INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics, I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Ryan Sweet, Ryan's the director of realtime economics, and Cris deRitis, the deputy chief economist. Well, guys, I'm back in the US of A and I have to tell you, I'm very happy to be back. 

Cris deRitis:                       That was quite the voyage. 

Mark Zandi:                      It was. 

Cris deRitis:                       Did you count up the number of miles you flew?

Mark Zandi:                      A lot of miles. I literally circumnavigated the globe, I did. Actually, last night, I got back last Saturday, last night was the first night that I actually slept eight hours. When I first got back, I was getting up at 3:00 in the morning, then 4:00 in the morning, then 5:00 in the morning. Finally, 6:00 in the morning and I got eight hours, because I went to bed at 10:00. 

Ryan Sweet:                      Hey, Cris, he's laying the groundwork, so he can say he's tired. 

Mark Zandi:                      No, I actually feel very good. I feel energized. I feel really, today's Friday, that's a good thing too. 

Ryan Sweet:                      Now that you're back in the US, trouble always follows you?

Mark Zandi:                      It does. 

Ryan Sweet:                      So your recession odds must now happen higher, now that you're back. 

Mark Zandi:                      No, did you look at the stock market today, what's going on? Lots of green. 

Ryan Sweet:                      Stock market. 

Mark Zandi:                      It's funny how my mood, I'm telling you, my mood depends on whether I see red or green on the screen. You guys, you don't feel the same way? No? Okay. 

Cris deRitis:                       I try not to look, yeah. 

Mark Zandi:                      I'm literally looking all the time. 

Ryan Sweet:                      Yeah, you're looking at the stock market. If my kids are in a good mood, then I'm in a good ...

Mark Zandi:                      That's a good point.

Ryan Sweet:                      That's the most important. 

Mark Zandi:                      That's a good point, that's a good point. Yeah, at your age, I felt the same way. Well, it's good to be back. We got a guest, John Leer. John, good to have you. 

John Leer:                          Yeah, great to be with you today. 

Mark Zandi:                      John always looks rested, have you noticed that? He never looks tired. I don't think they work him hard enough over there at Morning Consult. He's got a cushy job, that's my guess, look at him. 

John Leer:                          It's just Midwestern charm and a youthful spirit. 

Mark Zandi:                      Hey, I didn't know you were from, where in the Midwest are you from?

John Leer:                          I grew up in Indiana, just north of Indianapolis. 

Mark Zandi:                      Oh. You don't have any Midwest accent that I can discern. 

John Leer:                          Very controlled, I don't have any of that Wisconsin, Minnesota, Fargo style accent. 

Mark Zandi:                      Nothing, even Michigan. Michiganders have it, yeah. Well, it's good to have you. So this is your second foray on Inside Economics. You came back, thank you. 

John Leer:                          That's right, yeah. I wasn't scared away. 

Mark Zandi:                      Ryan does that to people. 

Ryan Sweet:                      A lot of people, a lot of people. 

Mark Zandi:                      A lot of people. Well, I wanted to ask you, because I think the last time you were on, you were building out your group, your economists at Morning Consult. I'd like to know how that's going, but maybe just quickly briefly tell us about Morning Consult again for the listeners out there that didn't catch it last time you were on. 

John Leer:                          Sure, yeah. So in a nutshell, Morning Consult is a global decision intelligence company, so we use daily global surveys to try to inform insights and actions. I'm the chief economist, so I focus on our economic intelligence, our economic datasets and analysis. We collect roughly 20,000 surveys every day across 44 countries in a range of economic indicators, and then release three monthly reports focused on spending confidence and employment and labor markets. So we're just constantly in this cycle, really trying to find ways to integrate our data into existing datasets, understanding those relationships, figuring out how our data might shed light on some otherwise area of uncertainty or darkness. 

                                             We've got a team now of six, soon to be seven, but we've got six full-time right now, so that's really exciting. Scott Brave runs our economic analytics group, so he's doing a lot of high frequency now-casting and a lot of that pretty fairly technical forecasting work. Then he's got two folks underneath him, both from the board here, from the Fed board, who are building out a lot of the data analytics work with him. Then I've got two analysts, Caitlin and Jesse, who sit in between and do a mixture of the writing and the narrative analysis, as well as some of the more technical forecasting. 

Mark Zandi:                      That sounds like a great team, and hard to build out in this kind of labor market, isn't it?

John Leer:                          Very challenging. It has taken, I think it's basically taken since we spoke last, basically a full year. 

Mark Zandi:                      Yeah, wow. Well, you guys do great work. 

John Leer:                          Thank you. 

Mark Zandi:                      One thing that highlights it for me is you run that daily survey of consumers where you ask essentially the same questions that the University of Michigan asks in their survey, but they do it I think twice a month and it's 500 people. 

John Leer:                          That's right. 

Mark Zandi:                      You're doing it with tens-of-thousands of people, right?

John Leer:                          Yeah. So every day in the US, we've got 6000 surveys that we're running, exact same five questions as used by the University of Michigan. So it allows us to get that very high frequency polls on the state of the consumer, how are they feeling. It also allows us to do a lot of demographic and geographic breakouts that become fairly challenging with 500 completes a month. Then we can do the cross-country, the realtime cross-country comparisons too, which right now is top of mind for a lot of folks, considering how troubled the world is. 

Mark Zandi:                      Yeah, I want to come back to that, the consumer surveys and what they're saying and how they vary across the globe. But before we do that, I'd like to just talk a little bit about the economic data that came out this last week, and if that's affected anybody's thinking about the economy's performance or where it's headed. I think this last week is heavy on housing data, so maybe, Cris, you could give us a sense of that and what the data is saying about the housing market and perhaps the economy more broadly?

Cris deRitis:                       Sure. Yes, there are a number of series' that came out this week, this housing week, in terms of construction and sales. So the general theme is weakening all around, that's nothing new, at least following our script in terms of where we anticipate things to go here. Mortgage rates remain high, so the MBA mortgage applications data came in light, it was down about 4.5%. So clearly, the refinance market is basically dried up and what mortgages are being underwritten are primarily purchases. 

                                             That follows or is aligned with the sales data that came out this week. Existing sales came in at $4.71-million, it's down from the previous number, so again, an indication of the weakening higher rates making it very difficult for people to afford homes and sales are coming in. Then on the construction side, we also saw signs of weakening. So building permits actually were flat relative to August, so this is data for September, 1.56-million building permits between single and multifamily, roughly flat from what it was in August. But housing starts were down and housing completions I think were roughly flat, maybe up a bit. So clearly on the housing start side, single family housing is coming in and multifamily, although it's up, it's not up tremendously. So it's holding its own, but it's not accelerating at this point. Completions, as we would expect, we did see some increase there, but quite modest as well. 

Mark Zandi:                      Right before I got on this podcast, I was with a group of economists, I think they called it an economic advisory panel for the New York Fed, we talked through different issues and someone on the panel brought up the point, the dark irony of rising interest rates hurting housing supply. You mentioned housing starts declining. Of course, we need more supply to get rent growth down, so that we can get housing cost inflation moderating, because that's right now probably the biggest contribution, at least to CPI, consumer price inflation, I think right now is the accelerating cost of housing, which goes back to rent. Do you have a perspective on that, any views on that kind of dark irony of that?

