Mindy: Last week, I saw three headlines that perfectly capture our economic confusion. Number one, a weak economy is good for military recruiting. Number two, Amazon Prime Day is down by 41%. And number three, GDP growth beats expectations. So here’s the million-dollar question, or should I say trillion-dollar question: Are we in a recession, heading into one, or completely missing the real story?
Mindy: Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my not receding anytime soon from being my co-host, Scott Trench.
Scott: I was really hoping at a few more years before jokes about my hairline made it onto the podcast intro, but I think we’re here. Speaking of receding, we’re going to be joined once again by Jay Scott on today’s episode to discuss whether or not we are in a recession here in the United States. He’s going to help us separate economic reality from economic anxiety, and we’re going to dive into what the data actually shows, why experts are split, and why not just experts, but the community here at BiggerPockets Money is actually split. And most importantly, what this means for your money, your job, and your FIRE journey.
Mindy: J, thank you so much for being here.
Guest: Hey, thanks for having me. Always thrilled to be here.
Mindy: Jay Scott is a real estate expert. He has written, I don’t know, 150 books, or five books, same thing, about real estate, negotiating real estate, estimating rehab costs, etc. But he’s also really, really, really into the economy. Jay, what is a recession? Let’s define this first of all before we start talking about, are we in a recession? What are we talking about here?
Guest: Yeah, it’s funny, that really should be an easy question to answer, but it’s probably one of the harder questions you’re going to ask me today. Let’s start with, there’s actually no formal definition of a recession where we can kind of check a bunch of boxes and definitively say, yep, we’re in one, or nope, we’re not in one. That said, the mainstream media does like to use the metric of GDP, Gross Domestic Product, which is basically the total economic output of the country. And they like to use that as a measure of whether we’re in a recession or not. And so the common mainstream definition is that if GDP decreases, in other words, if the economy shrinks for two quarters in a row, we like to think that we’re in a recession. And so if we look at where we are right now, Q1 of this year, we actually saw GDP shrink. We saw negative growth in the economy in Q1 of this year. Q2 ended in the end of June. We won’t get the GDP numbers, we won’t get the data for economic growth or shrinkage until the end of July. So we won’t know until the end of July if GDP is negative for Q2. But if at the end of July we find that GDP number is negative, we’re going to start to hear a lot of people talking about the fact that we’re in a recession.
So that’s one way to look at it, but there’s actually another way to look at it that I prefer. That’s that there happens to be a government agency, NBER, National Bureau of Economic Research, who’s tasked with determining when we’re officially in a recession. And it’s basically just a group of people who look at the data and they decide if they think we’re in one or not. And they have the final say when it comes to the official government determination of when we are or aren’t in a recession. And interestingly, it’s pretty common for this group of people to wait until after the recession is either well underway or even until after it’s over to actually declare that there was a recession. So while they aren’t saying we’re in a recession today, they could get together next year or even the year after that and decide that we’re actually in a recession right now, at which point the government will retroactively declare a recession and update all their charts.
Now, that’s the official definition of recession, but the reality is that official definitions are less important than just simply keeping our fingers on the pulse of where the economy is headed instead of thinking about, are we in a recession? Are we not in a recession? I actually prefer to think about the economy as a spectrum. So our job is investors is to look at various pieces of data and just try to determine are things getting better? Are things getting worse? Are they getting stronger? Are they getting weaker? So that way we can generate a good strategy moving forward for our portfolios.
Scott: I want to just chime in here and try my hand at this as well in a couple of ways and see what you think. I’m looking up a couple of definitions of recession here. And yes, there’s the two quarters of GDP contraction as one of the technical definitions. But there’s also just this general concept of it being a a a contraction in broad economic activity characterized by rising unemployment, lower consumer spending, lower corporate profits, lower valuations in a variety of asset classes and those types of things. And that’s what makes this so hard is that there’s components of this that from a media perspective are subjective. Um, and we don’t know whether we’re in a recession or not in an official capacity until long after it, and that leads to endless discussions about it and lots of conjecturing about it.
Mindy: So based on these definitions, what do you think? Are we are we in a recession or not right now?
Guest: Again, I don’t like that determination. Let let’s let’s approach it from a 10,000 foot level and then I’ll then I’ll answer that question. So I think you hit the nail on the head. At the end of the day, the economy consists of two main groups, the people that are in the economy and the businesses that are in the economy. And so if we want to know if we’re in a recession or if the economy is getting better or weaker, we’re going to look at how people and businesses are reacting and the data around people and businesses. And you mentioned a couple important pieces of data. Number one, unemployment. So do people have jobs? Do they have good jobs? Are their wages going up? If we look at unemployment data today, we see a couple things. It’s it’s pretty mixed data. Number one, a lot of people have jobs. The unemployment rate is somewhere around 4.1, 4.2%, which is a really good number, historically speaking. Most people have jobs. We’re actually seeing pretty strong wage growth, which is great. Wage growth is higher than the government’s number for inflation. So people in real terms are making more money now than they were last year. So that’s great.
