Piper Sandler Chief Global Economist Nancy Lazar Talks US Economy

SPEAKER_1 (0:02)

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Paul Sweeney (0:07)

Let's check in with our next guest, Nancy Lazar, Chief Global Economist at Piper Sandler.

Nancy, thanks so much for joining us here. I love, and I think our listeners would love to get your thoughts on what we heard from the Federal Reserve last week. The hike started, came in, we had a 25 basis point hike as the market was anticipating. What else did you take away from the Fed meeting?

Nancy Lazar (0:28)

Well, to listen seriously to what Chair Warsh says, he said one of the key indicators, economic indicators he's watching are weekly unemployment claims. It's a hard statistic, great historical relationship with the labor market, and claims are down 10 percent on a year over year basis, which means the labor market is healing really quickly. Layoffs are down, and that also implies employment is indeed going up. So listen to what he says and watch what he's watching, which is the labor market along with inflation. And there's maybe more truth than fiction to the relatively strong payroll employment report we had for the month of August. So claims, I think, were a mirror into what he was thinking, which is the economy is on solid footing, labor market is healing, and inflation is sticky.

He has a diffusion index. We have our inflation diffusion index. It tells you there's too many prices that are increasing 0.3 percent or more, and that just highlights that we are now seeing sticky inflation. And then third, and then I'll stop, is that does this strength in the labor market then imply that, say, in 2027, we could actually see even a further broadening out of inflation into wage inflation? And we think that's going to become more of a story indeed as we see this stronger labor market then leading to stronger wage inflation in 2027

Jess Menton (1:51)

Hey, Nancy, we didn't hear too much from Kevin Warsh about the Fed's balance sheet. What are you watching there?

Nancy Lazar (1:56)

Well, we watched the balance sheet closely. It's still very, very elevated. We also watch Money Supply. He is a monetarist. He made that clear in the Monetary Policy Report. He made that clear at Jackson Hole. And we watch the banking system. We watch bank lending. Bottom line is there's a lot of liquidity in the economy.

And that helps explain, one, why economic activity is solid and getting stronger, and two, why inflation is indeed sticky.

So the balance sheet, although it's off its peak, is still very elevated. It provides a lot of liquidity to Wall Street. Therefore, it provides a lot of liquidity for financial markets and is a contributor to the strength in the economy. More simply, though, watching money supply M2 growth, which is what classically monetarists, me included, have watched. It's growing 7% right now. And 7% money supply growth, 7% bank loan growth, a very strong government spending right now led by defense. That all suggests nominal activity is going to stay strong, which is very, very supportive of corporate revenue growth. So balance sheet money, bank loans, government spending, all point to a lot of liquidity, helping to support the economy and cushion it, quite frankly, from this backup in interest rates for now.

Paul Sweeney (3:12)

Hey, Nancy, I guess I should not be, but I continue to be, I guess, pleasantly surprised by the resilience of the US consumer here. How do you view the US consumer, who is facing inflation issues, particularly at the gas pump and some other places, but boy, the US consumer is more than hanging in there.

Nancy Lazar (3:31)

Well said, totally, totally agree. Not all consumer spending, which is what drives revenue for all these big retailers, are growing right now 6%.

That's echoed, say, by an American Express, whose revenues are actually up eight, and Visa, whose revenues are up 12 So my point is, I love to look at multiple different indicators to gauge what's going on in the economy. In this case, looking at consumer-oriented companies.

Second, it's really the high to middle-income consumers that's driving consumer spending. Consumer confidence is kind of stuck. Don't use U of Mish if you use Conference Board or our own daily survey. Consumer confidence is kind of sluggish. It's not collapsing, but it is sluggish. Whereas what you just suggested is indicated, and I agree with, is that the US consumer has been resilient. What's the disconnect between spending and confidence? Well, everybody's treated equal. High, middle, low income consumers are treated equal in the consumer confidence numbers. It's a measure of people. Whereas nominal consumer spending is a dollar metric, right? And so the high, middle income consumers drive that particular indicator. I think that's what's surprising people. And we saw that certainly also in the August retail sales data. And the middle income consumer is getting stronger here.