Cris deRitis:                       Yeah. It's the difficult situation, that's simply put. I think it continues to point towards the bluntness of the Fed's instruments, monetary policy can't solve everything. We actually do need more fiscal support, fiscal adjustments here I guess to compensate and address this. This is really fine tuning we're talking about here, right? We need more supply of housing, but we don't want to cause more inflation, so you need some type of fine tuning that the Fed just can't handle with its tools. 

Mark Zandi:                      Yeah. I made the point that it depends on how high, how long these high mortgage rates prevail, because we do have a large number of homes in the pipeline under construction, going to completion. In fact, I think it's still a record number, and it's piled up there because the labor supply issues and the supply chain issues related to the pandemic. But now, with an easing of those supply chain issues, we're getting appliances and building materials now making their way here, and the labor supply issues starting to ease up a little bit, because of the weakening in job growth, hiring, and that will allow these homes in the pipeline under construction to go to completion, and that should help with supply at least for a while, maybe six, nine, 12 months. If rates remain elevated for much longer than that, then we've got a big problem. We're going to see a big decline in supply coming to the marketplace, would you agree with that assessment?

Cris deRitis:                       Yeah, I would, and that's consistent with the data, the completions are up, but the starts are down. The permits, which that's future building activity, I view that as the option. Builders, they do see these positive forces in terms of still lots of demand, demographically driven demand especially, but the cost to build, or the cost of borrowing is preventative. 

John Leer:                          Isn't there an issue though with, one of the issues has been these older Baby Boomers staying in their houses for longer, as home prices start to fall, all of a sudden they're more likely to hold onto their houses, less likely to move into the smaller single-floor ranch or something like that. So I guess I just wonder, we were continuing to see sellers drop out of the market, to fewer older adults saying that they're interested in selling their homes. I wonder if that's a dynamic at play, in addition to the new home part of the equation to just higher input costs. 

Cris deRitis:                       Yeah. So there's a lock-in effect across the board, especially with the lower rates that people have been able to lock in on top of it. So not only a preference perhaps to age and place and not downsize, as you mention, but even now the economics make it even less likely, because they've locked in this 3% rate and moving and locking in a 7% rate is just not feasible for most people. 

Mark Zandi:                      So John, you mention in your survey work, you're finding that potential sellers are pulling their homes off the market?

John Leer:                          The share of homeowners intent on selling their homes has consistently fallen for the last eight or nine months. It was at 15% in February of this year and down to 10% now, so I think that's what we're trying to understand is that mismatch between the supply and demand over, in addition to the new home part of the equation, which is of course as important. Just understanding this dynamic between potential sellers and potential buyers. 

Mark Zandi:                      Yeah. It's an interesting dynamic, the narrative in my mind is because we've seen house prices decline here pretty sharply in a very short period, house prices, mortgage rates started to rise in the spring, house prices appear to have peaked in June nationwide, and they're coming in now pretty fast according to our house price data. More than half the metro areas across the country now are experiencing house price decline in places like California, Cris, what is it? What are price declines now is San Francisco and LA?

Cris deRitis:                       I think it's around 8%. 

Mark Zandi:                      Yes, some pretty big declines. 

Cris deRitis:                       In a matter of months. 

Mark Zandi:                      So it feels like sellers are actually capitulating, they're saying, "Oh, these mortgage rates are high, they're going to stay here for a while, high for a while, by the way, there's a recession coming, so I better sell now, otherwise if I try to sell six, nine, 12 months from now, I'm going to sell it at a lower price." You're seeing prices come down very rapidly. 

Cris deRitis:                       But that's only when sales was down. 

Mark Zandi:                      That's true, it's consistent with the sellers taking their homes off the market, John's data. We actually saw that months of supply actually rose, but that's a bit of a head fake. Inventories came down, it's just that we're not selling, we're selling at a slower pace, right?

Ryan Sweet:                      We don't talk a lot about the new home market, but that's only 10% of all home sales, existing, that's what John was referencing, that's the key part. People are just not going to list their homes now. 

Mark Zandi:                      Right, right. So Ryan, since you heard your voice, so given, and that's rare it took him this long for me to hear his voice, generally I hear his voice immediately.

Ryan Sweet:                      I was going to point out that you just said a recession is likely. 

Mark Zandi:                      I said they think a recession is likely, they think, the sellers. 

Ryan Sweet:                      Someone had a quote in CNBC. 

Mark Zandi:                      You take everything out of context, John, he does this all the time. Where's this headline? You've got to dig deep, you've got to dig deep. But we'll come back to that, we're definitely coming back to probabilities of a recession. But I was going to ask you a question, based on everything that's going on this past week, all the economic data and everything else that's going on, and a lot is going on, is your sense of how the economy's performing, where it's headed, changed at all, or are we still on track?

Ryan Sweet:                      No, I think we're still on track. I think our baseline forecast is still roughly right, that the economy's clearly slowed, and next year is going to be even more difficult, but we've got a lot of housing data this week, we've got industrial production, which actually came in a little bit better than I anticipated, so that was encouraging. I think the parts of the economy that we would expect to weaken by higher interest rates, stronger dollars of manufacturing, housing, that's all playing out to script. It's whether or not, and this is why it's great to have John on, can the consumer hold on? If they do, then we can skirt a recession. 

Mark Zandi:                      Whoa.

Ryan Sweet:                      Nothing really this week changed my outlook. 

Mark Zandi:                      Well, what did you just say, we could skirt a recession? Didn't you just say that?

Ryan Sweet:                      That's our baseline forecast. 

Mark Zandi:                      Yeah.

Ryan Sweet:                      Yours, your baseline. 

Mark Zandi:                      So you think we can still skirt a recession?

Ryan Sweet:                      I didn't tell you I think we can, I said our baseline. 

Mark Zandi:                      It's possible is what you're saying. 

Ryan Sweet:                      Anything's possible. 

John Leer:                          It reminds me a little bit, I grew up caddying and people would always ask me if it was going to rain, and the caddy master's answer was always, "Eventually." I think, so are we going to skirt a recession? Will there be a recession? Eventually, yes. 

Mark Zandi:                      I have a lot in common with you, John, I caddied too. 

John Leer:                          Did you really?

Mark Zandi:                      I did, indeed. That was a great job, I thought. 

John Leer:                          Great job. 

Mark Zandi:                      Yeah. Hard, did you double bag?

John Leer:                          Eventually, I started when the bag was bigger than me, so it took me a couple years to grow into the phase where I could carry a bag, but it was great. I got a partial college scholarship out of it. 

Mark Zandi:                      You must have been a good caddy, geez. You must have been a great caddy. 

Ryan Sweet:                      It almost sounds like the movie Caddyshack. 

John Leer:                          A little bit, it was a little bit like that. There were some characters. 

Mark Zandi:                      Well, John, I know you watch the economy very carefully from your prism, and just to level set, Ryan is very bearish on the economy, 70% probability of a recession in the next 12 months?

Ryan Sweet:                      75%, Mark. 

Mark Zandi:                      75%.

Cris deRitis:                       Oh, he pumped it up. 

Mark Zandi:                      Cris is also bearish, not quite as bearish. Are you 70%, Cris?

Cris deRitis:                       I'm 70%, I'll still with 70%.

Mark Zandi:                      70%, and I'm at 55% over the next 12 months, not as bearish. 

