SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
(SOUNDBITE OF COIN SPINNING)
MARY CHILDS, HOST:
Hello, and welcome back to "PLANET MONEY Predictions," the show where economic forecasters make economic forecasts.
JACOB GOLDSTEIN, HOST:
And then come back later to gloat about what they got right and own what they got wrong. I'm Jacob Goldstein.
CHILDS: And I'm Mary Childs. Last June, on our first episode of "PLANET MONEY Predictions," we welcomed two economic forecasters who made economic predictions about three of the most pressing economic issues of the economic moment.
GOLDSTEIN: Home prices, jobs, inflation.
CHILDS: Today we'll find out who knows and who got hosed.
GOLDSTEIN: And through it all, we'll try to understand what's going on in the U.S. economy.
CHILDS: That's on "PLANET MONEY Predictions" after this message.
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CHILDS: Jacob, you actually don't work at PLANET MONEY anymore. You are launching a new show.
GOLDSTEIN: Yeah, I'm launching a new podcast. It's called "What's Your Problem?" It's a show about business and technology.
CHILDS: But you are back today because you made a promise.
GOLDSTEIN: I made a promise, Mary, with you on PLANET MONEY last year, when you and I hosted a show where we asked two economic forecasters to come on PLANET MONEY and predict what the economy was going to do for the rest of 2021. And we all agreed on the show that we would come back on in 2022 to see how the forecasters did - you know, in particular to see whose forecast got closer to what really happened.
CHILDS: Yes. And last year, our contestants made three forecasts on home prices, jobs and inflation. So now, today, we will check their answers. Whoever got closer to the right answer on each gets a point. The person with the most points wins.
GOLDSTEIN: And the winner is going to explain to us what it all means, what's going on in the economy.
CHILDS: OK, now let's bring back our two contestants. First up, Diane Swonk, chief economist at Grant Thornton. Welcome back to "PLANET MONEY Predictions."
DIANE SWONK: It's great to be here, (laughter) as humbling as it is.
CHILDS: Humbling - you think it's going to be humbling?
SWONK: Oh, yes (laughter).
GOLDSTEIN: And welcome back, Alfredo Romero, economist at North Carolina A&T State University.
ALFREDO ROMERO: Well, you know, I knew you guys were going to pair me with somebody. And when I found out it was Diane, I felt like the match was Terminator versus Roomba.
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GOLDSTEIN: And to be clear, who is the Roomba in that metaphor?
ROMERO: It is me.
(LAUGHTER)
GOLDSTEIN: OK, now let's talk about the numbers. Let's talk about your forecasts and what actually happened. Are you ready?
SWONK: No, but go ahead.
(LAUGHTER)
GOLDSTEIN: OK. We're going to start with home prices.
CHILDS: Technically, the annual rise in the Case-Shiller National Home Price Index through October 2021.
GOLDSTEIN: Diane's forecast - a robust 8%. Alfredo - a wild 12.29.
CHILDS: What actually happened? The actual figure for the rise in home prices - a completely unbelievable 19%.
ROMERO: I remember talking to you during the episode. You made me feel that my number was too high, and turned out not to be high enough.
GOLDSTEIN: But it was high enough to edge out Diane. The bananas growth of home prices means that Alfredo's forecast was closer than Diane's. The score after one round - Alfredo 1, Diane 0.
CHILDS: Bing. Next forecast - how many jobs did the U.S. economy add per month in the second half of last year?
ROMERO: My prediction was that the U.S. economy was going to add 226,000 jobs per month.
CHILDS: Diane predicted a very strong 450,000 jobs added per month, which was pretty close. The actual number was just shy of 400,000.
SWONK: Yeah, that's not too bad.
CHILDS: So bottom line for jobs - the economy saw solid job growth through the end of last year, just as Diane predicted would happen. The score is now tied at 1. Bing.
GOLDSTEIN: Now we're to the final round. Whoever's closer on inflation is going to be the winner. By the way, we should say we use the standard measure of inflation, the Consumer Price Index, also known as CPI. CPI tracks the prices of the stuff households buy - you know, housing, gas, food, health care, practically everything.
CHILDS: Alfredo predicted that inflation for 2021 would be a moderate 2.4%. Diane predicted a somewhat high 3.1%.
GOLDSTEIN: In fact, the number was a blistering 7%.
ROMERO: Now, I don't think anybody could have predicted that.
CHILDS: Indeed, I think no one predicted that.
GOLDSTEIN: No one was even close, but Diane was closer than Alfredo.
CHILDS: So, Diane Swonk, we are pleased to announce you as the winner of the PLANET MONEY 2021 predictions and forecasting competition.
SWONK: That is a hard way to win when you've undershot it by over half (laughter).
ROMERO: And second place is pretty good. Out of how many candidates?
GOLDSTEIN: Two, two.
ROMERO: Perfect, perfect
GOLDSTEIN: Alfredo, sorry, that's it. You're getting kicked off the show now.
