AILSA CHANG, HOST:
Recent economic news has investors panicking and selling. After a weak jobs report on Friday, Japan's Nikkei index had its biggest single day drop in more than 30 years, erasing all of its gains for this past year. Here in the U.S., the Dow Jones Industrial average dropped 2%, but some economists say the market panic may be overblown. Gregory Daco is one of those economists. He's the chief economist at Ernst and Young, and he joins us now. Welcome.
GREGORY DACO: Thank you.
CHANG: So what was your initial reaction to what seems to be a global stock sell-off after last week's job report? Like, is this just some huge group freakout?
DACO: Well, I think generally speaking, there is a little bit of an overreaction because if you think back to what started this, it was a softer-than-expected payrolls report. So we had weaker job gain than expected in the month of July. We had a slight uptick in the unemployment rate. But in the grand scheme of things, you still have employment moving forward, and you still have a historically low unemployment rate at 4.3%. So the sell-off is really more of a reflection of the fact that the Fed did not start easing monetary policy last week but rather signaled that it might do so in September, which many view as a little bit too late relative to current economic conditions.
CHANG: OK. That said, do you think the reaction we're seeing, this market panic - does it seem a little excessive to you?
DACO: I think the market reaction is excessive because we're not in an environment where the U.S. economy is retrenching by any means, nor is the global economy because this has really turned into a global market sell-off. What we are seeing is a slowdown in economic activity with consumers being more prudent but where there isn't really that major retrenchment in economic activity that the panic would seem to indicate.
CHANG: Well, you know, Greg, I'm never one who likes to cast blame on journalists, but I can't help but wonder. It's not just investors, but it's also the media, I suppose, that contributes to some of this frenzy that we're seeing. How much blame do you lay on journalists who are covering the economy for what we're seeing in the market right now?
DACO: I don't think I put too much blame on journalists per se.
CHANG: Thank you.
DACO: But there is that feedback loop whereby you see headlines that sometimes indicate more concern than there really should be in terms of the underlying pace of economic activity. And that's why I say that there's a bit of an excessive market reaction to what ends up being a jobs report that was not terrible by any means, nor was it great. But it was an average jobs report - yes, weaker than expected but not signaling any form of retrenchment in the private sector, which undoubtedly would be concerning. Now, the big risk here is that this market sell-off would then feed back into the private sector and lead businesses to pull back on investment decisions, pull back on hiring and lead consumers to be more careful with their outlays, which could provoke the very slowdown that everybody has been fearing.
CHANG: Do you then think it was a mistake for the Fed to choose to keep rates unchanged last week?
DACO: I think generally speaking, yes, the Fed had a missed opportunity when it had the opportunity to ease monetary policy, recalibrate monetary policy and gradually adjust monetary policy to an economy that is no longer as inflationary as it was and an economy that is gradually cooling. Now it's time for Fed policymakers to think about recalibrating monetary policy, to today's economic conditions and tomorrow's economic outlook. I think that with the Fed signaling that intent to gradually ease monetary policy by cutting interest rates, that will be the signal that markets are looking for and a sign that the Fed is aware of the economic slowdown that's happening and the disinflation momentum that's continuing.
CHANG: OK. So to all those investors out there who are feeling a bit anxious that this sell-off is some indication of a broader economic downturn, what do you want to say to them to reassure them?
DACO: Well, I think you have to take a little bit of a step back. If you look at the July jobs report in and of itself, it wasn't a terrible one. We still have job growth that is positive. We still have an unemployment rate that is historically low at 4.3%. And more importantly, we still have disposable income growth that is moving at a subdued but positive pace of 1%, and that's still feeding consumer spending activity and consumer spending growth of about 2.5%. So we're still in an environment where the U.S. economy remains the global outperformer. Yes, it is cooling, but it's by no means falling off a cliff.
CHANG: Gregory Daco, chief economist at Ernst and Young. Thank you very much for being with us.
DACO: Thank you. Transcript provided by NPR, Copyright NPR.
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