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Moody's Talks - Inside Economics

Episode 73
August 26, 2022

Consumers Hang Tough and Confidence Off Bottom

Mark and Cris welcome back Wayne Best, Chief Economist of Visa, to give the latest American Consumer outlook, including the topics of excess savings, spending behavior and categories, credit trends, and interest rates. They also discuss President Biden's student loan proposal.

Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined today by one of my co-hosts, Cris, Cris deRitis. Good to see you, Cris.

Cris deRitis:                       Hi Mark. You're stuck with me.

Mark Zandi:                      A good person to be stuck with. I saw you just took a shot of what, espresso right before the-

Cris deRitis:                       A little coffee right beforehand

Mark Zandi:                      To get going here.

Cris deRitis:                       Got to keep up with you.

Mark Zandi:                      I had my 20 ounces of Wawa Coffee this morning, so I'm raring to go.

Cris deRitis:                       There you go.

Wayne Best:                     Wawa.

Mark Zandi:                      And there's Wayne Best. Wayne is the chief economist of Visa. Glad to have you back on Inside Economics. Thank you for joining.

Wayne Best:                     Great to be back, and look forward to chatting today.

Mark Zandi:                      You are back by popular demand. Very popular guest. I can't remember. How long ago was that?

Wayne Best:                     I don't remember either. It's been a while.

Mark Zandi:                      Months? At least a few months. Hard to believe we've been doing this podcast for more than a year now. So time is flying. But we got Wayne back because we want to talk about the health of the American consumer. Obviously, the consumer is key to the economic outlook, the firewall, as we've been saying between continued growth and recession. So we want to see how strong that firewall is from your prism, Wayne.

                                             Before we do that though, today, this is Friday, August 26th. Jay Powell, chair of the Fed, gave a talk, a very brief talk, at Jackson Hole, the confab of central bankers every year. And I thought maybe we could start with that. Wayne, you said you listened into the speech. What was your reaction to what he had to say?

Wayne Best:                     Well, I think firstly as you said, surprisingly, it was very short. I mean, usually his speeches at Jackson Hole are quite robust. But it was pretty much more of the same. Obviously continuing to fight inflation. We're not seeing a lot of results from that just yet. Very clear that I think he's looking for pretty healthy moves in the next meeting. So 75 basis point increase is probably much, much more likely.

                                             But also the words used, that this is going to create pain for households and businesses. For us to really get inflation under control, we're going to have to rise rates well beyond the neutral rate of two and a quarter to two and a half, which he basically talked about as being that neutral rate in this call. And then also to a much higher levels to actually break this back of inflation.

                                             So I think the words of pain to households and businesses are certainly being revealed in the stock market today with the stock market down pretty substantially. So not a whole lot of new news. I think people were hoping to see some shining light that inflation's magically dropping. And although it is, probably if Pete, especially with gas prices having come down, it still remains very elevated. So I think that's going to be quite a challenge for the Fed yet to go.

Mark Zandi:                      The one takeaway I had, and maybe this is why the market, the equity market, is down is his message that rates are going to go up, and they're not coming back down for a while. I think markets, if you look at futures for Fed funds, before today, markets were anticipating the Fed would raise rates going into next year, and then start cutting them by the end of next year. And I think he dispelled that view pretty aggressively today. He said, "No. Look, if history is any guide, we're going to be at these higher rates for an extended period until inflation gets back down." And I think that may be why the equity market is selling off a bit here.

                                             One thing I'm a little confused by though is the bond market hasn't sold off. The tenure treasury yield is about where it was yesterday. So I'm not sure what to make of all of that. But I'm sure investors are taking his words of caution into those declining equity prices. Cris, did you have anything to add on that, on what Jay Powell had to say?

Cris deRitis:                       No. It sounds like he learned a lesson in terms of keeping remarks short, don't say too much, from what Wayne mentioned. I was taking a look at what the market is implying for rate hike next month, that's now 58% chance of 75 basis points in September.

Mark Zandi:                      It was like 50% yesterday, I think.

Cris deRitis:                       And these things move around though a lot day to day. So you nothing don't want to read too much into that, but at least the market is suggesting that they're going to be aggressive.

Mark Zandi:                      The other thing he said was of course, data, I think he used the word data dependent again. There are the words data dependent. So we've got another inflation number coming out, CPI between now and the next meeting in September. We've got another employment report. So we'll see how those things go.

                                             And speaking of the data, we got a lot of data this week. We don't have Ryan here. He's the data maven to kind of guide us through. So we're a little bit rudderless. But I thought I, Cris, turn to you. Did you see any? We got the GDP revisions to the second quarter. We got gross domestic income in that release. That's always lagged a month after GDP.

                                             We got data on spending and inflation from the consumer expenditure to saving rates. So got a whole raft of data. What do you make of what the data ... Oh! And the university of Michigan survey came out too, going back to the consumer, that survey of consumer sentiment. So in its totality, what do you think the data said about what's going on in the economy this week?

Cris deRitis:                       So by and large, I think it's consistent with what the Fed wants or the movement towards a slowing of the economy, but hopefully not a breaking of it. The GDP revisions kind of as expected. Second quarter didn't shrink quite as much as what the first print suggested. So still negative, so still that two quarters of consecutive negative growth, but not quite as negative by this print.

                                             Perhaps more interesting was the GDI, gross domestic income, the other way we can measure output. And that was positive and I won't say strong, but certainly much higher than the negative GDP print. So a little bit of a discrepancy still between that GDP, GDI. Those two measures does suggest that we may very well see some additional revisions to GDP the first half of 2022's GDP going forward.

                                             So I think that's consistent what we've said in the past. We don't want to read too much into those negative prints. Clearly the economy is slowing, but not in recession yet, or wasn't at least in recession as of the first half of the year. We may very well get into recession soon. But the evidence is not supportive of that conclusion quite yet. What else? The incomes, personal incomes, were a bit weaker in terms of their growth rate, which again is consistent with the Fed's objective of slowing the economy. What else?

Mark Zandi:                      Well, just to circle back for a second on GDI, gross domestic income, just to make it clear to the listener, conceptually GDI is the same as GDP. It's just the value of all the things that we produce. So it's calculated based on different source data on personal incomes and corporate profits on the income side of the accounts, as economists say. And conceptually, they should add up to the same thing, but because of the different source data, they don't, and often, with subsequent revisions to data as the government gets more information, those differences narrow.

                                             But for right now, they're saying similar, but different things. Similar in that they're saying growth is slowing. But the GDI says growth is positive. The GDP says growth is negative. So somebody's wrong. The question is which? My sense, and I think you were intimating this is that the GDP will be revised higher to be more consistent with the GDI. So maybe still after the revision's negative, but not nearly so, or may even turn out to be positive. Who knows? But Wayne, let me turn it back to you. I know you were a careful purveyor. That's the right word, right? Purveyor. That's a good word, actually. Purveyor of data.

Wayne Best:                     Purveyor of cheese or something.

Mark Zandi:                      Well, I know you're a purveyor of fine food and dining. And a lot of great stories about that. Actually, the two of us had a wonderful meal, I don't know if you remember, but I definitely remember, in Las Vegas. It was like ... Oh my God,. You knew exactly where to go and what to get. It was like-

Wayne Best:                     I even told you what to order. And you ordered-

Mark Zandi:                      Yeah, exactly.

Wayne Best:                     No, no, no. You're not ordering that. I think I changed your order while we were there.

Mark Zandi:                      Yes, you did indeed. Thank God. You did. And I-

Wayne Best:                     You don't want that. You don't want that.

Mark Zandi:                      Wayne, here's another word, and I hope I pronounce it correctly. You're an epicurean. I would say that. A foodie, that's a better, let's say, popular way of saying it. You're definitely a foodie. You're well known for cooking meals for your banking clients, as I recall. You've never cooked me a meal, Wayne.

