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in general uh when you have interest rates going up and inflation at high levels uh usually this is the kind of
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things that will uh push people to spend less uh but then I think on the other hand what we have is the Dynamics of
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going out of Co and the fact that uh people have all these uh missed experiences and things that they want to
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do welcome to the ripple effect the podcast that takes you on a journey through the minds of work and faculty
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well certainly consumers have been spending big over the last 3 years the financial assistance from the government
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during the time of covid combined with other factors like no student loan payments have allowed people to buy
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things spend money fixing up their home or take a vacation but now we have higher inflation for the first first
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time in several decades and that could lead to a change in spending patterns so what will this mean for the economy e
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Goldstein is a professor of Finance here at the Wharton School eai great to talk
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to you again great talking to you thank you so obviously this has been a unique time over the last three years with how
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people have spent you were saying to me before we started this that maybe even still today there's an element of the
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covid spending that still is is impacting what's going on I think think so yes I I think uh when you go back to
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think about covid it was a period of time where people could not spend uh they could not do things that they like
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to do they could not take vacations uh they could not eat in restaurants uh and it's been you know a good two years or
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more that people felt constrained on all these things I think once uh we passed Co and people think like uh they see
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that they can go out again they can uh go back to living their lives uh there is a little bit of a change in the
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psychology of spending so you know uh one thing to uh think about is there are all these missed uh experiences so for a
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while you didn't uh go on vacation and then you go back and you check and there
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all these places you wanted to see you haven't had a chance to do it yet and
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now you feel like this is the time to to do it um but but I think even beyond that something has changed because
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people realized you know I should probably spend and consume and have a good time today because who knows what's
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going to happen down the road and I think those two things have changed during covid and the aftermath of covid
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and led people to uh think a little differently when they decide how much they want to spend um you know I I would
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add to this maybe a little uh speculatively something else that uh is happening now uh big time and and this
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is climate change and you know there is climate change itself but there is also the awareness of it uh and if you go
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back to think about all the news we saw over the summer uh about unprecedented weather and things are changing quickly
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and more quickly than we thought and all this and I think people start having this in mind you know who knows what's
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going to happen let's just do it uh as quickly as as we can because th things
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around us are changing and maybe things that we are doing today we will not be able to do uh a couple years from now or
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maybe things will change and uh we will just not have the same opportunities obviously we've seen a run of inflation
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uh unprecedented that we haven't seen in such a long period of time so then I
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guess with all of that money kind of a wash in the in people's pockets it's
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probably not a surprise to see them even spending when you've got that level of
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inflation in the economy because as you said we were we were blocked out of a lot of this for such a you know such a
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period of time yes I I will say this is true I mean you know as as you point out
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in in general uh when you have interest rates going up and inflation at high levels uh usually this is the kind of
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things that will uh push people to spend less uh but then I think on the other hand what we have is the Dynamics of
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going out of covid and the fact that uh people have all these uh missed experiences and things that they want to
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do uh and you know this was certainly very strong in the first year after Co covid but I think it still has an effect
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um and then uh the psychology that has changed the fact that people now say uh you know who knows when I will be able
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to do it again so I should probably just do it now so so I think this is kind of
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a counter effect to the inflation and the interest rate and pushing people to spend more despite of uh these
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traditional economic forces how much of it is potentially kind of a tale of two stories here with the people that have
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and the people that have not and how each grouping of people are are reacting to the higher interest rates in where
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they can spend what they can spend on and kind of the reassessment of of the idea of a budget and you know maybe that
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idea of a budget had gone away for a while as well yeah I think this is uh definitely true I mean we always have a
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story of inequality um and uh some people have money to spend and they're spending more
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other people don't have and they're spending less and in some sense over
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time we do unfortunately see these gaps growing so I I do think we see some of it now I mean certainly the fact that
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interest rates are high uh is affecting some people much more adversely than than others uh and I expect that we're
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going to continue seeing that uh going forward and and it is important to note you know I mean we are sitting here and
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talking about the fact that people are generally spending uh a lot um I don't
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think this is unbounded I do think there is some boundary to it it and at some point uh we will see that it is uh
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starting to to reverse uh and in fact it is important to note that we already see
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some of the signs of uh reversal or slowing down showing up in recent data it's not that when you look at the data
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uh this is unambiguously strong and and going in Just One Direction so it is a bit of a mix uh I I would say in general
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uh what you see is a level of spending that is above experts expectations given the economic uh conditions um but as you
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point out uh there are some people who spend more some people who don't and I
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also think that when you look at the aggregate you know it's it's a bit of a
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mix it's it's not like it is unambiguous uh increase if there is a slowing of the
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economy and there are suggestions that we're seeing that a little bit right now
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how much do we potentially slow down how much impact is there potentially or is that still kind of a wait and
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see uh I think this is still a a wait and see I mean uh you know this is in some sense really the the big uh
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question that is on everyone's uh mind um you know if you think a little bit
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about the economic uh developments of recent years uh we've seen a period of
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high inflation then the FED is coming in and starting to increase rates uh really
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fast and really substantially uh much more I think than uh was originally uh planned and uh and the expectation was
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that uh this is going to slow down the economy potentially bring a recession uh but at least it will help us uh fight
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inflation we haven't seen the recession coming in uh yet uh so uh that's that's
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the good news um but uh the the bad news in that is that we also did not see inflation fully under control I mean it
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is true that inflation did not continue to go up if you're thinking about the
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rate of increase in prices it has slowed down so from a level from a rate of 9% or so we are now down to four so this is
