A seasoned macroeconomist talks through short-term and long-term economic drivers.
Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Dr. Paul Ashworth. Paul serves as Chief North America Economist at Capital Economics. He joined the London-based research firm in 2001 from the National Institute of Economic and Social Research after taking degrees in economics and mathematics at Strathclyde and Warwick in the United Kingdom and completing a Ph.D. in monetary policy. In 2010, Paul was named Wall Street Journal Forecaster of the Year.
“Ashworth Tops Economy Survey,” by Justin Lahart, wsj.com, Feb. 7, 2011.
“Trump Tariffs Get to Stay in Place for Now. What Happens Next?” by Peter Hoskins and Yang Tian, bbc.com, May 30, 2025.
“Economists Welcome U.S.-U.K. Agreement for Signal Rather Than Substance,” by Harriet Torry, wsj.com, May 8, 2025.
“This Economist Thinks the Tariff Pause Could Be Permanent,” by Hannah Erin Lang, wsj.com, April 9, 2025.
“Consumer Sentiment Darkens Further With Inflation Worries Rising,” by Chao Deng, wsj.com, May 16, 2025.
“Why Trump Decided Not to Try to Fire Jerome Powell,” by Brian Schwartz, Josh Dawsey, and Nick Timiraos, wsj.com, April 23, 2025.
“The Weekly Briefing: AI’s Productivity Boom, Central Bank Rhetoric vs Reality, Recession Risk and More,” A Capital Economics podcast, Sept. 22, 2023.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Dr. Paul Ashworth. Paul serves as Chief North America Economist at Capital Economics. He joined the London-based research firm in 2001 from the National Institute of Economic and Social Research after taking degrees in economics and mathematics at Strathclyde and Warwick in the United Kingdom and completing a Ph.D. in monetary policy. In 2010, Paul was named Wall Street Journal Forecaster of the Year.
Paul, thank you so much for joining us on The Long View.
Paul Ashworth: You’re welcome. Glad to be here.
Lefkovitz: Well, it’s good to have you at a time of great economic uncertainty. Perhaps we’ll be feeling less uncertain after our conversation. I want to start out by asking what life has been like for you in recent weeks as a macroeconomist covering the US market in the wake of the Trump administration’s Liberation Day tariff announcements.
Ashworth: Yeah, busy obviously. There’s been an awful lot going on. And we’re not even 100 days into the presidency yet. In some ways, it’s pretty exhausting. But it’s also a very interesting time to be in macro. Obviously, we’re seeing Trump try a lot of different policies. Some are working, some are not. Some are getting pushback from the legal system; some are getting pushback from Congress. And now most recently, we’ve seen pushback coming from the markets on Trump’s tariff policies and also his suggestion that he might fire Fed Chair Jerome Powell. So, all very interesting. It’s so reminiscent, almost, of the global financial crisis how it fell in 2007 and then definitely again into 2008 when it just felt like it was building, and it became a sort of 24/7 job rather than 9-to-5 anymore.
Lefkovitz: Well, I mentioned in the introduction that you have won the Wall Street Journal’s Forecaster of the Year Award. Before we get into what you’re seeing right now, I wonder if you could give us a sense for your methodology, your approach, how you go about conducting an economic forecast? I imagine it’s both science and art.
Ashworth: Well, right now, because the policy environment has such an important impact on it, because there’s so much uncertainty surrounding what policy environment exactly will be, I think forecasting is almost more of a fool’s game now than it’s ever been. So, you’ll see a lot of people talking more about scenarios rather than talking about forecasts, we talk about our working assumptions a lot more. And that’s really the best you can do because things can go in so many multiple different directions. I think that’s something as a firm we learned after the UK’s vote to leave the European Union, the so-called Brexit, because obviously there’s such a big bifurcation in the two outlooks. You’ve got there leading first up to the vote, now will they leave, or won’t they leave?
Then once even they’ve voted to leave, there was obviously a lot of uncertainty about exactly what that meant, what type of Brexit will you get. It feels very much the same now, we obviously had a bifurcation going with the election and even then, though there’s still continual uncertainty about what Trump policies we’ll actually see push through. I mean, that’s it really—just forecasting is difficult at the best of times, and this is not the best of times because the policy environment is having such a massive impact on everything. It’s really just a case of being humble and talking more about scenarios, as best you can and trying to walk clients through what we think are the main points. What would happen in each of these scenarios? And obviously you’re inevitably going to get something wrong, but hopefully you’ve thought of most things so you can adjust.