Wayne Best:                     No. Well, we haven't done that yet, but maybe I'll put that on the list.

Mark Zandi:                      I'll bring you your favorite cilantro or something, just so you know.

Wayne Best:                     There you go.

Mark Zandi:                      Well anyway, back to the data, what is your characterization of the data we got this week? Similar to Cris, or something different, or how do you-

Wayne Best:                     Well, I think the big thing is that this two quarters of negative GDP growth really has a lot of people hung up. That's what you learned in school. Two negative quarters, recession, et cetera. But you have to look at what a recession really is. It's a significant decline in economic activity. It's got to be spread across the economy. And it has to meet kind of the three Ds, as they call it, need to be met. Depth, diffusion and duration.

                                             The issues that we had in the first part of this year in terms of being spread across the economy, well, frankly was spread pretty much around inventories and in trade. The consumer continued to spend throughout that period of time. And when the consumer's two thirds of the economy, it's pretty hard to call a recession when they're spending at the levels that they're spending.

                                             We all know that the spending that they did over the summer was pretty momentous. Everybody was out traveling. And I'm not saying necessarily international travel, but people traveled in their cars and everything else, even despite the high gas prices. Travel and vacation was super pent up, and people did it. And so we saw a lot of that type of activity leading up to the summer, and then all the way through the summer.

                                             And if people are still in the air or traveling still, they're still fighting some of the challenges and battles, especially when down in the Florida region was some of the challenges. There's so many planes going into that region at the same time. So we saw a lot of different challenges. But boy, people got out. And for many cases, obviously many cases people hadn't had a vacation in two years. So it's pretty hard to call a recession when the consumer is so darn strong. And I think that's really what I continue to follow and look at in terms of what the potential indicators.

                                             Now, Cris mentioned also the University of Michigan up a little bit, certainly positive. And I'm not surprised given the fact that gasoline's come down so much. Oil's down from just June to now, oil prices are down 30%. Gasoline, obviously a little bit more of the sensitive one to the consumer itself, down over 20%. So I was hoping to play the magic statistic game, because I had a good one for that. But-

Mark Zandi:                      We're pour in that. Don't worry.

Wayne Best:                     We'll keep it though. I've already given it away. But Ryan is the one that usually out guesses all of these. So I don't think Cris would get it.

Cris deRitis:                       Ouch!

Mark Zandi:                      Fight words. Not been out of a streak. That's a zinger.

Cris deRitis:                       That's stinks.

Mark Zandi:                      But true.

Cris deRitis:                       Ouch.

Mark Zandi:                      No, just joking. Cris can hang on the data for sure. I was going to ask you ... Oh, I did notice the saving rate that also came out with this raft of data, 5%. So that's a tad below the 7% that prevailed prior to the pandemic. So that would suggest that consumers are still drawing down ever so slightly, but drawing down all that extra saving they did during the pandemic. Did you notice that?

Wayne Best:                     I think that it's not surprising. Again, a lot of that probably used for some of that vacation travel, and of course in many cases, depending on the income level of the consumer, really used to offset some of these higher gas prices. Well, everyone's excited. Even Ryan said something about hearing about lower gas prices. And I think his in-laws were all excited where he's vacationing.

                                             But it had become a big news story. You're seeing a lot, "Oh, I'm really feeling great because gas is down to $4 a gallon," or whatever, when it was six, and here in California seven. So it has come down substantially. But still elevated, but down a lot less.

                                             And so I think that helps in terms of the consumer. I mean, that's just in your face all of the time. You go to the gas pump once a week. It's not like trying to remember what beef prices were two months ago when you bought steaks. And now, that oil and that gasoline price really is just front and center. And so I think it's providing some relief, and probably some of the reason for optimism that we're seeing. And hopefully that plays out in some of the other optimism surveys.

Mark Zandi:                      Yeah. I mean, sentiment is still very, very low. But I think a month ago, or the month before, when gas prices hit their peak nationwide in June, I think it was $5 a gallon on the nose, that's when sentiment hit an all time low, I believe. as measured by the University of Michigan. So we still got a long way to come back from that low point. But we're making our way back.

                                             I do want to ask you from your perch as chief economies of Visa, because I know you look at lots of data based on transactions over the Visa system, what are you seeing currently? What's the state of the consumer? Are they still out spending? Any sign of pullback? Any kind of weakness out there that you're observing?

Wayne Best:                     So what we have developed, and just to refresh the listeners on what we have developed, we've developed something called the spending momentum index, where we leverage our Visa data, but we go through a series of manipulations to remove all of the specific things that are particular to the payments business, new portfolio flips or new areas to use your cards, migration from cash and check, et cetera. So it's called the spending momentum index.

                                             And just as a reference again, if a consumer spends more than they did for this month versus the same month last year, then we score them 200. If they spent the same, we score 100 and if we spent less, we score them at zero. So it creates a classic diffusion index.

                                             So one of the key elements of this spending momentum index is that we're able to look at the number of people that are actually participating in spending. And from work that we've done with Stanford and other areas, we find that 80% of the growth in retail sales generally is related to more people showing up as opposed to people necessarily spending more. And that's exactly what the spending momentum index is intended to do.

                                             So the latest reading for August, I should say for July specifically, is it is coming down. It's below a hundred. It's down four and a half points. It's at 95 specifically on a seasonally adjusted basis, and has now recorded, on a month over month, decline in really five of the last seven months in 2022. So the trend is clear. Consumers are spending less.

                                             But if you look at the headline retail sales number, we see that of course growing. And then it has continued quite strong. So what the data really shows is that we're just seeing less people participating, and very likely it's the affluent because we are indeed seeing those retail sales. So those are the ones that are actually in there.

                                             So no surprise that the lower and middle income households continue to be stressed by high food prices and by high energy prices, et cetera. So they may not be participating as much as they did previously. And the only way to make this up is to have the affluent spending. And we've talked in the past about the strength of the affluent and levels of savings and pent up demand in terms of savings were, in many cases, they hadn't spent much in the last two years, partly in travel because they weren't able to travel.

                                             So I think those are tall tale indicators that clearly seeing a little bit of a pullback. But it's still showing up in terms of strong retail sales. And I think that trend will probably continue into the fall. But it's something we're going to have to keep a close eye on.

Mark Zandi:                      So just to summarize, based on the data, you're constructing the momentum index. And based on the overall spending data that we get from the census, your conclusion is that consumers are still spending. There's still positive growth in spending, which is key to obviously keeping the economy together. But the rate of growth is definitely swinging, and there's some weakness. And that weakness is likely among lower middle income households. So the folks at the top part of the distribution of income, they're still doing their thing. They've got the cash and no problem. But folks at the bottom, they're starting to struggle a bit. That's kind of what you're concluding.

Wayne Best:                     Good summary. Yes, absolutely.

Mark Zandi:                      I know the index you also look at it across regions. You've got very detailed regional data. Are you observing any differences in that softening regionally, or is it pretty much coast to coast?

Wayne Best:                     It's coast to coast. I mean, on a regional basis, the numbers declined across all four regions of the country, both the Midwest and the South moved back into contraction territory where they were slightly positive the previous month.

                                             Interestingly though, if we look out throughout the last two years, the spending momentum in the Northeast has been much more volatile than the other regions. And 2022 has really been no different. We think a lot of the reasons behind that is the larger share of households cutting back on spending in general relative to other parts of the US.

                                             The SMI for the West was firmly a negative to territory, but was actually a little less negative than all the other regions except the South. And this was really partially a result of the summer travel surge with destinations like Hawaii and Las Vegas benefiting from travel and tourism spending over these summer months.