But we’re also seeing some some less great data. Number one, the labor participation rate, the number of people that are actually looking for jobs and participating in the economy is decreasing considerably. 700,000 people last month stopped looking for jobs. A lot of them retired, some of them may have given up because they couldn’t find the job they want, some of them may just be taking the summer off, whatever it is. But 700,000 people essentially walking away from the job force last month was a lot. Additionally, what we’re seeing is a lot of people who are losing their jobs are having trouble finding new jobs. So this metric called insured employment claims, unemployment claims, basically people filing for unemployment week after week after week just hit its highest number since 2021. So people that don’t have jobs are having trouble finding jobs. That’s the employment piece.
The other side of that is consumer spending. So are people spending money? Because that’s obviously probably one of the single most important things in the economy. How much money are are people spending? Are there as many transactions now as there were last year? Is there as much money and currency flowing through the system as there was last year? And what we find is that consumer spending is actually trailing off a good bit. So from Q4 of last year to Q1 of this year, we saw a decrease in consumer spending of about 60%. It was still positive growth, we still more than than it was last year.
Scott: You’re not saying that if consumers spent a certain number of trillions of dollars in Q4, they spent 60% less than that. The growth is it the growth rate…
Guest: The growth rate. So yes, when I say that spending decreased by 60%, I’m talking about the growth in spending decreased by 60%. So if you look at Q4 numbers from 2024, we saw spending growth increase 4%. In Q1, we still saw growth in spending, but it was only 1.8%. So that total growth in spending decreased considerably from Q4 to Q1. Additionally, in Q2, first two months of Q2, we saw an actual decrease in spending, a contraction in spending. 0.1% in April, 0.9% in May. We did see a decent recovery in June, so things are kind of still a mixed bag. But long story short, we are seeing consumers starting to pull back, starting to spend a lot less than they were. And anytime consumers spend less, that’s going to be bad for businesses, it’s going to be bad for the economy in general.
Scott: But even then, it’s consumers are spending more. They’re just the growth rate is slowing. So we’re not actually seeing a contraction in consumer spending yet. Is that correct?
Guest: That’s correct. And keep in mind, we rely on growth in our economy. We rely on GDP, the total economic output of the country to go up. If GDP were zero, that would be a bad thing because we have inflation. The price of things is going up, the money supply is increasing. And so we need to keep up with that price increases, those money supply increases through expanded economic output. And so we need to see that growth and we need to see growth of at least two or 3% for the economy to keep up with the money supply inflation and the price inflation. And so when we’re only seeing 1.8% spending growth, that’s not getting us where we need to be long term.
Scott: So real inflation adjusted consumer expenditures may have fallen in Q1, is what you’re saying.
Guest: That’s exactly what I’m saying. That’s the consumer side of things. Then there’s the business side of things. Businesses typically lead the economy. So when businesses start to suffer, that’s a good indication that we may be heading towards economic softening, potentially even a recession. So what are we seeing on the business side of things? Production and manufacturing has been a mixed bag over the last few months, down a little bit, but not to the point where where we’re overly concerned.
One of the big issues that businesses are facing these days is bankruptcies. A lot of businesses are going bankrupt simply because interest rates have been so high for the last few years. Remember, a lot of businesses operate just like we in the real estate world operate on debt. They need to raise money, they need to borrow money in order to continue to grow and expand. And when the cost of that money is approaching 5, 6, 7, 8% for business debt, it’s really hard for businesses to make enough that they can pay that debt and continue to expand. And so high interest rates are starting to take a toll on businesses and we’re starting to see businesses going bankrupt at much higher rates than we have in the past.
Scott: What are some notable recent examples of businesses that have gone bankrupt in this way?
Guest: I’m not talking about any notable businesses. I’m not talking about companies like Google or Microsoft or or NVIDIA. I’m talking about a lot of small businesses. These are mom and pop businesses, the ones that keep the the economy going, the ones that that keep families employed and food on the table. So when we talk about bankruptcies, again, not talking about necessarily businesses you may have ever heard of, but a lot of smaller businesses are are struggling and going bankrupt. Some of that has to do with tariffs. We’re seeing import costs increase across certain sectors and a lot of businesses that rely on foreign manufacturing and imports are struggling the last few months. And so again, businesses not in a horrible position right now, but we’re starting to we’re definitely starting to see some softening from where we were last year.
Mindy: What are the actual indicators to look at to see if we’re in a recession? We’ll discuss this when we’re back.
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Scott: All right, after that brief recess, we’re back.
Mindy: In 2025 bankruptcy filings are on the rise, reaching the highest level since the great recession in some sectors and in first quarter, we saw 188 companies filing for chapter 11, the highest number since 2010 according to S&P Global. That’s pretty fascinating and for some reason I’m not catching that on the news in the same way. Maybe what I’m looking at, is that, is this commonly being reported on? Are these headlines all over the place?
Guest: I mean, if you’re following the economic data, this probably isn’t surprising. For me, this is this has been something that not only have we expected over the last couple years. Keep in mind, we’re in somewhat unprecedented territory with where the economy is today. We haven’t had a recession since 2008. We haven’t seen the start of a real recession since 2008. We can talk about 2020, kind of that blip that was COVID related, but most people wouldn’t consider that to be a true economic recession. And so going on 17 years since the last time we saw the beginning of a recession, that’s the longest period of time in history between the beginning of two recessions. Historically, we see recessions every four, five, six years. And so from purely a timing standpoint, the fact that it’s been 17 years since the last real recession tells me that it’s not surprising that we’re starting to see this slowdown. I expected it years ago, um, and if it doesn’t happen in the next couple years, I’d be very surprised.