I guess even coming up with frameworks for how to think about things, obviously in the runup to the election, Trump talked a lot about tariffs and what he’d do with tariffs if he got in, talked a lot about the 10% universal tariff and tariffs on China going up to at least 60%. So just thinking through what that would mean in terms of the impact on inflation and GDP growth and how to think about what would happen if tariffs were higher or lower, et cetera.
Lefkovitz: We obviously saw a trade war between the US and China in the first Trump administration in 2018. My memory that was the heart of it. How useful do you think that history is to us today in thinking about the road ahead?
Ashworth: Not really very useful at all. I’m not sure we can with hindsight now call that a trade war, maybe a light skirmish, something rather like a trade skirmish. We had tariffs of up to 25% on less than half of Chinese exports to the US, which means the effective tariff rate on China rose to something like 12%, 13%, something like that. Within the first couple of months the Trump administration has already worked 20% in two 10% tranches on top, on to exports coming from China, so that basically tripled what we’d already had in the first administration in the first couple of months. Then obviously, things have just gone exponential from there to the point where the effective tariff now stands north of 100%, so completely different, I think.
But also the currency response was very different then. So the renminbi weakened very quickly and very markedly against the dollar. Now how to offset some of the price hit, inflation hit from a higher price of imported Chinese goods. So obviously we’ve had the dollar going in the other direction this time. So yeah, I’m not sure it helps really. I guess we did learn a couple of things. We learned exporters are not really willing to eat this in terms of lowering their own prices. And so that’s an assumption we’re still sticking to. But yeah, certainly in terms of the currency response, it’s been the polar opposite. I guess as well, you could talk about how the Trump administration, the first administration was quite careful to avoid hitting final consumer prices as much as possible. The tariffs that were levied, were levied on intermediate goods as far as possible to try and absorb some of the hit to final prices. And that could be what we’re seeing now as the playbook again with the exemptions to things like electronics, those sorts of things.
So trying to avoid the price of an iPhone going through the roof. So yeah, the scour of it is completely different. The currency response is completely different. But I guess there are some elements that are common between the two.
Lefkovitz: Well, consumer sentiment is one area where we’ve already seen a negative effect. How much importance do you place on those consumer-sentiment numbers? To what extent can they become a self-fulfilling prophecy?
Ashworth: I place a lot less emphasis on the so-called soft data survey than we’re used to. The first thing is to say is that you’re referencing the University of Michigan’s consumer sentiment index, which has fallen very, very sharply over the last couple of months. And within that survey, it also records household inflation expectations and those have surged as well. Yeah, we also have other evidence from consumer confidence from organizations like The Conference Board, which suggest that although confidence has dropped back a bit, the decline is nowhere near as severe. And other surveys of household inflation expectations, which don’t show big surge. And of course, we haven’t seen the big surge in inflation expectations in market-based measures of inflation expectations. So breakeven inflation rates. So, I’d be a bit careful about interpreting the big decline in one single measure of consumer confidence and one measure of inflation expectations as particularly troubling. Particularly again, with that University of Michigan series, because it appears to be for whatever reason, I don’t quite fully understand why it is very sensitive to inflation. So the previous low in the University of Michigan series actually occurs in 2022 when inflation was in sight rather than in 2020 when covid was going full tilt and the economy was on its knees. So again, I find that quite interesting.
Lefkovitz: I’m curious which economic indicators you think are the most important to pay attention to?
Ashworth: Well, again, as I said, I think I put less weight—the survey evidence for whatever reason, the soft data used to be really good because it’s providing you with the best forward-looking guide to what’s actually happening in real time in the economy. Those measures for whatever reason, I think some of it might just be down to the fact that survey response-level rates have dropped quite a lot. So we can see this from some of the official surveys. Particularly the employment survey, long fine payroll numbers, response rates have dropped, half the initial response rates have dropped quite a long way. But I suspect that spills over into some of the soft data too, although it’s not fully reported. Consumer confidence appears to be less useful. With regard to consumer-spending, consumption, and survey-based activity measures like measures from the ISM and the S&P Global, they appear to have peaked—as a guide to industrial production, manufacturing, or indeed GDP. So that’s probably something that I would go to what’s happening to industrial production, manufacturing, and GDP.
