INSIDE ECONOMICS

Mark Zandi:                       Welcomed to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Cris deRitis and Marisa DiNatale. How's everyone?

Cris deRitis:                        Doing well.

Marisa DiNatale:              Very nice, very good.

Mark Zandi:                       It's been a while since we've had the group together, I think.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Someone's been away.

Cris deRitis:                        Yeah. Every ...

Mark Zandi:                       Yeah. Like last week you weren't here, Cris, right?

Cris deRitis:                        That's right.

Mark Zandi:                       You were somewhere.

Cris deRitis:                        Yep.

Marisa DiNatale:              [inaudible 00:00:38].

Mark Zandi:                       Week before that and the week before that. And Marisa, you were away on vacation. So, I'm the only ... Hey.

Marisa DiNatale:              You're the North Star of this whole thing. You are.

Mark Zandi:                       I don't think I've ever missed a podcast, have I? No, in part because-

Marisa DiNatale:              Probably not.

Mark Zandi:                       ... people move the schedule around so I can be on the podcast. It actually isn't fair. Good point. Yeah. All right.

Cris deRitis:                        No comment. No comment. Yeah.

Mark Zandi:                       And we've got Mr. Fieldhouse, David Fieldhouse. Good to see you, David.

David Fieldhouse:           Hey, Mark. Thanks for having me back.

Mark Zandi:                       Yeah. Last time was when? I remember it was hot out. That's all I remember. It was summertime.

David Fieldhouse:           Definitely the summer. That's right. Yeah.

Mark Zandi:                       Yeah, good to have you back. We're going to talk about the state of the American consumer, and obviously household leveraged debt, all part of that, and that's what you focus on. So we'll bring you into the conversation to talk about that. But of course you can participate in the entire conversation, David, if you've got a view, and we're going to play the game at some point. And you're going to play that too, right, David? You're in on that?

Marisa DiNatale:              I got a stat.

Mark Zandi:                       Good. Okay. Excellent.

                                                So I guess the headline for the week, at least from the perspective of the economy is the surge in long-term interest rates. This is Friday, October 20th. I forgot. Well, it's all a blur, but I think earlier today, the 10-year treasury yield got over 5% or close to, is that right, Cris?

Cris deRitis:                        Yeah. It spec’ed down a little bit. 4.92 right now, but-

Mark Zandi:                       4.92. Okay. So within spitting distance of five.

Cris deRitis:                        Yeah.

Mark Zandi:                       I guess you have to go back when to find a 5% 10-year yield. Before the financial crisis, I'm sure.

Cris deRitis:                        Before, yeah.

Mark Zandi:                       Yeah. And, of course, the other related headline is the 30-year fixed rate mortgage is now going for over 8%, right? 8%?

Marisa DiNatale:              Yes. Yes.

Mark Zandi:                       I think you have to go back almost 25 years for that to find an 8% mortgage rate.

Cris deRitis:                        That's right.

Mark Zandi:                       Yeah. Okay. So lots of questions. What's behind this? Where are we headed? What are the economic implications? But let's begin with what's going on. Why have rates risen so far, so fast? And just for context, I think if you go back to when David was on the podcast last in the summer, the 10-year treasury yield was well south of 4%, probably three and a half, three and three quarters. So we're up a percentage point and a half, let's say, since the low back in the summer. That is a big move in a very short period of time. And the biggest increases have been most recently in the last few days, last couple of weeks.

                                                So let me turn to you, Cris. What do you think is going on here? Why this surge in long-term interest rates?

Cris deRitis:                        Yeah, good question. I'd say it's maybe a combination of things. There's been a lot of economic data, certainly, I don't want to take away a statistic, but certainly there's some evidence that the economy's a lot more resilient.

                                                Consumers are a lot more resilient, strong retail sales, for example. So you could have bond holders, bond investors, pricing in that resiliency. I guess we could start with what it's not. It doesn't seem to be related to inflation expectations. I think you'd agree there. There's no evidence that the higher yield-

Mark Zandi:                       Which is good, right?

Cris deRitis:                        Yeah. Which is good. Right. So it's not that investors are requiring a higher yield because they expect inflation is going to be taking off here. So that is a good thing. And it doesn't seem to be related to the short term rate, the short end of the curve, the three month, six month. That hasn't moved much at all. So it's not that that's having an influence on the longer end.

                                                So it's really that nebulous term premium component of the long-term rate. And that could be any number of things. So the resilience of the economy, certainly.

Mark Zandi:                       So the term premium, you got to explain that for folks. What is the term premium?

Cris deRitis:                        Well, in general, I'd say it's the compensation for holding on to a longer-term debt instrument, right?

Mark Zandi:                       Mm-hmm.

Cris deRitis:                        10 years is a long time. Generally speaking, the investors will say, "You have to compensate me for holding onto this debt for a longer period of time versus a shorter period of time." And that can be influenced by all sorts of things. I say it's a bit nebulous because we don't know exactly what's influencing. We can hypothesize what investors might be thinking.

Mark Zandi:                       Mm-hmm. Which we're very good at it, by the way. Yeah. Okay.

Cris deRitis:                        Of course. Of course. We'll get right to it. Feel free.

Mark Zandi:                       I'm going to throw out some things.

Cris deRitis:                        Yeah. Feel free.

Mark Zandi:                       I'll throw out a few things. You'll tell me why I'm wrong. Then Marisa will come with the right answer.

Cris deRitis:                        Yeah, that's a good idea.

Mark Zandi:                       Good plan.

Cris deRitis:                        So I'd say term premium today could be influenced by the resiliency of the economy. So investors assuming that the economy is going to be stronger for longer, the deficits, there's lots of talk about government deficits, expanding government deficits, higher costs related to those. And then the third would be quantitative tightening as the Fed is engaged in quantitative tightening, allowing the treasury securities that they have to run off their portfolio. That also is influencing. You don't have this large buyer of treasury securities out there as we did during quantitative easing. And that could also be causing the long end of the curve to pop up.

Mark Zandi:                       Right.

Cris deRitis:                        What do you think? What do you think?

Mark Zandi:                       I think we're all reasonable. I mean, just to put a frame around what you said, and I think we've talked about this in the past. We kind of decompose the 10-year yield into three parts. Part one is the inflation expectations, and as you say, they feel anchored. No increase there.

                                                If you look at, and I'm not going to explain what these are, but just get it out there 1-year, 5-year forwards or 5-year, 5-year forwards, those are no higher today, not appreciably higher today than they were, say, three, four or five months ago. And that's a really good thing because if inflation expectations were rising, and that's the key to why long-term rates are going up, that will put pressure on the Federal Reserve to keep raising interest rates because obviously they want to keep inflation expectations tethered, anchored because that's key to getting actual inflation down. So that's good.

                                                Second part of this decomposition is expected real short-term interest rates, and that goes to Fed policy. And here I might disagree a little bit. I do think they have increased over the last couple three months that investors have finally bought into the Fed's forecast for rates, which is higher for longer, meaning we're going to keep rates up for a while.

                                                We're not going to be cutting rates anytime soon. Certainly not this year, probably not even in the first half of next year. And it wasn't until the last couple Fed meetings and all the jawboning and press conferences and everything else that comes out of those meetings that I think investors finally became convinced that, oh, and the economic data, as you point out, the economic data has been very strong. Oh, yeah, okay. The Fed's not going to be cutting rates anytime soon, and that has pushed up expected real after inflation in short-term interest rates. So it's not that the Fed has changed policy, it's just that the market's reading of that policy has shifted here in part because the economic backdrop has been good. I mean, the economy, as you say, is resilient and showing strength. But [inaudible 00:08:40]-

Cris deRitis:                        The November hike ... Oh, go ahead.

Mark Zandi:                       No. I was just going to finish. The decomposition, that's term premium part three, and there I totally agree with you. Hard to know that's not elsewhere classified. I don't ...

Cris deRitis:                        Exactly. Exactly.

Mark Zandi:                       We don't know what that is. But it does feel like all the treasury bond issuance after the end of the debt limit drama, because the treasury couldn't issue debt for a long time because of the limit. Once the limit was increased, then they issued all this debt. And that kind of focused people's, investor's attention on the government's fiscal situation and also just the governance. You can see the chaos that's ensuing even today in the House of Representatives. How in the world are these guys going to get it together to address our long-term fiscal problems, which are pretty daunting unless the lawmakers make a change.

                                                You mentioned quantitative tightening. Yeah, I think that's on the margin, the Fed going from QE, buying bonds, to QT, not selling them, but not replacing the bonds that mature or prepay on their balance sheet.

                                                The one thing I would also throw in there, maybe you said this, I missed it, is just it's a market. It's a financial market with lots of momentum players, speculators, lots of technical forces at work. And once a market's move in a certain direction, they tend to take on a life of their own. These speculators take over not forever, but for a while. And you had some prominent bond investors talking up yields, saying 5%, and here we are. So I'm guessing that that's also played a role, but that's how I would frame it. You were going to say something though.

Cris deRitis:                        Yeah, just on the short term rates, my point was that market has coalesced along around this idea that there will not be a rate hike in November and less, and even likelihood for December, it seems to be sharply reduced, but that's more in recent days or weeks. I think you were looking at maybe a little bit longer time horizon.