                                             If I look across all of the Metro areas that we track, over 877, about 835 of them lost some level of momentum in July compared to the previous months. Really, just 35 cities or so that are gaining momentum and some that didn't see a meaningful change. So a little bit more of a broad based contraction in consumer momentum across many of these Metro areas in July, which kind of is a sobering reminder that consumers in nearly all locations are facing the challenges and reducing their expenditures accordingly.

Mark Zandi:                      Interesting. Just for context, I believe there's over 400 metropolitan area across the country. And you're saying about 10% of those, only less than 10% of those, had positive momentum. The rest had negative momentum in the month of July. So that is broad based. I might be stretching you too far here, but I'll ask anyway, because I know we've talked about spending across different spending categories, types of spending in the past. Any insight there in the data that you're observing?

Wayne Best:                     Discretionary spending, still all of the metrics. We look at both discretionary and non-discretionary. And to be specific, we do not include gas and restaurants in those. And as I've described before, gas is either discretionary, non-discretionary depending if you're going on a summer travel vacation, or if you're commuting to work. And restaurants, we generally look at quick service restaurants as being kind of non-discretionary, but fine dining being discretionary.

                                             So pulling those two out and just looking at everything else, the numbers are all below a hundred, non-discretionary at 95.9 and discretionary at 94.5. And I think some of the reasons behind that is when you start thinking about travel and travel related spending, that spending often happens. If you're going to book a trip for the summer, you're often doing that in the peak spending months of March and April. Those are generally the months that people start to think about and then book, either paying for airfare or hotels or resort packages or cruises far enough and advanced. And those numbers indeed were north of a hundred back in those time periods. So we've seen a bit of a slowing in both of those broad discretionary non-discretionary categories.

Mark Zandi:                      But in general, broadly, there's loss of momentum, a slowing in momentum pretty much across all categories, pretty much all categories.

Wayne Best:                     Obviously not in terms of what we would see with gas, given the gas prices, et cetera. Those things are important. But it's also important to think about the fact, then why the heck can the census retail sales numbers be growing at the levels they're growing, which frankly was quite robust back in July.

                                             And again, it just really gets down to a much more of a concentrated set of consumers. And frankly, it's likely the affluent. You couple that with the fact that everybody's generally working, we still have very, very low unemployment rates, three and a half percent, twice the number of jobs available. People that are getting laid off, it's almost ... You're hearing the stories. "Well, great. I'm glad I got laid off. Maybe I can squeeze in a couple week vacation before I start my next job," because they're getting jobs just like that, being picked up quite rapidly.

                                             Boy, that surely doesn't sound like being in the midst of a recession. Usually you would never have that number of job openings. And I think you've seen the data on job openings relative to number of people looking for work at about 1.8. Pre-recession, 0.7.

                                             So there's just a lot of jobs that are still out there, and a lot of opportunities does still occur. It just gets back to the concerns of inflation's in your face. You're paying more for things. And until that starts to ebb, you're going to really see consumers be much more cautious, I believe, as we go forward

Mark Zandi:                      Just to provide broader context, because there are a lot of cross currents here, and just to understand where you're landing, because I know you do explicit forecasts for the broader economy. Can I ask, and maybe this is unfair, but roughly speaking, if you look at overall consumer spending and real consumer spending after inflation, what kind of growth rate do you have for 2022 and 2023? We're just ballpark. We're kind of around two percent-ish kind of growth on consumer spending.

Wayne Best:                     We're at 2.3 this year, and 2.1 next year in terms of real spending. Very similar to yours.

Mark Zandi:                      Very similar. And that's non recessionary. You do not have a recession built into your forecasts.

Wayne Best:                     At this point no, we do not.

Mark Zandi:                      We'll come back to that because we always end, recently, these conversations, these podcasts around people's probabilities of recession. And I want to get that from you, but we'll come back to that. I promise we're going to get to the game, the statistics game in just a moment. There's one more area, topical area I want to cover before we go there.

                                             And that is on credit use. I mean, there's been very ... If you look at the federal reserve data, I haven't looked at the Visa data per se, maybe you can give us some insight. But on the Fed data, you look at the growth in consumer credit, that's people borrowing on their cards and auto loans and student loans, that kind of thing, it's increased quite significantly. The growth rates are quite large over the last six, nine, even 12 months.

                                             And there's been kind of growing angst kind of out there in the economics community, in the policy community, that this is a sign of stress. This indicates that consumers are under stress. And I think Cris is actually a supporter of this perspective to some degree.

Cris deRitis:                       Well, some consumers, certainly.

Mark Zandi:                      Some consumers.

Cris deRitis:                       Some of that growth is higher end consumers getting back to the travel that Wayne mentioned.

Mark Zandi:                      Wayne, you see how defensive he is. He immediately had a ... Look, you made him shy with that snarky comment you made back early. But I did want to ask, before we get Cris to comment about that, I want to go back to Visa, how looking at the data. Did I characterize the data correctly? And how do you view it? Is it a sign of stress or something else?

Wayne Best:                     My team and I just literally went through, in exhaustive detail, and for some, this is probably going to sound like, "Oh my gosh, a snoozer," the entire credit bureau files for the second quarter.

Mark Zandi:                      Are you kidding me? I'm so excited.

Cris deRitis:                       Edge my seat edge here.

Mark Zandi:                      Edge of my seat.

Wayne Best:                     Cris is like, "Yeah, let's have lunch and talk."

Mark Zandi:                      Especially if you're cooking.

Wayne Best:                     Exactly. I'll talk about it while I'm cooking. So we went through, in exhaustive detail yesterday, as we do every quarter, as to try to get a better understanding of what's happening in these credit markets. And so let me give you some headline numbers that we saw that I thought was really quite interesting.

                                             First off, the overall credit score for the country just went down one point, and is basically nearly the highest levels that we've ever seen. Credit scores of consumers at the highest levels we've ever seen. I mean, wow! That really says a lot.

                                             And then we've been talking with our clients for quite a while about some of the reasons why that credit score has been high. And some of it is actually score migration. Think about the situation where you're stuck at home, lockdowns, et cetera. The only thing that you could really use was a credit or a debit card to order things online and have them sent to your house, whether it was food or groceries or restaurants or anything else for that matter.

                                             And throughout the entire period, we definitely saw delinquency levels or levels of concern of delinquencies really fall to levels that, I don't know, Cris can mention if we've ever seen them these low. I mean, as low as they have ever been in terms of bank cards specifically, I should say.

                                             And so what's happened is that we went through a period of time with a lot of loan accommodations, whether they be don't have to pay your credit cards for a few months back in 2020, to not paying your mortgage, to not paying your utility bill, and many other types of categories. And those things have played out so that people in many cases kept their cards current because they were a very key vehicle, especially in credit cards, for them to continue to transact online.

                                             So at this point, we ended up, if you're not paying your student loan and you're using some of those monies to keep your card current, in many cases, we saw score migration actually start to occur on people's credit score. So people that were near prime, for example, have turned into prime, and prime into prime plus, et cetera.

                                             And I think this has all led to partly talking about why this credit score number was at frankly the highest levels that we've seen. So that's a very, very key point. In the second quarter data we saw just ... I mean, one point is just rounding error in terms of the drop. I think the number's at 725 right now in terms of the average score.

Mark Zandi:                      That's typical score. The average score is 725?

Wayne Best:                     Yeah. That's the average right now, which is up from-

Mark Zandi:                      700.

Wayne Best:                     700-ish pre-pandemic. But we think there might be a bit of a migration pause starting to happen because some of these accommodations are now starting to finish and roll off. Only have about 1% of mortgages that are under accommodation still.

                                             And the other area that we talked about, I think on our last call, a lot of people didn't pay their utility bills during that period of time of accommodation. And now those are starting to show up. I think recent estimates show 16, 18 billion of utility bills that are now being asked to be paid.