CHILDS: Thanks for playing.
ROMERO: Thanks for having me.
CHILDS: We miss him already.
GOLDSTEIN: Diane won, and she's going to stick around. And in this next part of the show, we're going to ask her to answer a big question. Why did she and almost every other economic forecaster fail to predict that inflation was going to shoot up like it did? Why did we all get inflation so wrong?
SWONK: Oh, gosh, there's so many things that happened. First of all, we had a delta wave. And the delta wave was really unique in how it added to supply chain problems, which at the same time, demand was soaring still, especially for goods. We couldn't produce enough globally to meet that demand.
CHILDS: The point she is making is huge. Inflation is about too much demand and too little supply. And we've heard a lot about the supply problems.
GOLDSTEIN: But the inflation story is also a demand story. We have inflation in part because demand for goods soared last year. Americans bought more stuff, more goods than ever before, and the supply chain couldn't grow fast enough to make all the stuff Americans wanted to buy.
CHILDS: And part of the reason that demand is so high - the job market is booming.
GOLDSTEIN: Let's bring your other forecasts in here. So...
SWONK: Yeah.
GOLDSTEIN: ...Your jobs forecast was, you know, was right.
SWONK: Yeah.
GOLDSTEIN: And in a way, you would think that if you got it right on jobs, you would've been closer on inflation, right? Those two tend to go together.
SWONK: Yeah.
GOLDSTEIN: Like, how does that fit?
SWONK: Well, this is really fascinating 'cause I've been digging deep into this recently. And, you know, we've got 1.7 job openings for every person actively looking for a job as of December.
GOLDSTEIN: Which, to be clear, is a crazy lot, right?
SWONK: A record high. While the supply of labor has not come back - we haven't even hit the previous peak in employment we hit in February of 2020, even though we generated all those jobs.
GOLDSTEIN: Right.
SWONK: And that's really stunning.
CHILDS: Despite a booming economy and more open jobs than ever in history, millions of workers still haven't come back.
SWONK: And there's many reasons. Some of them can't because they don't have the child care they need because schools have been on and off - most notably, low-wage Black women have been hardest hit and had the hardest time coming back. College-educated women with young children also are losing hours, work. It's really been a setback.
CHILDS: But for those people who are working, who are able to work, all that demand for workers is great.
SWONK: I mean, over the last two years, I mean, retail wages have gone up at their fastest two-year rate.
GOLDSTEIN: Yeah, wow.
SWONK: Entry-level, low-wage workers have seen the fastest gains. And Gen Z, which is your newly graduating class of college students, kids in their 20s - early 20s - they're doing the best.
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GOLDSTEIN: So that's what's happening right now. But this is a prediction show. What's going to happen next? What's going to happen for the rest of the year?
CHILDS: Will the booming job market lead to even more inflation? We find out what Diane thinks and meet her new opponent after the break.
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CHILDS: Let's get ready for some more predictions with reigning champ Diane Swonk and a new mystery challenger.
GOLDSTEIN: Mary, why don't you solve that mystery right now?
CHILDS: I'd love to.
GOLDSTEIN: Tell us who the challenger is.
CHILDS: All right, Jacob. Sung Won Sohn is a professor at Loyola Marymount University, a winner of The Wall Street Journal's Forecasting Survey and was a senior economist on the president's Council of Economic Advisers in the White House.
GOLDSTEIN: Sung, come on down to forecast town. Are you ready to make some predictions?
SUNG WON SOHN: Yes, I am.
CHILDS: So, OK, let's start with the big one - inflation. What is your prediction for inflation for this year?
SOHN: The Consumer Price Index for 2022 will be rising at about 5.5%.
GOLDSTEIN: Five and a half percent - that's lower than right now but still really high. Sung is predicting that inflation is going to stay really high for the rest of the year. Now let's hear Diane's forecast.
CHILDS: OK, Diane, here we go. Headline CPI, year-over-year change, December '22.
SWONK: Oh, gosh. You know...
CHILDS: You got this.
GOLDSTEIN: What's the number?
SWONK: Two-point-three percent.
CHILDS: Two-point-three.
GOLDSTEIN: Two-point-three percent.
CHILDS: Diane is predicting inflation is going to cool a lot.
GOLDSTEIN: Two-point-three percent is way lower than that.
CHILDS: Very low.
GOLDSTEIN: Two-point-three percent is, like, normal.
SWONK: Well, but, you know, that's contingent on Russia not invading Ukraine and oil prices coming down in the second half of the year. Oil prices really do play a huge role here.
GOLDSTEIN: So oil was really high in December of 2021. And so if oil goes back down...
SWONK: Yes.
GOLDSTEIN: ...To a normal price, that'll be this great, big component of inflation that's coming down, basically.
SWONK: Right, right. That would be a big deal.
GOLDSTEIN: That also must assume that all of the supply chain, huge-demand-for-goods story...
SWONK: Starts to work its way out.
CHILDS: Overall, Diane's forecast is really optimistic.
