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, trustee co-host, Marisa DiNatale and Cris deRitis. Hi guys.

Cris deRitis:                       Hi Mark.

Marisa DiNatale:              Morning.

Mark Zandi:                      What's going on in your part of the world? Oh Marisa, are you getting inundated by rain out there in Southern California?

Marisa DiNatale:              It's been raining basically since Christmas, and it stopped yesterday. And we're supposed to get another storm this weekend. Where I am in Southern California by the beach, it hasn't been that bad. We haven't had flooding like further north where it's been terrible. So things are green here. It's kind of nice.

Mark Zandi:                      I don't think I've ever seen it green in Southern California yet.

Marisa DiNatale:              Yeah, it gets green in the winter because this is when we get rain. Just like two weeks around Christmas we get rain and then don't see it again for the rest of the year.

Mark Zandi:                      No. Is it just me, but I don't really hear any conversation around what this all means for the drought. I mean, what does it mean for the drought? Anything at all?

Marisa DiNatale:              Not much apparently. So there are big reservoirs that attempt to capture rainwater around the state and they've filled up a bit, but it's not put that much of a dent in it I guess.

Mark Zandi:                      I heard the snow pack though is-

Marisa DiNatale:              The snow pack is like a record. So yeah, I think it remains to be seen. So I've seen some things that say that this could bring us through the next year, but I don't know. It depends how much they can capture.

Mark Zandi:                      Well, I was hearing stories of they're finding bodies in reservoirs now, the water's so low. But that does sound scary.

Cris deRitis:                       Oh, like Lake Mead?

Mark Zandi:                      Lake Mead, yeah. Anyway. And Cris, how are things in, you holding down the fort there in suburban Philly?

Cris deRitis:                       Yeah, a little bit. Typical gray day here, but all good. I had an event yesterday in Philadelphia, spoke to the Philadelphia Business Journal at an event, and I had to actually-

Mark Zandi:                      Oh, that was Pat Harker was there wasn't he? The president of the Philly Fed. Didn't he speak at that? No?

Cris deRitis:                       He spoke last year. I stood in for him this year.

Mark Zandi:                      Oh okay.

Cris deRitis:                       So I actually commute from Westchester, PA down to Philadelphia, and I can appreciate why folks don't want to commute. And so it's eye-opening, right?

Mark Zandi:                      It's the traffic.

Cris deRitis:                       Traffic was pretty terrible. It was raining, so there were a couple accidents.

Marisa DiNatale:              Did you see that article that said that the traffic in Philadelphia is worse than the traffic in LA?

Cris deRitis:                       No.

Marisa DiNatale:              Yeah, they did a traffic study across all the major metro areas and they said the traffic in Philly is now worse than the traffic in LA.

Mark Zandi:                      How's that possible? That just doesn't feel right.

Marisa DiNatale:              I'll send you the link.

Mark Zandi:                      Yeah, could you?

Marisa DiNatale:              Yeah.

Mark Zandi:                      All right. Be very curious on that.

Cris deRitis:                       Oh, I'm waiting for those infrastructure funds to kick in here.

Mark Zandi:                      Hopefully we'll get our fair share in Philly. Well, very good. And we have a guest, David Wessel. David, good to see you.

David Wessel:                   Good to see you, Mark, and Marisa and Cris.

Mark Zandi:                      Yeah. And I see you had made your way into the office there in DC. You're at the Brookings Institution. And well, how do you feel about remote work? We have this question to everybody who comes on.

David Wessel:                   I think that I don't like coming in every day. This has been an unusual week where I had to come in every day and this morning I almost didn't make it. But I think that for my team, being here two or three days a week has proved very successful. And I think without that, we lack the kind of serendipity, and especially for our younger staff. I have to say that yesterday was one of the coolest days I've had at Brookings. I have the honor of having Ben Bernanke part of our team, and he brought in to show us his $12,000 gold Nobel Prize and passed it around the lunch table yesterday. So I was thinking like, okay, this does make it worthwhile coming downtown.

Mark Zandi:                      Yeah, that does sound cool. Better than a Oscar or Golden Globe, that's for sure. Yeah, that's wonderful. And David, before you joined Brookings, you were a journalist, a columnist for the Wall Street Journal for many, many years. When did you join the journal?