                                             So that could create some additional stress as I look at the card centric side of this as we go forward. But it's certainly not showing up in the data as it stands now. Delinquency is still very low. Loss is low. People keeping cards current. All of those things really point to a very favorable condition for the consumer at this point.

Mark Zandi:                      But this improvement in the general score, the average score across the population, is in part due to lots of reasons. I mean, the excess saving, perhaps, the strong job market, likely. But you're saying also the loan accommodations that were provided during the pandemic, there was mortgage loan accommodations by Fannie, Freddie, FHA, the bank card banks, they provided some loan accommodations. Obviously student loan borrowers, they've not had to pay on their debt and does look like earliest that will be the start of next year. That definitely has helped. That's also helped in this improvement in scores.

                                             So do you think the recent surge in outstandings, bank card outstandings, and also we've seen a surge in outstanding consumer finance companies, kind of the FinTech companies. Small, but still pretty large increase. Do you see that as a sign of stress, or do you think that's related to just increased transaction use, the higher rates of inflation? What do you think about that? How do you view that?

Wayne Best:                     I think the second quarter results showed bank card outstandings growing about 14, 14.2% to be precise. So I mean, very robust levels of growth, pretty much on a par with what we were anticipating also, which is great. I mean, we had a huge drop in outstandings as those outstandings were paid down through some of the stimulus even. People used some of those stimulus dollars to pay down their debt. And bank cards would be definitely one of those areas that we saw some of that contraction.

                                             We're probably in the third quarter going to get back to the pre-pandemic level of outstandings that we had on bank cards in the third quarter. So it is kind of just going back to normal, or back to where we were in 2019, if you will. A lot of the talk of the large increase in consumer credit, some of that being people rushing to get houses before interest rates started to rise. And we saw that really the mortgage side of that do pretty well pretty much through at least early part of summer until the rates got so high that that really had to be shut down, and slowed substantially.

                                             Autos, we all know about, are certainly still being challenged because of the lack of availability. But when you look at bank cards and FinTechs and the buy now pay later, which haven't fully been disaggregated, it'd be interesting to hear if Cris has seen any data on that, doing robust levels, but frankly, consistent with the spending that's going on right now.

                                             Again, one of the things we'll be watching in the fall and we're certainly watching now is what's happening in terms of delinquency levels. And they really haven't budged a bit. It's gone up a couple of basis points. But also in the data that we saw in the second quarter, there was a pretty traumatic increase in the number of subprime players, subprime acquisitions, I should say. So financial institutions taking on subprime types of customers because they're all working and everything else, maybe rebuilding credit, et cetera. So we may see some additional delinquency challenges in due time.

Mark Zandi:                      But just to summarize again, it feels like what you're saying is, yeah, it's picked up, but no big deal. What really happened is bank cards were paid down very aggressively in the pandemic. And we've just rebuilt that. And as you point out, the outstandings today are just back to, or barely back to, or not even quite back to pre-pandemic levels. That makes sense. Cris, what's your take on all this? Now, don't be defensive.

Cris deRitis:                       No. We're all friends here.

Mark Zandi:                      We're all friends here. We're all friends here. But what's your view of all this on the consumer credit side? I'm particularly interested.

Cris deRitis:                       I would agree in aggregate. I'm not particularly concerned about the consumer credit trends at this point. As Wayne mentioned, a lot of this is just normalization. We went through this period of great accommodation in terms of a lot of stimulus, as well as moratoriums on all sorts of loans. As that unwinds naturally, you expect to see things increase. So that shouldn't worry us. What does worry me is when I look at disaggregated data and dig a little bit deeper. For example, in the bank card, I see that some of the fastest growth rates-

Mark Zandi:                      And this is based on the Equifax credit files that we get every month?

Cris deRitis:                       That's right.

Mark Zandi:                      So it is very granular data, and it's all the files in the country.

Cris deRitis:                       Yeah, that's right. It's a census of their reports. I'm seeing some of the fastest growth rates, year over year growth rates, in terms of bank card and personal loans in the lowest credit score bands. And what makes me particularly worried about that is precisely the credit score inflation that Wayne mentions.

                                             So with everyone in general seeing their credit scores rising, those borrow who are still subprime in this environment, with all the stimulus and everything that's going on, well, they may actually be even worse than we would've attributed to their score.

                                             So to see that group rising at a very rapid rate ... Now, it's a small portion in absolute terms. So it's not a macro economic risk. If they go from 100 billion to 200 billion, it's a lot. But in a 20 trillion economy, not so much. But it does point to some weakness in that particular demographic.And when I marry that with data on savings, data on cash balances broken out by incomes, you do see a lot of stress in that lower end of the distribution. So I'm particularly worried about what's going on there.

                                             And when I do see those delinquencies, or when I see the growth rates rising, it also cautions me on the delinquency rates. We haven't seen anything yet, but that's also because the balances have been growing. That can artificially push down the delinquency rates. So I am worried that we are going to start to see some acceleration here in this particular segment of the market over the next couple of months, especially as inflation remains quite high.

Mark Zandi:                      Well, it seems consistent with what Wayne is saying. I mean, Wayne was saying, in the Visa data, we are observing loss of momentum, some softening, particularly among lower middle income households. And that would be consistent with what you're saying about the Equifax credit file data, that that's where you're seeing the balances growing more quickly because presumably those households are under stress and need that balance to help them kind of navigate through financially.

Cris deRitis:                       I guess I'm worried that there's a shoe to drop here. Right now, we're in this zone where the data still doesn't fully reflect perhaps the stress that folks are under.

Mark Zandi:                      But maybe not a macroeconomic shoe.

Cris deRitis:                       No, not a-

Mark Zandi:                      Because it's too small. It feels that way.

Cris deRitis:                       I'm not talking about this causing a recession. But certainly if we were to go into recession, this group is going to be even more exposed. Right.

Wayne Best:                     Especially when you couple that with higher inflation. I mean, again, I think the good news here is that different than other economic cycles that we've seen, you look at wage growth by income for low and middle income households, pretty close to 7% right now where the-

Cris deRitis:                       Strongest growth is.

Wayne Best:                     Where the highest was 4%. So it's still, in many cases, not able to offset some of the inflationary pressures. But that'll be an important element to watch for if we look at the wage growth relative to inflation levels. And if inflation follows a path that we think will actually occur with it starting to slow and slow quite dramatically as we get into early part of next year, then real incomes will actually, real disposable incomes will actually look to be quite positive and actually provide some relief relative to these inflationary pressures. Again, with the big if of if inflation falls at these levels.

Mark Zandi:                      One thing people don't understand, most people, you guys understand, but most people don't understand, is that when you're looking at the bank card data, the outstandings, how much bank card outstandings are out there, that can increase because people are using it as a debt vehicle. I'm borrowing on the card, and I'm going to have to pay an interest rate on it every month. But it also reflects increasing transactions, because if I'm out traveling or going to restaurants or going to ball games and using that card more, that's going to show up as an increase in the balance on the card. Do you have any sense of this acceleration in bank card outstandings that we have seen? How much of that is related to the use as a debt vehicle? And how much of it is transaction related? Is there any way to gauge that?

Wayne Best:                     Well, and I look at, I guess, the outstandings that are revolving, and typically 85. I think we're probably around 85. Let's say 85% to 88% of the outstandings on bank cards are incurring some kind of finance charge.

Mark Zandi:                      Oh, is it that high? I didn't realize.

Wayne Best:                     It's always been that number. We'd get closer to 90% if we were to go into an economic cycle with obviously the desire need for consumers to have to revolve in terms of their financial conditions. So it's always been that kind of a number. Different portfolios will be different than that if they're much more, as you say, paying off their balance every month, if that's the type of consumers that they're going after. But that's a typical number. And so if you look at their most recent trends, obviously with the affluent outspending and in such a big way, I think a lot of that is related to just actual spending behavior, and some of which was being paid off.

