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Transcript

Tim Sablik: My guest today is Richmond Fed President Tom Barkin. Tom, thanks for joining me and welcome back to the show.

Tom Barkin: Well, thanks for having me back.

Sablik: This is our last episode of 2025 and it seems like the perfect occasion to look back and reflect on how the economy has evolved over the course of the year and what you've learned.

Before we get started, I'll note that we're recording this on December 15. And with that, let's kick things off. If you had to pick one word or theme for the economy in 2025, what would it be and why?

Barkin: I think I would talk about resilience, if you just take a step back and think about what we've been through over the last five years — the pandemic, the surge in inflation, geopolitical conflicts, the rise in interest rates, the issues with Silicon Valley Bank, all the policy shifts that we've had over the last year — it's been an unbelievable set of circumstances. Over and over and over again, commentator after commentator has suggested we're just about to head into a recession. Yet the economy keeps motoring along. We expect a third quarter GDP somewhere in the 3 percent range. The economy is very healthy and very resilient.

If you even look at the one-year picture in that context and you remind yourself of what we were talking about last April — tariffs or immigration or uncertainty about the tax bill or deregulation or government spending, all of the things that were on the table — the economy keeps motoring along. So, I'd come back to resilience.

Sablik: You mentioned tariffs, which have definitely been one of the big sources of uncertainty. What have we learned about their impact?

Barkin: I think we've learned it's not that simple.

Some of it is very straightforward. An importer brings stuff into the country and a tax is put on it, and that's a tariff. So, your costs go up.

But how a dynamic economy responds when costs go up is very interesting. You've got the importer who is doing its best to minimize those costs, whether that's negotiating with the person who's bringing it into the country or by changing their supply chain. You've got their efforts to mitigate those costs — redesigning their product, bringing a lot more in to inventories earlier and holding those. You've got their efforts to pass it on, though many consumers exhausted with rising prices didn't just take price increases. We're not in 2022 anymore when people did. What they did was they pushed back — they traded down, they traded off. And so, what you saw was nowhere near as [many] price increases coming out of the tariffs as many people expected.

Then, you've got a business who has higher costs and isn't able to pass it on. You might have expected their margins to go down. But what we saw was a big surge in productivity — driven in part by automation that was launched two or three years ago; maybe reduced turnover, a decision to hire fewer people; maybe even those two letters that everyone talks about, "a" and "i." All of those things drove productivity, which then offset margins.

And so, you've got tariffs in effect — depending on what source you look at, four or five times the level that we had going into the year. You have had goods prices go up. But inflation has stayed largely in the same range and business margins have been OK. So, like I said, it's just not that simple.

Sablik: On your theme of resilience, how would you say that consumers have fared in 2025?

Barkin: Well, it has been an interesting year. Consumer spending in the first month and a half of the year was pretty weak. Part of that was weather. Part of that was a pullback for what was a strong holiday season in 2024. Then, all the tariffs were announced and you saw an incredibly strong March, driven in large part by front loading of things like cars and iPhones. Then [in] the spring, [it was] pretty weak on the consumer spending side. Sentiment hit very low levels. But then, [there was] a real resurgence over the summer.

You know, we're still short [of] data. We'll get data tomorrow, so I may know more. Tomorrow, we get retail sales.

I'll just say you've got a consumer who just keeps spending. That consumer is not very happy, and so the sentiment numbers are down. A lot of that has to do with inflation. There's some amount that has to do with political polarization. So far, that sentiment hasn't hit spending. We're still seeing spending.

I will say it has hit inflation in the way that I talked about before. People are trading at value-oriented retailers. They've traded down from beef to chicken, or from branded to private label, or from replace to repair, or they're not spending on a vacation so they can fund their iPhones. All those things are happening with the consumer.

Sablik: Some commentators have talked about a K-shaped economy when it comes to consumer spending, with patterns diverging for higher- and lower-income consumers. What's your read on the data on that question, and what might K-shaped consumption mean for the economy long term?

Barkin: There's no question that your economy is better if you're wealthier than if you're not wealthy. That's always the case, but it's even more the case now because wealthy people have had the benefit of significant accretion in asset prices — whether that be homes or stocks or the like.

I have to say, though, the underlying dynamics of the economy are still bolstered by the fact that people have jobs. Unemployment is historically low at 4.4 percent and real wages have been increasing over the last couple of years. As long as that's the case, you're going to see people spending. Yes, you're seeing wealthy people spend more than people with less wealth, but you're seeing both sides still continue in the economy. Now that can shift, and I think it really gets K-shaped if you start to see unemployment start to spike.

Sablik: What about businesses? You mentioned the challenges with figuring out pricing around tariffs and how much to pass on to consumers.

Barkin: I've described it as trying to drive through fog. You don't want to put your foot on the gas because you don't know what's around the next turn, and you don't want to put your foot on the brakes either because you don't want someone to slam into you. And so, businesses, for the most part this year, have been pulled over with their hazards on.

What that means is not as much hiring but they're not laying people off either, not launching a bunch of new investment but also not backing off of the stuff that's already been committed to. So [it's] stasis — not leaning in, not leaning back. That's where businesses have been.

I will say [there are] significant differences based on where you sit. If you're an energy provider, you're in the AI ecosystem; if you're a banker, if you're in the M&A [mergers and acquisitions] business; if you serve wealthy consumers, then your economy is pretty strong. On the other hand, if you're a farmer or a realtor, or somewhere in the D.C. metro ecosystem, or dependent on government funding like nonprofits or universities or hospitals, then it's significantly less good. So, it's very different. I guess you could call it K-shaped on the business side as well.