Mindy: I have a friend who was just visiting recently. He went on Shark Tank for a product that he has made. Apparently in the Shark Tank world, they have their own little community and, you know, their own little Facebook group and where they they just have conversations and discussions about like running a small business. And he said that because of these tariffs, there have been people who are caught up in this where they place a big order from overseas manufacturing and between the time they place the order and the time that it’s coming in, the tariffs click into place and they’re like, I can’t afford to pay for these product. I just have to stop selling this product because that’s my product and I can’t get it. I don’t have any way to continue on in business. And I think there’s a lot of these little stories that to your point, Scott, aren’t getting reported because who cares that that one guy who’s selling that one thing goes out of business. Like how is that affecting the economy? It’s not that one guy. It’s hundreds of that one guy. It’s thousands of that one guy who are selling this little widget and that little widget and all of a sudden, you know, the jobs that he is creating are no longer there. I’m seeing so many of these tiny little things that if it was a one-off, then, oh, okay, well, that’s that’s a little blip. But it’s like all these little one-offs that are starting to add up.
Scott: I have a couple of observations here. I just don’t understand what is currently the the drivers of the economy. The things that seem to have been true for the last 100 years seem to be not the case right now, right? In in in a couple of sectors, right? We’re two standard deviations above the average for price to earnings multiples in the stock market, right? We’re at a 200% stock market valuation to GDP ratio, the Buffett indicator. So expectations for company profits in the economy on the one hand are through the roof. And then there’s all this fear and uncertainty on the other hand in the anecdotal stuff that we hear from from from folks. We’re seeing bankruptcies on the rise. We’re seeing consumer spending growth slow or regress behind inflation. We’ll see how that ends up for Q2 here. And it’s just not fitting all nicely together.
Jay, one thing that we argue about, you know, you’ll post something on Facebook, I’ll agree with 95% of it and push back on one or two things here and there. And one of the things that I think is is an interesting one here and I’d love to get your your take on this here on the podcast is is the unemployment data. And I’ve observed that there’s an enormous surge from the Great Recession to today, to 2006, 2007, 2008 period to today in gig work. Let’s extend this concept of gig work to self-employment, small business ownership and those types of things. We’ve seen a huge surge, a huge shift in the percentage of people who work as employees at companies to people who work for themselves or as contractors in the in this gig work economy. And this has been bugging me for a long time because that’s a hallmark of a recession is rising unemployment rates. But if this population that was at the most risk, the gig workers and contractors, are losing their contracts or gig work or finding it harder, they’re making less dollars per hours an Uber driver because there’s longer wait times between rides or whatever. That’s not going to show up in our unemployment data. These people are not going to be able to file for unemployment, they’re not going to get fired. They’re just going to lose these income streams that are coming in or see their income decline and it’s not going to show up on those reports. And I think that’s a major factor that’s impacting the economy right now and will give insulation to employment data for the next several quarters at least. Something huge would have to happen I feel like for the official employment data to really see a sharp intake like we saw in the great recession. I just don’t think it can happen in today’s economy.
Guest: Yeah, and it’s actually worse than what you just said. Um, if you look at the the data around gig workers, the average gig worker in this country works an average of six months before they leave and either leave the job force or go and look for another W2. And so you have to ask yourself the question, if they’re leaving after six months, why is that? Did they achieve everything they were looking to achieve? Did they make all the money that they needed? Or were they not making enough money in that six months that they were able to survive and they had to give it up? If that’s the case, and I think logically speaking, we can all agree, it’s probably the case that gig workers leave because they’re not making enough money to to live and to survive, then that six months where they are apparently quote unquote employed in their gig work, they’re actually not employed or at least they’re very underemployed. And so if we’re measuring gig work and we see the number of people that may not be in the traditional job force, but we say we have this many millions of people in gig work, what we don’t realize is the vast majority of them or some large percentage of them aren’t making enough money to actually survive. They just haven’t realized it. And if we can look back six or 12 months, what we’ll realize is that most of the people that were in gig work, that wasn’t true employment for them.
Scott: I just want to call out though another component to this, which is the realtor world, right? Like how do you describe a realtor? They’re not a gig worker. Maybe a lot of agents over the last couple of years, they were making bank in 2020, 2021, maybe the early part of 2022. And then that dried up. We got 1.5 million realtors in this country and what like 800,000 active listings or something like that. And so it just doesn’t compute. So these folks are licensed realtors. They were making money. Maybe they drove Uber or did some task rabbit or whatever to try to hold out and see if they could get some business in there and now they’re finally applying for jobs. But that’s not hitting any of this data. And so it’s masking this this story.