David Wessel:                   I joined the Journal in 1984. I spent 30 years at the Wall Street Journal before I came.

Mark Zandi:                      Wow.. And I remember we would talk, probably not though in your first 10 years of that. I was still in school.

David Wessel:                   I started in Boston, in the Boston Bureau, and I came to Washington to cover economic policy right after the stock market crashed in 1987. And I spent all the rest of my career at the Journal in Washington writing about economic policy, except for about a year and a half where I was in the Berlin Bureau of the Journal.

Mark Zandi:                      Right. And I remember always getting nervous when you called when I got on little-

David Wessel:                   Why is that Mark?

Mark Zandi:                      You were a tough interview. Young people don't know this, but back in the day, you'd get little telephone slips and the receptionist would say so-and-so called and would write that and put it in your little box, you had your old name there. And every time I come back from lunch and I see David's name, I go, oh, I started sweating.

David Wessel:                   I don't believe it.

Mark Zandi:                      Oh yeah, you were tough. You were tough.

David Wessel:                   I don't believe this, but I'll take it.

Mark Zandi:                      Yeah, you were great. You were very good. And I think we talked on and off for-

David Wessel:                   A long time.

Mark Zandi:                      Couple decades, few decades. And when did you went to Brookings? What?

David Wessel:                   I went to Brookings at the very beginning of 2014 to be the first director of the Hutchins Center on Fiscal and monetary policy. And our mission is to improve the quality and efficacy of fiscal and monetary policy and public understanding of it. So I've been here for nine years.

Mark Zandi:                      Is Wendy Edelberg with you at Hutchins?

David Wessel:                   No, Wendy is a colleague of mine in economic studies. She runs something called the Hamilton Project.

Mark Zandi:                      Oh, the Hamilton.

David Wessel:                   The sister center of ours.

Mark Zandi:                      Yeah, right. She's very good as well. And are there specific issues, topics that you're grappling with right now? Is there things that are top of mind or is it mostly focused on monetary and fiscal policies?

David Wessel:                   We have a very broad definition of fiscal and monetary policy.

Mark Zandi:                      Okay. You can talk about anything you want.

David Wessel:                   Basically, let's see. I have a particular interest in place-based policies. I did a book on opportunity zones, which are a provision of the 2017 tax bill that created 8,764 tax havens across the US. So I'm working with some colleagues to think about how do we evaluate all the various place-based policies. There's a huge amount of money in the recent legislation that's targeted at sending federal money to distress communities. So that's one basket.

Mark Zandi:                      Can I ask on that, David? Are you pro or con because there's tends to be two camps here on the opportunity zones, folks that-

David Wessel:                   I think opportunity zones are well-intentioned disaster.

Mark Zandi:                      Oh yeah. Okay. That answers the question.

David Wessel:                   I think that the bill was not crafted in a way to achieve the aspirations of the people who started it. I could talk about this a lot. But on the fiscal monetary front, we're thinking a lot about in the military, when they do an operation and it doesn't go well, they do an after action report to figure out what did we get wrong? The Federal Reserve does not seem to subscribe to this approach to retrospective. So we're thinking about doing it for them.

Mark Zandi:                      Oh boy, that sounds interesting. Yeah. Well, let me ask you, now that you're on that topic while I have you there, what do you think of their policy this time last year when it's hard to remember back, but the funds rate target was still at the zero lower bound this time last year?

David Wessel:                   Well, I think I'm not alone. And actually I've heard Jay Powell acknowledge this, that they were late. So they should have raised interest rates earlier. I think obviously there's with a lot of uncertainty about how the pandemic would play out. But by March, 2021, we knew a lot about the pace at which the economy was rebounding and that we saw vaccines. And importantly, the fiscal policy response in March, 2021 was, and you can see this in the minutes, much bigger than the Fed anticipated. And they didn't adjust either their rhetoric or their policy.

                                             I give them a lot of credit for once they figured out they were wrong for catching up pretty dramatically. I mean, four and a quarter percentage points in one year in raising interest rates is not something we've seen before. And now we get to a really interesting question about when should they stop.

