A “Soft Landing” Looks Shaky as Recession Risk Starts to Rise


The Chinese economy is facing one of its most significant tests in years. With real estate prices falling off a cliff, unemployment skyrocketing, and a currency crisis, Asia’s largest economy could hit even harder times ahead. But this doesn’t mean the rest of the world will remain unaffected. In the US, recession risks are starting to rise as hopes of a “soft landing” are gradually fading away. With inflation still rearing its ugly head and American households running out of cash savings, the worst could be yet to come.

To give us a global view of the economy is Bloomberg LP’s Chief US Economist, Anna Wong, who also served on the Federal Reserve Board, the White House’s Council of Economic Advisers, and the US Treasury. Few people in the entire country have as good of a read on today’s economic situation as Anna, so we spared no questions about what could happen next.

Anna has some recession predictions that go against the grain of popular economic forecasts. From her data, the risk of a recession is far from over, and we could be heading into a shaky Q4 of 2023 and a dismal start to the new year. She details what could happen to inflation, unemployment rates, foreclosure risk, and why the Chinese economy’s failures could have lasting effects back home.

Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer, and today we have an incredible guest for you. We have Anna Wong joining us. Anna is the Chief US Economist for Bloomberg, which, if you’re unfamiliar, is an enormous media company that covers investing and economics throughout the world. Prior to that, Anna was the Principal Economist at the Federal Reserve Board, she was the Chief International Economist at the White House Council of Economic Advisors, and she’s done incredible things all over the world of economics.
So if you’re one of those people who listen to the show because you are nerdy and wonky and really like understanding what is going on, not just in the US economy, but in the global economy, you are definitely going to want to listen to this episode. I will say that Anna is extremely intelligent and she gets into some complicated… Well, not complicated, just more advanced economic topics. So just a caveat there. But she does a very good job explaining everything that she’s thinking about and talking about.
So if you want to learn and get better, and better understand the global economy, I think you’re going to really, really appreciate this show. Just as a preview of what we talk about, we start basically just talking about the differences between a soft and hard landing. If you haven’t heard those terms, basically, when the Fed is going out there and talking about risk of recession, they think that there’s going to be a “soft landing,” which means that we’ll either avoid a recession or perhaps there’ll be a very, very mild recession.
On the other hand, a hard landing would be a more severe, more average type of recession where there’s significant job losses, declines in GDP, that kind of thing. So we start the conversation there. Anna, who has worked at the Fed and at the White House, has some really interesting thoughts and some very specific ideas about what’s going to tilt the economy one way or another.
And then after our discussion of the US economy, I couldn’t resist, I did have to ask her about the Chinese economy. Because we’ve been hearing for years about how real estate in China is dragging down their economy. And just in the middle of August, over the last couple of days, we’ve heard some increasingly concerning news about the Chinese economy, what’s going on there.
Actually, just yesterday, the Chinese government announced they were no longer going to release certain data sets because it really just wasn’t looking very good. And Anna has studied the Chinese economy for decades, and so she has a lot of really interesting thoughts on what’s going on in China and how it could potentially spill over into the US economy and specifically, honestly, a little bit into the real estate industry.
So that’s what we got for you today. I hope you guys enjoy it. We’re going to take a quick break, and then we’ll bring on Anna Wong, the Chief Economist for Bloomberg LP. Anna Wong, welcome to On The Market. Thank you for being here.

Happy to be here, Dave.

Can you start by telling our audience a little bit about yourself and how you got into economics?

