Are We Heading Into a Recession? J Scott Breaks It Down

21:40Mindy Jensen: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 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. That gained headlines a week or two ago 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.

22:19Down 40%, you got to add another day. That's actually part of it. With four days, there's going to be less urgency 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.

22:59So it's looking like Amazon Prime Day, that 41%, that hit some headlines, but it's probably not true. But we don't know what exactly is true yet. Amazon hasn't released any data. And so a lot of it's still just speculation.

23:12Mindy Jensen: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. I read that headline as well. I'm not smart enough to draw any conclusions from that. But certainly, if I just went with common sense 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.

23:48And so 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.

24:04Mindy Jensen:I brought you on for wild conjecture, Jay. Make some stuff up. I don't want to be a fear monger, but I also want people to realize there's some stuff going on that isn't being reported and all these other numbers like you and Scott were just talking about that should give you pause with regards to 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 not even getting calls back.

24:38Mindy Jensen:And I don't think they are in these unicorn positions where 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. 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 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. 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 mail surveys, simply don't make sense today.

25:18The people that respond to those surveys aren't necessarily a good cross-section of the U.S. 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 of 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 of days ago, June inflation data came out. And there was a note that I think it 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.

25:59and 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 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 correct ways.

26:37Well, 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 tabulated and we get a big number. But when a third or more than a third of the data may be either incorrect, or just to be a little conspiracy theorist here, maybe manipulated in a way that makes whoever that person wants to look good or bad.

27:30It's possible that the data we're getting is not even as good as it was a couple of months or a couple of years ago. And I would argue that data wasn't great either. I think that this is where you got to go into tariffs, right? And you say, it just doesn't make sense, right? If you're going to impose higher costs on the 25 % of goods that are imported in this economy? What percentage of the goods are imported in this economy again, Jay? It's in the 30s, I believe. I don't have the data. 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.

28:00How does that not translate in an inflationary capacity to the CPI or the producer's parity index, the PPI? How does it not hit those numbers? 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 journey. I guess the third one would be that productivity is so much better. Maybe that's the AI component of this or whatever. Productive capacity gets so much better that it's driving those costs down enough to offset any costs imposed by the terrorists.

28:42But 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? Not, you know, whatever your opinion is 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 does that possibly make sense? So there is a third option, and it's probably a little too early to discount it, and we may even find that it's the right option.

29:16The 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 gone down considerably, which might tell us that they are eating some of these cost increases due to tariffs.

30:02Let's talk about what can go right for a second here in the economy. I want to start with interest rates, right? We're getting a bunch of headlines about Trump waving around a letter saying, I'm going to fire Powell. Here it is. Should I send it? Whatever. The guy fires Powell, and immediately you presume interest rates come down because a dovish Fed chair who is going to promise to lower rates will almost certainly be the selection. And wouldn't that have a major impact that would offset recession risk? 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.

30:35So 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 Powell, I don't think he's going to, by the way, because I think he and his advisors know this. the minute he were to fire Powell, 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.

31:09When you have lower interest rates, you're going to have higher inflation. Higher inflation leads to higher treasury yields. I want to push back on that one, right? That doesn't make any sense to me because I think there's one of two possibilities, right? Either Trump's going to fire Powell or 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, the yield will go down, the 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.

31:43But 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 share, the Fed can control the short end of the curve. They can control 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 step back real quick because I think this is really important. So I mentioned there's theory versus reality.

32:14The theory is that Al 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. 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.

32:56And 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 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 votes on interest rates leaving. Their tenure is up and Trump will be the person that appoints the replacements. So it's very possible that over the next year between the people 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.

33:36Doesn'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 board that were appointed by him, 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 kind of the first reactionary idea of Powell's gone, interest rates are coming down 3%. That's not going to happen. All right, stick around after our final economic break to figure out whether we're in a recession or not.

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35:51Mindy Jensen:Thanks for sticking with us. 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 they're creating documents, creating images, creating presentations, and all this stuff is just speeding up a 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.

36:29I 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 really trumps all the other things we discussed? It could have a couple different effects. And depending on who you ask, you're going to get different answers. I'm not smart enough to know exactly, but 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 stand to have the highest risk, which is very different than all of the technical revolutions we've had in this country, in this world over the last couple hundred years.

37:10Typically, when you have a technological revolution, it's the blue collar, the lower on the socioeconomic 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 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.

37:52And 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 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 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.

38:27And 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 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.

39:00And 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 can imagine in my mind, the world that we live in in five years has an unemployment rate that has plateaued higher than where it is today, but prices have substantially stopped increasing at the rate that they've been increasing the past couple of years.