Mark Zandi:                       Well, even on that, I don't think the market ever bought into, they're going to raise rates again. I mean, remember if you go back and look-

Cris deRitis:                        Well, the futures market was, yeah.

Mark Zandi:                       Yeah. The futures markets were saying some much less-

Cris deRitis:                        Less probability.

Mark Zandi:                       ... percent probability, right?

Cris deRitis:                        Yeah. But now it's zero, right?

Mark Zandi:                       Yeah, yeah, yeah. But I think-

Marisa DiNatale:              In November.

Mark Zandi:                       ... and that's probably-

Cris deRitis:                        For November.

Mark Zandi:                       ... [inaudible 00:11:06] rule but more of what's going on is these rates out into the future, out into 2024 and 2025. The market, I think if you look at forward curves, they pushed up their expectations pretty dramatically over the course of the last two, three months. And that's what I'm talking about. That-

Cris deRitis:                        Got it, got it. Yeah.

Mark Zandi:                       ... shift up is what was behind this increase in long-term interest rates, I think. I think that's what's going on.

                                                But I agree with you. If I had to say of that 150-basis point, 1.5 percentage point increase in 10-year yields, let's say, from three and a half to five, I'd say none of that's inflation expectations.

                                                I'd say probably half a point is expected real short-term rates, and probably it feels like almost a point is related to this increase in the so-called term premium, which by the way, interestingly enough, is simply a normalization of the term premium. Meaning before all this, it was negative, which pretty hard to explain. You can explain it, but it's really weird to have a negative term premium, meaning that investors aren't demanding compensation for buying a long-term bond. They're paying for the benefit of buying a long-term bond-

Cris deRitis:                        The privilege.

Mark Zandi:                       The privilege of, which is really weird. It happens, but it's really weird. So all that has happened is we've gone from a negative term premium, which is really weird, to a positive term premium, which is pretty close to its long run historical norms. So it just feels like we've kind of normalized here.

                                                Okay. Marisa, you've heard this conversation. Anything you want to add in or anything to say about that?

Marisa DiNatale:              I think that all aligns with the way I'm thinking about it. We heard from Jerome Powell yesterday, two days ago, and he reiterated the higher for longer notion. So I do think that he seems to indicate they're done raising rates, but that they're not going to be lowering them any times soon. And he also, in his comments, addressed the long run fiscal situation of this country and was talking about the unsustainability of the debt burden over the long term. So I do think what's going on right now in the House of Representatives has to be making investors nervous about the ability to govern and to tackle these long run issues. I mean, if we can't even get a speaker of the house and pass any bills, how can we tackle long run fiscal problems? So I do think that some of that term premium is reflecting investors, yeah, a feeling of that it's a bit more risky 10 years out into the future than maybe it was five years ago.

Mark Zandi:                       Right. I mean, I think we all knew how risky it was going to be, even if government was operating reasonably normally, it would still be pretty tough to do the things they need to do.

Marisa DiNatale:              Yeah. They've never done it before. They always kick the can down the road.

Mark Zandi:                       Yeah. And now you throw is-

Marisa DiNatale:              Now it's impossible.

Mark Zandi:                       Yeah. It's like, okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Well, we have an election coming up next year. Hopefully that kind of helps out here. We'll see how that plays out. But, yeah, I know that feels like wishful thinking at the current point in time.

                                                Okay. So we've seen this increase in yield. We're up to 5% on the 10-year bond, 8% fixed mortgage rates. We'll come back to what it all means for the economy, but why it doesn't feel like hair on fire. It doesn't feel like people are really that worried or panicked or nervous about it. I mean, my barometer for that is the stock market. The stock market, it's got red on the screen, but the S&P 500 is at 4,250 4,250, which is still within the range it's been for the past more than a year. It's basically been flat. So as interest rates have been rising here, the stock market hasn't risen, but it hasn't really fallen either. It's kind of hanging in there.

                                                You look at credit spreads in the bond market, VIX index, and other measures of perhaps investor angst, and you don't get the feeling that people are, investors are on the verge of losing it. Now, I'm sure that can change in an instant. We could see some big selloffs here. That's very possible, but we haven't so far. Why? What's going on? Do you have a view on that, Cris?

Cris deRitis:                        Yeah, I think for most households and businesses, they're fairly insulated from these rate hikes. Let's start with households. If you have mortgage, two thirds of households have mortgages or own their homes, half of those have a mortgage. They've locked in this ultra low rate three and a half, 4%. So, for them, it doesn't really matter, right? Mortgage rate goes to 8%. They're not moving, no plans to move when the rate was at six. They still don't plan to move when it's at eight, but they're just paying that monthly bill, very predictable. So no problem for them.

                                                There is some increased use of credit cards, so that is adjustable rate. So there you will feel some of the pain, but that, again, is tied more to the short term or the short end of the curve versus the long end. So there too, it's high, don't get me wrong, but it hasn't really shifted all that much because of the rise in the tenure. And businesses, too. A lot of corporations certainly have borrowed already in anticipation that rates were going to rise at some point, so they don't really need the capital right away. So I think that's why there's a moment of calm here. If this persists or if rates were to go higher for an extended period of time, that of course would be more negative and then you'll start to see more red on the screen. But for the time being, I think by and large, most households, most businesses relatively immune from the effects.

Mark Zandi:                       So my interpretation of what you're saying is it's not like hair on fire out there because the economic fallout of a 5% tenure treasury yield, an 8% fixed mortgage rate is okay, it is definitely negative, but it's not a big negative. The economy can digest that. So I'm an equity investor. I own stock. I'm not going to be buying in that environment in that situation, but I'm not going to be selling at that point.

Cris deRitis:                        Okay.

Mark Zandi:                       Okay. That makes sense. That makes sense.

                                                Marisa, what do you think? Why such a sanguine kind of perspective on all this?

Marisa DiNatale:              I agree with Cris. I think people haven't had to face the reality of 8% rates yet. We know that the vast majority of homeowners, 70% have a mortgage rate under 6%. So the housing market's not going anywhere, and we saw that this week and the housing statistics. People just aren't going to move. They're going to stay in place. Sure. Adjustable rate debt and auto loans, which are a bit longer and are facing higher rates, but that's a small part of the overall economy. They still have a lot of saving. And I think we'll talk about this, too, when we turn to the consumer. They still have a lot of savings, so they're not having to dip into these revolving debt instruments to the extent that they're really going to feel these higher rates yet. So yeah, I just think that they haven't had to face it yet.

                                                Now, I would say there is a lot of corporate debt that will come due in the next couple of years. So there will be businesses that are going to be faced with having their loans come due in a high rate environment and they're not going to want to refinance it, the rates that are out there now. So that's something maybe we can talk about or consider of how big of a chunk of the economy is that and does that pose a risk, economy-wide. But in terms of the consumer and households, they're just insulated for the time being. I mean, if this continues for a couple of years and excess saving is completely drawn down by a lot of households that need cash for spending, then we might be looking at something different. We might be looking at a riskier situation, but I think right now they don't need loans at 8%.

Mark Zandi:                       Mm-hmm. Maybe the other reason, and I agree with all that, although I want to come back to the corporate debt. I'm really curious what data you're looking at. In fact, maybe we can bring that up. And I just got a stat for the stats game.

Marisa DiNatale:              Aha!

Mark Zandi:                       Oh, I hope I didn't give it away, but-

Cris deRitis:                        Corporate debt!

Marisa DiNatale:              Actually it's more the commercial real estate debt.

Mark Zandi:                       Oh, CRE debt. Yeah.

Marisa DiNatale:              Yeah. Right, right. So I think the corporate debt is not that large, but the CRE debt coming due over the next couple years is big.

Mark Zandi:                       Yeah. Okay. Maybe the other reason why no hair on fire kind of reaction is people think rates are going to go back down.

Marisa DiNatale:              Mm-hmm.

Mark Zandi:                       The odds that we go from five to six is a lot lower than the odds we go from five back to four, right? That's my view. I mean, if you step back and say, okay, fundamentally what's at the top of the list of the reasons why yields are higher, what we're basically saying is it's kind of a stronger economy. The economy's been strong. I mean, our real GDP tracking estimate for the third quarter, just in the third quarter, and we're going to get GDP next week, is around 4%. That's really pretty strong growth. And that's not some one-off thing. That's strength across the board. Consumer spending, business investment, government spending, the whole shooting match, and that's double the rate of the economy's potential.

                                                But we do at least, I think we know that it's going to slow pretty dramatically in the fourth quarter and first quarter because of all the headwinds we've been talking about, student loan payments, UAW strike, government shutdown, the higher oil prices, now the higher long-term interest rates, so the growth slows, it feels like it's going to take the steam out of things, wring out those speculators and momentum players that we were talking about, maybe cause bond investors to become a little less nervous about what the Fed's going to do on short-term interest rates and we get interest rates coming back in as opposed to going higher.

                                                And so you've got that view that, well, this isn't great. We're at five, but then we're not going to six. We're more likely going headed back to four, then no problem. Does that resonate? Cris, does that [inaudible 00:22:02]?

Marisa DiNatale:              Yeah. And that is our forecast, right?