Mark Zandi:                      And maybe we can come back to that. That be a good topic today. This week we got the consumer price inflation report, CPI report. And that's been kind of top of mind at the moment. So we'll dig into that and talk a lot about the different macro issues, job market, monetary policy, and the thing that everyone wants to know, are we going into recession? And then at some point we're going to play the statistics game. David, hopefully you'll be willing to play that game. Nice way to kind of digest some tough economic statistics and we'll do that. But let's get down to it and go right to the CPI report and maybe Marisa, can you give us a rundown on your take of that report? By the way, I thought it was a pretty good report, not trying to bias your perspective here. I'm just saying.

Marisa DiNatale:              You could almost say it was to script or writing the strike sound.

Mark Zandi:                      Yes, exactly.

Cris deRitis:                       I think it's exactly what you would want to see.

Mark Zandi:                      Exactly. David, these are Zandisms. They know me well. Yeah, they know me well. Yeah. So go ahead, Marisa.

Marisa DiNatale:              Yes, it was a good report. It was a great report. The overall CPI fell 0.1% month over month, and that was the first decline, at least rounded to one decimal place that we've seen since May of 2020. This is the headline, CPI. Over the year, prices are up 6.4% and that's the softest year over year increase since October of 2021. The main reason that headline inflation fell is energy prices, which are dropping very rapidly. They fell four and a half percent just over the month.

                                             They're still up 7% over the year. Within energy, fuel prices fell 17% over the month. So energy is really the drag on headline inflation right now. Core inflation, which is stripping out food and energy, was up 0.3% over the month. That was a little faster than the 0.2% increase we saw in November. And over the year, core is up 5.7%. That is the slowest pace since December of '21. It does seem like food inflation, which has been in the headlines quite a bit, is slowing. It rose 0.3% over the month, and that's the slowest pace of food inflation since April of 2021. This i, despite all the egg headlines I'm seeing. Egg prices are up 60% over the year. That's the every article I look at talks about eggs.

Cris deRitis:                       Cookies too. Cookies.

Marisa DiNatale:              Cookies?

Mark Zandi:                      It saw a big increase too. Yeah. Anyway.

Marisa DiNatale:              Well, I noticed white bread is up something like, I don't know, it's up by a huge amount, biggest increase since 1974 too. But overall food.

Mark Zandi:                      The whole egg thing is a big deal in my household. My daughter eats like a gazillion eggs.

Marisa DiNatale:              So do I. I eat an egg every day.

Mark Zandi:                      I try to explain apples and oranges. Can we substitute something? She goes, what are you going to substitute for an egg? And I think she's got me there, right?

Marisa DiNatale:              That's a fair question.

Mark Zandi:                      That's a fair question.

Marisa DiNatale:              An egg is a perfect food.

Mark Zandi:                      An egg is an egg.

Marisa DiNatale:              Right. So the egg thing. Yeah, so there's the egg thing which is on everybody's mind. But overall food, and this is food both at home and away, slowed over the month. Goods prices are also falling, so they've been falling for three straight months. I think within goods, the thing everyone likes to look at is vehicle prices. So new car prices actually fell for the first time in a year. It was a small decline. It was 0.1% over the month. They're still 6% higher over the year. Used vehicle prices are really falling. They've fallen for six straight months and they're down almost 9% over the year. Core services accelerated over the month and they're up 7% over the year. And services-

Mark Zandi:                      Including housing or not including?

Marisa DiNatale:              Yeah. And so this is what the Fed is really keyed into is now they're looking at core services, I think X shelter, excluding shelter, and we can talk about shelter. So shelter prices have been accelerating. They were up over the month both for rents and owner's equivalent rent. We think that that's going to soften probably in the middle of this year, just given the incoming private sector data that we see on new rental agreements, which show softening and signings of new rental agreements. That's just going to take a little while to show up in the BLS figures. So rents are really key in the services sector. But what the feds looking at is things that they think they can control through monetary policy, where prices are influenced by the wages that employers are paying to people. So they're really keyed into the core services.

Mark Zandi:                      And from there that I was a little confused about, and I actually saw, I don't know where I saw this, but I think core services including housing, was up, what was it? 0.4?

Marisa DiNatale:              0.5 over the month.