John Leer:                          I would split the difference probably and I would say a lot of it oddly enough is from all of the data that we're collecting really over the last two weeks, it has just consistently come in lower than I would have expected. We have this, Scott Brave and Kayla built what they called the consumer purchasing power barometer and just really starting to see instances of middle and high income consumers walking away from a pretty wide range of purchases due to higher than expected prices. It's been a really strong indicator thus far, leading indicator of real PCE. So I think it's hard to say, but I think the first quarter of 2023 is going to be marginally negative, and then it's a question of what that second quarter will look like. I think it's going to be really, really close. 

Mark Zandi:                      Well, Q3, we're just into Q3, that's going to be positive, right? We're now tracking ...

Ryan Sweet:                      Around 2%, yeah. 

John Leer:                          Did I misspeak? I was talking about the first quarter of 2023. 

Mark Zandi:                      No, I know, so what do you think about Q4? You think Q4 ...

John Leer:                          It will be point-something, either point-something positive or negative, but it looks to me like it will be almost flat. 

Mark Zandi:                      So you're thinking, so what's the probability of recession?

John Leer:                          I'd put it closer to 60%. 

Mark Zandi:                      Okay, and you're thinking ...

John Leer:                          65% in the first half of 2023. 

Mark Zandi:                      First half of 2023, okay. 

Ryan Sweet:                      That Q3 number, that GDP number, just like the first half of the year, it needs another asterisk, because if you take out trade, net exports, we're tracking .4% annualized, which is very, very weak. Inventories and exports declines in the first half of the year, now it's adding to the second or Q3, but if you strip out the weakness in the GDP data, it's becoming more prevalent. 

Mark Zandi:                      Yeah. Well, it feels like if you strip out the net exports since this time last year, GDP has basically been flat. 

Ryan Sweet:                      We're moving sideways. 

Mark Zandi:                      We're moving sideways on GDP. On jobs, still lots of jobs. In fact, we've got another strong data point there on UI claims, initial claims for unemployment insurance, which is a window into layoffs. They're very low. 

Ryan Sweet:                      We're puzzled by that. I was surprised, because I thought Hurricane Ian was going to choose Florida and they fell in Florida. 

Mark Zandi:                      Right, right. Which indicates that the labor market's still strong, and not at all consistent with the idea that we're certainly not in recession and recession is not eminent. I'm not saying you guys think that. You're also first half recession kind of guy too, aren't you, Cris and Ryan? First half of '23, that's when you think the recession will hit?

Cris deRitis:                       Probably more second quarter versus first, yeah. 

Mark Zandi:                      Okay, that's splitting hairs, but okay. Fair enough. 

Cris deRitis:                       A little insight. 

Ryan Sweet:                      You've got to give a month, a day, an hour. 

Mark Zandi:                      So John, one indicator that I look at for gauging recession, whether it's eminent or not, is the change in consumer confidence. Not so much the level, right now we know everyone's very pessimistic and dark, they've been that way for a while, since the pandemic hit more or less. Which really, when it changes to the downside in a very significant way, because that indicates that consumers are losing faith I think, that they're going to hold onto their job and they go, "Oh, my gosh." And they stop spending. That's recession, when the consumer packs it in. 

                                             In fact, I'm sorry, this might be the competition, but I look at the Conference Board survey, the monthly survey, and by looking historically, if that survey, the index falls by more than 20 points in a three-month period, we're in recession six months later on average. It takes about six months for that to happen. That's not happened so far, the last data point we got from the Conference Board was actually not bad, it actually improved a little bit and over the past three months it's basically flat. So that indicates, if history holds and that relationship holds, no recession certainly into next year. Does that resonate with you, that kind of frame?

John Leer:                          Certainly, it's the case that it's the change in confidence that matters, and you see that really clearly if you start doing demographic breakouts or country comparisons, looking at the difference in levels doesn't tell you a whole lot. But for us, what we've been tracking for a while is this ongoing divergence between what we've seen in confidence, which has fallen precipitately this year, roughly 15%, 20% this year, and then the actual spending data. It's held up remarkably well, when you go back and look at the updated national accounts data, it looks even better I think in hindsight. 

                                             The first half of the year was pretty strong, and so there's something going on and I think that is largely this really, really strong jobs market and a robust war chest of savings. We're starting to see that savings dwindle pretty rapidly, and then there's a question of whether or not the income stream that consumers are benefiting from in the form of wages will dry up. What I can tell you most recently is that confidence is yet again falling, despite the fact that gas prices have leveled out, they're increasing a little bit, but it's a pretty dramatic difference from let's say what we saw over the course of the summer where these rising gas prices was very, very strongly correlated with the fall in confidence. 

Mark Zandi:                      Interesting. So is this the questions that are similar at the University of Michigan survey? Okay, so that daily survey that you do, you're saying recently, what, last couple three weeks?

John Leer:                          Three weeks was the other turning point, yeah. 

Mark Zandi:                      Is that broad based across all demographics, high income, low income?

John Leer:                          Basically, in what I've been watching really closely is older adults, it feels like they get how inflation is likely to play out and affect their finances in a way that younger adults don't. So older adults in many ways have been a leading indicator of the broader consumer sentiment over the course of the last 12 months, and older adults have become noticeably more pessimistic about the economy in the last three weeks, and we're starting to see that essentially trickle down like waterfall effect to hit other age groups. 

Mark Zandi:                      That's interesting. So your data would be consistent with this frame of falling consumer confidence leads by a few months, and this weakening you're seeing right now, if it continues, would be consistent with the forecast that you made that we're going to experience some negative numbers in the first half of 2023.

John Leer:                          I think that's right, yeah. Although, I should add, and maybe it's surprising, but you've mentioned the Conference Board, they have a lot more focus on labor market outcomes. We track whether or not employed adults expect to lose income, that number has continued to fall, so among people who are working, it's really something like 9% expect to have some sort of pay loss, which is down from 12%, 13%, 14% earlier this year. So the people who have their jobs are really, really feeling great about it. There's a question of what sort of shock might happen I think that could dislodge those folks. 

Mark Zandi:                      Could it be the case that this recent weakness you're seeing, typically among older Americans, is related to the weakness in the equity market? We saw a pretty sharp decline. Okay. 

John Leer:                          Also very possible. 

Mark Zandi:                      Okay, okay, interesting. All right, so you're pretty pessimistic as well. Not as dark as these two other guys, but pretty pessimistic. But if your forecast is correct, it sounds like we need to continue to see further weakening in sentiment here, which will ultimately have to show up in spending. 

John Leer:                          That's right. 

Mark Zandi:                      All right. Let's do this, let's play the game, the statistics game. I think this is a good place to play it, before we go back to some of the other work, John, that you're doing, survey work that we want to talk about. The game, as most listeners know, is we put forward a statistic, the rest of us tries to figure that out through questions, clues, deductive reasoning. The best statistic is one that is not so easy, if we get it quickly, not so hard that we never get it, and it would be nice if it's apropos to the topic at hand. But I'll warn you guys, mine has nothing to do with anything. So it's going to be a little tough. 

Ryan Sweet:                      Did it come out this week?

Mark Zandi:                      It did indeed. 

Ryan Sweet:                      Okay, all right. 

Mark Zandi:                      I'm not sure if I answered that question, the way I answered it will help you or hurt you in your quest, but it is relevant in that sense. It's timely, let's put it that way, it's a timely statistic. 

Ryan Sweet:                      All right. 

Mark Zandi:                      Okay, all right. Who wants to go first? Ryan, you want to go first?

Ryan Sweet:                      No, let Cris go first, a lot of housing data. 

