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in general uh when you have interest
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rates going up and inflation at high
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levels uh usually this is the kind of
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things that will uh push people to spend
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less uh but then I think on the other
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hand what we have is the Dynamics of
00:00:15
going out of Co and the fact that uh
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people have all these uh missed
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experiences and things that they want to
00:00:22
do welcome to the ripple effect the
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podcast that takes you on a journey
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through the minds of work and faculty
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I'm your host Looney and in each episode
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we'll be diving deep into the
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inspiration behind the groundbreaking
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research that Wharton professors have
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conducted and exploring how their
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findings resonate with the world today
00:00:41
well certainly consumers have been
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spending big over the last 3 years the
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financial assistance from the government
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during the time of covid combined with
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other factors like no student loan
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payments have allowed people to buy
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things spend money fixing up their home
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or take a vacation but now we have
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higher inflation for the first first
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time in several decades and that could
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lead to a change in spending patterns so
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what will this mean for the economy e
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Goldstein is a professor of Finance here
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at the Wharton School eai great to talk
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to you again great talking to you thank
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you so obviously this has been a unique
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time over the last three years with how
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people have spent you were saying to me
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before we started this that maybe even
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still today there's an element of the
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covid spending that still is is
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impacting what's going on I think think
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so yes I I think uh when you go back to
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think about covid it was a period of
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time where people could not spend uh
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they could not do things that they like
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to do they could not take vacations uh
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they could not eat in restaurants uh and
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it's been you know a good two years or
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more that people felt constrained on all
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these things I think once uh we passed
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Co and people think like uh they see
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that they can go out again they can uh
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go back to living their lives uh there
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is a little bit of a change in the
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psychology of spending so you know uh
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one thing to uh think about is there are
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all these missed uh experiences so for a
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while you didn't uh go on vacation and
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then you go back and you check and there
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all these places you wanted to see you
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haven't had a chance to do it yet and
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now you feel like this is the time to to
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do it um but but I think even beyond
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that something has changed because
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people realized you know I should
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probably spend and consume and have a
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good time today because who knows what's
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going to happen down the road and I
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think those two things have changed
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during covid and the aftermath of covid
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and led people to uh think a little
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differently when they decide how much
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they want to spend um you know I I would
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add to this maybe a little uh
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speculatively something else that uh is
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happening now uh big time and and this
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is climate change and you know there is
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climate change itself but there is also
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the awareness of it uh and if you go
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back to think about all the news we saw
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over the summer uh about unprecedented
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weather and things are changing quickly
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and more quickly than we thought and all
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this and I think people start having
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this in mind you know who knows what's
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going to happen let's just do it uh as
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quickly as as we can because th things
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around us are changing and maybe things
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that we are doing today we will not be
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able to do uh a couple years from now or
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maybe things will change and uh we will
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just not have the same opportunities
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obviously we've seen a run of inflation
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uh unprecedented that we haven't seen in
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such a long period of time so then I
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guess with all of that money kind of a
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wash in the in people's pockets it's
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probably not a surprise to see them even
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spending when you've got that level of
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inflation in the economy because as you
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said we were we were blocked out of a
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lot of this for such a you know such a
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period of time yes I I will say this is
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true I mean you know as as you point out
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in in general uh when you have interest
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rates going up and inflation at high
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levels uh usually this is the kind of
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things that will uh push people to spend
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less uh but then I think on the other
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hand what we have is the Dynamics of
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going out of covid and the fact that uh
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people have all these uh missed
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experiences and things that they want to
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do uh and you know this was certainly
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very strong in the first year after Co