Mark Zandi:                      0.5. And housing was up 0.8.

Marisa DiNatale:              That's right.

Mark Zandi:                      Yeah. So the services X housing felt like it came in pretty strong. It was actually accelerated in the month. Again, that's what the fed's looking at. So therefore everyone's looking at that more carefully. Just didn't feel like the arithmetic added up. I didn't go back and do the arithmetic did, and they must have gotten it right, I guess, but just looked weird to me. Did that not strike you score? Yeah, that was the core services X housing. It looked like it was a bigger number. They reported a bigger number than you would've thought given the components. I just... No? No one heard. No one didn't strike you? Okay, forget about it.

Cris deRitis:                       No, I thought it looked okay. Didn't catch that. That would looked okay. So it's still seven and a seven and a half 7.4% year to year.

Mark Zandi:                      Yeah, right. Still strong.

Marisa DiNatale:              Yeah. So if there's one concern we have in the CPI report, it's just looking at these service price inflation because that's really where you get into the wage inflation. And so we're keenly looking at wage inflation every time we get some metric that we can look at over the year or each month, whether it's the ECI or the BLS report that we saw the last month. And it does look like wages are turning over. They're softening a bit, but they tend to be sticky, so it can take some time.

Mark Zandi:                      So what's the bottom line? What do you mean?

Marisa DiNatale:              The bottom line is, I mean, in inflation is clearly softening. Priced growth is clearly decelerating, and we see it across goods. We've seen this shift from buying goods to services. You see it in goods, you see it in food and energy have been the main drivers of headline inflation and those are clearly softening. Food, not as quickly as we would like. But even there, a few months ago, we saw some softening in food inflation, and we were reluctant to say this was a trend but it's clearly a trend now. I mean, it's clearly decelerating, particularly os fuel prices are coming down, because that's a big component of food inflation is just shipping and trucking food across the country.

                                             So I think it's a great report. I think it's exactly what the Fed would want to see. I don't think it changes anything in terms of what we're expecting the Fed to do early next month or next meeting is in February. It will be before the next CPI report. So this is the last report they get before they meet in February, and we're expecting them to raise rates 25 basis points, which would be a step down from the pace they've been going at.

Mark Zandi:                      Hey, David, you heard that kind of rundown. Does that kind of fit with your...

David Wessel:                   Yeah, I mean, I think Marisa has it right. It does suggest that the peak inflation is passed and things are coming down. I think some of this is the normalizing of supply chains. I mean used car prices were down now six months in a row. I'm kind of intrigued by the Feds focused on wages. The Fed seems to think that, Powell said at a thing we had here about a month ago, that the pace of nominal wage increases is too high to be consistent with meeting their target. And of course, wages are going to be pretty important in the service sector. So what I'm really curious about is what kind of signal they send in February. Are they sending a signal? We think we're winning the war and we can relax or do they send a signal saying, look, we're making progress here, but we're not going to relent until we actually see more tangible evidence that prices are approaching our target. And I don't think they're there yet.

Mark Zandi:                      Yeah. Hey, Marisa, do you know when do we get the employment cost index report? We don't get that until after, that's in February sometime, right? That's the quarterly series from BLS. It controls for mix and occupations industries. So we're not going to get that for a while, I think.

Marisa DiNatale:              Yeah, I'm looking at it right now. I'll come back to you and I'll tell you the date. But yeah, I don't think that they're going to get it the morning.

David Wessel:                   March 17th. No, I'm sorry. Wait, take it back. Employment cost index for December 22 is scheduled to be released on January 31st. So we will get there.

Mark Zandi:                      Okay. Very good. Just in time because that'll be a key statistic.

David Wessel:                   And I think what's interesting is that it's not very controversial when you have six, seven, 8% inflation and your interest rates are at zero for everybody on the FOMC to agree it's time to raise interest rates. But now we're getting to the point where there's going to be some disagreement between people who are going to say, look, we have to err on the side of doing too much even if that means we have a recession. And others who are saying, oh, come on, monetary policy works with a long and variable lag, we've done a lot. We're starting to see some progress against inflation. The markets think we're winning this war, and so we should not do too much. And I think we'll begin to see that tension in, I think it'll spill over in public soon, but certainly it'll be going on inside the Fed as we get more into 2023.