Mark Zandi:                      Okay, Cris, you go first. All right, I have a feeling this is a housing statistic. 

Ryan Sweet:                      It's got to be. 

Mark Zandi:                      Let me guess what it is already, before you even say it. Only kidding. 

Cris deRitis:                       It could be a housing statistic, but another statistic that, if you get this ...

Mark Zandi:                      I'm a god? I'm a statistics' god if I get this?

Cris deRitis:                       So this is ...

Ryan Sweet:                      ... There is collusion. 

Mark Zandi:                      No collusion, there is no collusion.

Cris deRitis:                       My number is 35. 

Mark Zandi:                      35.

Cris deRitis:                       Yep.

Mark Zandi:                      Okay.

Ryan Sweet:                      Is this buyer traffic from the NEHP?

Cris deRitis:                       Oh, well, that would be the housing, over what period?

Mark Zandi:                      What?

Ryan Sweet:                      Next six months?

Cris deRitis:                       Next six months, that would be the legitimate 35 to guess, so I'll give you the cowbell for that. 

Mark Zandi:                      Wait a second, but that wasn't your statistic. 

Ryan Sweet:                      There's another 35 out there. 

Mark Zandi:                      That's not fair, that's not fair. 

Ryan Sweet:                      There's another 35 out there. 

Cris deRitis:                       What?

Mark Zandi:                      You can't give a cowbell for a statistic he just made up. 

Cris deRitis:                       I said there was also a 35 that was housing related, and that's the one. 

Mark Zandi:                      Oh, I see. Cowbell. The 35 I want to talk about is different. 

John Leer:                          No units required when you play this game?

Mark Zandi:                      If you need the units, John, come on. If you need the units, we'll give you the units. 

Ryan Sweet:                      Is this a percent?

Cris deRitis:                       No.

Mark Zandi:                      Is it a statistic that came out this week?

Cris deRitis:                       Yes, it was reported in a Wall Street Journal article. 

Mark Zandi:                      Oh, wow. 

Cris deRitis:                       It is a statistic, it comes from a legitimate agency. 

Ryan Sweet:                      We'll cover this on economic ...

Cris deRitis:                       No, no. 

Mark Zandi:                      Is it housing related?

Cris deRitis:                       No, no. 

Ryan Sweet:                      Is it one of your random surveys?

Mark Zandi:                      Is it survey based?

Cris deRitis:                       Nope. Would you like the units?

Mark Zandi:                      Yes, please. 

Cris deRitis:                       35 ships. 

Mark Zandi:                      Oh, is that the number ...

Ryan Sweet:                      Ships?

Mark Zandi:                      35 for ships. 

Cris deRitis:                       Boats, large vessels. 

Ryan Sweet:                      Is that the number of boats parked off Port of Long Beach?

Cris deRitis:                       No.

Mark Zandi:                      I heard that's down to nothing now, maybe they're just managing it, they're all off in the Pacific. Is that the number of ships in the Shanghai Port?

Cris deRitis:                       No. You're getting further. 

Mark Zandi:                      Further.

Cris deRitis:                       I promise it has relevancy. 

Mark Zandi:                      It's got to. Is it related to supply chain issues?

Cris deRitis:                       Not particularly. 

Mark Zandi:                      Oh, okay. 

Ryan Sweet:                      Is it ships parked somewhere?

Cris deRitis:                       It is ships parked ...

John Leer:                          Russian energy ships. 

Mark Zandi:                      Energy? Go ahead. 

Cris deRitis:                       There are 35 ships, LNG ships that are parked off the coast of Europe waiting to unload. 

Mark Zandi:                      That's a lot of ships. 

Cris deRitis:                       It's a lot of ships, so they are not unloading the gas that they have, because so far the weather has been mild in Europe, they're not drawing down, they're at capacity, storage is maxed out. 

Mark Zandi:                      Isn't that interesting?

Cris deRitis:                       But they're waiting there, because they expect that prices are going to rise, so it's still in their interest to wait. So my optimistic view is that could actually help us in terms of keeping energy prices down, right?

Ryan Sweet:                      You saw a drop in UK utility prices recently. 

Cris deRitis:                       Exactly, and in EU, or in Europe overall. 

Mark Zandi:                      Because of this or something else?

Cris deRitis:                       Well, I think it's a mix. So the other factor is China, which of course now we don't know what's going on there, because they're not releasing GDP stats. If there's weakness there, that's lowering demand potentially, so there's that. Then the supply certainly is encouraging as well. 

Mark Zandi:                      Yeah, actually that's a really good statistic. 

Cris deRitis:                       I thought so. 

Mark Zandi:                      Yeah, yeah. Impossible for us to get. 

Cris deRitis:                       Absolutely.

Mark Zandi:                      But nonetheless, very interesting. They're at capacity right now in terms of the LNG storage?

Cris deRitis:                       Very close to it. They actually don't have capacity to unload more ships at this point. 

Mark Zandi:                      I see. Well, that may explain why natural gas prices here in the US are also down, because we're back down to $5 per million BTU. We were almost double that, I think. 

Cris deRitis:                       Yeah, we were close to $10. 

Mark Zandi:                      Yeah, so that's also encouraging for us in prices here. I also noticed that storage or inventory of natural gas is pretty strong here as well, it's been surprising to the upside, so I guess that's all consistent. That may go to exports are down from the US as well, right? So it all fits, okay. The dots are getting connected in my mind, see how that works?

Cris deRitis:                       So it could help, it could help the inflation picture here. 

Mark Zandi:                      Okay, very good. Okay, that was a good one, hard, but good one. John, you want to go next?

John Leer:                          I'll go. I should say, I'll preface this by saying the last time I was here, I think Ryan guessed this in two seconds, so I have dramatically changed the scale. 

Mark Zandi:                      Shell shock. 

John Leer:                          A slightly more arcane, less well known statistic. So this the statistic is, I'll give you the units too, it's 0.9 percentage points. 

Mark Zandi:                      That's the statistic, 0.9 percentage points. 

John Leer:                          It came out this week. 

Ryan Sweet:                      Is it something that you guys ...

John Leer:                          Publicly available, government released. 

Mark Zandi:                      Is it related to industrial production? Nope?

John Leer:                          It's not. 

Mark Zandi:                      In housing?

John Leer:                          No, it is related very closely to something that is near and dear to what I'm working on. 

Ryan Sweet:                      Inflation expectations?

John Leer:                          No.

Mark Zandi:                      But he paused, did you notice that?

Ryan Sweet:                      He hesitated. 

John Leer:                          Sorry, that was a good fake. 

Mark Zandi:                      But related to consumer spending in some way?

John Leer:                          No.

Ryan Sweet:                      Incomes?

John Leer:                          Closer.

Ryan Sweet:                      Closer.

Cris deRitis:                       Is this median usual weekly earnings?

John Leer:                          Closer, and you got the ...

Cris deRitis:                       Wages.

Mark Zandi:                      BLS? Bureau of Labor Statistics, okay. What else came out from the BLS this week?

Ryan Sweet:                      I'm not sure. 

Mark Zandi:                      Is it wage related? Labor market related?

John Leer:                          Labor market related. 

Cris deRitis:                       Oh, is this the insured unemployment rate?

Mark Zandi:                      No, no. 

Ryan Sweet:                      That's 1%. 

Mark Zandi:                      Is it 1%?