So they’re probably something that I pay less attention to than I used to. And that just leaves us with the hard data. So retail sales, I’m very interested obviously in what households are doing and developing beyond that. The payroll numbers are still the number one indicator in the market because it gives you the first look at what’s happening each month. So we get the data for say, well, next week we’ll get the data for April only a week after a month has actually ended. So that’s about as timely an indicator as we get these days.
Lefkovitz: Well, there are currently fears of both recession and inflation. I’m wondering if there’s one or the other that you’re more or less concerned about.
Ashworth: Yeah, two of the key policy elements that Trump’s put in place: The curbs on immigration and the tariffs are both stagflation and so negative for real GDP, positive for inflation. I’d probably be more worried about inflation right now. I don’t think the tariffs are severe enough to hit the economy that hard. I downplay the hit confidence a little bit as we’ve already talked about. On top of that, I think the uncertainty that might be weighing on investment, for instance, to well begin to fade pretty quickly as it becomes clear to people that Trump is going to settle on some tariff rates of pretty close to what he was talking about during the campaign. Essentially a 10% universal tariff, albeit with higher tariffs on China specifically. So I can see uncertainty easing up quite considerable, or at least people learning to live with the uncertainty and inevitable chaos, the risk, in Trump presidency and pushing ahead with investment projects anyway. So I’m not too worried about downside hit to GDP. I think the recession could quite easily be avoided. Inflation, I think is more of a concern.
It helps the energy prices have come down a bit. So headline inflation might peak at something like 3.5%. The core inflation certainly looks to be heading to around 4% by the end of this year. The only good news is that most of that inflation should be transitory and of course I’m a little bit cautious. It’s become almost a bit of a meme at this stage. But we know that tariffs are essentially like a hike in taxes—sales taxes. So they create a one-off shift in the price level. But there shouldn’t be an ongoing impact on inflation, which is the changing prices. Unless you get very significant second-round effects, which I wouldn’t expect to see given the late market conditions have been easy. And given that, mostly we got through the spike in price inflation in ’22 when inflation peaked at 9%. Most of that was reversed within the next couple of years, we didn’t go all the way back down to 2%. We certainly got most of the way back down. So I wouldn’t worry too much about secondhand effects.
Lefkovitz: Well, obviously there’s a lot of acrimony between the president and the Fed chair. It’s been in the news a lot lately. The president clearly wants lower rates. Do you think that replacing Powell before his term ends is a realistic possibility? How are you thinking about this relationship?
Ashworth: It’s a possibility, but I’m not sure what it would achieve for Trump because obviously the Fed chair is only one vote on the FOMC. Being chair of the Fed board also doesn’t even guarantee that you remain chair of the FOMC. It’s cursory. And by convention at the start of each year, the rest of the FOMC, which is obviously the rest of the Fed board plus the regional Fed presidents, usually vote to basically make the Fed board chair, the FOMC chair as well. So the FOMC being the rate-setting committee or policy-setting committee at the Fed. So, you could replace Powell and then still not get lower interest rates, you want because essentially the existing FOMC could sideline the new Fed board chair.
So the only alternative then would be to sack the board and replace all the board members, the other six board members, and then you could have a majority. But obviously that would be incredibly disruptive, take a considerable amount of time to get new candidates confirmed by the Senate, and basically blow up any remaining credibility as an inflation fighter the Fed might have had. You could see from the market response when Trump was bad-mouthing Powell and talking about replacing him, although short yields went down the longer yields have long been to the curve by now. So, you can do all of this, cause all of this disruption, sack the Fed chair, sack the Fed board, and actually end up with higher interest rates along into the curve, which is the opposite of what you’re looking for. So I think Trump quite rightly came to his senses or appears to have come to his senses for now at least anyway.
Lefkovitz: You spoke earlier about scenario analysis really being the only way to approach the current environment, just given all the variables and all the uncertainty. I’m curious for what the most likely scenario is in your view on tariffs?
Ashworth: Well, our working assumption all the way along has been basically that Trump would follow through in his campaign pledges when he talked repeatedly about a 10% universal tariff, which he started talking instead about reciprocal country-specific tariffs. But I think he’ll revert to essentially that 10% universal tariff. And I think that’s motivated in part to try and get the trade deficit down, but also to raise new tax revenue for the government that can be then used to fund the tax cuts or spending increases elsewhere. And so, tariffs on China are essentially going to be a lot higher, we think maybe 50-60%, which will close off a lot of direct trade between the two countries over the next few years, but could lead to very significant rerouting of trade via third-party countries. So again, that’s something where there’s a parallel with what happened during the first Trump administration when we saw a lot of rerouting of trade.