Sablik: You and other Fed policymakers have commented on how we seem to be in this kind of "low-firing, low-hiring" equilibrium. How has labor demand evolved over the year?

Barkin: The job growth has definitely slowed through the year, and that's very consistent with what we hear from the contacts we talked to. They don't want to cut back and do a lot of layoffs. It was hard to find people two or three years ago. Business is still good, demand is fine. But on the margin, they're just not hiring.

Part of that is concern about the future. Part of that is an interest in the prospects of new technology like AI. Part of that is that the quit rate has dropped. Part of that is that they're benefiting from automation that they put in place two or three years ago when labor was really short. All of those things have led to less hiring and that's absolutely what you see in the jobs data.

Sablik: What about labor supply? How has that changed over the same time, and how does that affect your interpretation of overall labor conditions right now?

Barkin: I said the unemployment rate is still historically low. That's odd because job growth has been so low through the year. But it's also because labor supply has been so low.

And that has been reduced immigration. These are tough numbers to get precise on, but think of it as one and a half to 2 million fewer people coming into the country than we would have seen two years ago. Then, you've got deportations. Again, the numbers are hard to get a handle on. I think I've seen good numbers that suggest three-quarters of a million people have lost protected status — in other words, work permits. So you add that up, you're in the 2 million, 2 and a half million range.

Then, you've got my generation, the baby boomers, who are aging out of the workforce. Now I'm obviously not aging, but they are. [Laughter] I mean, there's 1.3 million people [who are] 65 and up leaving the workforce every year over the last two or three years. You can get in the 3 to 4 million range. Divide that by 12 [and] you're talking 300,000 jobs a month that we might have been resourcing with people that were no longer resources. So, you can take a lot of job reductions when you're not growing the labor supply.

Sablik: The Fed has had to navigate this landscape of mixed signals from the data, and then you mentioned this period when we had no government data reporting during the shutdown in October and November. How did you continue to gather information about the economy during that time, and what did you learn from that process?

Barkin: Well, I learned how much I like the classic government data. It's comprehensive, it's reliable, and it's easily calibrated because you've been with it for a long time.

I've been saying for years, that's all great but the data comes a month, month and a half late and then it's revised three times. That's part of why this bank is so focused on being on the ground and talking to folks. We believe you can get a better real-time assessment of the economy by talking to businesses in the economy. You can see turning points sooner.

And, to the extent you get data that doesn't quite feel like what you're hearing, it gives you the chance to challenge those assumptions. A great example would be we saw a big, significant benchmarking redo of the job growth data in the middle of the summer. Every business we've talked to all year long has said, "I'm not hiring. I'm in a hiring freeze. I'm just going to shrink through attrition." It was strange that we were growing at 150,000 jobs a month according to the initial reported numbers. The numbers as now reported feel much more consistent with what we heard and with what we thought we were seeing.

So, what do we do? We're out, and I think the number is closing in on 4,000 contacts this year. That's an impressive number. We're trying as best we can, and I'm trying as best I can personally, to understand the economy from the ground.

Sablik: Based on everything we've been talking about today, how would you sum up the state of the economy in terms of the Fed's mandate at the end of 2025?

Barkin: Our mandate is maximum employment and stable prices. Unemployment — giving you the numbers through September, we'll see what tomorrow's numbers look like — is 4.4 percent. In my working lifetime, 45 to 50 years, unemployment has been that low only twice: the late '90s and the late 2010s. Even in 2007, it wasn't that low. It's ticked up. That's not something that, uh, that I'm happy about. But it's still relatively low.

Inflation is 2.8 percent. Our target is 2 percent. Obviously, that means we've got a ways to go on inflation. But it, too, is well down from what it was at 7 percent back in 2022.

We've made a lot of progress on inflation. We're not all the way there. Unemployment remains low, but it's moving in the wrong direction. Neither one is perfect. But if you took those two numbers and put them in some 300-year historical grid, I think you'd say, not bad.

Sablik: What are the things that you'll be keeping a close eye on as we move into 2026?

Barkin: The economy is an ever-changing thing, so I'll be looking at it all.

I will say I worry about narrowness. We've described that consumer and business K-shape. The business K-shape is disproportionately indexed to artificial intelligence, energy, and related industries. What happens if that frenzy starts to ease? The consumer side, as we've talked about, is disproportionately indexed to the wealthy customer, who is also highly indexed to equities which are, in turn, highly indexed to the AI economy. And so, if you lost that economy, might you lose energy from the rest of the business sector and energy from the wealthy consumer? I don't know. So, narrowness is something I'm thinking about.

Stimulus is another thing I'm thinking about. The tax bill that was passed in the summer should have significant tax refunds coming in the first quarter. Maybe there will be payments to farmers. There may be other payments that come at the same time. We lowered rates 100 basis points last fall and 75 basis points this fall. I'll be looking to see what, if any, impact that has in the economy as we get in the new year.

And then I'll just say the third thing is sentiment — animal spirits, if you will. The indicated numbers are not very good. It hasn't flowed through to spending. Will that start to flow through to spending? Or, on the other side, as the uncertainty of the last year starts to fade into the past, will businesses start to lean in and lean forward?

Sablik: Tom, thank you so much for joining me to close out 2025 and happy new year to you and all our listeners.

Barkin: You too, and thanks everybody for your interest in the Richmond Fed and in what we're doing.