John Leer:                          It's regional data, so you've got to pull things back a little bit and dive in a little deeper. 

Cris deRitis:                       Did this come out today?

John Leer:                          This week. There we go, Cris is starting to think. 

Cris deRitis:                       That was this morning though, right.

Mark Zandi:                      Oh, is that the unemployment rate in Iowa?

Cris deRitis:                       Indiana.

Mark Zandi:                      Indiana.

John Leer:                          No, I'm going to give it to you. 

Mark Zandi:                      No, no. 

Cris deRitis:                       We're just going to name all 50 states. 

Mark Zandi:                      We're going to name all 50 states, all in the Midwest. 

Cris deRitis:                       Nebraska.

John Leer:                          It's the highest, it's a month over month change and this was the highest month over month change. 

Ryan Sweet:                      This is hard. The largest increase in the state unemployment rate. 

John Leer:                          Not unemployment rate. 

Mark Zandi:                      I think we should give up, this is getting embarrassing, it's embarrassing. Ryan's getting embarrassed. Look at him. 

John Leer:                          We've got a two-month lag on this, so today or yesterday they released the state level quits rate. 

Mark Zandi:                      Wow. That is digging deep. 

John Leer:                          That is the value for Oklahoma, which had the highest month over month increase in state level quits, but that's for August. The only reason I know that is because we're doing a lot of state level analysis of whether or not employed people are looking, are actively applying for other jobs. So we track on that same consumer confidence survey, we track whether or not employed workers are actively applying for other positions, and trying to figure out what sort of dynamics we can identify at the state and MSA level. 

Ryan Sweet:                      I think John gets it, that is probably the most difficult statistic that we've ever had. 

John Leer:                          I think last time, Ryan, I don't even think I mentioned it, I think I had said ...

Ryan Sweet:                      That one was good, that was good. 

John Leer:                          You guessed the thing right away. These guys are pros, let's come in and be a little bit more prepared. 

Mark Zandi:                      So general quit rates are coming, they're elevated, they're high, they're coming down. 

John Leer:                          Apparently, I don't know. I'm skeptical of that, but the reason I say that is LinkedIn came out today with an indication that their proxy for quits is back up, the national number that we track has started to trend higher again, so the quits number for September I believe, is the most recent data that we have. So you're right, that September, things fell. I'm skeptical that trend is going to hold. 

Mark Zandi:                      Oh. Well, that would be a problem actually, right? Because quits are tied to wage growth, wage growth is tied to inflation, that's tied to what the Fed's going to do or not do, so if quits start moving back up again, that feels really, that doesn't feel right to me. But wow. 

Ryan Sweet:                      You're right though, forecast the employment cost index, which is our preferred measure, just use quits rate, it does a really good job. 

Mark Zandi:                      That would be disappointing. Okay, all right. Well, that really tested us, I'll have to say, John. That was tough. That was tough. Oklahoma, a change in the quit rate in Oklahoma in August. 

John Leer:                          Preliminary too, that will be revised. 

Mark Zandi:                      Preliminary. Seasonally adjusted or unadjusted, John?

John Leer:                          Seasonally adjusted. 

Mark Zandi:                      Oh, okay. I thought you were going to give us the unadjusted change. 

Cris deRitis:                       Now 35 ships off the coast of Europe doesn't ...

Mark Zandi:                      That's easy. Ryan, show us how this is done, give us a statistic that we have some reasonable probability of getting. 

Ryan Sweet:                      All right. Minus 86% year over year. 

Mark Zandi:                      Minus 86% year over year. 

Ryan Sweet:                      I'll give you a hint, so if you look at the level, it's the lowest since the late 1990s, early 2000s. 

John Leer:                          This week?

Ryan Sweet:                      It came out this week. 

Mark Zandi:                      Down 86%, it's an economics statistic that came out this week?

Ryan Sweet:                      Yes, yes. 

Mark Zandi:                      Economics statistic, okay. It's not a financial market variable?

Ryan Sweet:                      Nope.

Mark Zandi:                      Is it housing related?

Ryan Sweet:                      It's housing related. 

Mark Zandi:                      Something around the inventories?

Ryan Sweet:                      It's not inventory. 

Mark Zandi:                      No?

Cris deRitis:                       It's not purchase mortgage?

Ryan Sweet:                      You're getting close, Cris. 

Mark Zandi:                      Refi?

Ryan Sweet:                      Refi.

Mark Zandi:                      Oh, okay. Who gets the cowbell?

Ryan Sweet:                      Refis are down 86% year over year, and that index is the lowest since, so if you look at the refi index, it's off, it's the lowest since the late 1990s, early 2000s. So it ties us back into the housing related data, but also consumers, they're not, homeowners aren't refinancing, because of higher mortgage rates. 

Mark Zandi:                      Let me reverse the game on you, what do you think the average interest rate is across all mortgage loans outstanding? You take all the loans out there, look at their mortgage rate, take an average, what do you think it is right now?

Ryan Sweet:                      3.8%?

Mark Zandi:                      Pretty close. 3.5%, 3.5%. So okay, you're 3.5% and the current mortgage rate is well over 7%, isn't it, on a 30-year fixed? So you can't ...

Ryan Sweet:                      You're locked in. 

Mark Zandi:                      Well, yeah. The only reason you would do it is you need, desperately need the cash. So call cashout refi, but you'd have to be pretty desperate to do that, because that would be pretty expensive to do. 

Ryan Sweet:                      Exactly.

Mark Zandi:                      Interesting.

Ryan Sweet:                      You want a number that's more difficult than John's?

Mark Zandi:                      More difficult than the change in the quit rate in August in Oklahoma, seasonally adjusted?

Ryan Sweet:                      I won't let you guys suffer too long. 13. 

Mark Zandi:                      13. You really want us to try to figure this out?

Ryan Sweet:                      Just take one shot. There's a number of references, I'll give you a very easy clue. 

Mark Zandi:                      Beige Book?

Ryan Sweet:                      Yes.

Mark Zandi:                      Oh, way to go. 

Ryan Sweet:                      There's no data in the Beige Book, but you can ...

Mark Zandi:                      References to recession?

Ryan Sweet:                      Yes. There was 13 references to recession in the latest Beige Book, zero in January.

Mark Zandi:                      These are comments that the Fed collects from businesses in the district bank areas. 

Ryan Sweet:                      Exactly.

Mark Zandi:                      We're hearing the word recession now. 

Ryan Sweet:                      We're starting to see more signs and references to recession. 

Mark Zandi:                      This goes to John's point about consumers starting to lose their nerve, because they're thinking recession too. Interesting. 

Ryan Sweet:                      All right, Mark, let's hear yours. 

Mark Zandi:                      Okay. Mine might be a little hard too, but Ryan, you should get this one, because it's something that we've been talking about. 4.97%, 4.97%.

Ryan Sweet:                      Is that the terminal funds rate that markets are ...

Mark Zandi:                      No, that could be, but is it that high? 4.97%?

Ryan Sweet:                      I think it's close to 5% now. 

Mark Zandi:                      Oh, okay. No, that's the wrong, I see Cris, I do not award a cowbell to that, because it's not the 4.97%. John, do you even have your cowbell?

John Leer:                          I've got my cowbell, this is from VJ. 

Ryan Sweet:                      Is this a financial market variable?

Mark Zandi:                      It is indeed. 

Ryan Sweet:                      Okay.

Mark Zandi:                      It is indeed, and it's a daily data point. 