39:36Just because I love doing it, I can't resist. I take the same observations and almost reach 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, ExxonMobiles 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, small companies that started in garages like Google and Amazon or in a college dorm like Facebook. And I believe that is much more likely of an outcome from this AI race.

40:11Think about 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 stay so far ahead of that because an AI could rapidly re-engineer that using a very small cohort of a small community, for example, and really replicate that almost to a better degree. Look at TikTok, right? For example, 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 ChatGPT or whatever your preference is.

40:48They can spit out code that can solve many of these problems 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 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?

41:24I'm going to Google, I'm going to type into Google less and I'm going to type into ChatGPT or Grok more when I've 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. I think we just said the same thing. I think we're pretty much in agreement there that it could be bad for businesses. It could be bad 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.

42:00So there was 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 browser 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 OpenAI, who are in theory going to create their own browser and create their own search engine.

42:37And 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 startup technology that's been around for a year or two could potentially take down Google at its most profitable business unit. It could have so many unexpected things, too, that benefit, again, the consumers or the small producers. For example, let's take agriculture, right? Right now, most of the food produced in this country is in the breadbasket, right? 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?

43:21Over a lot of distances. Who knows how that's going to play out? But I think that there's 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 – if there's a rise in standard of living and there's limited physical space to live in, I would imagine that rents will rise as a percentage of real spending.

44:00Yeah. Certainly, the thesis that inflation would continue at 2 % would be good for real estate. One truism we have in the real estate world is that historically, inflation and 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 2%, 2.5%, that real estate value should grow long-term at at least 2%, 2.5%. So that's the big question, though. Do we see inflation continue or do we see deflation, which I think is the risk? Jay, are we in a recession? I was hoping that if I spoke long enough, I could avoid that question.

44:36I remember I mentioned earlier that we have this group of government folks, Enver, who will meet at some point in the future and look back and say, we were in a recession or we weren't. They're going to look back today and over the last couple of years, and they're going to determine that, no, we're not in a recession. 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 level of government.

45:08Uncertainty is going to drive a good bit of additional economic softening over the next 6 to 12 months. And I would not be surprised to find that if we have this conversation 6 or 12 months from now, my answer might change. Well, I want to preview some data with you here. Our audience agrees with you. It's 46 percent, the largest cohort of this. The question is, do you believe the United States is in recession currently? 35 % I posted this an hour ago, so it'll fill out over the next day with close to a thousand votes, I believe. About a third of folks believe, yes, we are in a recession. About half say, 46 % say no, and 18 % are not sure.

45:42I 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, 12 months. For what it's worth, I looked at this in February, 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, the 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. 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.

46:24But 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.

47:01And because they were historically 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 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%.

47:34And 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 overperforming, outperforming for the last couple of years, then it's really easy to think, hey, my situation's getting better. The economy has to be good because my situation is getting better. But if you don't own hard assets, you're probably thinking, my situation is not getting better.

48:10Prices are going up. Work is getting more difficult. Things just don't feel as good. So it's not surprising that there are a lot of people, 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 we talk about it from an individual, how are you feeling standpoint. 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.

48:40There's a headline here that 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 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.

49:16Again, 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. And what's interesting, I don't have the data and I'm not sure how much different it would be if at all, but the data you were just presenting was based on income levels. We could also do the same exercise using net worth levels. And I'm curious how much different it would be. And again, I don't have the data, but it's just kind of a thought experiment that that could result in a much different answer than what we just saw.

49:53Mindy Jensen: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? Jscott.com, letter J-S-C-O-T-T.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. All right. Thank you so much. And we will talk to you soon.

50:28Mindy Jensen:Thanks. That was J. Scott. Scott Trench, what did you think of that episode? I always love talking to J. I love following him on Facebook, get 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 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 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.

51:07It 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.

51:44The middle class is shrinking. That's a real problem. Who knows where it's going to go from here? 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 all time highs, even adjusted for inflation.

51:57Mindy Jensen: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. Yeah. At the end, I wanted to chime in with this. We talked Jay after the recording, as so often happens, there's a good nugget that comes from those after recording conversations. And I'll just chime in that, you know, the question, what do you do in the context of this environment comes up?

52:35And, you know, we discussed this at length, but Jay 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, you're 80 % or even at or approaching it. It's time to diversify and that will sway a lot of these risks.

53:04And there's ways to take advantage, to diversify in a way that will take advantage of really any market condition that's ever existed.

53:09Mindy Jensen:Absolutely. Scott, should we get out of here? Let's do it. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Mindy Jensen saying out the door, Velociraptor.