Guest: Unemployment has historically been a very difficult set of data to get your head around. There’s lots of different metrics, lots of different data that in some ways seem contradictory or not necessarily complimentary and and even like really smart economists, I’m not going to claim to understand unemployment data very well, but even really smart economists that I followed have said that it can be really difficult to get a true picture of what’s going on in the employment sector simply from the data that that’s released by the government. And that was 10, 15, 20 years ago when we had a lot more traditional employment and pretty easy to parse data. These days, like you said, with the gig economy and with things changing, people having multiple jobs, it can be very, very difficult to actually get a good understanding of what’s going on in the employment market and with the employment data. And so even really smart people kind of disagree what the trajectory is for for the labor market right now. Are things getting better? Are things getting worse? Are things staying the same? General consensus is that things aren’t getting better. General consensus is that we’re either treading water or things are starting to get worse.
Mindy: One of the things that really prompted me to reach out to you to say, would you come on and talk about this with me, is I saw an article from unusual whales. It says, first day of traffic for Amazon Prime Day is down 41%. I mean people write articles about these are all the things that are on Prime Day, and people talk about Prime Day, and I’m going to wait to buy this on Prime Day. And then all of a sudden it’s down by 41%. That’s a big number.
Guest: That gained headlines a week or two ago during during Amazon Prime Day, which is actually now four days. It went from Amazon Prime Day to Amazon Prime two days to now Amazon Prime four days.
Mindy: Down 40% you got to add another day.
Guest: That’s actually part of it. With four days, there’s going to be less urgency from from buyers to go out and spend money. So that’s number one. Number two, there’s some belief that that 41% number was generated by one of the brands, one of the big brands on Amazon who specifically they saw a 41% decrease and kind of extrapolated that decrease across the site, whereas while we haven’t gotten official Amazon data yet, the numbers are actually looking pretty good. But again, it’s four days instead of two, so it’s hard to tell how much of that was a product of just having extra days to buy versus consumers really wanted to spend versus businesses giving better deals. So it’s looking like Amazon Prime Day, that that 41%, that hit some headlines, but it’s probably not true. But we don’t know what what exactly is true yet. Amazon hasn’t released any data and so a lot of it’s still just speculation.
Mindy: Okay, and what about the article Air Force and Space Force hit 2025 recruiting goals three months early? And the bulk of these people coming in are college graduates, and the reason that college graduates go into the military for the most part is because they can’t find a job.
Guest: I read that headline as well. Um, I I’m not smart enough to make any, to draw any conclusions from that, but certainly, um, if I just went with common sense and and logic, I mean that tells me that there are a lot of people out there that don’t believe that their job prospects are particularly good right now and are looking for an alternative path. And so I I can’t think of any other reason why the military might be more attractive today than it was a year ago or two years ago or five years ago. And again, I don’t have data to support this, but the logical conclusion is simply that people don’t feel like there’s as many opportunities elsewhere.
Mindy: I brought you on for wild conjecture, Jay. Make some stuff up.
Mindy: I don’t want to be a fearmonger, but I also want people to realize there’s some stuff going on that isn’t being reported in all these other numbers, like you and Scott were just talking about, that should give you pause with regards to, you know, just living a willy-nilly financial life. Don’t rage quit your job because your boss made you mad. If you really want to leave your job, make sure you have another one before you jump out. I have a lot of friends right now who are looking for jobs and just can’t find them. They’re they’re not even getting calls back. And I don’t think they are in these unicorn positions where it’s, there’s just no jobs available. I think there’s jobs available, there’s just a lot more people looking than in recent years past.
Guest: If you’re looking for reasons to be concerned, let me give you another one, and this is something that’s starting to get talked about a a little bit more recently. Let me start with, I’m not a big truster of government data, not because I think the government’s purposely lying to us or that they’re bad at their job. Um, I think if anything, the government, they move slowly. And so data collection techniques that might have made sense back in the 80s and 90s, phone surveys and and mail surveys, simply don’t make sense today. The people that respond to those surveys aren’t necessarily a good cross-section of the US. And so the data we get, again, isn’t purposefully manipulated by the government, but it’s probably not very good data.
The last couple months, what we’ve seen, and this has been by the admission of the government agencies themselves, is that they’re starting to change the way that they collect and impute a lot of the data that they’re getting. And so a good example of this is a couple days ago, June inflation data came out, and there was a note that I think was the Wall Street Journal picked up on and called the BLS, the Bureau of Labor Statistics, the group that puts out the inflation data and verified that this was true, and they verified that it was true. But basically, the story goes that historically about 10% of inflation data can be very difficult to generate from true data. The data sources are just too hard to collect and and there’s not enough resources at the BLS to go through that data. And so about 10% of the data historically has been what’s called imputed, meaning they kind of take information here, information from there, and then somebody who claims to be really smart says, I think the right answer is this and they put a number into that cell of the spreadsheet and they hope it doesn’t mess up any of the rest of the data that was actually collected in in in correct ways.
Well, that 10% of data that they’ve had trouble collecting and have been imputing is now up to 35% as of the June inflation report, meaning 35% of the cells in the spreadsheet that were used to generate the inflation data for June were not taken directly from sources that are necessarily reliable, but instead are filtered through some people who kind of make their best guess judgment at what that data is. And then the whole spreadsheet is is tabulated and and we get a big number, but when a third or more than a third of the data may be incorrect or just to be a little conspiracy theorist here, maybe, um, manipulated in a way that makes whoever that person wants to look good or bad, it’s possible that the data we’re getting is is not even as good as it was a couple months or a couple years ago. And I would argue that data wasn’t great either.