Mark Zandi:                       It is our forecast, yeah.

Marisa DiNatale:              By the end of next year, we see the Fed starting to think about lowering rates. So even if rates stay high for 2024, I think most people think, "Well, I can tough it out for another year. They'll be headed back down by 2025."

Mark Zandi:                       Yeah. What do you think, Cris? Does that ring true to you? That argument?

Cris deRitis:                        It does. I'm wondering, are you adjusting your bond portfolio? Should I call my broker or ...

Mark Zandi:                       I haven't. I've been thinking about it though. I've always been in short-term bonds, a lot of municipals for obvious reasons, and I buy the bond. I don't buy a bond fund. That always makes me nervous. But I've been in short-term bonds and I wonder. Feels like, geez, this 5%?

Marisa DiNatale:              You said, "For obvious reasons." What? It's not. Why are you in municipal bonds of-

Mark Zandi:                       I pay a lot of taxes-

Marisa DiNatale:              ... for [inaudible 00:22:53]?

Mark Zandi:                       I pay a lot of taxes. Sorry. Yeah, exactly. But I've been thinking about that, but okay. And the third question I asked was what's the ramifications of this for the economy? It sounds like what we're saying is the reason why no one's hair's on fire is because it's a headwind, but it's not going to blow the economy over, at least not by itself. Is that right? Not yet, right?

Cris deRitis:                        Not yet.

David Fieldhouse:           Yeah. This is new news, right?

Mark Zandi:                       Yeah. Yeah, exactly.

David Fieldhouse:           As this persists, things will change, but the rates could be back down next week, right?

Mark Zandi:                       Right. I am thinking that our forecast, you mentioned our forecast, Marisa, may be a bit too optimistic, meaning we've got-

Marisa DiNatale:              Push it out further.

Mark Zandi:                       Yeah, we've got yields coming back to four and even a little bit below, and that's where we expect them to remain. That's kind of the, for a long time we've been thinking that 4% is the long run equilibrium, 10-year treasury yield but that's consistent with nominal potential GDP growth. In the long run, those two things should be roughly equal. I won't go into reasons why we talked about it in the past, but that's the stake in the ground that we use. But I'm wondering if not the stake in the ground should be at four and a half, four and a quarter because the economy is so resistant to these higher rates for the reasons you described that are kind of features of the economy that have developed over the course of the last five, 10 years. The fact that rates are so low and households and businesses locked in those low rates, that's kind of, sort of unique to the period, and it does make the economy more resistant. We can talk about other ways that the economy's more resistant to interest rates, but that's one of the obvious ones.

                                                Therefore, to get the economy to a growth rate that's more consistent with its potential, maybe for a while we need to see higher yields than we thought. Not 4%, but maybe, as I said, four-and-a-half percent. That also goes to the long run equilibrium federal funds rate target, the rate the Fed controls, the so-called R-star, similar kind of arguments. Maybe that should be a little bit higher. Up to now, it was two and a half. Maybe it should be closer to three, something like that. What do you think, Marisa? Am I making sense?

Marisa DiNatale:              Yeah. Yeah. I think that all makes sense. I mean, the interest rate sensitivity of the economy really hinges on housing, financial markets, loans that households and businesses take out. And as you said, we're very much insulated from much of that. So I think psychologically households probably aren't even processing that interest rates are so much higher because they're just not really having to face it unless you're looking at putting your home on the market or buying a house right now and you realize mortgage rates are 8%. But we were in a period of, I mean, pretty much my whole life that I can remember, we've been in a period of very, very low interest rates. So I just think people don't, there's a lot of people out there that they haven't processed this kind of new world order with interest rates yet. And you're right. I think it's going to take a while for this to manifest itself in the economy. I wonder about your opinion about, you mentioned corporates had locked in low interest rates as well. What about other segments of the economy where loans will come due?

Mark Zandi:                       What are you thinking about? I mean, there's the household sector. They've locked in the corporate sector.

Marisa DiNatale:              Commercial real estate.

Mark Zandi:                       Yeah. See, you mentioned CRE. We've done a fair amount of work. It's not inconsequential, but it's very manageable. I mean, if you look at the CRE mortgage debt that's coming due through 2025, by our calculation, it's 1.5 trillion. Now, that sounds like a lot, but in the grand scheme of things, not so much. And in the office market, the CRE mortgage loans for office properties, that's three, 400 billion in the banking system, a hundred billion over that period. So not inconsequential, but it doesn't feel like the tsunami of debt's going to come pouring.

                                                And the other thing is we're seeing a lot of forbearance. I think banks are showing a lot of forbearance when loans are rolling over and needed to be refinanced. They really don't want to push owner over the cliff and into default because they know that it's going to lead to distressed sales, more price declines and make everything even more difficult. And even the regulators, I think, issue guidance. When I say regulators, I mean the Fed and the OCC, and they have to say, "Hey guys." They didn't say it this explicitly, but this is what they meant. "Be judicious in how you do these things." Really, it doesn't make a whole lot of sense to push a lot of people into default. But nonetheless, there is debt coming and to both of your points, the longer rates remain high and stay there, the more difficult all this becomes in as this debt rolls over.

                                                Hey, I wanted to mention one other thing though, that goes to the point that the economy is more resistant to rates, and that is the most rate sensitive sectors of the economy are single-family housing and the vehicle industry. This goes to the consumers and for very idiosyncratic reasons to this period, those two sectors are less vulnerable to the higher rates. In the single family housing market is because there's a shortage of homes. We got a lack of affordable homes. I mean, vacancy rates, the homeowner vacancy rates are at a record low. And so, that cushions the blow from the higher rates, certainly on home building. I mean, not home sales, but home building, in-house prices.

                                                And in the vehicle sector, you've probably got some pent-up demand, right? Because during the pandemic, global producers couldn't produce, so prices went skyward. People couldn't buy. And there's an underlying latent demand for new vehicles that is also putting a floor under vehicle sales and making it unlikely that we're going to see big declines in vehicle sales, even in the context of higher interest rates. So those two rate sensitive sectors of the economy are much less sensitive today, again, because of the features of the current economy.

                                                Does that resonate with you, Cris, what I just said? Did that make sense?

Cris deRitis:                        It does. Yeah, it's a bit of a mixed bag though, right? Yeah. There's some resilience there, but that doesn't necessarily help our inflation project, right?

Mark Zandi:                       Yeah, but that's because you're wrong about inflation. You keep going back to demand. It's not about demand. It's all about supply and inflation is coming in.

Cris deRitis:                        Yeah, but do you think the supply is going to ramp up in housing anytime soon?

Mark Zandi:                       Yeah, the multifamily side? Yeah, it's coming in. We're going to-

Cris deRitis:                        Oh, and are they completions? I guess, yeah.

Mark Zandi:                       In completions, yeah, in terms of rents, which is what matters in terms of measured inflation, right?

Cris deRitis:                        Yeah.

Mark Zandi:                       So yeah, I actually think so. And on the vehicles, I do expect on the other side of the UAW strike, obviously, but I do expect we will see a lot more supply there, and that should bring new vehicle prices down at some point over the next 12, 18 months. So yeah, absolutely. I'm counting on supply. Yeah, for sure. Yeah.

                                                Hey, anything else on the long-term interest rates while we're on the topic before we move forward? Anything I missed? Anything you want to say? Just going, going, going, gone.

Marisa DiNatale:              What's the yield curve looking like?

Mark Zandi:                       Oh, That's an interesting question.

Cris deRitis:                        [inaudible 00:31:13].

Marisa DiNatale:              I mean, because it's-

Mark Zandi:                       That's an interesting question. Oh, that's really interesting. Yeah.

Marisa DiNatale:              Yeah. Because it could be soon not inverted.

Mark Zandi:                       I know.

Cris deRitis:                        Well, let's not go crazy now. And that [inaudible 00:31:27]-

Mark Zandi:                       Okay, so 10 years at five, the Federal fund rate target is somewhere between four and a quarter or four and a half. Let's say five and a quarter, five and a half. So it's let's say 535. So it's 35 basis, 0.35, percentage point difference inverted. The Fed funds rate is above the 10-year yield. That's within spitting distance, though.

Marisa DiNatale:              Yeah, it is. And if you do, the two year is at 509.

Mark Zandi:                       It's 509? I didn't look.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Is it 509?

Cris deRitis:                        Oh, that's really spitting distance.

Marisa DiNatale:              Yeah.

Mark Zandi:                       That's even spitting distance. Yeah. I don't know. If you go back into-

Marisa DiNatale:              Does it matter? Does it even matter though?

Mark Zandi:                       Well, it is interesting. Go ahead, Cris. Go ahead. Go ahead. Say what you want to say.

Cris deRitis:                        If you go back to your economic history, right?

Marisa DiNatale:              Oh, boy.

Cris deRitis:                        It's not the inversion that leads the recession. It's the reinflation or the steepening of the curve after that inversion that then is correlated with the recession after it.

Mark Zandi:                       It's the next step. So the curve inverts, then it becomes positively sloped, and then boom, you're in recession.

Cris deRitis:                        And then, you're in recession. So I don't know if we want this.