So I started being very interested in economics because of financial crisis back in early 2000s in college. And after that, I started working in DC for some former senior officials and the IMF and at the Federal Reserve. And in early 2000, it was a pretty exciting time to study global economics, partly because there was some very interesting phenomenon that was happening such as the global saving glut, and the dollar depreciation, and China accumulating international reserves via purchasing US treasuries and also predictions that maybe the US housing market was in a bubble and there will be a correction.
So when 2008 happened, I was in graduate school getting my PhD in economics from University of Chicago. After I got my graduate degree, I worked at the US Treasury on the international side of things. And there, I had covered G7 countries, I had been through the fiscal cliff in 2013 in the US and I also covered China in 2015 and 2016. And after Treasury, I went to work as a economist in the Federal Reserve Board where I also covered the Chinese economy. And I did that for a couple of years.
And during the trade war, I went to work for a year at the White House Council of Economic Advisors. So every year, the Federal Reserve would send an economist to the White House CEA. That’s historically been the case. So I was that economist from 2019 and 2020. And while I was really there to work on trade war, supply chain, resiliency, which actually started before the pandemic began, because of the trade war, there was already a lot of concerns about vulnerability of US supply chains.
So when the pandemic happened, I was also there to study, to forecast what would happen to the US economy if there were no fiscal stimulus and what is the appropriate size of the fiscal stimulus, and forecasting the collapse of the US economy in April 2020. And I will never forget that moment. It was very formative, that second part of my tenure at the White House during the pandemic.
And so that was why I became the Chief US Economist at Bloomberg because I thought this is the time to forecast and study the US economy, because it’s a time where if you have a view about where inflation’s heading, where GDP growth is heading, this is a very exciting time. Whereas in the previous 10 years, inflation just fluctuate around 1% to two point some big percent.
It’s just not as exciting as international side of things. So now as a Bloomberg Chief US Economist, I mainly focus on forecasting where inflation is going, where growth is going, whether there will be a recession and the Fed funds rate, where it would go. So that’s my job now.

All right. Well, it sounds like we have someone extremely qualified to answer all of our questions that we have for you. So we feel lucky to have you here, Anna. And I want to talk about the Chinese economy in just a little bit because there’s been a lot of news coming out about it. And given that our show is so much about real estate and some of the trouble they’re having with real estate, we’re particularly interested.
But I’d love to just start at the highest level here given your experience at the Fed too. We’re hearing a lot from the Federal Reserve, Jerome Powell, a lot about a soft landing and if that’s possible. Could you just tell us a little bit about the concept of the soft landing, first of all? And what your views on the feasibility of it is?

Yeah. I think the concept of soft landing is not very well-defined. It’s a nebulous concept. Because some people would interpret it as saying that there would be a recession, but it will be very mild where unemployment rate will still increase from today’s 3.5% to four-ish percent. But I think right now, most investors who are talking about soft landing are really of the mind that there won’t be a recession at all, and that inflation would come down painlessly where the labor market will continue to be tight.
I think that’s basically what people have implicitly in their mind. And in terms of the possibility of this, so Bloomberg Economics, my group, is still of the mind that there will be a recession, that getting inflation back to 2%, which is the Fed’s target, will be painful. And that a rise in unemployment rate to at least 4.5% is necessary to bring inflation back to 2%.
