We have a lot of questions
surrounding this economic climate and what that means
for companies bottom lines. Today I'm speaking with
chief economist at Moody's, Mark Zandi. Will AI
transform the way companies do business? And what does
that mean for workers and what does it mean for
employers? AI has the potential for
really changing a lot of business practices. It's coming on very
rapidly. Businesses are already aggressively
investing in these new technologies. History is a
guide. It does take time for those
technologies to be incorporated into business
practices and to have a big impact. You know, we tend
to see the technology, we can see it, we can feel it,
we can taste it. We know it's coming. Therefore, it should happen
immediately. It doesn't happen that way. Generally, it happens over
periods of several years or even a couple decades. I think all businesses will
benefit and also be challenged by artificial
intelligence. I know a lot of employees
are worried they're going to be replaced by AI, and
maybe employers are thinking, "great, I can not
pay workers and I can have them work 24/7." Do you
think that that will happen anytime soon? I mean, you
kind of alluded that maybe not, but you tell me. I think AI will have
differential impacts, challenges and
opportunities for both workers and employers. I mean, obviously for
workers, the challenge is that their job will be
eliminated or replaced or significantly changed in
some way. That will require the
worker to get other skills and and experiences to be
able to navigate in a world with AI. Opportunity, because if
you're able to harness the power of artificial
intelligence in your work, you should be able to
command a higher wage. And the fact that AI is
lifting everyone's productivity. For
businesses, the challenge is it could change the
competitive landscape quite dramatically. A company's
comparative advantage may be significantly disrupted by
the fact that AI has come on and allowed other
businesses to enter into the marketplace with this new
technology that allows them to compete. And of course,
the benefit is productivity gains. I mean, businesses
are scrambling to try to figure out how to raise the
productivity of their labor force. They know that it's
going to be hard to find workers in the future,
given demographic trends aging out of the workforce
by boomers and weaker immigration. So that is a
benefit. So there's challenges and
benefits to workers and employers. What would you say is the
biggest risk that companies are facing right now? The biggest threat that
businesses face, I think at this point is just high
interest rates and a lack of credit because of the
banking crisis and because of the Federal Reserve's
aggressive policy of raising interest rates over the
past year, businesses are struggling. And that, I
think, is particularly difficult for smaller,
mid-sized companies that don't have access to a lot
of sources of funding. The big guys, they can go
into the capital markets and raise funds if they need to
and probably have a bigger cash cushion anyway. But
for smaller and mid-sized companies, that's a
problem. I think at this point, the
biggest threat to their business. All right. Inflation. It's
hitting all of us individually. But what does
it mean for companies and how they're changing their
investments? The high inflation is
creating a lot of crosscurrents for
businesses. I mean, obviously, it's raising
costs, the cost of labor, the cost of materials. So businesses are
struggling, trying to figure out how to manage those
higher costs and maintain their margins and their
bottom line. But it's also allowing some
businesses to raise prices more aggressively. We've
seen since the pandemic has hit, inflation took off,
that overall economy wide margins are wider than they
were prior to the pandemic. So that would suggest that
businesses, at least on net across all industries, have
been able to pass through and then some, those
increases actually helped to lift the bottom line and
make earnings even stronger. I suspect that's not going
to continue going forward as inflation moderates I mean,
the Fed is working really hard through higher
interest rates to cool off the economy and get
inflation back in. We'll start to see
competitive pressures intensify in those margins,
come back down to something that was more consistent
with pre-pandemic. But for the time being,
businesses are enjoying wider margins and better
profitability. Will we see a recession in
the next year or why do you think a recession has
stalled? Recession risks are high and
we're in a world of high inflation. And the Federal
Reserve that's been raising rates very aggressively to
try to quell that inflation. So historically, in that
kind of world, recessions often follow not always,
but more often than not. We have a fighting chance to
get through this current period without an economic
downturn. And it's going to, I don't
want to be Pollyannaish, it's going to be a tough 12,
18, 24 months. But I think we could avoid
a recession because inflation is moderating. We are past the worst of
the fallout from the Russian war and the pandemic. The Federal Reserve's
higher interest rates are beginning to slow the
economy. Wage growth is slowing,
price pressures are starting to abate. Probably even
more importantly, the economy is amazingly
resilient due to factors that are kind of unique to
this period. For example, the excess
savings that consumers built up during the pandemic,
that's the extra savings that they wouldn't have
done without the pandemic because they were
sheltering in place. So particularly high income
households in low and middle income households have a
lot of cash that they've been using to supplement
their income and maintain their spending even in the
face of high inflation. And then business people
have done a really good job maintaining their payrolls. They're not laying off
workers to any significant degree. And that, I think,
goes to the fact that business people have been
struggling with labor shortages even before the
pandemic, realized that they're not going away any
time soon, given demographics, given the
aging out of the workforce by boomers, you know, my
cohort, given weak immigration. And so I think
businesses are loath to lay off. And if they don't lay
off, businesses don't lay off. I don't think we go
into recession. It's the lay offs that
spook consumers that then stop spending and push the
economy into an economic downturn. And right now,
that doesn't feel like that's going to happen. Makes sense. All right. A
little bit of a pivot. Is global warming changing
any of your economic models? How are economists and
investors adapting to the changing environment? We are incorporating climate
risk into our modeling and into our forecasting, and
it is starting to impact our longer term economic
projections. When I say long term, more
than a year or two over the next 10, 20 years, the
biggest economic cost is going to be related to
so-called physical risks. Those are the damage
created by hurricanes and flooding and wildfires
which are occurring with greater frequency and
causing increased economic loss that we're all going
to have to struggle with. The other cost is so-called
transition costs, the cost of moving from an economy
that's dominated by fossil fuels to one that's driven
by clean energy and green energy. And that's a cost. You can see that the
Inflation Reduction Act is an effort to provide tax
credits to promote that transition, but that's a
cost to taxpayers. So that's going to be borne
by all of us for a long time. It's not like
something that's going to drive the economy off the
rails at any given point in time. It's more like a
weight on the economy, kind of like a corrosive on the
economy. It's weakening underlying
productivity growth, adding to the cost structure of
businesses and financial institutions and just kind
of throwing sand in the gears and making it more
difficult to navigate. It's a problem for a lot of
businesses, but it's not in general, an existential one
for businesses. Last question. Will the U.S
. remain the world's leading
economy? The U.S. will indeed remain
the world's leading economy, at least in my lifetime. I'm not worried about it. You know, lots of
challenges, but at the end of the day, we're still the
AAA credit on the planet. You know, we're working
hard to get that credit rating down, I'll have to
say. But when push comes to
shove, you know, we figure out how to get it together
and get the job done. Where the best and the
brightest of the world want to come to go to school and
to live and to work. And that's because you have
opportunities here that you can't get anywhere else. As a result, if you can
continue to attract the best and the brightest, we'll be
just fine. We'll continue to drive the
the global economic train for as far as the eye can
see.