                                             Now, one other thing that we did find in the latest review of the Credit Bureau file is that there's a tremendous amount of consolidation going on. I mean, let's think about it. And this is not atypical at this stage of an economic cycle when we start to see rising interest rates. You see financial institutions that are offering very attractive balance transfer offers at very low interest rates just at the time that interest rates are starting to decline.

                                             And as a consumer, if you see that your minimum payment is going up because of the fact that the interest rate's going up, it's also right in your face. And so you start looking potentially for those additional opportunities to consolidate. In fact, the data showed that consolidation and the amount of consolidation really hit, I think, the highest level that we've seen since we've been following it in 2016. So highest level of consolidation.

                                             So that's got a lot of the activity also. And that may be in more likely than not people figuring out other debt that they have and consolidating it in terms of a card program. The question is what is the interest rate on that? Is it enough to cover the level of risk that's associated with it? Often those offers are very, very low in terms of the interest rates. But I think it is a combination of the two right now. And both will have to be looked at closely as we go forward.

Mark Zandi:                      Can I just clarify or make sure I got it right? Are you saying that this unprecedented level of consolidation is also adding to the growth rates and the outstandings that we're observing?

Wayne Best:                     If you think about it, if I have other types of debt instruments, whether it be a retail store card or something else, and now I'm consolidating that onto a bank card, that is creating more consolidation. And those are all outstandings, and conceivably revolving outstandings.

Mark Zandi:                      And to that point, if you look at the Equifax data, it is broken out by bank card and retail card. Retail card is down quite a bit. And they're not big numbers again. But if you add them into the bank card, if that's what's going on, which that sounds reasonable, that would be adding to the growth rate for sure.

Wayne Best:                     But the personal loans are up.

Mark Zandi:                      And when you say personal loans, that's at the consumer finance companies?

Wayne Best:                     Yeah.

Mark Zandi:                      Yeah. That is up. But it's still small too, right? I mean, in my mind's eye, tell me if I got the data wrong, but before the pandemic, 100 billion in outstandings at consumer finance companies. Now we're at 140 billion, something like that.

Wayne Best:                     I think it's a little higher now. I think more like 160 almost.

Mark Zandi:                      Oh! Is it one 60?

Wayne Best:                     Yeah. It has risen. And included in that, of course, is by now pay later, which has been a new avenue or new area that we've seen a lot of growth in too. But think about it. I mean, if you look at the big ticket items, whether they be exercise bicycles or new mattresses, I mean, consumers bought those during these downturns and took on levels of debt. Sometimes those had interest rates that are not as attractive as maybe a financial institution is offering and in terms of a balance transfer. And so you want to consolidate those. It's a natural thing to occur.

Mark Zandi:                      Let's play the game. And then after the game, just to make sure everyone knows where we're headed. I do want to talk about student lending. That obviously was big in the news this past week. The president, President Biden, came out with a plan for the student loan program. And Cris, you've done a lot of work in this area. So I'm going to turn back to you.

                                             But before we go, let's play. The game, the statistics game is simple. We each come forward with a statistic or two. The rest of us try to figure that out with questions and clues and deductive reasoning. The best statistic is one that's not so easy that we get it immediately, not so hard that we never get it. And if it's relevant to the topic at hand, bonus question.

                                             I will preface all this by saying my statistic may be on the hard side. So just preparing you. But I'll go later. I'll go last. Cris, I'll turn to you first. And I should also say, I don't know, Cris, if you have a cowbell. Generally, it's Ryan who brings the cowbell. I don't have the cowbell. Oh, there we go. We're ready. We're ready to go. Wayne can aspire to that cowbell then. Let's go. Cris, what's your statistic of the week?

Cris deRitis:                       I was going to go with an easy one.

Mark Zandi:                      But now you're not?

Cris deRitis:                       But now, [inaudible 00:45:13].

Mark Zandi:                      He's upset. No.

Cris deRitis:                       So I'll go with $9.38. It's still pretty easy, but $9.38.

Mark Zandi:                      I think I know what that is.

Cris deRitis:                       Go for it.

Mark Zandi:                      That's natural gas prices.

Cris deRitis:                       It is. Oh, there we go.

Mark Zandi:                      Natural gas. That's the price of per million BTU, $9:30 per million BTU. Is it million?

Cris deRitis:                       Million metric BTUs.

Mark Zandi:                      Million metric BTUs. I always get that confused.

Wayne Best:                     You got to get that right?

Cris deRitis:                       Yeah.

Mark Zandi:                      I always get that wrong. So I get a half a cow. But come on. That was pretty impressive.

Cris deRitis:                       Impressive.

Mark Zandi:                      Why'd you pick that statistic? I'm curious.

Cris deRitis:                       So as you were talking about gasoline, the other gas we should be paying attention to is this natural gas. And so that's the highest, $9.38 cents is the highest level since I think 2008 in the US. Much higher, certainly in Europe.

Wayne Best:                     These are crazy levels. I mean, you think about at pre pandemic, we were at 2.30, 2.50, something like that.

Cris deRitis:                       Yeah, very low.

Wayne Best:                     That's going to be an impact for consumers in heating their homes. And of course we know that the amplified effect, I think that number is closer to 30, 40 in Europe. This is a big challenge. This is something that's coming up that's going to be quite problematic. Now, I've seen some recent data that maybe Germany has been stockpiling a little bit to be able to save or have available during the winter months. But in general, this is going to be quite problematic for the entire Euro zone in terms of the cost of heating their homes.

Mark Zandi:                      Cris, do you want to explain more succinctly why prices have gone up here to such a degree? I mean, we've got a lot of gas. We've got all the fracking gas everywhere. But why have prices gone up here?

Cris deRitis:                       So why the US, which has plenty of gas, certainly relative to Europe? Because it is a global market. Gas is-

Mark Zandi:                      Increasingly.

Cris deRitis:                       Increasingly. And with the Russian invasion of Ukraine, the Europeans are searching for other sources of gas, including liquified gas from the US. So a boom for producers in the US. They have another market that they can sell into. But Asia also has been a big consumer, continues to be a big consumer, of US liquified gas. So that's just putting even more pressure on gas prices globally.

                                             And so therefore, as a consequence, even US consumers are going to be facing higher gas prices. Certainly as we go into the winter, maybe not facing as quite an increase as they are facing in Europe, but this is going to weigh on consumers' balance sheets. And as we're talking about debts and ability to pay, utility bills are going to be front and center in terms of their concerns.

Wayne Best:                     Including propane. Propane's going to follow even worse trends than that. So that could be also a big challenge for those that heat their homes with propane.

Mark Zandi:                      Absolutely. I mean, one thing to point out is there's a constraint on how much natural gas from the US can be liquified and shipped overseas. So called LNG facilities, liquified natural gas facilities, there's a capacity constraint. So that limits the price increases that would likely occur here. I know likely you just can't ship it. It's going to stay here in the United States because you just can't ship it over there.

Wayne Best:                     But wouldn't there be some impact there too from the demand for that? As the demand for that liquified natural gas goes overseas and the price of it starts to increase, that could have some ripple effects in the United States.

Mark Zandi:                      I mean, in the near term, there's physically, I just can't ship anymore overseas. But you're right. I mean, there's a lot of investment going on now because of that arbitrage. I mean, if I can get 30, 40 bucks over in Europe, I'm going to build LNG facilities here and try to ship it over. But that takes time. That's not going to happen this winter. That happens over 2, 3, 4, 5 years given how complex that is. But that's the point.

Cris deRitis:                       So to that point, it could be here for a while, these elevated prices. Don't expect to see any relief any time soon.