We are skeptical of the soft lending optimism for a couple of reasons. Number one, many people today cited resilient consumption. You saw the strong retail spending yesterday. Many people cite that as one reason of soft landing. Well, when we looked at the pattern of consumption over the past recessions in the last 50 years, it turns out that consumption always is resilient before a recession and even in a recession. In an average recession, consumption does not even drop off.
Consumption just maybe even tails off services consumption, in fact, on average, grow a trend even during a recession. So it’s just not the kind of indicator you want to derive comfort in because it has no forecastability of a recession. Second reason that people cited as why they’re optimistic, it’s just broadly speaking, economic indicators lately have been surprising on the upside. It turns out that two months before the Great Recession in 2007… So December 2007 is the beginning of that recession.
Two months before that economic data were all surprising on the high side as well. PMI was doing well and auto purchases was also solid, nonfarm payroll, just two months before that recession was going at 166,000 jobs added, just two months before it started to be negative. So currently, in the most recent jobs report, we saw that the economy added 187,000 jobs. And that number is likely to be smaller in the next month.
Because we have seen in the past couple of weeks bankruptcy of the trucking company, Yellow, and that already shaved off at least 20,000 from the headline. And also, we have been seeing a trend of downward revisions in these jobs number. And by looking at various benchmark series, our view is that the nonfarm payroll number is overstating the strength of the economy. And the disinflation trend, the low core inflation reading that we have been seeing lately is not due to painless reasons.
It is because the underlying job market and labor market is weakening more than these headline figures are suggesting. We are expecting consumer delinquencies to surge after October, and we’re already seeing small firms bankruptcy going up sharply. We are expecting by the end of the year, small firms bankruptcy would reach the level that you would last see in 2010, so would consumer delinquencies.
And in fact, I think the best economic indicators with proven forecasting ability for recession is the Federal Reserve, a survey of senior loan officers. And in that survey, the Fed asked senior loan officers in banks, “What are the plans for credit tightening in the second half of the year? What did they do in the past six months?”
And this is actually a causal channel of economic activity. Whereas consumption, resilient consumption, PMI, those are coincident indicators. But whereas lending, people can only spend if they can borrow. And lately this is what you’re seeing, consumption is propped up by borrowing. So the moment that it becomes harder for them to borrow or the cost of financing this borrowing becomes exorbitant, they will have to downshift their activity.
Similarly, on the corporate side, the mysterious things that has been why, on the corporate side, we see activity being very resilient is still very narrow corporate spreads. And usually, on a downturn, you will see widened corporate spreads. That’s because bankruptcies are happening and credit risk are worsened and there will be credit downgrades, things like that.
And we’re seeing the very, very beginning of that. And usually, when that happens, it’s a very non-linear process. One of the reasons that people have been citing as why we won’t have a problem like we did in previous recession this time on the corporate side, is that credit quality is very good. And looking at mortgage origination, you see the credit scores or consumers are very good, nowhere near what it was in 2006.
But what happens is that some of the pandemic policies, such as the student loan forbearance policies, have distorted credit scores. In fact, by some estimation, credit scores might be artificially inflated by 50 basis point. So if you look at the tranches of mortgage originations by credit scores, and you discount the lower 10th percentile, 20th percentile of mortgages by 50 basis point of credit score, in fact, credit quality is not that much better than 2006.
So I think that a lot of these things that are underneath the service will only bubble up to the service as you start seeing this snowball financial accelerator effect. And that’s why I just don’t think that the things that people have been citing for being optimistic about soft landing today, do not stand the test of history. So this is why we are still thinking that a recession will happen later this year.