GOLDSTEIN: But - there is a but here - Diane did have a warning for us, and it's this. We know that to fight inflation, the Federal Reserve, the Fed, America's central bank, is about to start raising interest rates. That's what the Fed does to fight inflation. Higher interest rates means it's more expensive to borrow money, so people tend to borrow and spend less, so demand goes down. Demand goes down, inflation goes down. But that can also hurt the economy.
SWONK: The Fed has never really chased inflation successfully without having precipitated a recession, yeah.
CHILDS: This thing the Fed is about to do - raise interest rates to bring down inflation - tends to have this unfortunate side effect - causing a recession. Diane thinks we probably won't get a recession in 2022, but we might get one next year.
SWONK: 2023 is going to be a hard year.
GOLDSTEIN: So you feel like we'll get through this year, and you're more worried about next year.
SWONK: Yes.
CHILDS: The thing to remember about Diane's forecast - much lower inflation. Sung, Diane's opponent, thinks inflation will be really high through the rest of the year. And he tells a really different story about what's going on in the economy.
SOHN: I am very concerned about inflation. And it is not just supply chain problems we are seeing. I think it's a broadening. For example, rents, which account for about one-third of the CPI - they have just begun to rise, and we are going to see quite a hike going forward. One additional thing is that businesses - they are saying that they have really no problem passing higher labor costs and higher costs on to consumers. Consumers are happy to get the merchandise, and there is really no resistance. And this is one of the reasons why we are beginning to see a wage-price spiral.
CHILDS: A wage-price spiral - this is a classic inflation thing you don't want. Businesses give people raises. That part is good. But then they raise prices to get the money to pay the workers more. And when lots and lots of businesses are doing this, prices start going up across the board and you get inflation. That inflation eats up the purchasing power of workers' wages, so they demand more raises. So businesses raise prices. So inflation keeps going up and eating the raises that people keep getting - spiral.
GOLDSTEIN: So everything you're saying sounds totally plausible to me. And yet you are definitely at the high end of the spectrum. Lots of people say, you know, inflation's going to go back down to 3%, something like that - much, much lower than what you expect. Why do you think they see the world differently than you do? They have basically the same set of facts you do.
SOHN: I don't think they are factoring in inflation psychology, inflation expectations. We have been in a low-inflation environment with really no inflation expectations for decades. Clearly I am taking a risk in saying that things have changed. We are bending the trend. But I am willing to make that bet.
CHILDS: Sung is willing to bet that all the other forecasters are stuck in the past. They are not acknowledging the vibe shift. And with inflation, this is a huge deal. Jacob, you and I did a show a while back before inflation really took off. And the key question then was, why had inflation stayed so low for so long? And a big part of the answer seemed to be inflation is largely a self-fulfilling prophecy. When people expect it to be low, they don't demand raises. They aren't willing to pay higher prices. And inflation stays low. But the core of Sung's forecast is this idea that inflation expectations may finally have changed. Now that people are expecting higher inflation, that actually makes higher inflation more likely.
GOLDSTEIN: Mary, I think that is actually a perfect place to end the show. But we do got to get their last two forecasts on the record.
CHILDS: That's right.
GOLDSTEIN: So let's just do those right here. First, home prices - Sung is predicting a rise of 12% - Diane, 8%. And on jobs, Diane is predicting that the economy is going to add 200,000 jobs per month for the rest of the year. Sung is predicting 350,000.
CHILDS: What's going to happen? Who will be the next winner? Find out next time on PLANET MONEY predictions and forecasting competition show.
So will you come back on the show in a year to talk about how everything actually went, how things turned out?
SWONK: Sure (laughter).
SOHN: Yes. I'll be happy to. And hopefully I will tell you I was right 100%.
CHILDS: (Laughter) What kind of prize do you want?
SOHN: Well, maybe you can call me more often so I can talk to you.
CHILDS: (Laughter).
GOLDSTEIN: You never call. You never write. I have some good forecasts. Call.
SOHN: OK. Yeah. Yeah. Yeah. So - well, I hope you call me before then.
(LAUGHTER)
GOLDSTEIN: The latest - next year at the latest.
SOHN: OK, great. Yeah.
CHILDS: Every Sunday, OK?
SOHN: Every Sunday.
CHILDS: Yeah.
SOHN: Well, I don't know about that. But...
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CHILDS: If you would like to make predictions about what stories you think we should cover, email us - planetmoney@npr.org. We are also on all the socials - @planetmoney.
Today's show was produced by Nick Fountain and Sam Yellowhorse Kesler and edited by Jess Jiang. Our executive producer is Alex Goldmark.
Jacob, for all the loyal listeners out there who miss the sound of your beautiful voice, what is your new show?
GOLDSTEIN: The show is called "What's Your Problem?" It's about the problems that really smart people are trying to solve in technology and business right now. I'm Jacob Goldstein.
CHILDS: I'm Mary Childs.
GOLDSTEIN: This is NPR. Thanks for listening.
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