Scott: I think that this, this is where you got to go into to tariffs, right? And you say, it just doesn’t make sense, right? If you’re going to impose higher costs on the 20%.
Guest: It’s in the 30s I believe. I don’t have the data.
Scott: We got a third of our goods imported here and there’s a substantial tax on those goods that are going to be paid by the importers. How does that not translate in inflationary capacity to the the CPI or or the producer parity index, the PPI? How does it not hit those numbers? And and I think there’s two answers, right? One is bad data, which I wasn’t really considering. But the other is a pullback in consumer spending at the highest possible level where people are buying less of those goods forcing the producers to lower prices. Those are the only two economic responses to that that journey. I guess the third one would be that productivity goes so is so much better. And maybe that’s maybe that’s the AI component to this or whatever. Productive capacity got so much better that it’s driving those costs down enough to offset any cost imposed by the tariff. But it’s fascinating that that data has not shown up in the official data set. That really has a lot of red flags going for me. Like, are we really sitting here saying this dude’s a genius? You know, whatever your opinion is of of of politics or whatever. But are we really saying that these tariffs are going to come into play and have no impact on inflation and inflation is beaten and we should lower rates while we’ve got these tariffs in place? Like, how can how does that possibly make sense?
Guest: So there is a third option and it’s probably a little too early to discount it and and we may even find that it’s it’s it’s the right option. The third option is that those price increases for the time being at least are being somewhat or entirely eaten by the retailers, the wholesalers, the retailers, the people that are importing the products. In which case, we may not see inflation, we may not see reduced consumer spending, but what we will see is lower profits, smaller margins from these retailers because they are eating the extra costs. And so it’ll be very interesting to look at Q2 earnings data. We’re just starting to get Q2 earnings data. We haven’t gotten any from any major retailers yet, but it’ll be interesting to see companies like Target and Walmart and Home Depot and Lowe’s to see if their margins or their profits have have gone down considerably, which might tell us that they are eating some of these these cost increases due to tariffs.
Scott: Let’s talk about what can go right for a second here in the economy. Well, I want to start with interest rates, right? We, you know, we’re getting a bunch of headlines about, you know, Trump waving around a letter saying I’m going to fire Powell. Here it is, just send it, you know, whatever. The guy fires Powell and immediately, you presume interest rates come down because the dovish Fed chair who is going to promise to lower rates will almost certainly be the selection. It wouldn’t that have a major impact that would offset recession risk?
Guest: So keep in mind there’s theory, then there’s reality, and then I’m going to layer on top of that the real reality. So let’s start with the theory. The theory is Trump fires Powell, puts in somebody who was willing to do his bidding and I say that sincerely with he has said his bidding is, he wants to drop interest rates a couple points. And so the minute he were to fire Pal, I don’t think he’s going to by the way because I think he and his advisors know this. The minute he were he were to fire Pal, we’re likely to see the US dollar drop, dollar strength drop, just due to loss in confidence in our currency. We’re likely to see interest rates, so treasury yields and interest rates spike because it’s a good indication that we’re likely to see inflation. When you have lower interest rates, you’re going to have higher inflation, higher inflation leads to higher treasury yields.
Scott: I want to push back on that one though, right? That doesn’t make any sense to me because like, I think there’s one of two possibilities, right? Either Trump’s going to fire Powell or he’s going to just not say, all right, we’re going to wait it out until he’s done. I think it’s like September of next year, right? 2026. When we get to next year, this will be our guy. And the market will respond by inverting the yield curve, right? Assuming that the price for US Treasuries will just go down, which means the yield will go down, price will go up because people will be expecting the new Fed chair who will almost certainly be promising to lower rates on day one to lower those rates at that point in time.
Guest: But what happens when you lower rates? You potentially drive inflation. And what does higher inflation mean? Demand for higher yields in bonds. Investors aren’t going to buy 10 year bonds at 5% if they think the 10 year inflation rate is going to be 6%, they’re going to demand 6%. And so the Fed chair, the Fed can control the short end of the curve, they can control the the overnight rate and the really short end, but they can’t necessarily control the 10, the 20, the 30 year rates. But let me let me step back real quick because I think this is really important. So I mentioned there’s theory versus reality. The theory is that Powell gets kicked out and gets replaced by somebody who’s willing to lower rates and the thought is there’s a big shock to the economy. Probably true. Um, I think there would be an immediate shock to the economy, the currency, our treasury yields, our interest rates, all of that. But the reality is that the Fed chair can’t unilaterally lower interest rates. There are 12 members of the Fed committee that decides to lower rates or not lower rates, and they take a vote. If the majority doesn’t think that rates should be lowered, rates are not going to be lowered. And so the new Fed chair, while they have some implicit power, they don’t at the end of the day have enough power to unilaterally decide to lower rates.