Mark Zandi:                      Well, of course the high natural gas prices in Europe are the reason why Europe ... If we don't think we'll go into recession here, well, we'll just get to the back end in a second, obviously the risks are very high. But in Europe, it feels like they're going into recession because these energy prices, these natural gas prices are over. Did you just see the British have a cap on energy spending, and that just jumped threefold. It's going to jump threefold in October, I think from a 1,000 pounds, to like 3000 pounds. That's crazy.

Cris deRitis:                       It's incredible.

Wayne Best:                     If they were paying $1200, $1,400 to heat their home, it's going to be 4,500. I mean, these are astronomical numbers and scary.

Cris deRitis:                       Impossible.

Mark Zandi:                      I don't see how they navigate through that. Although, the new prime minister there is going to come forward with some kind of fiscal package to try to provide some relief. We'll see how that works out. That was a good one, particularly because I got it so fast, and that was a hard one. Whoa! Very good. Wayne, you're up?

Wayne Best:                     The number I have is 3.9

Mark Zandi:                      3.9.

Cris deRitis:                       A number that came out this week.

Wayne Best:                     Yes.

Mark Zandi:                      You said that slowly though. You had to think about that. That's interesting. Is it a price?

Wayne Best:                     Yes.

Mark Zandi:                      Is it a commodity price?

Wayne Best:                     Well, yes. Is this like 50 questions or something? I mean, yeah.

Mark Zandi:                      That's the way we saw this game. That's how this works. So $3.90.

Cris deRitis:                       Gasoline?

Mark Zandi:                      I don't know the gas, gasoline. No, that's at ... Oh, it is gasoline. It's gasoline. The cost of a gallon of gasoline. Very good.

Wayne Best:                     But on what day of the week?

Mark Zandi:                      Oh, geez.

Wayne Best:                     Come on.

Mark Zandi:                      It was probably yesterday. AAA price was $3.89.

Wayne Best:                     Yeah, it was actually on Monday.

Mark Zandi:                      Oh, it was Monday. Well, all these days blur into-

Wayne Best:                     I think we'll give you a half a cowbell.

Mark Zandi:                      Very, very good. Well, that's a big deal. So we went from five bucks in mid June to $3.90 today. For consumers, as you were pointing out earlier, that's a huge deal.

Wayne Best:                     If you look at the spending by low and middle income households on kind of core needs, food, housing, transportation, which gas is a large portion of it, that's two thirds to three quarters of the monies that they spend. So this number coming down is going to have some very positive impacts on consumers. And again, I would not be surprised if we start seeing it, if it continues to fall in this manner, have very positive impacts on consumer confidence also.

Mark Zandi:                      I mean, just the rule of thumb, and this is just a rule of thumb, every penny decline in the cost of a gallon of gasoline saves the American consumer $1.2 billion over the subsequent year. So if you do the arithmetic $5 to 3.90, that would save them what? 100 and-

Wayne Best:                     60-ish.

Mark Zandi:                      50 billion. That's a lot of money.

Wayne Best:                     That's a lot of money.

Mark Zandi:                      That's a lot of money. I mean, just for context-

Wayne Best:                     And they need it. They need it for higher food prices, or higher housing, or in this case higher heating bills, or to pay their heating bills. But that's a very positive move, if we can stay in that kind of a pathway.

Mark Zandi:                      Yeah, that's a good one. I have a hard one. This is hard, but I'm going to do it anyway. And I will help you out here if it's too hard. I'm going to give you three numbers, three statistics. They're all related obviously. The first is 22.4, and it's a percent, 22.4%. You can write this down. The second one is 16.1%. You can write that down. And the third one is 5.2%. And I will give you a hint right away. Very much in line with the conversation we were having just a few minutes ago about consumer credit. So what are those three numbers?

Cris deRitis:                       Came out this week?

Mark Zandi:                      Well-

Wayne Best:                     Another long pause, another long one.

Cris deRitis:                       That's a no.

Mark Zandi:                      Well, it's very timely. Did it come out this week? But the other criteria here is apropos to the conversation that we're having. And this is definitely apropos to that.

Cris deRitis:                       This is from the Equifax consumer credit data, the report report?

Mark Zandi:                      It is.

Cris deRitis:                       These are annual growth rates?

Mark Zandi:                      Year over year growth rates

Cris deRitis:                       Year over year. Year over year growth rates for bank card.

Mark Zandi:                      Which one's bank card?

Cris deRitis:                       22%.

Mark Zandi:                      No.

Wayne Best:                     No, it would be 16.1, if anything.

Mark Zandi:                      Exactly. That's the 16.1.

Wayne Best:                     The 22.4 probably is the year over year growth rate of personal loans.

Mark Zandi:                      Exactly.

Cris deRitis:                       Consumer finance.

Mark Zandi:                      Consumer finance.

Wayne Best:                     And 5.2.

Cris deRitis:                       Is that mortgage now?

Wayne Best:                     That might end up being mortgage.

Mark Zandi:                      No. That's retail card. It has bounced back a little bit over the ... It fell sharply during the pandemic. Hasn't made its way back, but it's 5.2% year over year. And just here's what blew my mind, and this is why this data is so cool, and why I envy Wayne, because he has so much data. He has so much data. Bank card, this is maybe a test of you, Wayne, in billions of dollars, how much bank card debt or outstandings is delinquent, in billions of dollars? And this is as of July. There's almost 800 billion in outstandings. What do you think is actually delinquent? Cris, you want to take it?

Wayne Best:                     1.4% of it.

Mark Zandi:                      That's very good. According to our data, it-

Wayne Best:                     $11 billion.

Mark Zandi:                      Well, ours says 18 billion, 18 billion. And you know what it was in February 2020, the month before the pandemic hit? 27 billion. So Cris was making this point about delinquencies could be low because the denominator of the delinquency rate, the outstanding, is growing quickly. But not really. It's low because it's low. There's just not many bank card that are delinquent.

                                             Here's here's a really cool statistic. This is across all household debt, all household liabilities, auto, mortgage, student loan, although that's give an asterisks, cards, in July, there's there was 15.6 trillion outstanding, 15.6 trillion outstanding. Get your mind around that for a second. 197 billion of that was delinquent. Only 197 billion was delinquent.

                                             And as of February 2020, 345 billion. And that was even low compared by historical data. And then you say, "Okay. Well, what about student loans?" Well, student loans, because they went to zero, there's no delinquency because people don't have to pay. That's 60 billion. So even add that back in, the amount that's delinquent is nothing compared to history. I mean, that's just an amazing, amazing statistic. There's just no delinquency.

Wayne Best:                     It goes to show you the health of the consumer. I mean, they're in really a different spot because of all of these programs and stimulus and everything else that's happened over this time period. And that's going to start to fade over time, not on withstanding what Cris has said. I think we have to really watch what's happening with those loss rates and delinquencies as time goes on because those programs aren't in place anymore.

Mark Zandi:                      So Cris, what do you make of that, those numbers I mean, just given ...

Cris deRitis:                       No. It all makes sense.

Mark Zandi:                      It all makes sense. So from the macro, the broad picture, things feel pretty good. It's just the blemish or the stress point is those lower income households that are now accumulating debt quickly.

Cris deRitis:                       That's the group I'm worried about.

Wayne Best:                     And especially, watch for this for a segue, if we go into a recession.

Mark Zandi:                      Absolutely. But before we get to that, and we're almost there, I do want talk-

Wayne Best:                     Wait a minute. I mean, I think we got your answers to your numbers. So that we should get full cowbell for that, Cris. Full cowbell.

Mark Zandi:                      Yeah, okay.

Cris deRitis:                       Well, I'm in control of the cowbells.

Wayne Best:                     You're in control of the cowbell.

Mark Zandi:                      Exactly. No, absolutely. That was well done. Well done guys. Well done.