Instead of going from China to the US, it went from China to Vietnam for final processing and then on to the US. So that’s our general view on tariffs. It’ll be a bit disruptive, add to inflation temporarily, but that won’t cause a recession or any vastly inflationary impact. So we went from being pretty bearish on that as far as the consensus goes, because I don’t think a lot of other countries were taking Trump at his word even postelection. And now I think we’re probably seeing these things quite sanguine and bullish on that for the same view.
Lefkovitz: I want to take a step back and ask you about some longer-term economic drivers. There is a notion that the US economy is not working for a lot of Americans. The elements of both the right and the left seems to sort of agree on this. Yet inflation has been low, and unemployment has been low. And the US, of course, has grown more than a lot of advanced industrial economies. What do you see as the source of the malaise that we’re seeing?
Ashworth: Well, the ultimate driver of an economy’s wealth is its productivity, its GDP per capita. And the bottom line is that the US enjoys very strong significant growth in GDP per capita and productivity from the mid-90s to the mid-2000s. But since then, and it really predates the global financial crisis too, since then, productivity growth has been pretty weak. It’s been running at sort of 1%, 1.5%, even dipped below 1% for a while through most of the 2010s and into the 2020s. So, driving stronger productivity growth, I think, would be key for this, which is very difficult to do. But we’d have some optimism surrounding AI, but that is a general purpose technology that could drive a resurgence in productivity growth, maybe into the 2%, 2.5% rates that we saw during the previous IT revolution in the mid to late 90s and early 2000s. So, yeah, I think it comes mostly down to weaker productivity growth just not generating the gains in real wages that we’ve seen in previous decades.
Lefkovitz: But you are expecting AI to have a meaningful impact?
Ashworth: I would hope so. Obviously, it’s very difficult to say exactly when it will occur, but it does appear to have all the characteristics of what economists will call the general purpose technology. So, really transformative technology like steam power or electricity or, as I said, the IT revolution in the mid-1990s when we saw the birth of the internet and desktop computer revolution too. So, I’m optimistic. A lot of it could drive some productivity growth, but it’s obviously very difficult to say exactly when this might occur.
Lefkovitz: There’s also a view out there that government spending has grown far too much and is crowding out the private sector. We obviously have DOGE trying to make cuts. How big of a problem do you think public sector in the US is?
Ashworth: Oh, I’m not sure that is very big of a problem. Certainly if you look at overall federal spending outlays as a percentage GDP and particularly if we removed interest costs, for instance, and they don’t look egregiously higher compared with the long-run average. If anything, I think revenues that are bit below average. But increasingly, the budget deficit is just being driven by the increase in interest costs. That’s the bigger issue now. It’s just the accumulation of debt over the last couple of decades, particularly around the global financial crisis. Obviously, showing covid is the big issue. I don’t think you would argue that government is crowding out too much. Certainly, again, if we look at interest rates, they’ve normalized. They’re no longer near zero. But again, they are not ridiculously high, the term premium on a 10-year Treasury yield, is maybe in positive territory now. But it’s still a lot, I think, was during the 1990s, for instance, when we talk about bond vigilantes. Obviously, corporate bond spreads above there are pretty low still. I’m not sure I could agree that government spending is crowding out private sector activity.
Lefkovitz: The level of the US debt has been rising, and that’s been ringing alarm bells for a lot of folks. How concerned are you about the debt level in the US?
Ashworth: It’s a massive, big existential threat in the long run. But when the long run will occur, is anybody’s guess. The actual crisis point could still be a decade or two away, to be honest. Negative debt terms is GDP, debt/GDP ratio is just coming up to 100% now. The CBO forecasts or project that it will rise to about 120% within another decade’s time. So we’re definitely moving now into uncharted territory, at least for the US. But other countries, so Japan, even Italy, have seen their debt ratios move up to even higher than that. And obviously, borrowing costs for Japan are still very low. And even borrowing costs for Italy, which doesn’t have the benefit of being able to print its own currency, are reasonable. So I think the one thing we’ve learned over the last decade or two is that you can get away with a lot more because there’s very strong demand for risk-free assets in the market. A crunch time will come at some point. But like I said, exactly when is very difficult to say.