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uh this is okay but but four is still uh pretty high and and higher than uh policy makers are comfortable with um so
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we're still not out of the woods uh so they are still you know uh continuing to
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to try to slow down in inflation and bring it back towards the two and as long as they're continuing to do that uh
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there is still the chance that there will be a significant slowdown in in the economy and we might even see a
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recession so there there's the consumer side of this but there's also uh the
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business side of this and and companies that are dealing with this and trying to
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especially at this time of the year make kind of an idea and a path as to what they should expect from consumers right
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now how much of a challenge is it for companies do you think at this time of the year especially retailers who really
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in in years past story has been you make your money you make your hay at the end
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of the year to adjust to this Dynamic when they assume that interest rates are going to stay higher for longer and
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that's going to present a variety of other challenges for them yes absolutely
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I mean all firms are now uh thinking about these different scenarios uh what this is going to imply to their uh
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revenues uh and ultimately to to the bottom line um and um you know I I will say overall uh it's it's ambiguous uh
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some uh some will be more optimistic some are less optimistic and it's very hard to tell where where it's going to
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go I mean overall when I look at what happened in the last few months um I think the signs are overall fairly
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encouraging and uh you know we do see as we discussed spending still fairly strong and I think there is a good case
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to believe that it's going to continue being strong uh going into the holiday
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so at the end of the year is going to be good for uh for many firms in that respect um but there are so many forces
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going on uh and the fact that interest rates are still high and the fact that also the the reserves that allowed
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people to spend more are dwindling to to some extent um at some point there will
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be some inflection point and we might see it starting uh to go the other way is there an element of that spend then
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that you think is still actually out there in in people Pockets at this point I think so yes I mean you know you you
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mentioned it's uh those who have and those who have not and and clearly that
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that's true that that's there uh so uh certainly uh from the point of view of
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many uh households they don't have uh the the money to to spend or whatever they had whatever they accumulated uh
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during covid is is gone uh but we still have a significant uh portion of the population uh that has those significant
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reserves in can spend and I think as I mentioned in the beginning I still think the psychology of covid and the fact
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that they have a deficit of uh spending in their mind they wanted to do all these things and they didn't do them uh
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combined with the fact that they still have money to do it still pushes them to spend and I think this is what we see in
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the in the data what do you think's been the the impact on the mindset of the
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Federal Reserve and the leaders in terms of making these rate increases that obviously theyve they've made over the
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last year and a half but also the path to go forward I mean the question now is whether or not is there another rate
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increase that's needed or is it something that you know we're off the books we can let it sit for a while and
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see how the economy reacts to it so when you listen uh to uh the leaders of the FED um you know the people at the board
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the presidents of the regional fed um they are basically watching it as we go and continuing to update almost on a
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daily basis I I would say um I think uh whenever I uh listen to them and and talk to to people who who work there uh
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there is a sense that uh what we are seeing is not exactly what we expected and doesn't really go by the book
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according to recent experiences uh so it's it's a bit of a a novel uh dynamics that that we see here
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but you know life continues to have novel elements right you you never see exactly what you've seen before and I
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think this is what we see here um so they are just watching the data continuously and and trying to decide
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what to do um as as you know there was a period of time where they they paused the the rate increase because they
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thought that uh they've done enough uh of it and now they uh want to see how it
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affects the economy and they don't want to overshoot because the risk of overshooting is that you're going to
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push the economy into a severe recession uh so that has been the mindset recently
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but there are certainly um some uh some other voices um and and you know I think
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it really depends on how the data uh evolves how then should companies be thinking about their quarterly
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expectations with all of these Dynamics at play I mean they still obviously are looking for the the best profitability
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that they can fine but if we do see a a relatively noticeable slowdown in what consumers think then they have to
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reassess what their numbers are going to be over the next couple of quarters don't they yes absolutely so you know
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the the CFOs uh of of the the companies I think all companies are exactly the same position uh they are updating as we
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speak and they are continuously watching the data and and deciding what to do I mean in some sense this is not uh
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unusual because this is what they always do I mean it's it's not like you can
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think about a period of time where there is no uncertainty and we know exactly where we are going there are always
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different factors pushing in different directions and uh you always need to to update uh but I think it will be fair to
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say that this is a period with uh increased uncertainty because of all these things that we discussed so you
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know they they have to continuously watch what the FED is doing um what spending is uh and when you're thinking
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about spending it's at the mro level but also at the industry level and the level
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of their own firm um and and they're making uh predictions uh based on that what do you think then is the message to
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the public about what we're seeing play out right now and obviously what we've
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seen with the Federal Reserve and how companies are reacting to all of this as we head towards the end of the year and
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we think about 2024 which I think a lot of people hope is going to be a better year than we've seen this
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year yes um a lot of people hope it's going to be a a better year uh I think
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that's a fair statement uh but we don't really know um I I think uh as as we
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discussed um there there are still those uh headwinds uh coming away um basically
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the fact that interest rates are still high inflation is still not completely under control um
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you know people hope that there is a soft lending um but we haven't seen it yet um
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and we might fall into alternative scenarios uh you know one one scenario is the scenario of no lending at all
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where inflation is still up up there and and is not fully under control another scenario is a scenario of lending but is
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not so soft so we we're going into a recession so those are still out there as possibilities going into uh
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2024 I think there are reasons to be optimistic and hope for a soft Landing but it's certainly not guaranteed e
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great to talk to you again thank you very much very good talking to you thank you thank you e gold steam professor of
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Finance here at the warten school thank you for listening to the ripple effect we hope you found this episode
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