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covid but I think it still has an effect
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um and then uh the psychology that has
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changed the fact that people now say uh
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you know who knows when I will be able
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to do it again so I should probably just
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do it now so so I think this is kind of
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a counter effect to the inflation and
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the interest rate and pushing people to
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spend more despite of uh these
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traditional economic forces how much of
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it is potentially kind of a tale of two
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stories here with the people that have
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and the people that have not and how
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each grouping of people are are reacting
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to the higher interest rates in where
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they can spend what they can spend on
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and kind of the reassessment of of the
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idea of a budget and you know maybe that
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idea of a budget had gone away for a
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while as well yeah I think this is uh
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definitely true I mean we always have a
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story of
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inequality um and uh some people have
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money to spend and they're spending more
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other people don't have and they're
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spending less and in some sense over
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time we do unfortunately see these gaps
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growing so I I do think we see some of
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it now I mean certainly the fact that
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interest rates are high uh is affecting
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some people much more adversely than
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than others uh and I expect that we're
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going to continue seeing that uh going
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forward and and it is important to note
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you know I mean we are sitting here and
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talking about the fact that people are
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generally spending uh a lot um I don't
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think this is unbounded I do think there
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is some boundary to it it and at some
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point uh we will see that it is uh
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starting to to reverse uh and in fact it
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is important to note that we already see
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some of the signs of uh reversal or
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slowing down showing up in recent data
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it's not that when you look at the data
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uh this is unambiguously strong and and
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going in Just One Direction so it is a
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bit of a mix uh I I would say in general
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uh what you see is a level of spending
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that is above experts expectations given
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the economic uh conditions um but as you
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point out uh there are some people who
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spend more some people who don't and I
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also think that when you look at the
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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
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uh increase if there is a slowing of the
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economy and there are suggestions that
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we're seeing that a little bit right now
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how much do we potentially slow down how
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much impact is there potentially or is
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that still kind of a wait and
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see uh I think this is still a a wait
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and see I mean uh you know this is in
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some sense really the the big uh
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question that is on everyone's uh mind
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um you know if you think a little bit
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about the economic uh developments of
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recent years uh we've seen a period of
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high inflation then the FED is coming in
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and starting to increase rates uh really
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fast and really substantially uh much
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more I think than uh was originally uh
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planned and uh and the expectation was
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that uh this is going to slow down the
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economy potentially bring a recession uh
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but at least it will help us uh fight
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inflation we haven't seen the recession
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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
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in that is that we also did not see
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inflation fully under control I mean it
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is true that inflation did not continue
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to go up if you're thinking about the
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rate of increase in prices it has slowed
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down so from a level from a rate of 9%
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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
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pretty high and and higher than uh
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policy makers are comfortable with um so
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we're still not out of the woods uh so
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they are still you know uh continuing to
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to try to slow down in inflation and
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bring it back towards the two and as
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long as they're continuing to do that uh
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there is still the chance that there
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will be a significant slowdown in in the
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economy and we might even see a
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recession so there there's the consumer
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side of this but there's also uh the
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business side of this and and companies
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that are dealing with this and trying to
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especially at this time of the year make
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kind of an idea and a path as to what
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they should expect from consumers right
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now how much of a challenge is it for
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companies do you think at this time of
00:08:55
the year especially retailers who really
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in in years past story has been you make
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your money you make your hay at the end
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of the year to adjust to this Dynamic
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when they assume that interest rates are
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going to stay higher for longer and
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that's going to present a variety of
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other challenges for them yes absolutely
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I mean all firms are now uh thinking