Mark Zandi:                       But here's the thing about that, Cris, because that dawned on me. So, I went and looked. Let me ask you. Historically, why does the curve reestablish a positive slope right before recession? What's causing that? Is it the short-term rate or long term rate?

Cris deRitis:                        It's cutting, right?

Mark Zandi:                       The Fed's cutting, right? And it's not about the 10 year yield rising. It's about the Fed.

Marisa DiNatale:              So, it's the short end of the curve.

Cris deRitis:                        Yeah, the short.

Mark Zandi:                       The Fed says, "Oh, my gosh. I screwed up. I pressed on the brakes too hard. We're going in." They then take their foot off the brakes, slam on the accelerator, and the funds rate declines, short-term interest rate decline. So you're already going down the slippery slope into recession because, and the Fed knows it and everybody knows it.

Cris deRitis:                        Yeah.

Mark Zandi:                       This time is-

Cris deRitis:                        Is different. Oh, God.

Mark Zandi:                       You said it, not me.

Cris deRitis:                        Oh, God.

Marisa DiNatale:              You both said it.

Mark Zandi:                       Yeah.

Marisa DiNatale:              You're finishing each other's sentences.

Mark Zandi:                       Right? I'm not kidding, right? So it's all about the 10-year [inaudible 00:33:39].

Marisa DiNatale:              Well, that is what is happening right now. That's for sure. A hundred percent for sure.

Mark Zandi:                       Yeah. 100%, right.

Marisa DiNatale:              That's what is happening right now.

Mark Zandi:                       This is totally different if the curve goes positive again. Totally, for totally different reasons. Yeah.

                                                So anyway, let's play the game. The stats game. The game is we all put forward a statistic. The rest of the group tries to figure that out through cues and clues, deductive reasoning. The best stat is one that isn't so easy. We get it immediately. One that's not so hard that we never get it, and one that's apropos to the topic at hand. We've been talking about interest rates, but we are going to talk about the consumer, and of course you can talk about anything you want. You can have a stat about anything you want. So tradition has it, Cris? I nearly blew this last week.

Marisa DiNatale:              Did he?

Mark Zandi:                       Yeah, I did. I nearly blew it. Marisa, you're up.

Marisa DiNatale:              Okay. I think you'll get this. So I think you're going to get it, Mark.

Cris deRitis:                        Oh, just Mark.

Mark Zandi:                       Just Mark.

Cris deRitis:                        Oh, wow. That stinks.

Mark Zandi:                       I know [inaudible 00:34:37].

Marisa DiNatale:              You'll probably all get it, but Mark is definitely going to get it. Okay.

Mark Zandi:                       Okay. Now I'm not going to get it. Yeah.

Marisa DiNatale:              But I like it and I want to talk about it, so that's why I'm using it. Okay. So don't berate me for using a statistic that's too simple.

Mark Zandi:                       Ah, I might still berate you. Go ahead. Yeah.

Marisa DiNatale:              Excuse me. $192,900.

Mark Zandi:                       192,000 ...

Cris deRitis:                        $900.

Mark Zandi:                       $192,000?

Marisa DiNatale:              Correct.

Cris deRitis:                        Oh!

Mark Zandi:                       Oh, really?

Cris deRitis:                        Oh, yeah. Come on.

Mark Zandi:                       Oh, really? It's really that simple. David, do you have any idea?

David Fieldhouse:           No, I don't.

Cris deRitis:                        Federal Reserve, Marisa?

Marisa DiNatale:              Yeah.

Cris deRitis:                        Source? Yeah. A survey that came out recently.

Mark Zandi:                       Survey of Consumer Finances.

Marisa DiNatale:              Clearly, you know what it is, Cris. Say it before Mark does.

Mark Zandi:                       Is it median net worth or something?

Marisa DiNatale:              That's right. It's median net worth in 2022 of US households.

Mark Zandi:                       Okay.

Marisa DiNatale:              Yeah, I was going to say 37%, but I knew you would know that. Okay. So, the Survey of Consumer Finances came out a few days ago, and it covers, it's the first one of these surveys that the survey happens every three years. It's the first look we have at kind of pre- and post-pandemic view of household finances and it's chock full of really cool data. So we get data on income, net worth, assets, debt, all kinds of things. They ask questions about COVID and work experiences during the pandemic. So the median net worth of all households rose 37% between 2019 and 2022. And that is an all-time record as far as this survey goes back. And if you look at the previous record, this is more than double that. So it was, the previous record had been an 18% rise in median net worth. That was right before the Great Financial Crisis. Median net worth for households rose 37%, mean net worth rose 23%.

                                                So there's actually some compression between the bottom end of the income spectrum and the top end of the income spectrum in terms of net worth. That wasn't the case with incomes. So when you adjust for inflation, incomes rose 3% and it was 20 something percent before inflation. There was greater income inequality, but in terms of net worth, there was actually a little bit of compression between the top and the bottom. So 192,900 is the actual dollar amount of median net worth that households have.

                                                And it accrued to pretty much every demographic group. So that's true up and down the income scale. It was true of all ages, all races, all ethnicities, education, generation. So it truly showed us what we already knew, right? Because we've had estimates of excess saving during the pandemic. We obviously know how very strong the consumer is, how strong the job market has been, but this really shows us that households were able to really sock away a lot of money up and down the income spectrum during the pandemic because of the stimulus that a lot of households got directly.

                                                We had the forbearance on all kinds of debt going on. We had expanded unemployment insurance benefits, expanded other sorts of federal benefits like food stamps. So we had PPP loans. So there all this stimulus in the economy at the same time that we couldn't really spend money on services. So people really were able to save and net worth, if you look at the components of it too, you see more people were able to start or contribute to retirement accounts. More people own stock than they did before. These things are modest, but you see it across all of the different income categories.

                                                And at the same time, we saw debt not really change very much. So people did not take on more debt during the pandemic, generally speaking. I mean, of course there are different outcomes. There's a lot of people that lost jobs during the pandemic, and they obviously didn't fare as well, but debt was pretty tame in terms of the change over that period. And just debt service actually fell to a 30-year low over that period of time, too.

Mark Zandi:                       Do you know the Survey of Consumer Finances, triennial, in every three years, when in the year is it conducted? So when they say 2022, when in 2022?

Marisa DiNatale:              Yeah. So actually it does capture, it goes through April of 2022. That was the last month where they were conducting the survey.

Mark Zandi:                       Okay. That makes sense.

Marisa DiNatale:              So it does reflect sort of the start of the, right after Russia's invasion of Ukraine and the Fed had started to raise interest rates in March. So we do get a little bit of that. And of course, inflation had been high prior to that, just with the reopening of the economy in 2021 and supply chains being gummed up. So we were already in a higher inflationary environment, and then the Russian invasion of Ukraine put even more pressure on that. So there was some of that captured in this survey.

Mark Zandi:                       Although if you-

Marisa DiNatale:              They do it over the course of several months, though.

Mark Zandi:                       But they do it now, they did it now, it wouldn't look nearly as wow, right?

Marisa DiNatale:              Sure. Right.

Mark Zandi:                       Yeah, because stock prices are down, housing values are down. So I would think it's still up a lot from where it was pre-pandemic, no doubt. People are still a lot wealthier, but not nearly as wealthy as those data seem to suggest. [inaudible 00:40:29].

Marisa DiNatale:              Yeah, I mean, we had a 40% increase in house prices over a two-year period, and this reflects that, housing inflation and the stock market had done really well, right then it kind of tanked throughout 2022. Home values went nowhere or fell slightly. So yeah. It does not capture the decline in asset values that we saw through much of 2022.

Mark Zandi:                       Yeah. But it's a good statistic, particularly in the context of the consumer, which we'll get to just after this.

                                                Hey, David. Do you want to go next?

David Fieldhouse:           Yeah, I'd love to. So my number, it's 20.5. This is a number that, it didn't come out this week. It was released earlier this month. That may be a bit of a hint, but 20.5.

Mark Zandi:                       20.5. And is it a percent?

David Fieldhouse:           It is a percent, yep. 20.5%, yep.

Mark Zandi:                       And it has to do with this-

David Fieldhouse:           Credit related.

Mark Zandi:                       Consumer credit related?

David Fieldhouse:           Mm-hmm.

Cris deRitis:                        Is it a growth rate?

David Fieldhouse:           No.

Cris deRitis:                        No.

Mark Zandi:                       And is it a government statistic?

David Fieldhouse:           It is not a government statistic.

Mark Zandi:                       Oh, okay.

Marisa DiNatale:              Is it from the Equifax data?

David Fieldhouse:           It is.

Cris deRitis:                        Okay.

Mark Zandi:                       You said it was not a growth rate.

Cris deRitis:                        It's a share?

David Fieldhouse:           Yeah. A share of something? Yes.

Cris deRitis:                        Share of something. Okay.

Mark Zandi:                       So the share of households that have a consumer-financed loan?

David Fieldhouse:           I would say it's more of a share of a different type of statistic. So-

Marisa DiNatale:              Is it a-

Mark Zandi:                       Of a different type of statistic?

David Fieldhouse:           Yeah. So it's one portion of another statistic. I don't know if that makes any sense but-

Mark Zandi:                       Yeah. So boy, it's not something like the-

David Fieldhouse:           Two numbers. It's a division that's going on here.