Ryan Sweet:                      Low expectations?

Mark Zandi:                      Nope, nope. 

Ryan Sweet:                      Spread? High yield corporate bond spread?

Mark Zandi:                      Yeah, high yield corporate bond spread, 4.97%. 497 basis points, 4.97%, that's the difference between the interest rate on a so-called high yield corporate bond, these are bonds issued by corporations of lower quality, below investment grade, relative to the 10-year treasury, the risk-free rate. So on average, historically, that spread has been almost on the nose 500 basis points, 5%. I'm taking it all the way back to when the junk bond market was put on the planet in the late '90s by Michael Milken. 500 basis points, so we're exactly within a basis point equal to the long run average. 

                                             Now, historically, that spread will rise when the economy's under a lot of stress and recession is a real threat, because investors think, "Oh, we're going into recession, businesses are going to start losing money, they're not going to be able to pay back their debt, therefore you've got to pay me a higher interest rate to buy that bond to compensate for that risk, that default risk, that credit risk." But you don't see any of that in the data right now, none, zero. So how do you explain that? Except for it's not consistent with the idea that we're going into recession, at least not anytime soon. 

Ryan Sweet:                      How would you explain that?

John Leer:                          What's the typical lean time?

Mark Zandi:                      It tends to start rising several, six months before from very low levels, and then once it blows through that average 500, that's about the time, a month or two later you're in recession. But the trajectory's straight up, straight up, because defaults start to mount pretty quickly. But you just don't see it in the data. You looked into this. 

Ryan Sweet:                      At least historically, the high yield corporate bond spread very closely tracks the VIX, so if you run a regression, model high yield corporate bond spread off the VIX, the VIX would say that the high yield corporate bond spread should be closer to 700, 800 basis points now, versus 500. You see that relationship is pretty tight historically, and it's broken down since the financial, or the pandemic, and I think our last podcast, I think we had Aaron Klein from Brookings on and him and I, I think were on board with the idea of this moral hazard that central banks have gotten involved in the high yield bond market, or the corporate bond market. Bank of England next week is going to start buying corporate debt again, so maybe that is causing this relationship to break down. But the spreads should be a lot wider than they are right now. 

Mark Zandi:                      I hear you about the moral hazard, that doesn't feel right. Put yourself, I'm an investor, I'm an investor in fixed income corporate debt, do you think that you really test your high probability that the Fed's going to bail you out? It has be to a crisis, it has to be pandemic shutdown before they would step in, right? No?

Ryan Sweet:                      Corporate profit margins are wide, perceptions of credit risk are low, if you look at the Moody's default forecast, it's going to rise, it's going to normalize a little bit, but I think they're forecasting 2% to 3% next year. So I think that's also helping keep spreads tighter relative to where on market ...

Mark Zandi:                      But that's my point, maybe the economy, you guys are too pessimistic. No?

Ryan Sweet:                      I'm being realistic. 

Mark Zandi:                      But the bond market is saying, at least in this case, this statistic, if you take it at face value, maybe there's other technical factors going on, who knows? But it would have to be a pretty whopping big technical factor to wash out the message there. I don't know, just I find that interesting. 

Ryan Sweet:                      Yeah, no. It's fascinating. We've been doing a lot of work in this trying to date where we are in the credit cycle, and things seem to be tightening, but they're not tightening so quickly that it would be a recession. 

Mark Zandi:                      Okay, all right. Okay. 

Ryan Sweet:                      See, John, that's what he does, he cherry picks. 

Mark Zandi:                      No.

Ryan Sweet:                      He looks at one number, one number out there that supports this non-recession. 

Mark Zandi:                      Wait a second, I have four indicators I'm looking at for recession, one is the policy yield curve, the difference between a 10-year and the Fed funds rate, that has to invert, the funds rate has to go over the 10-year. I don't know if you've noticed, but the 10-year keeps moving north and it's now over 100 basis points, a full percentage point above the current funds rate target, so that's not consistent with recession. What's that?

Ryan Sweet:                      It is narrowing between the 10-year and three months. 

Mark Zandi:                      I said the funds rate, I said the funds rate. The funds rate, I'm just saying. 

Ryan Sweet:                      These podcasts are recorded, Mark, so we go back ...

Mark Zandi:                      I'm just saying. 

Ryan Sweet:                      You mentioned yield curves, you said the 10-2, the 10-3, the goal post. 

Mark Zandi:                      I've got four indicators, the second one is the change in consumer confidence, that's still not signaling anything yet. No, what John said, what three hairs I have on my head did stand up when he said it, so I'm paying attention. Third is the high yield corporate bond spread, it doesn't feel like that's saying recession dead ahead. Of course, the unemployment rate, which doesn't give you any lead if that's rising, but that rises more than half a point year over year, you're in recession. But right now, that's 3.5% and given the UI claims, it doesn't feel like that's going to be rising here anytime soon. So those are the indicators that historically they would be saying, if we're going into recession first half of next year, they've got to be tripping wires here pretty soon, right? No?

John Leer:                          I guess my only pushback there would be to say historically, when is the last time that we had 8% inflation? I think it's a little challenging to figure out how this is all going to play out when the dynamics are so unique to this particular experience. That's maybe what people say about every recession, but you almost need to go look I think at emerging markets or places that have experienced fairly rapidly rising energy cost and inflation and figure out how that plays its way through the economy. 

Mark Zandi:                      That's interesting. So you're saying my indicators are sending false signals, because they're skewed by or biased by the current environment. 

John Leer:                          I think what we all have in the back of our mind, the financial crisis, credit conditions, hyper focused on how a lack of liquidity might play its way through, that doesn't feel like that's the case right now. Probably not housing, so what's the mental model for thinking about this particular recession and then how should we adapt our interpretation of a lot of the different indicators?

Mark Zandi:                      That's a good point, that's a good point. Talking about what's going on in people's minds, let's go back to your survey work on consumer inflation expectations. 

John Leer:                          Yeah.

Mark Zandi:                      Because my sense is that, that's going to really determine to a significant degree fundamentally how things play out here. Of course, inflation expectations jumped, first with the pandemic and then got pushed up much higher because of the Russian invasion and the spike in oil prices and other agricultural goods prices, and that increase in inflation expectations has, first of all, sent the Fed on high alert and caused them to really pivot and start raising rates, but it also goes to the surge in wage growth that was out of bounds relative to our traditional measures of labor market slack, like unemployment, like the employment to population ratio. So to get a wage growth back in to something consistent with a more normalized level rate of inflation, 2% inflation, those inflation expectations have to come back down, they have to normalize. It feels like, and I'm going to characterize data and then turn to you and say if I got it right, but it feels like it's starting to move in the right direction. Expectations of inflation are coming in, but they're still very elevated. Is that right based on your survey work?

John Leer:                          In the US, I think that's right. So we, I should say, we've taken a unique approach to measuring inflation expectations, we call it the indirect consumer inflation expectations, it's a collaboration of researchers from the Cleveland Fed and Brandeis University. So what we do is we ask people how much would your incomes have to change to make you equally well off for the changes in the prices and goods and services that you buy? So it's really tying together this concept of wage growth and price growth. 