Lefkovitz: You mentioned immigration earlier. I wanted to ask more generally about demographics. You hear demographics or destiny. What do you see in terms of demography in the US? We hear also that birth rates are slowing.
Ashworth: Yeah, we know because of the aging of the population that there’ll be downward pressure on labor force. There would have been downward pressure on labor force growth anyway. Certainly in terms of how we think about an economy’s potential GDP growth is normally taken to be the sum of productivity growth, which we think could pick up a bit, but equally labor force growth as well, which we think could drop off as the baby boomer generation really begins to hit retirement age. Obviously, that will also put upward pressure on aging of the population but put upward pressure on healthcare costs and Social Security costs. So it’s a reason to think about fiscal policy too, which could be a further drag on the economy.
But I think it’s important to stress that the US isn’t a country most affected by this. Countries like Italy and particularly Japan will be much harder hit by the aging of their populations and even China that had a one-child policy in place for so long, but actually will be hit harder—with reaching the point now where China’s labor force is basically now stagnant rather than rising as it has been in recent decades. So any GDP growth you get out of China for the next decade or two is basically going to have to come out, productivity gains. So I think it’s entirely plausible that GDP growth in China, which is still running at about 4% to 5%, something like that, in decades time could be down to 2%, something like that. So even hiding behind what we expect the US to generate year on year. So yeah, it’s certainly an issue for the US, but it’s less an issue for the US than it is for many other Western countries and even China.
Lefkovitz: Well, you’re part of a global team of economists at Capital Economics. I’m curious, you mentioned some of the shifts in trade relationships as a result of the trade skirmishes in the first Trump administration, but I’m curious when your team looks around the world currently and you think about the current state of affairs, are there certain economies or regions that you are especially bullish or bearish about that you see as winners or losers as a result of tariff policy and trade relationships changing?
Ashworth: Yeah, I obviously the country’s most dependent integrated into the US economy, are the ones with the most to lose and that would be Mexico and Canada. In both cases, 15% of their GDP is basically exports to the US, whereas you can contrast that with China where exports to the US are less than 3% of GDP in these times, so certainly Mexico and Canada are the ones with the most to lose. Again, it depends where we go from here. Ten percent universal tariff is still a level playing field for most other countries and shouldn’t be too much of an issue, but if we get product-specific tariffs rising—so for instance, auto tariffs at 25%, we could see pharmaceutical tariffs at 25% too. Those would obviously hit the big producers of auto, so European countries like Germany, Asian countries like Japan and Korea could be hard-hit. And pharmaceutical production is obviously generally focused very much in Ireland, Switzerland, Israel, those sorts of countries. I think roughly, from memory, 50% of Ireland’s exports to the US right now are pharmaceutical goods, so obviously they’ve got a lot to lose, depending on what happens on the outcome of the investigation into trade for pharmaceutical products.
Lefkovitz: And what are you seeing in terms of the housing market?
Ashworth: Yeah, obviously interest rates haven’t come down as much as we’d like, in part because the Federal Reserve hasn’t been able to cut interest rates down. First because growth held up so well last year, and then this year it’s all about the threat from tariffs and inflation, holding it without that. That appears to be holding back home sales, which is understandable. Households are obviously sitting on mortgage rates of 3% or 4%, so it doesn’t matter if mortgage rates then come down from 7% to 6% or even 5.5%, something like that—it’s not going to convince homeowners that they should exchange those lower rates for higher ones. So I think activity is going to remain pretty muted in terms of resell activity and therefore price gains too in terms of house prices. It’ll be interesting to see how the immigration curbs play into this because obviously that means weaker population growth and therefore weaker demand for housing particularly over the long run. But then how much were immigrants, many of them undocumented immigrants, adding to demand for housing maybe in the rental sector, but not necessarily in the home ownership side of the equation.
I certainly wouldn’t expect a big boom in-house prices. I think it’s probably going to be quite a quiet time in the economy over the next couple of years with nothing much happening, maybe a modest rebound in home sales and modest further gains in-house prices, basically just running in line with wage gains and income gains in the economy.
Lefkovitz: Paul, thanks so much for joining us on The Long View.
Ashworth: Thanks, you’re welcome.
Lefkovitz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow us on socials at Dan Lefkovitz on LinkedIn.
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