Mark Zandi:                       Yeah, right. Yeah.

Marisa DiNatale:              It's not a delinquency rate, is it?

David Fieldhouse:           No.

Mark Zandi:                       No.

Marisa DiNatale:              It's too high. It's some sort of debt service?

David Fieldhouse:           Getting closer.

Mark Zandi:                       I don't know. David comes up with these weird statistics.

David Fieldhouse:           Yeah, yeah. Let's see. It's a statistic on something that you all have, I presume.

Mark Zandi:                       An auto loan?

Cris deRitis:                        No. No.

David Fieldhouse:           There's even more of them out there. You might have a couple of them maybe.

Marisa DiNatale:              Credit cards.

Mark Zandi:                       Power washers.

David Fieldhouse:           Yeah. Credit cards.

Marisa DiNatale:              Mark's wealth is in power washing machines.

Mark Zandi:                       Yeah. Or power washes. Thank god I didn't finance them. Geez. Yeah.

David Fieldhouse:           So, something related to credit cards.

Mark Zandi:                       Credit cards.

Marisa DiNatale:              Oh, well, no. It sounds like a credit card interest rate almost.

Mark Zandi:                       Is it the percent of households that have more than three credit cards?

David Fieldhouse:           No, no. It's a measure of how much households are stressed, but it doesn't have anything to do with delinquency. It's something to do with credit cards.

Marisa DiNatale:              Is it like the share of the balance they're carrying over from month to month?

David Fieldhouse:           Yeah, the utilization rate.

Marisa DiNatale:              Oh, okay. Okay. So the utilization rate is 20%.

David Fieldhouse:           20.5%, exactly.

Marisa DiNatale:              20.5.

David Fieldhouse:           And the reason I bring that one up is that it's getting very close to where it was prior to the pandemic. So if you look, it's obviously seasonality in credit cards, but when you look prior to the pandemic, so this is a number from September. September, 2029, it's 20.7%, and right now it's 20.5%. So what that says, the utilization rate is, it's almost where it was prior to the pandemic. We haven't got there yet, so it's going to seem a little bit boring, but it was increasing pretty rapidly. We've seen growth in the credit card space, credit card balances. It's been pretty aggressive. It's been slowing, it's been still coming in, but we're still seeing some growth and we still have some room to grow on the credit card side. So this does suggest that households still have some wherewithal and can still continue to borrow, but their borrowing is increasing.

                                                And when we think about that conversation we had about the interest rates, any balances that they're paying interest on is going to be quite expensive. So that's going to start to be something to continue to watch. But right now it's still manageable. We're almost right back to where we were prior to the pandemic.

Mark Zandi:                       Marisa-

Marisa DiNatale:              Is that-

Mark Zandi:                       I'm sorry, go ahead.

Marisa DiNatale:              I was just going to say maybe you should define the utilization rate for listeners who may not know.

David Fieldhouse:           Oh, yeah. No, that's great. So this is basically the balance relative to the total credit lines outstanding. So total balance is divided by total credit lines outstanding for the population in the United States. So it's essentially the fraction of the credit card line that's being used. The higher the utilization, the more stress that these borrowers are, the more likely they're going to turn to revolvers, pay more interest.

Mark Zandi:                       And I got cut off because of my Zoom problems, but you said the utilization rate on cards is 20.5. What is it typically?

David Fieldhouse:           So just prior to the pandemic in the same month, it was 20.7. So it's been rising.

Marisa DiNatale:              [inaudible 00:45:54].

David Fieldhouse:           We're almost back to where we were prior to the pandemic, but we're still not at the level where we were prior to the pandemic. So we understand mortgage finance is in pretty good shape, but when you look at credit cards by this measure, if you look at utilization, we're still okay. But it's definitely been the fastest growing consumer credit segment out there.

Mark Zandi:                       Okay. So we're just back to pre-pandemic. We're not above pre-pandemic.

David Fieldhouse:           No. And I think the question, no, we're not back to where we were. I mean there was a lot of headlines out there about the-

Mark Zandi:                       Well, there's no difference between 20.5 and 20.7, is there? You're not saying that? No.

David Fieldhouse:           No. I mean, we're essentially where we were prior to-

Marisa DiNatale:              The difference is 0.2.

Mark Zandi:                       Right. Yeah, yeah. Right. Thank you. Thank you-

Marisa DiNatale:              According to my calculations.

Mark Zandi:                       ... for that, Marisa. Calculation.

Cris deRitis:                        David?

Mark Zandi:                       Okay, very good. That was a good one.

Cris deRitis:                        I had a quick question on that one. Do you know, is that more people who are typically revolving or just revolving more, they're taking on more debt? Or do you see more people who are typically transactors, they usually pay their balance off every month, but now they're starting to revolve more? I think the dynamic could be different [inaudible 00:47:00].

David Fieldhouse:           Yeah, it's a great question. I think we are seeing fewer revolvers prior to the pandemic. So when you look at things like the utilization rate by different credit bans, you're actually seeing that the utilization rate is pretty much lower in every single band except for the highest credit band. So what I'm saying is that subprime borrower are using their cards less than they did prior to the pandemic, the typical subprime borrower. But the very highest segment, the super-prime borrowers are actually using the cards more.

                                                So when you think about some stories out there about retail spending overall and a lot of additional spending by wealthier, more established people, that's very consistent with that super-prime population. Just using it for more transactional purposes and not necessarily revolving. So that's the only sliver we're actually seeing. High utilization rate is really the people who are unlikely to really need the credit cards and for revolving purposes.

Cris deRitis:                        I see. So could that be just inflation related, right? People are swiping for gas costs more. It doesn't really point to stress but ..

David Fieldhouse:           No, no. Yeah, and I don't think it's pointing to stress at all. I think it's just they are swiping more. You're right. It could just be gas prices. It also could just be that the wealthier part of the population potentially is just spending more overall.

Mark Zandi:                       Okay. Yeah, that was a good one. Very good. Thank you.

                                                Cris, you want to go next?

David Fieldhouse:           Sure. 4.5% and 13.8%. The same statistic just for two different ...

Mark Zandi:                       Government statistic?

David Fieldhouse:           Government statistic.

Mark Zandi:                       Retail sales?

David Fieldhouse:           Nope.

Mark Zandi:                       Came out this week?

David Fieldhouse:           Came out this week.

Mark Zandi:                       Consumer related?

David Fieldhouse:           Yes.

Mark Zandi:                       Hmm. Okay. Marisa, you're pretty good at these.

Marisa DiNatale:              I know.

Mark Zandi:                       Four and a half or-

Marisa DiNatale:              [inaudible 00:49:05] five and 13 ... Is one month over month and one year over year?

David Fieldhouse:           No. They're both year over year.

Marisa DiNatale:              They're both year over year.

Mark Zandi:                       Yeah. What else came out this week?

Marisa DiNatale:              There was housing data. There was-

Mark Zandi:                       Yeah, there was housing. There was existing home sales. Anything on existing home sales?

David Fieldhouse:           It's not housing-related.

Marisa DiNatale:              It's not housing.

Mark Zandi:                       Not housing. Consumer related. Yeah. Huh.

Marisa DiNatale:              The Beige Book.

Mark Zandi:                       Can you give us a hint?

David Fieldhouse:           It is income related.

Mark Zandi:                       Income related.

Marisa DiNatale:              Oh, is it average weekly earnings?

David Fieldhouse:           You got it. You got it. Four and a half is the total, right? So full-time workers' weekly earnings went up four point a half percent over the last year. Any guesses on the 13.8? It's-

Mark Zandi:                       Same report?

Marisa DiNatale:              Leisure/hospitality.

David Fieldhouse:           No, same report. Just a different demographic.

Mark Zandi:                       Yeah. Who's up 13 and a half? Wow.

David Fieldhouse:           13.8 but-

Mark Zandi:                       13.8.

Marisa DiNatale:              It's a demographic group, it's not an industry or something.

David Fieldhouse:           Correct.

Cris deRitis:                        The young or the old?

Mark Zandi:                       The young.

Marisa DiNatale:              The young.

Mark Zandi:                       It's got to be the young, right?

David Fieldhouse:           No, it's the old.

Mark Zandi:                       Really?

David Fieldhouse:           65 plus wages up 13.8%.

Mark Zandi:                       What's that all about?

David Fieldhouse:           It's a complete reversal, right? You're right.

Mark Zandi:                       Yeah.

Marisa DiNatale:              Yeah.

David Fieldhouse:           More recently it was the young getting the big increase.

Mark Zandi:                       Yeah.

David Fieldhouse:           I don't know. There's no detail, but-

Mark Zandi:                       No. Interesting.

David Fieldhouse:           No. They also had a 7.6% increase last quarter. So it's not just one [inaudible 00:50:43].

Marisa DiNatale:              Job switching?

David Fieldhouse:           Possibly, yeah.

Mark Zandi:                       By the older demographic?

Marisa DiNatale:              Yeah. How old? 65 plus?

David Fieldhouse:           Yeah.

Mark Zandi:                       That's weird. It could be a mix issue potentially, right?

David Fieldhouse:           Yeah.

Marisa DiNatale:              Yeah.