                                             What we have seen, so we measure in the US, we do 20,000 respondents per week, and then on a monthly basis we do, I think we're now at 20 countries and we do 1000 responses per month. So just this past week, we've seen a moderate decrease, where now I think we've got on the level front we're at like 7.01% for the 12-month ahead inflation expectation. So it's a little high on the level front, but the trend has dramatically fallen from where we were in the middle of July. I think what's interesting is it's just a clear decrease, it's like the turning points are much higher now than it was during that earlier period over the summer where just every month things got higher and higher, and higher. 

                                             Now, we see it's down one week, it's up another week, it's down one week. It feels like consumers really don't know what to make of all this, because you've got high levels of prices, but also concerns that maybe we're going to go into a recession, maybe prices, that would suck some of the wind out of these price increases. At the same time, I think I was talking about this earlier, they were previously very strongly driven by gas prices, we're seeing that relationship dissolve a little bit. Then maybe the last thing, not to totally go off topic, but we just published this today with the Cleveland Fed, so I think it's probably interesting, which is we ran a flash survey in the UK trying to figure out if all this uncertainty in, political and economic uncertainty, how that was affecting inflation expectations there, and saw a pretty dramatic increase particularly among people who followed politics very, very closely. So I think that's maybe the high level piece, these are all 12-month ahead inflation expectations. 

Mark Zandi:                      Can I ask why 12-month? Why not longer term?

John Leer:                          Well, we also have the five-year number too, where that was added after the fact, so we've got I think now only maybe three months of that data. But what's been interesting is we just don't see, they're very, very strongly correlated, we see people who have higher 12-months inflation expectations in general also tend to have higher five-year inflation expectations, which is a little different than what the New York Fed reports. They see, the way that they are asking consumers, there's a greater difference I think between those two measures. 

Mark Zandi:                      So the one-year ahead inflation expectations is 7%. 

John Leer:                          That's right. 

Mark Zandi:                      Which obviously is pretty elevated. 

John Leer:                          Pretty elevated. 

Mark Zandi:                      Of course, the current inflation rate CPI, consumer price inflation is a little over 8%, so that's obviously influencing that thinking. But what's the peak in that?

John Leer:                          I think the peak was, we saw it in the third week of June, I think it was just shy of 8%. 

Mark Zandi:                      Oh, so it's only come down a point. 

John Leer:                          It never breached 8%, yeah. But it was at let's say 3% in February 2022. The summer it was just every week you could just feel it building, and then the other point I was mentioning is that while we've seen this decrease in the measure of central tendency, the average that we report, the distribution of the respondents has fairly dramatically changed. It's a much higher share at the end of the tail, so you've got more people who think that inflation is going to be something like 10% or higher, which is a little concerning. It's hard, that's I think the challenge with inflation expectations is figuring out how to make sense of it with a single number, when the distribution might be evolving as well. 

Mark Zandi:                      Any difference across demographic, age, income?

John Leer:                          Yeah, really, really strong differences. If you're, again, similar to confidence, you see higher, older adults much more likely to have higher inflation expectations. They've been more responsive to changes in prices as well, it looks like younger adults, they just don't update their inflation expectations as quickly from week to week. We see geographic divergences in general, consumers living in metro areas that have elevated inflation also have higher inflation expectations, the same is true globally.

                                             I think it's consistent with some of that finding that people who know that inflation is a really big problem, all of a sudden they start tracking prices very, very closely, and it's a luxury essentially to be able to not have to worry about inflation and live your life and make your saving and spending plans in a world of 2% inflation where it doesn't change the cost of bread. 

Ryan Sweet:                      Have you looked to see if food prices are a key contributor to short run inflation expectations? Because they are, at least in the University of Michigan, it's food prices, it's gas prices. 

John Leer:                          I'd have to go look. I think we've seen food prices globally, I just don't think that we have enough variation at the monthly frequency with food prices to start understanding what it means on a weekly level for inflation expectations.

Cris deRitis:                       Do you see any difference by education? The New York Fed shows ...

John Leer:                          We do see pretty strong differences, yeah. Pretty strong differences with higher educated people in general have higher inflation expectations. Gender matters a lot, males tend to have higher inflation expectations. 

Mark Zandi:                      Oh, is that right?

Ryan Sweet:                      That's interesting. 

Mark Zandi:                      I wonder why that's the case? That's interesting. 

John Leer:                          So yeah, we're doing a lot, partnerships with a few other companies to dive into the data and really understand how these changes might be impacting. 

Mark Zandi:                      You mentioned you did a flash survey in the UK, are you doing the same kind of survey in other parts of the world? Are you seeing the same dynamics everywhere?

John Leer:                          Well, slightly different dynamics. I think a surprising finding was in Russia, following the invasion, we had a momentary increase in inflation expectations and then it came down and it remained shockingly stable, that's consistent with what we've seen in our confidence data and some ...

Mark Zandi:                      Do you believe anything, any survey you get out of Russia though? If I were, Jesus, I'd be so nervous to answer, I'd be scared. 

John Leer:                          We're not asking about their views on Putin. 

Mark Zandi:                      Still.

John Leer:                          What we have seen actually, as soon as he announced the constriction, we've seen a pretty strong and decrease in ...

Mark Zandi:                      Oh, really? Okay. So people are responding to it.

Cris deRitis:                       Those are online surveys, right?

John Leer:                          They're all online surveys, yep. But my experience thus far has been that those things like regime or level of economic development really dramatically affect the level, but as soon as you start looking at the trends, you can plot Russia on top of Europe and do a pretty direct country to country comparison. 

Mark Zandi:                      I see. So what's the takeaway here? My interpretation of what you told us, 7% down less than a point from the peak, I don't come away feeling warm and fuzzy. 

John Leer:                          Not out of the woods yet, that's my ...

Mark Zandi:                      I think we're still in the woods, it feels like to me. 

John Leer:                          Yeah, still in the woods. 

Mark Zandi:                      Deep in the woods. The distribution, okay. That's your somewhat pessimistic outlook, I guess, because it feels like you need to have much higher rates, much slower growth to wring that out. That's where you're coming down. 

John Leer:                          I don't know if they're fully unanchored, but it does feel like this period of higher inflation is ingrained in consumer psychology in a way that it wasn't a year ago. 

Mark Zandi:                      That is interesting. Now, the sentiment, if you look at the Mich survey on inflation expectations, it paints a somewhat less dark picture, right?

John Leer:                          Yeah, although they both, the New York Fed released something recently too, I think they're jumping around right now, and part of that is just the monthly cycle. We're seeing, what we see is consistent with theirs, in the sense that week over week we're seeing a lot of more turning points than we saw three months ago. 

Mark Zandi:                      Okay. Interesting, okay. Let me ask you, we're getting a little late in the podcast here, I know you guys do so much interesting survey work and actually, I'm sure you recall, but we did some work with you back in ...

John Leer:                          Yeah, that was great. 

Mark Zandi:                      ... during the pandemic, really found that very insightful work. I know you're working now on remote work perspectives, can you just fill us in on that? That's the topic we've been talking a lot about on the podcast as well. 

John Leer:                          I think there are two things, I should say I'm sitting at home right now, so that should be ...

Mark Zandi:                      I am, Ryan is, three or four of us. 

John Leer:                          So there are two things, so on the worker front, we have seen very, very strong evidence that folks who work from home, first of all, that their so-called burnout, their level of burnout is much, much lower. They report higher levels of job satisfaction, lower levels of work related stress, even when you control for income, age, education and occupation, or industry, sorry. The second is that there's some evidence that they also assign a fairly strong financial value to having that flexibility and freedom to work from home. Again, even after controlling for all those sorts of factors. So I think it's hard to see a world where you could strip people of working from home and not compensate them in some way, that feels ...