Cris deRitis:                       Ryan would not have gotten that by the way.

Mark Zandi:                      Not a chance. Are you kidding? Not a chance.

Wayne Best:                     That's in your wheelhouse, Cris.

Cris deRitis:                       Guy's on the beach. He's in a different frame of mind there.

Mark Zandi:                      He's having his Mai Tai or whatever. What was I going to say? Oh, student loan program. Let's just quickly talk about that. Cris, you want to give us a thumbnail? What did the president do? And then what'd you think of what he did?

Cris deRitis:                       Tough to be quick here, but I'll do my best. So student loan debt forgiveness program was announced on Wednesday by the president. $10,000 of forgiveness for borrowers earning less than $125,000 a year, couples less than $250,000 a year. That goes up to $20,000 in forgiveness for Pell Grant recipients. So the idea was to provide even more relief for that group.

                                             I guess, very quickly in terms of cost, cost estimates on this plan vary. There's a lot of details yet to be written. The latest I've seen is something close to half a trillion or more. It really depends on some of the take up of the plan, because it goes beyond just the debt forgiveness piece. It's also proposing caps on the income based repayment plans that some borrowers are on. So instead of having a maximum 10% of your income being paid to student loans, that would be lower to 5%. And it would also shorten the term over which you'd have to pay from 20 years to 10 years.

                                             So that combination of lower cap and shortened term could actually increase the cost of this plan substantially. It could get up to a trillion if we see a lot of take up in the plan. But lots of moving parts here. I think the big question is-

Mark Zandi:                      CBO has not scored it yet, have they?

Cris deRitis:                       CBO has not scored it. That's right.

Mark Zandi:                      Sorry.

Cris deRitis:                       So there have been others who have scored it. But again, we're making a lot of assumptions here because the-

Mark Zandi:                      Take up is the key here.

Cris deRitis:                       The present made the announcement, but there's a lot of details that have to go through. There's lots of white space to be filled in between now and when these actual forgiveness actually occurs. There are also potentially lawsuits going on at the moment to see if the president's plan can actually move forward. Most likely it will, but that's going to complicate things.

                                             One other key point is that the moratorium has been extended through end of the year in terms of payments. So none of this actually really matters if you want from a GDP or economic perspective until we get to that point. Lots of discussion, lots of questioning in terms of the impact of this forgiveness on the economy, on the macro economy. So what's it going to mean for GDP? What's it going to mean particularly for inflation at this time?

                                             In our previous podcast, we've talked a lot about deficit spending at a time when you have high inflation is only going to contribute to inflation. And that is certainly the case here in terms of just the debt forgiveness piece of this. We estimate that inflation would go up by about eight basis points over the next year in 2023. So not a huge impact that we're talking about here. There would be some positive impact to GDP, and a little reduction on unemployment rate.

                                             Much of that though is going to be offset by the fact that as the moratorium ends at the end of the year, people are going to have to start paying back. So some people are getting relief here. They won't have to pay as much or anything if all their debt is forgiven. But a very large group, a larger group actually, is going to have to start making payments again. So that will have the opposite effect in terms of directing some of the money that they might be spending on other goods towards these student loan payments.

                                             And so that would actually work counter to inflation, counter to the GDP growth and lead to potentially a little bit of increase in unemployment rate. Again, this is all on the margin. We're talking basis points here. So net, we don't foresee a significant increase in inflation due to this plan, at least not in the short run.

Mark Zandi:                      So people hate this thing, this plan, people love this plan, but you shouldn't hate it or love it based on the macroeconomic impact, at least not in the near term.

Cris deRitis:                       Yeah. I'd agree with that.

Mark Zandi:                      Because it's a wash

Cris deRitis:                       In terms of the inflation arguments around this, I don't think that's the crux of the issue here based on our calculations, based on the calculations of many others, including the Penn Wharton model, including other researchers are not seeing much of an impact. Once you combine both factors together-

Mark Zandi:                      It washes out

Cris deRitis:                       It kind of washes out. I don't know if anyone actually loves it. I've heard people are okay with it, but there's one group that actually-

Mark Zandi:                      No one really loves it because either they want more debt forgiveness, they didn't get enough debt forgiveness or they don't like debt forgiveness at all.

Cris deRitis:                       Or perhaps somewhere in between.

Mark Zandi:                      I want to hear if Wayne has a view on this. But what's your view? Do you have a sense of that? I mean, where do you land? And I know you also thought deeply about if you were a king for the day or a week how you would kind of fix this problem because it's obviously a problem.

Cris deRitis:                       I've been thinking about this for a while. I thought of plan years ago, and I've trying to influence debate. I will say my biggest issue with it, and we can get into the fairness issues, which I think are very important. My biggest issue is that there's no reform attached to this plan. So I think this is just a recipe for further problems down the line. We've created this huge moral hazard here, meaning that people aren't going to come to expect that there will be more debt forgiveness in the future, and they're going to change their behavior around that.

                                             We're not reforming the cost of education. So some of this debt forgiveness or this assumption of future debt forgiveness is going to be captured by colleges and universities. They're not feeling the real pressure to bring in tuition or reform the system. So that probably isn't going to benefit students in the long run.

                                             And again, my biggest concern is that we are kicking the can down the road here. And we might say, "Oh! Well, this is a one time debt forgiveness. It's a one time spend of 500 or more billions of dollars." But in all likelihood, there will be another round or a continuous ask for additional debt forgiveness down the line.

                                             So that's my biggest issue with this is that just throwing money at the problem without actually reforming the system isn't going to cure anything, and actually could open us up for bigger economic problems down the line. There could be really serious inflation area effects as we go along. Maybe not be in the short term, but the plan doesn't really address those issues.

Mark Zandi:                      Wayne, I don't mean to put you on the spot, and you don't necessarily have to have a view, but do you have any perspective on this program?

Wayne Best:                     I think Cris outlined it. I mean, it's still something being digested at this point. I think he outlined it incredibly well. And I think everything that he said is something to be watching for.

Mark Zandi:                      And Cris, if you were king for the day or a week, or maybe you need a month for this one, what would you do?

Cris deRitis:                       So to my mind, there are two issues here. One is the existing book, all the loans that have already been originated, and then there's the future. And we have to tackle those problems in two different ways. For the existing portfolio, I would forgive loans to folks who have relatively low balances. So folks with less than $10,000 in debt, who many of those didn't complete their degree programs. They don't have the income to actually justify the loan. They've been struggling with these loans for years. There's a very high default rate in that lower income, lower balance.

Mark Zandi:                      These guys haven't graduated so their incomes are not going to be able to support the debt anyway.

Cris deRitis:                       Exactly. I don't think there would be any real resistance to writing off the debt for that group. So we're talking about 15 million borrowers in that with less than $10,000.

Mark Zandi:                      I think it's 20 million. Or no.

Cris deRitis:                       That's if you include-

Mark Zandi:                      The Pell Grant. Sorry.

Cris deRitis:                       Something around that. I don't think there would be much grousing around that. I think that does address an issue that we have in our bankruptcy system that makes it very difficult to discharge student debt. It's not in the borrower's interest, certainly it's not in the taxpayer's interest really to continuously go after these people for 20, 30, 40 years into social security, into their retirement, trying to get this debt paid back, that quite frankly will never be paid back. The economics just don't work for them.

                                             So writing off that debt I think is sensible. I don't think that there's a whole lot of resistance to that group. And if anything, there could be some real benefits. You wipe the slate clean for these people and they are able to perhaps restart without having this continuous burden on them.

                                             For the rest of the group though, I would Institute something more that is income based repayment. So just make the entire system income based repayment schedules. That's going to address a lot of the issues that people have in terms of the affordability of the debt, while still favoring or enforcing the contract that has been made, the social contract, the actual monetary contract that has been made. So that's what I would do for the existing portfolio.