Mark Zandi:                       It could be just data. Usually when you can't explain it-

David Fieldhouse:           It's data.

Mark Zandi:                       ... it's a data problem.

Cris deRitis:                        Or we like to think that it's a data problem.

Mark Zandi:                       It's got to be a data problem for sure. Yeah.

Cris deRitis:                        It doesn't fit the narrative.

Mark Zandi:                       Doesn't fit the narrative. Yeah, yeah. Interesting.

David Fieldhouse:           But the 4.5 was the metric to focus on, right? Because that is coming in, it was 5.7% growth last quarter, right, so that wage growth is slowing.

Mark Zandi:                       Oh, okay. Good.

David Fieldhouse:           Right, right. Yeah.

Mark Zandi:                       Okay, good. Let's move forward and talk a little bit about the consumer. And let me preface this by saying, I sent an email to you guys earlier in the week and said, "What do you think we should be talking about this week?" Cris, you came back and said, "The consumer." And because intimating that the consumer is fragile in some way, and that might be some kind of threat to the economy. And I immediately thought that the opposite, the consumer's in really good shape and doing their part and hanging tough. And one of our other colleagues, Scott Hoyt, who we tried to get on because he follows the consumer carefully, couldn't because he's away sort of said the same thing because what are you worried about? What's concerning you? So what's concerning you? What's going on? I mean, why are you worried about the consumer?

Cris deRitis:                        Well, we're future focused. So worried that the consumer is going to face, is facing headwinds. The student loan debt is one of the headwinds you mentioned earlier. David, I think alluded to debt growing. So particularly credit card debt, which is adjustable rate. So certainly there are some threats here. And we are projecting a slowdown in the economy overall. So some of these tailwinds in terms of labor market and wage growth, they're not going to be blowing quite as hard. So I think we need to continue to focus on the consumer because the consumer is really in charge here of our economic futures. So that was the motivation.

Mark Zandi:                       I see.

Cris deRitis:                        So, I agree with you. Current data or most recent data, no problem. Things are looking even better than expected, but higher rates going into an environment, potential slowing than we expect.

Mark Zandi:                       Right. I mean, it would require ... Right, because right now the consumer is hanging tough doing their part to describe it how you want to, but the numbers look pretty good, right? I mean, overall, real after inflation consumer spending is 2%-ish, give or take, depending on the month. That's exactly where you'd want it to be. That's strong enough to keep the economy moving forward and not too strong to feign inflation to any significant degree.

                                                And all the fundamentals look pretty good to me. I mean, jobs, low unemployment, wage growth is moderating, but it's now growing more quickly than inflation, particularly for low wage workers. Leverage is low, debt service is low. People have locked in, as we discussed. Net worth is up. Asset prices are up. They're not as high as the Survey of Consumer Finances says it was done early in 2022. But still people are in pretty good shape. A lot of excess saving. We can, a lot of debate as to how much, but no matter how you debate it, there's still plenty there for middle and high income households. So you scan the income and balance sheet of households, you say?

                                                Yeah. I mean, there's always things to worry about, but broadly speaking, it feels like it's on pretty solid ground. No? Cris? No, yeah?

Cris deRitis:                        Currently. Certainly there are pockets of risk though, right? Delinquency rates are rising, right?

Mark Zandi:                       Well, let's take one at a time.

Cris deRitis:                        Okay.

Mark Zandi:                       Let's, I'm going to play economist-psychiatrist. You're always so worried. Let's unpack your fears, Cris, and let's take them one at a time. Okay. You mentioned delinquency. Is that where you want to start? Is that your darkest fear for the consumer?

Cris deRitis:                        It's one of them.

Mark Zandi:                       Okay. Let's start there. Because got David. We've got the specialists in the house.

Cris deRitis:                        Okay. Yeah.

Mark Zandi:                       So, okay. What's your fear? Articulate your fear on delinquency? I guess it's on consumer debt and leverage.

David Fieldhouse:           Right? Yeah. In terms of-

Mark Zandi:                       Not you, David. First, Cris.

David Fieldhouse:           Oh!

Mark Zandi:                       Cris is on the couch.

Marisa DiNatale:              Cris is the one that's scared.

Mark Zandi:                       Cris is the one who's scared. We're going to listen to his fears and then I'm going to ask you, make him more scared or make him less scared. We're going to play, you're going to play specialist. But go ahead, Cris. Articulate your fear?

Cris deRitis:                        Sure. So revolving debt is increasing. Borrowers are continuing to add to their bank card, credit card balances, particularly for lower middle income households. So that is going up. I don't think there's any debate around that. Interest rates are high and no sign that they'll be falling anytime soon. So those monthly payments will continue to rise. The delinquency rates are rising today. They're at levels that are, and let's focus on credit card. That's probably where my biggest ... Credit card consumer loans, probably my biggest fears, those delinquency rates are rising. They are either at or above 2019 levels, and that's occurring at a time when the unemployment rate is still relatively low and we project it to go higher. So those delinquency rates are bound to rise further.

                                                The fear is that, given this environment, you'll see more consumers having to cut back, having to pull back. That certainly could lead to higher losses, higher defaults in terms of banks, tighter lending standards. And then just a more general slowdown in spending growth.

Mark Zandi:                       Okay. So David, is Cris on solid ground here? Has he got good reasons to be nervous about what's going on?

David Fieldhouse:           I think there's definitely some reasons to be concerned. I'm going to try to be a little more optimistic. Sometimes I come on here and I'm a little pessimistic here, so I'll try to take a-

Mark Zandi:                       Just be real.

David Fieldhouse:           ... counter [inaudible 00:57:25].

Mark Zandi:                       Just be real. Yeah, yeah. I want to know your real feelings. Yeah.

David Fieldhouse:           Yeah, I'm definitely concerned about the pockets. So you see the finance loans that are out there. There's definitely been some bad loans that have been issued since the pandemic. They're seeing very high default rates. If you look at subprime auto, especially in the used cars market, very, very high default rates. Very, very high delinquency rates. But that is a very isolated set of loans and consumers. I think you've seen on personal loans, especially finance, personal loans high delinquency rates, high default rates there higher than prior to the pandemic. So those are areas of concern.

                                                However, there's been tightening overall. So you have seen tightening in the finance lending overall. So we're not having loans just issued to anybody who maybe doesn't have the capacity to repay them. Lenders have been tightening for the last year, and we've really seen that come in. So I think that's a reason to be optimistic.

                                                And so, some of those higher delinquency rates are just coming from those bad loans. And if we don't have the poor issuance anymore, tighter lending standards, we should see some of those delinquency rates potentially come in a bit.

                                                Now, Cris's point though, is very valid that there are some high delinquency rates overall, and the economy's in really great shape. So what happens if the economy deteriorates? That would be my biggest concern, is where does the economy head? And then the other concern I have is really is the current debt levels sustainable for a wide portion of the population given where interest rates are? So if you look at the credit cards that are being assessed interest rate, now you're seeing interest rates around 23% for credit cards. Prior to the pandemic, that was closer to 16, 17%. So I mean, that's a meaningful difference. If you start revolving on those cards very quickly things can get out of hand for some borrowers. So we don't have a ton of revolvers right now out there based on historical standards, but there are some, and I think that could be quite problematic.

Mark Zandi:                       Feeling better, Cris? Or I don't know. He said he was going to be more optimistic.

Cris deRitis:                        I don't know.

Mark Zandi:                       I'm not sure.

Cris deRitis:                        You brought up three other reasons to worry. I don't know.

David Fieldhouse:           Yeah, yeah, yeah. No, no, but I always talk myself in there, but I will say, here's some reasons to be optimistic. Mortgage financing is in great shape. So we've talked about that. When you look at things like the Pulse Survey, how households are facing potential hardship, that's actually improving. So more households today are indicating that they're going to be able to make their payments than they did a year ago. And it's been sort of improving over the last couple months.

Mark Zandi:                       Just for the audience, the Pulse Surveys, this special survey this has been conducting since the pandemic on an irregular basis, and it's very detailed in terms of the questioning, and you get some really good granular information about things like how hard it is to folks to pay on their debt by income, by age, by different demographic groups. And you're saying that feels like it has a better tone to it, is what you're saying?

David Fieldhouse:           Yeah, it's more, households are indicating they can make payments today than they were several months ago, a year ago. So there's been some improvement in the trajectory there.

Mark Zandi:                       So some of that makes sense with inflation coming back in, they're-

Marisa DiNatale:              And the job market's strong.

Mark Zandi:                       That's remains strong. Yeah. Okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Yeah. Here's the thing, Cris, that I take solace in. Here's a good statistic. David, I know you know this. I'm sure Cris knows it as well, but how much credit card debt's total outstanding?

Cris deRitis:                        Was it 900 billion, a trillion dollars?

David Fieldhouse:           A trillion now.

Mark Zandi:                       A trillion. It's about a trillion. And of course that includes everybody, right? Folks like me who were ... I don't borrow against the card, but I use the cards a lot and that's reflected in the data. So a trillion.

                                                How much consumer finances there? That's buy now, pay later. All the consumer finance stuff. How big is that, do you think. David, you probably-

David Fieldhouse:           About 200 billion, probably.

Mark Zandi:                       How much?