Mark Zandi:                      Baked.

John Leer:                          It feels baked in at this point, so that's part of it. The other part of it is we've started to run small business surveys as well, so from Q3 we saw an overwhelming majority, I think 55%, 60% of small folks with 10 to 500 employees saying that they operate in a hybrid work environment. It just feels in many, many ways that's how people are expecting to operate going forward. I don't think that economists have fully thought through all the spillover effects of the ways in which that changes people's purchasing patterns, commuting times and all that stuff. 

Mark Zandi:                      Yeah. I think the game has changed, meaningfully, meaningfully. 

Ryan Sweet:                      This is why Cris is always grumpy, he's going into the office. 

Mark Zandi:                      Yeah, you're right. 

Ryan Sweet:                      The grumpy economist. 

Cris deRitis:                       I'm more productive. 

Mark Zandi:                      So insight into the question of productivity? To some degree, I guess that goes to if workers feel more relaxed and better about their work environment, they're going to more productive. But I'm leaping, is there any insight there?

John Leer:                          We were running some survey questions asking people to compare their productivity to pre-pandemic periods, and that was showing that those folks who were working from home indicated that they were more productive than they were prior to the onset of the pandemic. That dataset I think just became less and less trustworthy, it was very difficult to ask people two years after the fact to go describe how much work they were doing now compared to two years ago. That's not sound survey methodology. It is clear, that is something that Scott on my team and I talk about a lot, just the productivity numbers are terrible. They are really, really bad. So when you talk about wages, that's one thing, but if you start talking about unit labor costs, it's a different story. 

Mark Zandi:                      Yeah, okay. We can go on and on, and on, but since I've got you, one more thing. We've got these elections coming, right? Two weeks I think, less, less than two weeks, I know you do a lot on the other side of the house, you do a lot of political survey work, any insight there? Can you handicap the election at all?

John Leer:                          I wouldn't handicap it, because I do think it's going to come down to a lot of these contested races. It's very clear that Biden's approval rating is much lower than it was a year ago. We've seen some bounce back at the national level, I think what we all know is just how important it is to go look race by race, district by district, and start breaking out that data. I should say, in some of the states that are some of the most contested states, we've seen that people's views of the economy at least have fallen fairly dramatically relative to prior to the election in 2020. So there's a case to be made there that the economy's certainly a headwind to incumbents holding onto their seats in those battle ground Senate seats. 

Mark Zandi:                      Yeah, okay. All right, I wanted to ask you one more thing. An open ended question, because you are looking at a lot of different survey results, what survey result has surprised you the most, most recently? Like you said, "Oh, my gosh. Where did that come from?" Anything interesting out there?

John Leer:                          I think a lot of times it's making sense of, the labor hoarding survey, that was interesting. 

Mark Zandi:                      The what?

John Leer:                          Labor hoarding. 

Mark Zandi:                      Labor hoarding? Okay. 

John Leer:                          We spoke with small business owners and tried to figure out to what extent they were holding onto workers even if they didn't feel like the demand was there, based on a supply, labor supply issue that was driving labor hoarding. With some I think fairly strong evidence in fact that there was labor, there was evidence of labor hoarding. I told you a little bit, we just ran an updated random control trial, trying to understand the impact of wage expectations on inflation expectations. 

Mark Zandi:                      Oh, yeah. Right. 

John Leer:                          So we ran the first wave almost a year ago, and now we ran a second wave and there's evidence of causality running from wage expectations to inflation expectations in a way that didn't exist before, it was strictly the inverse. So we're starting to see now some evidence ...

Mark Zandi:                      Oh, bummer. 

John Leer:                          ... spiral. That was surprising to me, I thought we had ... The first time we ran it, it was a 20% pass through, so basically people expect to be made 80% worse off for a given change in prices. They don't expect their wages are going to keep up with inflation. 

Mark Zandi:                      Right, right. Okay, well, that's a little disconcerting as well. Because Ryan, your work has shown that it's inflation affects wages, but wages have not turned around and affected prices or inflation, at least so far. 

Ryan Sweet:                      So far. We're using the employment cost index, things like that to see. So it's interesting work to look at inflation expectations, wage expectations, so maybe that's the early warning sign that we're moving from a price wage spiral to a wage price spiral. 

Mark Zandi:                      Yeah, a problem. 

Ryan Sweet:                      A big problem. 

Mark Zandi:                      Yeah, okay. You guys are making me depressed. I need to go back on the road, I need to go visit Iceland or something. Well, John ...

Cris deRitis:                       35 ships, Mark, remember. 

Mark Zandi:                      35, that was a really good one, Cris, that was a good one. That was the one positive news, I guess. John, I want to thank you for coming on, it was a really ...

John Leer:                          My pleasure. 

Mark Zandi:                      Very thoughtful and interesting and really appreciate your insight. This is a special podcast, because this is Ryan's last podcast on Inside Economics. 

Ryan Sweet:                      You had to bring it up. 

Mark Zandi:                      No, no. In all honesty, being very earnest, I will miss you. Your insight, your thoughtfulness, your wit, I'll even go as far to say your trolling really added to this podcast, made it what it is. It's a success, we've done, in a little over a year, I think we've seen our listenership rise to a very significant degree. I get lots of great comments wherever I go, people are listening and a lot of that success goes to you, Ryan. 

Ryan Sweet:                      Thank you. I'm going to miss you and Cris so much, I can't tell you how much this place means to me. It's hard, but just working with you guys for the last 17 years, it's meant the world to me. 

Mark Zandi:                      Yeah, right. Cris, anything you want to say?

Cris deRitis:                       I still don't believe it. 

Ryan Sweet:                      You still don't believe it. 

Cris deRitis:                       I haven't fully processed it yet. 

Mark Zandi:                      This is your last podcast though, right, am I right about that?

Ryan Sweet:                      It is, this is my last one. 

Mark Zandi:                      We do have Marissa joining. 

Ryan Sweet:                      You're in really good hands, you've got Marissa. 

Mark Zandi:                      We're in good hands. 

Cris deRitis:                       But you'll definitely be missed. 

Mark Zandi:                      We're going to be watching the ratings very carefully here, that's a message to Marissa. 

Ryan Sweet:                      I told Marissa, I was like, "You've got to keep Mark in check." 

Mark Zandi:                      That's exactly ...

Ryan Sweet:                      Passing the baton onto her. 

Mark Zandi:                      She's good at that actually. 

Ryan Sweet:                      But this podcast has been one of the highlights, every week I look forward to it. 

Mark Zandi:                      Yeah, I really do as well. Well, thank you, Ryan. I really appreciate it and one last cowbell. Actually, we got all these cowbells with the three of us on the cowbell, we're sending them to your home, all of them. You're going to have 10,000 cowbells. 

Ryan Sweet:                      That's perfect. 

Mark Zandi:                      On your front stoop. 

Ryan Sweet:                      When my kids get sick, they want the bell, so when they're upstairs and they need something, they ring the cowbell. 

Mark Zandi:                      No, is that right? Repurposed, nice. Oh, man. I'd nip that one in the bud. 

Ryan Sweet:                      That was a bad mistake on my part. 

Mark Zandi:                      Yeah, bad mistake. Okay, well, with that, we are going to call this a podcast. Thanks, everyone. Talk to you next week. Take care.