Great. Thank you. And you just answered one of my other questions. But just to summarize for everyone, it sounds like what a lot of prominent media outlets or other forecasters are relying on are variables that don’t necessarily have the right predictive qualities for a recession. And some of the data points that you just pointed to are in fact better examples of what we should be looking at if we’re trying to forecast a recession.
You said at the end of this year… And I want to just follow up on this conversation because it does seem from the other forecasts I read, people are split. The people who do believe there’s a recession, some say end of this year, some say in the beginning or middle of 2024. The Fed started raising interest rates. What is it now? 15, 18 months ago, something like that.
We know that it takes some time for these interest rate effects, rate hikes to ripple through the economy. But what do you expect to happen between now and the end of the year that’s going to go from this gray area that we’re in now to a bonafide recession?

Yeah, a very good question, Dave. So resilience in the economy in the last two years. To be able to accurately forecast a recession, I think one needs to also have a good understanding of what is boosting the resilience in the last two years. And for us, we actually have been pushing against recession calls last year, Dave.
If you remember last year, there was a lot of people who were talking about recession at the end of last year, or in the middle of last year. But we were never in that camp. We have been consistently saying that the recession will be in Q3 of this year, Q4 or Q1 2024. And the reason why is precisely because of the lags that you just described of monetary policy.
So we estimated some models, and all those models would suggest that the peak impact of monetary policy would occur around the end of this year. So I think those are the tools that central bankers typically use, like top-down [inaudible] models. But we also look at this from a bottom-up perspective. Because there are some unique things propping up the economy these two years, one of which is that household to have built up this cash buffer from the fiscal stimulus, and also from savings during the last two years.
Because in the early part of the pandemic, they couldn’t spend if they have all this money. And also, from the stock market wealth effect, all that. And so we look at also income buckets, how much households have in excess savings. And what we see is that in terms of the runway, how many months that these cash buffers could support somebody’s normal spending habit without them needing a job or something like that.
It shows that by the end of this year, towards the end of this year is when probably the lower half of the population will be out of these buffers. So either they come back to the job market, and this is why labor supply has been increasing this year so far. It’s because of these people who were on the sidelines suddenly feel that desperation that they need this job because the cushion is gone.
So that’s one reason why, from a bottom-up analysis, we think that the second half of this year, around the end of this year, is the time. And second, I think from a natural experiment point of view, you also see the impact of these pandemic policies. One of which is that during the pandemic, the administration boosted the emergency allotment for people’s food stamp money and for a poor household.
And we’re talking about household in the perhaps lower 20 percentile by income bucket. And those people saw their food stamps allotment going from less than $100 to as much as $300. That’s a lot every month they got more. And there’s more pandemic policies such as childcare credit, and of course the three rounds of fiscal stimulus. But this SNAP program, this food stamp emergency allotment, it expired earlier this year at March of this year.
And immediately, you saw this plunge in demand for food. Not just trading down to cheaper food, but just plunge in demand in food. And you see evidence of that in the earnings call that is finishing up just around now from food company like General Mills, Tysons. They’re talking about a decrease in volumes of food demand. Because we saw early signs of that tremendous impact from this expiration of food stamp emergency allotment in plunging card box shipments.
That is actually one of former Fed Chairman, Alan Greenspan’s favorite barometer of the US economy, cardboard shipments and freight, railcar loadings. Both of them plunge at the same time. And it turns out that 30% of the demand for cardboard shipments came from food industry. And it turns out that one of the primary reason I think for that plunge is because of food demand plunge from this emergency allotment expiration.
And now, we are expecting to see the expiration household resuming student debt payment in October. And the average amount of a student loan borrower is about $300 per month in payments. So that basically subtracted $300 per month in spending power they could have in buying other stuff. And so that’s a tremendous amount that could shave off about nine billion per month in spending power for the US economy.
It’s a tremendous shock. Similar to the food stamp allotment program that also took away about $200 in spending power of a household. And this is what I meant by a natural experiment. You see these pandemic policies expire and bam, and then that’s where you get that plunge somewhere. So this is why I think that in October, once those payments resume, you’re going to definitely see consumers pulling back on consumption.
I mentioned earlier in this podcast that consumption is a poor predictor of recession. So if consumption is resilient, it doesn’t tell you about the chances of recession tomorrow. However, if consumption is not doing well, it definitely will tell you something about the recession probability tomorrow because consumption accounts for two thirds of the US economy.
And so that’s one non-linear shock that I’m expecting to see. And I think it will have ripple effects. Because I mentioned earlier that student loan forbearance policy inflated people’s credit scores. So the Biden administration extended the period of when credit agencies can dock people’s credit score if they are delinquent on their student loan by another year.
So after October, we won’t see credit scores deterioration yet from people who could not pay on the student loans. But I do think that on the margin, some people would be paying. And then you will see auto loans or other consumer loans, a credit card loans delinquency deteriorate. So while credit companies cannot dock a person for being delinquent on student loans, they could dock somebody for being delinquent on auto loans and credit card loans.
And all that means that we are going to see credit score deteriorate. And the pullback on consumption will also affect firms’ profitability, which also leads to more bankruptcies over time. And so I think we are going to see measures of various credit risk worsen starting in the fall and going into next year.

Wow. Thank you for explaining that. I’ve just been wondering about timing because it does feel like we’re… For the last year and a half or so, we’re hearing a lot there’s going to be a recession. And it’s curious when the tipping point is going to be. But I appreciate that explanation on your thinking about timing.
You mentioned the unemployment rate of 4.5%. Just for context for everyone, I think we’re at about 3.6-ish percent right now. And this is in August of 2023. How bad do you think it’s going to get, Anna? Is this going to be a long-drawn-out thing, a short recession? They come in all sorts of flavors. What are you expecting?