Marisa DiNatale:              He did.

David Fieldhouse:           200. There's different estimates. 250 billion.

Mark Zandi:                       Yeah. Give me the highest one you got. Give me the highest one you got.

David Fieldhouse:           I think it's around 250 billion.

Mark Zandi:                       Yeah. 250 billion. Okay. Take subprime auto. How big is that? The whole shooting match? What do you think? Four or 500 billion?

David Fieldhouse:           Yeah, maybe. Yeah, if that.

Mark Zandi:                       Okay. Yeah, add that all up. I mean-

Cris deRitis:                        Two trillion.

Mark Zandi:                       Really? Well, on the cards, I'd say no more than half of that's real debt. So maybe it's a trillion in debt that you're worried about, but in the grand scheme of things, what are total household liability? 16, 17 trillion, something like that? Something like that.

                                                So, I don't know. It's hard to get worked up about ... I mean, I'm not arguing. It's not a constraint on particularly low income consumer spending, but it's hard to get to a place where it could be existential in some way to consumers. The thing that really dings consumer spending in a meaningful way. No? Or ...

Marisa DiNatale:              I agree with that, but what about some of these households that might be stressed now having to pay back student loans as well?

Mark Zandi:                       Talk about that, David. I mean, you're a pretty sane one about that too, right?

David Fieldhouse:           Yeah. So the great thing with the resumption of student loans payments is that there is a on-ramp period for all of this. So it's going to take basically a year until next October before you report it to the bureau. The government's letting everybody sort out new servicers and everybody getting used to paying again.

                                                So I think what's going to happen here is that you will start to see payments resume. We are seeing student loan balances being paid off really at a record rate by obviously the people who are ready for this and for those who aren't, they're going to have a year or two to adjust. I think you'll see people making payments. The only real negative of not making payments right now is that you're going to be assessed interest rates or interest. So you'll want to start to pay back that debt to avoid accruing additional interest.

                                                And you'll see people start to pay that back. They're going to start to work through their precautionary savings. So that's maybe a concern that's out there. So you're able to pay your student loan and your credit card today, but you're going to start to draw down on your excess savings. Eventually you get into trouble. Let's say it's next year. Now you don't have the same level of savings. Now you have trouble making the payment to that credit card because you already started paying this student loan. So I think there's a bit of a concern out there, and we do see a correlation between student loans and unsecured debt overall. So those are the categories where people may have trouble making payments, but overall, because of this on-ramp period, it's going to be a very soft easing back into the world of paying student loans again.

Mark Zandi:                       Mm-hmm. Okay. So ... I'm sorry.

Marisa DiNatale:              And those loans typically have low interest rates? Low interest rates on the loans, right?

David Fieldhouse:           Yeah. Yes, but they are rising, the student loan debt interest rates are rising. So the direct federal student loans are pretty reasonable but definitely nothing like a credit card or a subprime auto loan, but they are rising. It's another fallout from these interest rate environment that we're in.

Mark Zandi:                       They're tied to the tenure, aren't they or-

David Fieldhouse:           Yes. Yeah. Yes.

Mark Zandi:                       ... the Federal-backed loans, right?

David Fieldhouse:           Yeah.

Cris deRitis:                        So could be for new borrowers. It could be an issue, right?

Mark Zandi:                       Could be an issue. Yeah, it could be an issue. Yeah.

                                                All right, Cris, what else is bothering you about the consumer? Leverage, I mean, I don't mean to dismiss it either. I agree with you. That's definitely a soft spot. In a high rising rate environment, it's going to hurt. There's no doubt about it. And you throw in the student loan payments, it's definitely going to take some steam, some starch out of particularly low, low middle-income households in their spending. So I don't mean to dis it or dismiss it, but what else is bothering you?

Cris deRitis:                        Yeah, it's on the margin, right, we're talking about?

Mark Zandi:                       Yeah, yeah.

Cris deRitis:                        Margin matters, right?

Mark Zandi:                       Yeah, yeah, absolutely.

Cris deRitis:                        What else? Well, certainly the labor market has to be front and center, and we have a labor market projection, certainly that is calling for some slowing. It's not going off the cliff, but there's risk there that-

Mark Zandi:                       Right.

Cris deRitis:                        ... you get an unemployment rate north of four, four and a quarter percent. On its own, it's not a recession necessarily, but it is starting to do some damage in terms of spending power.

Mark Zandi:                       Right, right. Yeah, that's a difficult one because it's very simultaneous, right? We're saying the consumer's going to hang tough, therefore the economy's okay. But if the economy's not okay, then the consumer's going to suffer. It's like-

Cris deRitis:                        Pretty much.

Mark Zandi:                       ... where's the duality here? It's pretty difficult to get your mind around it. But what you're saying is if something kind of pushes the labor market more off the rails, we expect it to slow under the weight of all these things we've been talking about, interest rates, so forth and so on. If it slows more than we anticipate, then it could do more damage to consumers. And then it becomes all self-reinforcing downward. That's what you're intimating.

Cris deRitis:                        Correct. Yeah, yeah. Okay.

Mark Zandi:                       But something else has to come. I mean, at least in our thinking, if we've got it roughly right, something else has got to happen for that to occur, unless we got it wrong, unless the slowdown is going to be much more substantive than we're anticipating in terms of job creation, I guess.

Cris deRitis:                        Yeah. There has to be another trigger.

Mark Zandi:                       It has to be something else, right?

Cris deRitis:                        Yeah. It's not on its own. Conditions look strong and demand for labor is strong right there. There isn't any reason to believe that labor market's going to go south, but it could be higher for longer interest rates are going to actually do more damage than what we've anticipated here. So just as one example.

                                                Or oil price shocks. That's probably another key consumer factor that worries me is that you could get another surge in gas prices here.

Mark Zandi:                       Mm-hmm. But thinking about it from the prism of the consumer income statement and balance sheet, I mean, the only soft spot that you can identify is leverage among low income households, debt service, those with cards, subprime auto, student loan maybe. But there's not something else in the income statement or balance sheet that's got you worried. It's something else out there that has to happen to cause consumers to pull back, and then you get into a self-reinforcing cycle down. But there's nothing else. I'm asking, there's nothing else? Yeah.

Cris deRitis:                        Yeah. Again, on its own, I don't see that we could have, I think it's unlikely that we would have a truly consumer-driven recession where consumers for no other reason except for the debt that they've incurred, slow down their spending and push us into recession. I agree, there has to be some other factor that has to be layered on top.

Mark Zandi:                       Yeah, because in times past, if you look at other periods prior to recession, the consumer, there were more issues, it seems to me there was more what I'd call spent-up demand. People had bought forward in the vehicle industry that was common that the vehicle producers would provide these big discounts, zero rate financing, pull forward sales. So when things started to soften up, people really pulled back as they had bought ahead of time, or asset prices fell sharply. The stock market cratered down 20, 25% and stayed down and knocked the wind out of high-end consumers. Or the financial crisis, too much borrowing, too much leverage, a lot of foreclosures, collapse in housing values. None of that is evident today. And again, there's some blemishes around in terms of cards and subprime model, but it feels like that's small potatoes in the context of those previous historical experiences.

Cris deRitis:                        Yeah, although this could be more of a garden variety we're in a recession, right? Not all recessions, of course, have involved-

Mark Zandi:                       The consumers.

Cris deRitis:                        ... the consumers as the main cause, right?

Mark Zandi:                       Yeah. Yeah. In fact, it's interesting. When I talk to other kind of economists who have recession forecasts, they tend to blame it on businesses, not on consumers. They go, "Okay, the consumer's fine. I don't see that happening, but businesses, that's what I'm really worried about." But yeah, that's a topic for another day. That's a topic for another day.

                                                Okay. Marisa, anything on the consumer you want to bring up anything worrying you that hasn't been mentioned? And that's okay if there's nothing, I'm just asking. Just to complete, yeah. Okay.

Marisa DiNatale:              No, I don't think so. I'm feeling pretty good about it. I'll just mention we get a lot of listener questions, and we've had a lot of questions asking for our excess saving estimate, an update on that. You mentioned Scott Hoyt who compiles these for us.

                                                And so, the data were just revised because the BEA did comprehensive revisions right to the GDP statistics, and along with that, they revised the savings rate. So our estimate of excess saving as of the middle of this year is about $1.9 trillion. Over half of that though is in the very top of the income distribution, the top 10% of the income distribution. And then it's kind of spread out. The bottom 20% has 6%, and then you're looking at anywhere from 6% to about double that for people in the top half of the income distribution, the 60 to 80 and the 80 to 90.

                                                So there's still excess saving out there for every income distribution, but it's definitely dwindling at the bottom end of the distribution. So back to what we're talking about. And if there's risk out there, these are the people that are most likely to have to put things on credit cards to finance spending. And as this goes on, if we're facing higher oil prices for a long time, if we're facing higher interest rates for a long time, this is certainly where the risk is is at the bottom of the income distribution. But for right now, they do have excess saving left.

Mark Zandi:                       Did you define excess saving? Do you want to submit it to define it?

Marisa DiNatale:              Yeah, this is the latest.

Mark Zandi:                       You didn't define it, though. What is it? What is that?