                                             For the new loans, that's where I think the government, we have to take a serious look at our program. Clearly it's not working. I would put more caps on it. I would reduce the government's role. I don't think that the government needs to fund a lot of graduate school loans, for example, or they can do that in a much more targeted fashion. So I would actually leave that more to the private market, which has shown that there's ample capital out there. It's more expensive, certainly.

                                             But I think that actually does a better job of sending the signals to students around the value of the educations that they may be receiving relative to the debts that they're incurring. And I think that's where we have a real imbalance today. People making decisions not fully informed perhaps by their future income prospects, being sold, in some cases, a bill of goods in terms of what the value of the education that they're embarking on, what the value of that really is.

                                             So I would scale back the government's program dramatically on all fronts. Both on the undergraduate side, we should just have some lower caps here, and certainly on the graduate side, I think there's much more scaling back of the program that could be done.

                                             And a lot of the headlines that we talk about with people having hundreds of thousands of dollars of debt, well, they do tend to be these graduate programs, or they're lawyers, or doctors, people who do have some higher income capacity. So for them, they have some other avenues that the government isn't really serving a need in terms of a market failure, perhaps. It is really just caught up in some long run scheme or momentum that we've had. So I think we need those types of more decisive reforms.

Mark Zandi:                      Well, I'll tell you what? We certainly should do a podcast on this, because there's a lot to talk about here. But I would nominate you for king for, not a month.

Cris deRitis:                       King for the day, all right.

Mark Zandi:                      Wayne, I would not let him be king for a month, but maybe for a day, maybe for a day. I'm not sure. We're going to end the podcast with our assessments of the probabilities of recession risks that we've been doing this now for the past, at least couple, three months, given the high level of risk that exists. Cris, do you want to go first? What's your probability of recession in the next ... Well, you pick your horizon. Which horizon do you want to talk about? And what's your probability of recession?

Cris deRitis:                       You want to go through the end of 2023?

Mark Zandi:                      Okay. We can do that.

Cris deRitis:                       A calendar date.

Mark Zandi:                      So 18 months really, effectively. So what's your probability recession over the next 18 months?

Cris deRitis:                       It hasn't really changed. 60% is where I've been. I stick with that, largely because of the yield curve, still sending this signal here.

Mark Zandi:                      [inaudible 01:11:08]. But go ahead.

Cris deRitis:                       You can't ignore it. But then I am increasingly concerned about these other issues, particularly in Europe. And if Europe goes down into recession, I think that does complicate things much more for the US. So I think we've quite a bit of exposure there.

Mark Zandi:                      60%. Wayne, what do you think?

Wayne Best:                     We think it's around 50%. So not terribly far off. But as a point of reference, our model has had a lot of false signals at 50%. So we see that the numbers got to be a little bit higher than 60% for us to be concerned about that.

Mark Zandi:                      Before you would change your forecast, your actual forecast for a recession.

Wayne Best:                     Exactly. We'd have to see this tick up. Now, if I look at the factors that drove up this number from 30 to 50 over the last month, a big part of this is related to confidence level of consumers, the consumer expectation for business conditions specifically.

                                             And I have to believe in these 30 days since that last number came out that we might see some improvement there with gasoline prices having come down. And I think we could see that. And that could actually pull this back down. So we could have a couple of false starts or whatever. Again, just frankly, back to the old oil picture again.

                                             So if we see that pull back, if I look at the various factors, those that are in kind of neutral category, the conference boards leading indicators, corporate profit margins, financial conditions. But we follow the three month 10 year spread and, that's certainly still expansionary in this cycle. So I think it's a little bit of a mixed bag here. That number has risen. But I would not be surprised to see maybe a trail off a little bit, assuming gas prices stay where they're at.

Cris deRitis:                       Does Powell's speech influence you at all?

Wayne Best:                     I think we'll end up ... I think we were already counting on a 50 or 75 basis point really looking at the end of the year, numbered around three and a half, three and a quarter, three and a half. So I don't think that's changed substantially in our outlook. So like I said in early on, I think just what he said was pretty much on par with what he has been describing. They're going to be pretty aggressive.

Mark Zandi:                      Well, I had been saying close to even odds for recession between now and the end of 2023. I won't change that yet. I'll still say close to even odds. But what I will nuance is I actually think the odds of recession in the more immediate near term are lower over the next six months, six, nine months, they feel lower to me. The labor market is just too resilient. And when you're creating jobs, people spend. And to Wayne's point, if gas prices are down, that should help in terms of income, real income and confidence. And that should keep the economy moving forward.

                                             And I actually would've reduced my probability of recession to say 45%. The only thing that's keeping me from doing that is that damn yield curve. The way we look at Wayne is the 10 year, two year. And that is firmly inverted. I mean, I look before we got on today. It's negative 40 basis points. The two years 40.4 percentage points above the 10 year. That's a pretty strong historical signal.

                                             And Wayne, to your point about the 10 three month, if they go 75 basis points or even 50 basis points, three month is going to be above the tenure when they actually make that move. So that's the only thing that's keeping me from lowering my odds of recession. So I'd say close to even odds, not quite there yet, and probably closer to one third probability over the next six months.

Wayne Best:                     But importantly, I think we're not talking a 2008 global crisis type recession. If at all, it would be very likely mild. I mean, again, companies are not really laying off. I mean, they may be taking off some certain types of employees, et cetera. But they're getting picked up. The demand is still very, very strong, and pretty hard to do when you have this level of employment.

Mark Zandi:                      Cris makes a great point, Wayne, and I'm not letting you say it, Cris, because I want to say it my way, then you can tell me if I got it wrong.

Cris deRitis:                       I make a lot of great points. I'm wondering which one.

Mark Zandi:                      It's a great point. It's a great point. He's saying, look, we are in a very fragile spot, no doubt about it. We're in a very fragile ... Confidence is weak. Yeah, it's improved a little bit, but it is weak. Growth is slowing, the Fed's on the war path. If anything else happens that isn't to script, we go in. And between now and the end of 2023, that feels like a long time for things to go off the rails. That is a very legitimate, I think, kind of perspective. Did I get that right, Cris?

Cris deRitis:                       You did. Beautiful. I'm going to write that down.

Mark Zandi:                      Yeah. Write that down. So I get it. Well, we had a great conversation, covered a lot of ground. Is there any ground we missed, Wayne, that you'd like to cover, or do you feel pretty good about the conversation?

Wayne Best:                     No. I think we hit some of the main points. Just again, the health of the consumer cannot be underestimated. They're all working. They've lowered their level of indebtedness. They're spending out there pretty, very positive all the way around. And obviously inflationary pressures are impacting different income groups, et cetera. But certainly hope to see some of these inflationary pressures start to come down, certainly seen in gas already, and hopefully in other categories very soon. I think that will play very strongly as we look at the balance of this year.

Mark Zandi:                      Cris, did you notice what he did? You should take a lesson from this. And that is end on a high note. Always works.

Wayne Best:                     Hopeless optimist.

Mark Zandi:                      There you go. Thanks Wayne, really. It was an honor and a pleasure to have you join again, and hopefully we'll get you back again soon.

Wayne Best:                     I'd love to join you again. This is a lot of fun, even without Ryan. Even without Ryan, it was a lot of fun.

Mark Zandi:                      I have to say that we're missing a little something without Ryan. I don't know what it is. But a little-

Wayne Best:                     A little sarcasm or something.

Mark Zandi:                      Oh, that's what it is. It's the sarcasm. We need that sarcasm.

Cris deRitis:                       And the pessimism.

Mark Zandi:                      Oh! And we need the pessimism. We need the sarcasm and the pessimism. Whoa! He'll be back with that. With that, dear listener, talk to you next week. Take care now.