As Anna Karenina, the novel begins, “All unhappy families are unhappy in their own way just like recessions.” So the average recession being that unemployment rate have to go near 5%, at least almost 5%. But because the pandemic era has improved the balance sheet of… You have investment grade firms which are able to refinance some of their debt with the lower interest rate during the low interest rate period in the early part of the pandemic.
There are a lot of heterogeneity across credit risk. When I said that this recession would be prompted because of the worsening credit risk, I’m talking about on the consumption side, the poorer half of the country; on the corporate side, the less creditworthy path of the corporate world. But there are still pockets of resilience. And I think this is why, overall, this recession will be a mild one just because it’s not the kind of situation of 2008.
To have something of the magnitude of 2008, not only do you need vulnerability in the economy, and we do have vulnerability in the economy, you also need some amplifier, some propagation of those weak points. And in 2008, that propagation mechanism is the subprime mortgage and the packaging and tranches stripping the credit, each of the subprime into various tranches. And that leads to this and transparency of the credit quality of this assets you’re holding.
And when subprimes start getting into trouble, it is that fear of not knowing what you have in your hand, “Is it toxic? Is it not toxic?” And that everybody just pulls back. And you need that kind of propagation mechanism. And oftentimes, it’s unclear beforehand what it is because it is so hidden. Usually, you don’t know ahead of time. But as I said just now, suppose that if in fact that people’s credit scores were so inflated and their behavior, in fact, mimics somebody with much lower credit scores today, maybe the credit quality of a lot of assets on the consumer side today are mispriced.
Another potential shock today is, of course, a commercial real estate. Everybody has been talking about how it’s just a ticking time bomb related to the fact that a lot of commercial properties are vacant right now given the remote work trends that was started during the pandemic. So I cannot tell you exactly what would be the source of a potential amplifier of a downturn. But that this is why we are of the view that the baseline is still a mild recession, but with the caveat that I think, ex ante, it’s hard to say where that shock, that propagation mechanism is coming from.

Yeah. It’s one of those things where it’s almost certainly not going to be the thing that you think it’s going to. If you hear about it so much that whenever it’s in the media enough that people maybe mitigate against it or-

Yeah, exactly.

I don’t know.


They focus on it when there’s a bigger creeping risk that no one’s really seeing.


You did, Anna, mention the commercial real estate market, but earlier mentioned something about mortgage quality and loan quality. And I’m curious if you have concerns or thoughts about the residential real estate market and any risk of foreclosures or defaults going up there?

Well, Dave, I was looking at the mortgage origination in the residential market by different percentile of the credit scores. And my observation there was that on the lower 10 percentile, if you just take those numbers as given, you see that the average credit scores of the bottom 10 percentile by credit scores in mortgage origination, was about 60 or 70 points higher than before the 2008 crisis.
And a second observation is that that average credit scores of the bottom 10% and 20% has been deteriorating in the last three years in terms of mortgage origination. And those two things are pretty alarming to me, because why is mortgage origination deteriorating at a time where credit scores was inflated? And in those two years where credit quality was deteriorating in the mortgage origination, that was when credit scores was actually increasingly inflated. Not just inflated earlier on, but increasingly inflated.
So that tells me that in the last two or three years, the people who are buying, the higher the interest rate they’re getting on their mortgage, the likely that the average credit quality behind that mortgage is not as good as the one two years ago. And furthermore, if I adjust that credit score inflation by the amount that I think is feasible, 50 basis point, in fact, the average credit quality is not clearly better than 2006.
And in terms of foreclosure, now that’s a curious aspect of this housing market. What’s different today than back in 2006 is that we have significantly lower housing supply. And that has kept housing prices from falling too much. And there are many reasons why housing supply is not as high as before, but I think one reason is also that there’s been less foreclosure. And I think one of the reasons is also related to the administration policies from Freddie Mac, Fannie Mae, that I think there has been some remediation policies that has delayed and make it harder for foreclosures to happen.
And related to the pandemic also that there’s been policies that want to reduce the risk of homelessness on the part of people who are suffering. So from a humane perspective, I can see exactly why that would be the case for it. But from a housing supply perspective, that is one curious case. So I think underneath the surface, a lot of this resilience is perhaps just deferred and delayed because of actual policies, pandemic-related policies.