Mark Zandi:                      Well, it almost feels like that's already started? I mean, you saw Pat Harker, the Philly Fed President put a stake in the ground supporting quarter point rate increases going forward. He says 50 basis points are, 75 certainly. And now 50 is done, we're going to quarter point.

David Wessel:                   Right. But I think the question is, what do they think people call the terminal rate is? How far do they have to take it? And they won't put a number on it until they do their next public forecast, but I think there will be some disagreement. How many quarter point increases? One, two, three, four, six. And I think it'll depend a lot on what's going on in the economy. One thing that if I were them I'd worry about is they're really going to be, this has taken us in another direction. I don't know if you want to go here. But if there's a fight over the debt ceiling later this year, that could be very disruptive to the financial markets and to public confidence in the economy. And if I were at the Fed, I'd want to get whatever I was doing done before that happens so I don't have to be raising rates in the middle of that mess.

Mark Zandi:                      Oh, that's interesting. So that would argue for what, somewhat higher terminal rate sooner rather than later?

David Wessel:                   Exactly.

Mark Zandi:                      Oh, interesting. Let's come back to that. Before we go down that path, Cris, is there anything else you wanted to add on the CPI report and also what it might mean for the conduct of monetary policy?

Cris deRitis:                       Sure. I think Marisa summarized it nicely. One asterisk I might put it around the energy is that although energy prices, gas prices came in, energy services actually went up. So electricity prices, and there's some volatility there of course. But if I think about the household balance sheet, households are still feeling the pinch in terms of their utility costs. And those do take some time given regulations to filter in as well.

                                             I think the rent and owner's equivalent rent, obviously there's some volatility there as well. It's not a great thing that they bounce back up. Now we do expect to see the general trend downward, but I think that may color the fed's decision here in terms of how aggressive, certainly it takes rate cuts, I think off the table until we see some decisive declines there. But it may bias to David's point, maintaining a higher rate of a longer period of time. So that plus the services X shelter number, I think also would argue for somewhat higher rates for extended period of time as well until we really see that coming in.

Mark Zandi:                      You know what the report did for me, it didn't change my forecast for inflation. I expect that to come in over time, get back to target sometime kind of mid 2024, that didn't change, but I'm increasingly more confident in that forecast. I feel pretty darn good that that's going to happen. I mean, assuming oil prices don't spike again, and that's obviously a risk and assuming the pandemic doesn't take us in a direction it hasn't so far, and China can get back and supply chains can normalize here as China winds down its no COVID policy.

                                             The rent and housing costs, that's increasingly in cement, and it's going to show up in lower cost of housing services here later in the year. And the labor market's cooling. I mean it's very clear it's cooling and wage growth has rolled over. So there's a lot of script to be written. And that's Zandism I've said, I say that all the time. Lots of script, but script feels like it's increasingly indelible ink to me. I guess no one writes with ink anymore. But you get my drift.

David Wessel:                   Do you think we're going to have a recession or not, Mark?

Mark Zandi:                      Pregnant pause.

David Wessel:                   You're not allowed to say it depends.

Mark Zandi:                      Well, no. I think the probabilities of a recession are high, kind of an NBER defined recession are high. This sounds like a cop out some degree. It is 50 50. I'd say that I can see it going either direction. I wouldn't argue with anyone who says we're going in re-. Well, with Cris I would argue, but most other people I would not argue. But I have to pick a side because we produce numbers that we put into databases that clients use, like JP Morgan, B of A, Wells Fargo, when they do their loan loss provisioning, they need numbers. So we got to put numbers in a database.

                                             So we have no recession in out... In fact, Cris coined the term. I'm curious, David, what you think of this. Slow session. Cris, you want to define slow? And actually Cris enterprising enough, he went out and bought the URL slow session.

David Wessel:                   Oh, geez. Really?

Mark Zandi:                      Exactly.

David Wessel:                   Buy it with your money or is it a movie?

Mark Zandi:                      No, no. His money. 10 bucks.

Cris deRitis:                       I took one for the team, right?

Mark Zandi:                      Yeah.