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about these different scenarios uh what
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this is going to imply to their uh
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revenues uh and ultimately to to the
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bottom line um and um you know I I will
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say overall uh it's it's ambiguous uh
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some uh some will be more optimistic
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some are less optimistic and it's very
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hard to tell where where it's going to
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go I mean overall when I look at what
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happened in the last few months um I
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think the signs are overall fairly
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encouraging and uh you know we do see as
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we discussed spending still fairly
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strong and I think there is a good case
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to believe that it's going to continue
00:09:57
being strong uh going into the holiday
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so at the end of the year is going to be
00:10:01
good for uh for many firms in that
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respect um but there are so many forces
00:10:06
going on uh and the fact that interest
00:10:08
rates are still high and the fact that
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also the the reserves that allowed
00:10:13
people to spend more are dwindling to to
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some extent um at some point there will
00:10:18
be some inflection point and we might
00:10:21
see it starting uh to go the other way
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is there an element of that spend then
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that you think is still actually out
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there in in people Pockets at this point
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I think so yes I mean you know you you
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mentioned it's uh those who have and
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those who have not and and clearly that
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that's true that that's there uh so uh
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certainly uh from the point of view of
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many uh households they don't have uh
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the the money to to spend or whatever
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they had whatever they accumulated uh
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during covid is is gone uh but we still
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have a significant uh portion of the
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population uh that has those significant
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reserves in can spend and I think as I
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mentioned in the beginning I still think
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the psychology of covid and the fact
00:11:04
that they have a deficit of uh spending
00:11:08
in their mind they wanted to do all
00:11:09
these things and they didn't do them uh
00:11:12
combined with the fact that they still
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have money to do it still pushes them to
00:11:15
spend and I think this is what we see in
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the in the data what do you think's been
00:11:19
the the impact on the mindset of the
00:11:20
Federal Reserve and the leaders in terms
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of making these rate increases that
00:11:27
obviously theyve they've made over the
00:11:29
last year and a half but also the path
00:11:32
to go forward I mean the question now is
00:11:34
whether or not is there another rate
00:11:36
increase that's needed or is it
00:11:38
something that you know we're off the
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books we can let it sit for a while and
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see how the economy reacts to it so when
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you listen uh to uh the leaders of the
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FED um you know the people at the board
00:11:54
the presidents of the regional fed um
00:11:58
they are basically watching it as we go
00:12:02
and continuing to update almost on a
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daily basis I I would say um I think uh
00:12:10
whenever I uh listen to them and and
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talk to to people who who work there uh
00:12:16
there is a sense that uh what we are
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seeing is not exactly what we expected
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and doesn't really go by the book
00:12:25
according to recent
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experiences uh so it's it's a bit of a a
00:12:29
novel uh dynamics that that we see here
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but you know life continues to have
00:12:34
novel elements right you you never see
00:12:36
exactly what you've seen before and I
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think this is what we see here um so
00:12:42
they are just watching the data
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continuously and and trying to decide
00:12:46
what to do um as as you know there was a
00:12:48
period of time where they they paused
00:12:50
the the rate increase because they
00:12:51
thought that uh they've done enough uh
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of it and now they uh want to see how it
00:12:57
affects the economy and they don't want
00:13:00
to overshoot because the risk of
00:13:01
overshooting is that you're going to
00:13:03
push the economy into a severe recession
00:13:06
uh so that has been the mindset recently
00:13:08
but there are certainly um some uh some
00:13:11
other voices um and and you know I think
00:13:14
it really depends on how the data uh
00:13:16
evolves how then should companies be
00:13:19
thinking about their quarterly
00:13:21
expectations with all of these Dynamics
00:13:24
at play I mean they still obviously are
00:13:26
looking for the the best profitability
00:13:28
that they can fine but if we do see a a
00:13:32
relatively noticeable slowdown in what
00:13:34
consumers think then they have to
00:13:36
reassess what their numbers are going to
00:13:37
be over the next couple of quarters
00:13:38
don't they yes absolutely so you know
00:13:41
the the CFOs uh of of the the companies
00:13:45
I think all companies are exactly the
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same position uh they are updating as we
00:13:50
speak and they are continuously watching
00:13:52
the data and and deciding what to do I
00:13:55
mean in some sense this is not uh
00:13:57
unusual because this is what they always
00:14:00
do I mean it's it's not like you can
00:14:02
think about a period of time where there
00:14:04
is no uncertainty and we know exactly
00:14:06
where we are going there are always
00:14:08
different factors pushing in different
00:14:10
directions and uh you always need to to
00:14:13
update uh but I think it will be fair to
00:14:15
say that this is a period with uh
00:14:18
increased uncertainty because of all
00:14:20
these things that we discussed so you
00:14:22
know they they have to continuously
00:14:24
watch what the FED is doing um what
00:14:26
spending is uh and when you're thinking
00:14:29
about spending it's at the mro level but
00:14:32
also at the industry level and the level
00:14:34
of their own firm um and and they're
00:14:37
making uh predictions uh based on that
00:14:40
what do you think then is the message to
00:14:42
the public about what we're seeing play
00:14:46
out right now and obviously what we've
00:14:49
seen with the Federal Reserve and how
00:14:51
companies are reacting to all of this as
00:14:54
we head towards the end of the year and
00:14:55
we think about 2024 which I think a lot
00:14:58
of people hope is going to be a better
00:15:00
year than we've seen this
00:15:02
year yes um a lot of people hope it's
00:15:06
going to be a a better year uh I think
00:15:08
that's a fair statement uh but we don't
00:15:12
really know um I I think uh as as we
00:15:15
discussed um there there are still those
00:15:18
uh headwinds uh coming away um basically
00:15:22
the fact that interest rates are still
00:15:24
high inflation is still not completely
00:15:26
under control um
00:15:29
you know people hope that there is a
00:15:31
soft
00:15:32
lending um but we haven't seen it yet um
00:15:36
and we might fall into alternative
00:15:39
scenarios uh you know one one scenario
00:15:41
is the scenario of no lending at all
00:15:43
where inflation is still up up there and
00:15:45
and is not fully under control another
00:15:49
scenario is a scenario of lending but is
00:15:52
not so soft so we we're going into a
00:15:54
recession so those are still out there
00:15:56
as possibilities going into uh
00:15:59
2024 I think there are reasons to be
00:16:01
optimistic and hope for a soft Landing
00:16:04
but it's certainly not guaranteed e
00:16:06
great to talk to you again thank you
00:16:07
very much very good talking to you thank
00:16:08
you thank you e gold steam professor of
00:16:10
Finance here at the warten school thank
00:16:13
you for listening to the ripple effect
00:16:15
we hope you found this episode
00:16:16
informative and engaging don't forget to
00:16:18
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