Yeah, it’s interesting to see about the credit quality. I had never previously heard about the potentially elevated credit scores. That’s really interesting. Because I’ve definitely been reassured about the housing market based on some of those credit quality… And the fact that even a lot of these forbearance programs and foreclosure moratoriums did lapse more than a year ago, I think. And we’re still seeing pretty low foreclosures.
They are ticking up, but they’ve still been pretty low on a historic scale. And so I think that’s, to me, one of the more interesting things in the market to watch for in the next year or so is: will a potential recession, or really anything else, spur more foreclosures in the housing market over the next couple of years?
Anna, I wanted to shift a little bit out of the US, actually. We rarely talk about this on the show, but since we have an expert with your background, I would love to just talk a little bit about the Chinese economy. For the last year or so, we’ve heard a lot about how Chinese real estate has been a drag on their economy. From my understanding, a lot of asset values have gone down, and that’s depleted a lot of savings or net worth of a lot of citizens.
We also heard yesterday something pretty unique that the Chinese government will no longer be releasing youth unemployment data because it was growing so high. So it does seem like there’s a lot of economic turmoil coming out of China. So would love just your perspective on that. But I think for our audience, we’d love to know what impact will the Chinese economy, second-biggest economy in the world, have on perhaps the American economy?

Yeah. Okay. On the Chinese economy, I think one of the driver of China’s growth has been real estate. And that’s related to multi-decade policies in China that suppressed investment options of Chinese household. So from Chinese households’ perspective, there were not many instruments that you could invest in, and that’s why it’s very typical for a household to over-weight on real estate. And this is why, in terms of a housing bubble, China does have a continuous problem there.
And every time the real estate market slows in China, you see significant impact on the economy. And economists have used more granular input-output tables to get at the direct and indirect impact of real estate sector on Chinese growth. And that number is actually massive. It’s a big number, and it’s much bigger than in US. If you think that in US, a housing market downturn would push the US into recession, in China, that’s several factor larger.
And in the past 20 years, every time you see that there’s a housing price cycle in China. And it’s very clear because you just need to look at the first-tier Chinese cities’ prices. Every time that happens, there’s hard landing fears in China and there’s capital flight away from China, the renminbi weakens.
And what makes the recent cycle, this current cycle pretty severe, is that it seems to be related to some scarring on the household side from the long pandemic policies of shutting down the economy. And so it seems like this time, this China shock, this is a serious China shock. So I would say it could be even worse than the 2015, 2016 hard landing shock.
Some of the indicators that had in the past been indicative of the Chinese economy is of course, as I mentioned, first-tier Chinese city housing prices. And in the past, whenever that has fallen, the government could stop publishing it. And in fact, whenever the government stopped publishing something, that’s when you know something’s not doing well.

Yeah, no news is good news. No news is bad news.

Yes. So number one. Number two is a thing called total social financing, TSF. And basically captures the credit impulse of the economy, and it’s just falling through the roof right now. It is worse than 2006. That’s in terms of level. That’s really bad.


And I would say, as an economist, just as an economist focus on measurement issue from a statistical agency’s perspective, it’s actually easier oftentimes to collect price data than quantities data. So at times where all these economic indicators are sending mixed signals, I would focus on prices.
And some of the prices that you can observe here is, for example, Chinese PPI and US import prices from China because we also collect those data. You don’t necessarily need to rely on China’s data. You can see some of these data on the US side, and those are weakening very much. And deflationary spiral don’t come from nowhere. Similar, you can extend even the same analysis to the US economy in terms of our labor market.
A lot of people talk about labor market strength in the US. But you look at wages and you look at the jobs opening data. Is it possible that just a decrease of 34,000 jobs opening could lead to more than one percentage point decrease in wage growth? It’s that sort of stuff where if you believe more in the price data… Because it’s very easy to collect prices data in China’s case, prices of consumer discretionary.
In US cases, it’s very easy to collect prices on wages, but it’s harder to count the number of jobs, the number of jobs openings, the housing starts in US. And versus in China, it’s hard to count the exact unit of quantity. Whereas prices data, we have it everywhere.

And you’re seeing deflationary data.