Cris deRitis:                       I put Mark's paper there even so.

Mark Zandi:                      Yeah, exactly. So no. But I want to come back and we're going to ask you, and I'm going to put you on notice now what your probability of recession is over the next 12 months and see if you want to answer that question. But to me, it feels like inflation is coming in here and I'm just much more confident in that forecast going forward and that certainly has implications for monetary policy.

                                             So David, when you think about these questions that you asked, what is the terminal rate? How much higher do they have to go? Half point, quarter point, do you have your own expectation and forecast? I mean, if I asked you, David, what do you think the terminal rate's going to be? Do you have a view on that?

David Wessel:                   Yes. Although I would put more guess than forecast, if you don't mind.

Mark Zandi:                      Well, it's all a guess. It's all a flavor of guess.

David Wessel:                   I think they're going above 5%, I would say five and a quarter if I had to put a number on it and maybe even five and a half. And I'm kind of surprised by the market's expectation that the Fed will be cutting rates by the end of 2023. That suggests to me that the markets must think that inflation's going to come down pretty substantially and that the unemployment rate will go up a lot. And so the Fed will feel the need to ease. I think if you look at the Fed's summary of economic projections and you listen to what Powell in particular says, they pretty much think the unemployment rate is too low and they want to drive it up. And so that leads me to believe that they will be a little bit tighter than some people think.

Mark Zandi:                      So the terminal rate is, you wouldn't argue with the market.

David Wessel:                   Five and a quarter, five and a half.

Mark Zandi:                      That's what's embedded in the market right now.

David Wessel:                   But the market thinks they're going to, some people at least think it's going to cut by end of the year, and I think they'll hold it there for longer.

Mark Zandi:                      Right.

David Wessel:                   I think that ll the recent fiscal action has kind of made the fit push up the terminal rate a little bit, but they also must have a great deal of confidence that we're not going to get any more fiscal policy in this Congress. I mean, we'll be lucky if we can keep the lights on. So that makes it a little bit easier for them because in the past they've been constantly, we've all been surprised at much federal spend in Congress has approved.

Mark Zandi:                      Yeah, right. Okay. Well, let's go back to the debt limit. And that's the other big notion over the past couple of weeks. And I guess the angst here has risen in significant part because we've observed the high level of dysfunction recently in Congress. So given the difficulty Republicans have had coming in with a speaker. How big a deal do you think this is? How worried should we be about a breach of the debt limit, do you think?

David Wessel:                   I think we should be worried. I think that it's always been, people have often seen this as a lever to get something out of the administration or the other party. But usually they've been willing to play the game of chicken, and at the last minute they flint and they take some face-saving move. And the problem is, this time it may not be so easy to find that face-saving move. And there are Republicans who believe that we should just, what? It's not as bad as everybody says they're trying to scare us, we shouldn't just do it. And so my best guess is there's going to be a lot of tension, a lot of noise. People will be very nervous, the treasury's about to hit the debt ceiling any day now. And then they'll use this extraordinary measures things where they kind of move money around to avoid not being able to sell bonds.

                                             But sometime in the summer or the fall, they won't have enough money to pay the bills and they won't be able to borrow. If I had to guess, and this is even less sure than my guess on the terminal rate, my guess is that they'll fail to raise the debt ceiling. They'll be a huge market reaction, and they'll come to their senses 48 hours later. It'll be like the tarp vote where they did the wrong thing and then the market reacted negatively.

                                             Kevin McCarthy made some noises recently, the new speaker suggesting backing away from the idea that we're willing to play this game of chicken. So I took that as a hopeful sign. And I think one really interesting question is, well, how did the Democrats play this? The Democrats in could come to the rescue of the Republicans and get this debt ceiling out of the house and then it'll pass the Senate. But they will probably wait till the last minute to do that. And so there may be a lot of tension about what do the Democrats want if they're going to vote for a debt ceiling increase, or what do the hardcore Republicans want in exchange? So it's very confusing. But there are a bunch of people in the House of Representatives who are more interested in tearing down things than good policy. And with such a small margin, people are got to be very dangerous this year. I think.

Mark Zandi:                      Just to make sure I got it right. So you think the most likely scenario is that we actually breached the debt limit?