And so assuming that we don’t have seven members of the Fed committee who are looking to lower rates, it’s unlikely we’re going to see rates come down just because Powell is is replaced. So that’s the reality. But here’s the reality on top of the reality. Over the next year, we’re going to see several members of the FOMC committee, the Fed committee that that votes on interest rates leaving, their tenure is up and Trump will be the person that appoints their replacements. So it’s very possible that over the next year between the people that that Trump has already appointed and the people that Trump appoints in the next few months, the majority of people on the FOMC committee could be Trump appointees. Doesn’t necessarily mean that they’re going to take the same radical approach towards interest rates, they haven’t in the past, the ones that are on there now haven’t in the past. But the reality of the reality is that it takes a vote. Trump is going to have some more people on the on the board that were appointed by him and and he’s going to appoint them based on what they’re going to do for him. So we don’t know exactly what’s going to happen, but I’m not nearly as concerned as as kind of the the first reactionary idea of Powell’s gone, interest rates are coming down 3%. That’s not going to happen.
Scott: All right, stick around after our final economic break to figure out whether we’re in a recession or not.
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Mindy: Thanks for sticking with us.
Scott: Let’s talk about another component of this economy, which is AI. The adoption rate seems to have massively ticked up in the last 12 to 18 months among many people in this economy, many companies in this economy. There is real power to it. I mean, good God, my email is so much more efficient using AI powered tools, right? Like creating documents, creating images, creating presentations, and all the stuff is just speeding up work that otherwise would have taken me much longer to do today. And so there’s a real productivity gain I think that’s being that’s actually being captured by the economy now in a really rising way, even as AI, you know, has been around for a while. I think it’s being adopted to boost the productivity of average people in this economy at a much faster and faster rate. Can that just offset all of this and spur on massive growth that that really trumps all the other things we’ve discussed?
Guest: It could have a couple different effects, and and depending on who you ask, you’re going to get different answers. I’m not smart enough to know exactly, but to to Mindy’s point I’m happy to throw out some wild conjecture. First, keep in mind who’s at risk from AI. My thought is if you do your job by sitting in front of a computer all day, you are at risk from AI. You you stand to to have the highest risk, which is very different than all of the technical revolutions we’ve had in this country and this world over the last couple 100 years. Typically when you have a technological revolution, it’s the blue collar, the the lower on the socio-economic spectrum workers who are most at risk because they get replaced by productivity. In this case, it very well may be the white collar and the more highly trained folks that are getting uh, replaced by AI. So that’s number one.
Number two, yes, it could significantly increase productivity, which is good for businesses. Businesses will be able to generate a lot more supply of whatever it is they’re creating, whether it’s goods or services. On the other side, it could be tremendously bad for workers, because when businesses can perform optimally without necessarily having people sitting at desks, they’re not going to hire those people. And so what we might find is that the unemployment rate goes up and productivity goes up. Now, the good thing is when productivity goes up, in theory, prices settle or even go down, we may see deflation because businesses can generate their their goods and services with so much less overhead. They don’t have to pay as many people, they don’t need to have as much office space, basically they just need computers. Because they can generate all their goods and services with so at so much less cost, they may be able to lower prices. So what we might find is we’re living in a world where the unemployment rate is high, but the cost of things is low. And so people find ways to supplement their income, gig work or multiple jobs or lower paying jobs that’s still sufficient to cover their lifestyle, to put food on their table, to pay their rent. Who are the biggest losers in that world? In reality it’s investors. So real estate investors are going to find that in a in a deflationary world, in a world where prices are coming down, rents are coming down. And when rents come down, the value of property comes down. When people are making less money, when people don’t have to pay as much to live, they’re not going to pay as much for real estate, they’re not going to pay as much in rent. And so real estate investors could get hurt.
Additionally, we could see businesses get hurt. We could see the equity markets get hit. So it’ll be good for businesses that their productivity is going up, but when so many people are laid off, potentially we don’t have as much money flowing through the economy, people don’t have as much money to spend. And so we see earnings drop and we see the stock market drop. Lots of things at play here, but I could imagine in in my mind the world that we live in in five years has an unemployment rate that is plateaued higher than where it is today, but prices have have substantially stopped increasing at the rate that they’ve been increasing the past couple years.
Scott: Just because I love doing it, I can’t resist. I take the same kind of observations and and almost reach the opposite conclusions to you, Jay, with respect to AI because, you know, when you look at the internet, right, it wasn’t the established businesses, you know, the established, you know, Exxon Mobiles of the world that benefited from the much lower cost of doing business and video conferencing and those types of things. It was new players that didn’t exist previously in small companies that started in garages like Google and and Amazon or in a in a college dorm like Facebook. And I believe that is much more likely of an outcome from this AI race. Think about the the proprietary database and algorithms that meta has created painstakingly over the last several decades. Those are now almost worthless, right? Or they will be in two years. They have to come, they have to stay so far ahead of that because an AI could rapidly re-engineer that with using a very small cohort of of of a small community for example, and really replicate that um, almost to a a better degree. Look at TikTok, for example, of of how that’s working. So I think we’re going to see explosions coming out of nowhere from a lot of companies and we’re going to see the ability to compete with the big boys using Grok or chat GPT or whatever your preference is. They can spit out code that can solve many of these problems at a at an astonishingly improving rate. And soon it may be as good as some of these engineers at top companies which would allow me to compete. I have no engineering capability whatsoever, but I might be able to compete with stuff that people were producing two years ago at BiggerPockets, highly trained software engineers. So I think that’s going to really disrupt things in a in an interesting way and that’s going to drive costs down dramatically, which I think is going to harm corporate profits to a pretty substantial degree. Because if I’m paying for something online right now, like I’m going to Google less, right? I’m going to Google, I’m going to type into Google less and I’m going to type into chat GPT or Grok more when I got questions, that’s going to be devastating for Google. It’s going to be beneficial to these AI providers, but who knows how that’s going to exactly play out.