Yes. So I think that the key indicators in China, the housing prices, PPI, and also using corresponding US data on counterparty data and also the total social financing data in China, those are pointing to some serious trouble on par or worse than 2015.
In terms of spillovers to the US though, when I was at the Federal Reserve, I wrote a paper on the spillovers from a China hard landing on US and global economy. And so you can think of it as the shock has three propagation channel. Number one, is through its impact on commodities. So China will lead to disinflation and deflation on various commodity prices such as iron ores and oil and zinc, copper, aluminum. China’s demand, historically, account for at least 40% of those commodities.
So number two, the second channel is through trade. So if we export less to China, then from a GDP accounting perspective, we have less growth. So these two channels are not so important for the US. Because in terms of our direct trade exposure to China, very small. Finally, the third channel, which is where it gets dicey, and this is the main channel of how a China hard landing could slow us down.
It is through the risk asset channel. So in terms of direct bank exposure to Chinese assets or even indirect US bank exposure to China related… So suppose we are highly exposed to UK bank, HSBC, which is very exposed to Hong Kong or China, that channel is not that important in terms of finance. It’s really the global risk asset channel. What happens if there’s a sudden hard landing in China, is that it would lead to global risk-off.
So you would see credit spread widened, sovereign spread widen. The dollar would appreciate. So my paper’s estimate is that if China falls four percentage point below expectations, then the dollar could appreciate by 6%. And usually, when the dollar appreciates, it tightens global financial conditions, it makes it harder for companies [inaudible] hire.
And VIX would also increase. If China’s GDP growth is four percentage point below expectations, our model expect to see about six percentage point increase in VIX. So that’s close to one standard deviation. Oil price would decrease by 40%. So it’s actually through that channel that pulls back people’s appetite to lend that could lead to problems in slowing US down.

You gave us an idea about the US economy and timing. Do you think we’ll know anything about the extent of the Chinese economic situation and its potential impacts anytime soon?

Well, Dave, as I was saying, when we encounter measurement problem, if the data is not available to you, what is available to you is actually what is happening to prices and the real world. And China does not have a monopoly to its own data. In fact, the US also measures a lot of counterparty data. We can say how much China is importing from us.
So if Germany’s export to China dropped, because Germany exports a lot of capital equipments to China, there’s a usual pattern of how China slowdown could affect the rest of the world. And you just need to tally up those signs to have a good gauge of how bad is the trouble with China.
So right now, we are also seeing people are debating on whether there’s a recession in Germany. And certainly the mood is very gloomy in Germany, which is another manufacturing powerhouse. That economy is very much tied to the Chinese economy. If they’re not doing well, I think it’s highly suggested that China is not doing well either.
So also, I would look at commodity prices where traditionally, Chinese demand account for the bulk of it, as I was saying, iron ore, zinc, aluminum. If those prices are falling dramatically, it does tell you that demand is slumping in China. So it’s pretty obvious, you can tell immediately.

All right. Well, thank you so much, Anna. This has been extremely helpful. We appreciate you lending your expertise to us today here on On The Market. If people want to learn more about what you and your team are doing at Bloomberg and follow your analysis and writing, where can they do that?

You will need a Bloomberg terminal. And once you have a Bloomberg terminal, you type in BECO, B-E-C-O GO. And there you can see all our insights and thematic pieces and reactions to data.

All right, great. Well, Anna, thank you so much for joining us. Big thanks to Anna. I hope you all enjoyed that interview. Anna, clearly a very knowledgeable and smart person, knows a ton about the real estate market, knows a ton about the economy and I really appreciated what she was saying. I think there’s a lot of different conflicting data out there.
But what I really liked about Anna’s analysis is that she acknowledged that there’s a lot of conflicting data and said there are certain data sets, there are certain data series that just aren’t that good predictors of recession. Maybe they’re good at predicting something else, they’re important for some other reason, like consumption. She was talking about US consumption. It’s not a good predictor of recessions.
And so she and her team are able to distill what data points are important and which ones are not. I love that because I think as real estate investors, that’s something we also have to do, not just in broad macroeconomic terms, but also when you’re looking for property, you need to decide which data sets are important to you, which indicators, which numbers are really going to determine the performance of your deal.
And so I think learning from people like Anna about how to pick the right indicators, the right data sets is something that we could all learn and benefit from. All right. That’s what we got for you guys. Thank you all so much for listening, and we’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media. Research by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions and investment strategies.


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