It just doesn't seem like that's where the work is being done right now.

Lisa McCracken (27:33):

So, any final comments on the economic outlook? Final words that you would leave with our listeners?

Eric Winograd (27:43):

Look, I always feel—I feel bad at this point because whenever I'm asked to describe the outlook, it is not a good outlook, right? It just isn't. We're talking about slower growth, higher prices, financial market volatility, and a lot of structural challenges. And that is the nature of where we are. I don't wanna downplay that, but I wanna go back to where I started and just observe: look, the good news is that we are starting from a relatively solid position. The reason that the Fed, and the reason that any central bank, targets being in equilibrium is because it makes you maximally resilient against shocks. It means that you can absorb a bigger shock with a smaller economic impact. And we came into this in a position where I think it would take a pretty big shock to really and truly upend the apple cart. Now, look, we're seeing a pretty big shock. And so the name of the game for the next few months—and probably the next few quarters—is going to be assessing whether that shock is big enough to undo the starting point that we came in at. We don't know enough right now to say that conclusively, but again, keep in mind that the direction of travel isn't great, but we're starting from a relatively good place. And that should give us some comfort that all is not lost, if you will.

Lisa McCracken (28:56):

Well, thank you, Eric. I know you're a busy man these days. Appreciate you joining us and sharing your thoughts, and best of luck in your role and staying on top of this hour to hour. It's a bumpy ride, but it's an interesting one. And thank you all for listening today. You can access additional NIC Podcasts at nic.org, and we will see you again soon. Thanks, Eric.

Eric Winograd (29:20):

Thank you.