Guest: I think we just said the same thing. I I think we’re pretty much in agreement there that it could be bad for businesses, it could be bad for unemployment for employment, it could drop prices. For anybody out there that is interested in this idea of upstarts or startups basically coming along and killing large businesses, I think we’re going to hear the term innovator’s dilemma a lot more in the near future. So there’s a book written back in the I think late 80s, early 90s called The Innovator’s Dilemma by a guy named Clayton Christensen. For anybody in the tech industry, it was kind of a must read book, but it’s all about why large companies that have such a huge technological advantage and head start often fail and often get eaten by startups out of nowhere. And so your example of the browsers is a great example. Just the last few days I’ve been reading a lot about this idea that Google is probably at risk from some of these small AI startups like open AI who are in theory going to create their own browser and create their own search engine. And in theory, it could be the thing that takes down Google that nobody has been able to take down obviously for the last 20, 25 years and now this this startup technology that’s been around for a year or two could potentially take down Google at its its most profitable business unit.
Scott: We can have so many unexpected things too that benefit again the consumers or the small producers. For example, let’s take, let’s take agriculture, right? Right now most of the food produced in this country is in the bread basket, right, in the in the Midwest, you know, in the Great Plains. There’s a reason to believe that it might be more efficient to use AI to build very small but highly efficient gardens or whatever in the future which have the advantage of not having any transport costs, right, over over a large distance. I like who knows how that’s going to play out, but I think that there is almost certain to be immense productivity gains which I think should benefit society as a whole in a major way with winners and losers very difficult to predict. I guess the opposite point would be I would take real estate in that space because I think physical space is a perpetually limiting factor if the standard of living is rising for people, whether it’s deflationary or inflationary, we’re going to target an inflation rate of 2% in the long term. Real estate should be a, you know, if there’s a rise in standard of living and there’s limited physical space to live in, I would imagine that rent, rents will rise as a percentage of real spending.
Guest: Yeah, certainly the thesis that inflation would continue at 2% would be good for real estate. One truism we have in in in the real estate world is that historically inflation and uh, real estate values have basically worked in lockstep up until at least a few years ago. So it’s reasonable to believe that if inflation continues to grow at two, two and a half percent, that real estate value should grow long term at at least two, two and a half percent. So uh, that that’s the big question though. Do we see inflation continue or do we see deflation, which I think is the risk?
Mindy: Jay, are we in a recession?
Guest: I was hoping that if I spoke long enough I could avoid that question. I remember I mentioned earlier that we have this this group of of government folks, NBER who will meet at some point in the future and look back and say we were in a recession, we weren’t. They’re going to look back today and over the last couple years and they’re going to determine that no, we’re not in a recession. And so for me that’s good enough to say that as of this moment while we’re having this discussion, we are not in a recession. That said, I’m definitely seeing signs of economic softening. I think there’s enough volatility going on in trade and business and at the highest levels of government. Uncertainty is going to to drive a good bit of additional economic softening over the next six to 12 months and I would not be surprised to find that if we have this conversation six or 12 months from now, my my answer might change.
Scott: Well, I want to preview some data with you here. Our audience agrees with you. 46% the largest cohort of this, the question is, do you believe the United States is in a recession currently? 35%, I posted this an hour ago, so I’ll fill it out of the next day with closer to 1,000 votes, I believe. About a third of folks believe yes, we are in a recession, about half, 46% say no, and 18% are not sure. I am likely in the no or not sure camp myself in alignment with you, Jay. I’m not necessarily ready to say whether I think we will be in a recession in the next six to 12 months. For what it’s worth, I looked at this in February and you know, the macroeconomic data and I was like, I just don’t understand how expectations can be met at the highest level for the stock market, um, US US based stock market given the factors that are at play. And so I pulled out and moved to paid off real estate, turtling and playing defense here.
Guest: So one thing that I didn’t mention but is really important, especially when you do surveys and polls and ask people what they think, keep in mind that when we talk about recession from an academic standpoint like we’re doing here, we’re talking about the economy as a whole. But when you ask people, are we in a recession or not and they’re not thinking like an economist, they’re not looking at the data, most likely what they’re hearing when you ask that question is, do you feel like we are in a recession? Is your financial situation at a point right now that you feel like the economy is bad and you’re suffering? And the reality is that just because we might not be in a recession, doesn’t mean that there aren’t a lot of people who are suffering out there. Historically, we’ve had a very large middle class and typically speaking when the economy shifts, when it softens or strengthens, it’s the middle class that notices it first. And because they they were historically so such a big group that was bundled together, if you were to survey the American people is the economy getting better or worse? what you would hear is a a pretty consistent yes or no.