Marisa DiNatale:              I didn't define it. That's right.

Mark Zandi:                       I don't think so, did she? No. Okay.

Marisa DiNatale:              No, I did not define it. Okay. So we've talked about this before. So this is a measure. The Federal Reserve puts one out. There's other measures of it we take the Fed's data and we do some of our own estimates and combine it with other sources of data. So we looked at what the savings rate was prior to the pandemic, and we compare that to today, and we say, "Are we still at seven?" I think we were at 7% as the sort of equilibrium savings rate. Is that right?

Mark Zandi:                       Six. Well, because of the revision you mentioned, it's closer to six. It was seven, seven plus but it's closer to seven.

Marisa DiNatale:              Yeah. So, with the BEA data, the kind of pre-pandemic savings rate was 6%. So we look at any saving above 6% as being quote, unquote, "Excess savings." So saving above and beyond sort of what this pre-pandemic equilibrium saving rate was, and so that we are estimating at $1.9 trillion as of the middle of the year. There's a bit of a lag in the data.

Mark Zandi:                       So, Cris, that feels like a warm blankie to me. No? It should make you feel very comfortable about the consumer. I mean but all that-

Cris deRitis:                        Well, the distribution, right? The distribution that-

Mark Zandi:                       You're worried [inaudible 01:13:49] in high income households. That means-

Cris deRitis:                        Yeah, it's highly dependent and it's highly skewed in that direction. And then there's a question of whether, how much of that, well, I guess this is a philosophical debate, is this, how much of that savings is truly available for consumption versus have the households actually classified that as wealth at this point?

Mark Zandi:                       Yeah. Here's my theory on that. If it's sitting in your checking account-

Marisa DiNatale:              Yeah, this is not-

Mark Zandi:                       ... it's not sucked away somewhere. That is, I can see it in my bank account. If I need it, I will use it, right? No?

Cris deRitis:                        Well, if I need it-

Mark Zandi:                       [inaudible 01:14:25].

Cris deRitis:                        ... I will use it is a recipe for avoiding a prolonged recession, right? Avoiding a downside risk, right? I have a shortfall. I have the savings I can use. I can fill the gap. It doesn't lead to additional spending.

Mark Zandi:                       No, no, no, no, no.

Cris deRitis:                        So it's not accelerate, no.

Marisa DiNatale:              But it's insulation nonetheless.

Cris deRitis:                        It's insulation. Yeah, yeah.

Mark Zandi:                       It's a warm blankie I've been talking about. In fact, that might be a good title for this podcast. We Got a Warm Blankie in Here, a warm blankie.

                                                Well, okay. We're running short of time. You mentioned listener questions, and you're saying there were a lot of questions around excess saving. Do you want to throw out one other question? We'll take it before we call it a podcast.

Marisa DiNatale:              Yeah. Can I go back to a question about CPI, because we have several of the same question about owner's equivalent rent?

Mark Zandi:                       Yeah. Mm-hmm.

Marisa DiNatale:              So owner's equivalent rent is the implied rent that a homeowner estimates they could get for their house where they'd put it on a rental market. So Mark mentioned that rents make up a very large portion of the Consumer Price Index because the cost you pay for your housing is the biggest cost you have. So there's a lot of questions around OER that are skeptical, I would say, in tone, like how good are homeowners really at estimating what they could get for their homes were they to put it on the rental market, or they have some expertise about the rental market that they're adequately, accurately estimating that? And why is that even a thing? Why aren't we just measuring rents directly? Why are we asking homeowners what the value of their home would be on the rental market?

Mark Zandi:                       Cris, do you want to take a crack at that?

Cris deRitis:                        Sure. So I guess I would, going back into my memory here, so as I recall the survey of the homeowners in terms of what they expect they could get for their rent, for their homes if they were to rent, that number is used as a weight. But the actual price, the actual rent in that owner's equivalent rent calculation is actually from the rent survey. So the listeners are correct in their assessment, and that is actually what the BLS is doing. You could still argue, well, maybe that weight isn't the greatest, right, because you are relying on us. But the impact, I would argue, on the overall calculation is muted because you're not actually relying on that homeowner to declare what the rent is and use that as the actual price.

Mark Zandi:                       I think it all goes back to market rent. It's the rents that folks are actually paying in the marketplace that ultimately drive the owner's equivalent rent and the rent for shelter numbers. So I don't think there's that bias that the listeners are implying in the data. So I don't think that's an issue, although having just said that, all of a sudden I'm worried that maybe I'm missing something or I forgot something. Probably we'll go back and take a look and just make sure I have that right. Yeah, yeah.

Cris deRitis:                        Okay. I mean, the series are pretty, are very highly correlated. The primary-

Mark Zandi:                       Yeah. With rents. Yeah.

Cris deRitis:                        Yeah.

Mark Zandi:                       Right.

Cris deRitis:                        So, even if they're not measured precisely, they're still quite informative.

Mark Zandi:                       Yep, yep. Okay. All right. I think we're going to call it quits late afternoon on a Friday. And we've got lots of sports here in Philadelphia. We've got Phillies tonight. Got Phillies on Saturday. We've got Eagles on Sunday, so a lot going on here. Got a lot of games. You don't care about this, do you, Marisa?

Marisa DiNatale:              I do.

Mark Zandi:                       You do? Okay. You're still a Philly fan?

Marisa DiNatale:              I mean, mildly.

Mark Zandi:                       Yeah, mildly. People don't know this.

Marisa DiNatale:              I've been watching the Phillies.

Mark Zandi:                       You have been. Okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Because you lived here for how many years?

Marisa DiNatale:              I jump in during the playoffs.

Mark Zandi:                       How many years did you live in Philly before you moved out to Southern California?

Marisa DiNatale:              I mean, almost my whole life. Since I was six years old.

Mark Zandi:                       Oh, really? You're a Philadelphia native? Oh, I didn't know that.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Oh, I didn't know that.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Okay.

Marisa DiNatale:              From Boston to Philly when I was six or seven.

Mark Zandi:                       Oh, that explains a lot. Now I understand you better.

Marisa DiNatale:              Yeah.

Mark Zandi:                       That whole Boston thing.

Marisa DiNatale:              Yeah, there's some Boston in there.

Mark Zandi:                       There's some Boston in there. Okay. Very good. Cris, David, anything?

Cris deRitis:                        Are you conflicted by a Phillies victory and the prospect of recession?

Mark Zandi:                       I know, I know.

Marisa DiNatale:              Yeah. I thought you were going to bring that up, actually. I was surprised you didn't.

Mark Zandi:                       Yeah. You want to explain that? Does someone want to explain that curse?

Cris deRitis:                        Yeah.

Mark Zandi:                       Go ahead.

Cris deRitis:                        Every time that-

Marisa DiNatale:              I think you should, because ...

Cris deRitis:                        Because you know baseball better than ..

Mark Zandi:                       Well, every time the Phillies won the World Series, there's economic calamity, right? 2008, 1929, I think. Wasn't it 1929? So there's this theory based on data. We got two data points that whenever the Phillies win the World Series, buckle in, baby. So I am conflicted because I want the Phillies to win, but certainly don't want a recession.

Marisa DiNatale:              The economy was already in a recession when the Phillies won the World Series in '08, though.

Mark Zandi:                       Oh, is that right? That's probably ... Oh, yeah. Of course.

Marisa DiNatale:              Yeah, because they would've won the World Series in October, and-

Mark Zandi:                       There you go.

Marisa DiNatale:              ... the recession had started a year before.

Mark Zandi:                       There you go. I knew she could come up with a reason.

Marisa DiNatale:              So it's good. You can root for the Phillies with abandon.

Mark Zandi:                       That's good. Real good. Yeah.

David Fieldhouse:           Correlation, no causation.

Cris deRitis:                        1980s, though. Forgot 1980.

Mark Zandi:                       I forgot. 1980, right. 2008, 1980, 1929, right? I forgot 1980. So all really pretty abysmal years for the economy.

Marisa DiNatale:              It seems like the statistic is that when we are in a recession, the Phillies are more likely to win a World Series.

Mark Zandi:                       Oh, that's what it is. That is interesting.

Cris deRitis:                        We were already in a recession? Is that what you're ...

Marisa DiNatale:              I'm just saying. In both of those, in 1980 as well, right? We were already, I think a recession had already begun by the time the Phillies would've won the World Series.

Mark Zandi:                       Probably wasn't declared by the time it was ... Yeah.

Marisa DiNatale:              Yeah. It wasn't, right. None of these things were probably declared by NBER yet.

Mark Zandi:                       In hindsight, we were definitely in.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Yeah. I know. It sounds like we should do some research here. What do you think? I have one of the young economists take a look.

Cris deRitis:                        Well, this is a topic. I'm sure our listeners are going to jump all over.

Mark Zandi:                       I'm sure.

Marisa DiNatale:              I'm sure I'll get some emails about this.

Mark Zandi:                       I'm sure.

Cris deRitis:                        It's typical, yeah.

Mark Zandi:                       Well, please, listener, send in your questions. We love them, and we'll definitely try to get answers to them in future podcasts. But guys, I think we're going to call this a podcast. Everyone have a nice weekend. Take care now. Talk to you next week.