These days we don’t see nearly as much of that because the middle class is shrinking. We’ve got a lot more people being pushed down into lower socioeconomic layers and then we have a few people that are being pushed up into higher socioeconomic layers. And if you’re being pushed down, you’re probably experiencing something very different than somebody who’s being pushed up to the top 10% or 5% or 1%. And your experiences of what’s going on in the economy is going to be very, very different. If you own assets, hard assets, whether it’s Bitcoin or real estate or stocks or gold or any of those things, your view of what’s going on in the world financially is going to be a lot different than if you don’t own hard assets because hard assets have been over performing, outperforming for the last couple years that it’s really easy to think, hey, my situation’s getting better, the economy has to be good because my situation’s getting better. But if you don’t own hard assets, you’re probably thinking, huh, my situation is not getting better. Prices are going up, work is getting more difficult, things just don’t feel as good. So it it’s not surprising that there are a lot of people and and I’m not going to tell them that they’re wrong because that’s their experience. But just remember when we talk about recession from an academic standpoint, we’re going to get much different answers than when when we talk about it from a an individual, how are you feeling standpoint.
Scott: I want to chime in on that point as well because I can’t help myself again, but you know, look, I’m looking at a data set here on what you just said. It’s Pew Research for the shrinking middle class, this observation that you have here. There’s a headline here, the the percentage of Americans who are in lower income, this is all inflation adjusted, has increased to your point from 25% to 29%. But more of the shrinkage to the middle class is actually relative to them going into the upper income brackets here. So we’re seeing a stratification of wealth, which is, which is 100% true, but it’s actually been more shifting Americans as a whole towards the upper income portion in there, which I find very interesting. And I think that a major catalyst for that is the advent of the internet, technology. And I think AI is only likely to accelerate the stratification, again shifting more people into the upper income class, but also creating a larger lower income bracket here because I think it amplifies the ability for elite income earners to earn and makes it harder for folks that are not able to benefit from that technology for whatever reason to drive their earnings up.
Guest: And what’s interesting, and I don’t have the data and I’m not sure how how much different it would be if at all, but the data you were just presenting was based on income levels. Uh, we could also do the the same exercise using uh, net worth levels and I’m I’m curious how much different it would be. And again, I don’t have the data, but it’s just kind of a a thought experiment that that could result in in a much different answer than than what we just saw.
Mindy: Okay, Jay, I so appreciate your willingness to come on here and share your vast knowledge of all things economy. I don’t know another person that I know so well that I could just say, hey, you want to come on and chat about this, who would be as intelligent, as well versed in this material as you. So thank you so much for joining us today. I really appreciate your time. Where can people find you?
Guest: jscott.com. Letter J S C O T T dot com. That will link out to everything you might need and my email address is on there for anybody that wants to get in touch with me.
Mindy: All right. Thank you so much and we will talk to you soon.
Guest: Thanks.
Mindy: That was J Scott. Scott Trench, what did you think of that episode?
Scott: Always love talking to Jay. I love following him on Facebook, getting into the discussion with him. I think we agree on most things with a couple of nuanced disagreements there. So I agree with this take. We have the same same take, I think, no, we’re not currently in a recession and I think a big part of the reason why people feel that we’re not in a recession is because of the stock market valuations which have bounced back to peaks, right? They’re back, they’re back at all time highs. I think that has a lot to do with things. I think that the anecdotes on the ground continue to talk about the middle class struggling, losing their jobs, finding it harder and harder to get jobs. It does seem to be an employer’s market in many parts of the economy right now, and I think there’s a lot of things to be worried about.
There’s also things that could go really right over the next couple of years which I think include things like AI or a reduction in interest rates. So it’s really hard to tell whether we’ll be in a recession anytime in the near future. That term you used at the beginning of this, economic confusion, I think is a great way to describe where things are right now, right? On one hand, American wealth and prosperity is at all-time highs and more and more people are benefiting from that despite headlines to the contrary, even as a huge portion of the population and more and more people are being left behind by that in middle class of shrinking. That’s a real problem. Who knows where it’s going to go from here? It it seems like there’s a lot to be worried about right now. But also investors clearly are not worried and are valuing things at at all time highs even adjusted for inflation.
Mindy: I am in the camp of I’m not sure if we’re in a recession or not just because there is so much confusion and so many conflicting stories and conflicting bits of information that are coming in. I’m happy to be wrong. I would love to side with you and Jay and say no we’re not in a recession, but I’m just not sure. I’m going to continue on my path of investing the way that I’m investing and we’ll see what happens.
Scott: Yeah, at the end, I want to chime in with this. We talked to Jay after the recording and as so often happens, there’s a good nugget that comes from those after the recording conversations. And I’ll just chime in that, you know, the question of what do you do in the context of this environment comes up and, you know, we just discussed this at length. But Jay put it, put the nail on the head, you diversify. This is how you handle economic uncertainty. If you can’t handle the uncertainty of what’s going on in the economy, you diversify, right? We just had Frank Vasquez on the show talking about how to build a Golden Ratio portfolio. There are answers to how you invest that are other than 100% concentration in this asset class or this asset here. And if you’re worried, diversify, especially if you’re approaching your FIRE number at 80% or even at or approaching it. It’s time to diversify and that will sway a lot of these risks and there’s ways to take advantage to diversify in a way that will take advantage of really any market condition that’s ever existed.
Mindy: Absolutely. Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying out the door…
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Mindy: a Velociraptor.