David Wessel:                   I would say I'm pretty narrow. I would say 45% we have a big showdown, they flinch to the last minute and we don't go over. 55% or maybe 60% that they actually can't come to an agreement, there's a crisis. The government says we can pay the bond holders but if you don't do something by Tuesday, we can't write social security checks. That would be so upsetting to the markets that then they'll scare the pants off the Republicans in the house and they'll do it. That's my guess.

                                             This is based on very little reporting and just trying to read the body language. And a lot depends on what happens over the next couple of months. I mean, is everything a fight in the house or does the house manage to, they score their points and then they get onto doing business? I don't think we really know yet. And of course, there's always a possibility that McCarthy loses a person or two. Maybe George Santos resigns and is replaced by a Democrat, and then it makes it even harder for him to push something through without the Democrats support. And if he needs the Democrats, then it'll be much more likely to be a truce rather than a Armageddon.

Mark Zandi:                      Right Whenever we come up to the debt limit, the discussion quickly goes to what can be done to get around the debt limit. And you always hear these different ideas. I'm just going to throw two of them out there and get your reaction. The first is the 14th Amendment. So that was an amendment passed during the Civil War, and there's a clause in there, I think Section four, if you read it sounds like it gives authority to the President to continue to pay on the debt. So if there's a debt limit breach, he can say, I'm invoking the 14th Amendment and we're going to, treasury keep paying your bills.

                                             The other is the so-called platinum coin. And in some legal language, the executive advance is given authority to issue a platinum coins of any amount. So the thought is, oh, they could issue a trillion dollar coin, have the Fed effectively buy the coin for a trillion dollars in the so-called Senior ridge. The difference between the trillion dollars and the cost of producing the coin, which is inconsequential, is cash that the Treasury can use to pay its bills. What do you think of those? And it's actually gained some traction. I think back in, I'm making this up so I may not have exactly right, but like a Paul Krugman, another Nobel Prize winner endorses the idea, I think of a platinum coin, I believe in that kerfuffle over the limit. What do you think of those ideas?

David Wessel:                   I think they're fun to talk about, but I find it really hard to believe that they would do them. But I don't know. What you're saying is, if Congress fails to act, will the administration do something of that they can't be sure is legal and figure we'll figure out the law later? One thing I'm sure of is they're going to say we can't do this because if they said they can do it Congress can be irresponsible. But I think they're kind of gimmicky.

                                             And I think especially anything that involves the Fed is really unlikely because the Fed is going to be reluctant to decide with the president over Congress for something Congress should do. But I ensure that they're dusting off those old memos and saying, what do we do? But my guess is that they won't do that stuff because it really does start to look like a banana republic more than we are already.

Mark Zandi:                      Cris, do you have a view on that question about the 14th amendment and on the platinum coin?

Cris deRitis:                       It's a tough one. If we really do come down... It's can't hard to even contemplate what that financial Armageddon looks like if we're not able to make good on our payment. So I think we would start looking at those other options if it really came down to it.

David Wessel:                   I'm assuming that if we go over, the Armageddon is relatively short-lived that it's so disruptive that they do it. So if social security checks go out a day late, it's disruptive. It's not the end of the world. I don't think it can go on for a month. That would it really be time to immigrate.

Mark Zandi:                      But even the legality of that payment prioritization is-

David Wessel:                   Yeah, no, it's a big issue. We know a little bit from the Fed minutes about what they were thinking about the last time, about how they would do it. So we know a little bit about their prioritization thing, and some of it, I mean, I've heard that some of it has to do with it's all well and good for us to say, oh, pay this one and pay that one, but their computers aren't set up like that. It's like the whole problem we had with unemployment insurance during the pandemic, we couldn't figure out. Somebody said to me, the problem is the state unemployment system computers is they can add and not multiply. So we had to add $600 and couldn't say we're going to pay a hundred percent of your wages.

Mark Zandi:                       I didn't know that. That's interesting.

David Wessel:                   I think any of us who worked in any company that has turns out that software doesn't always do what you think, oh, surely you thought of this.

Mark Zandi:                      Well, in 1979, there was a case. That was a kerfuffle around the debt limit. They actually increased it in time, but they couldn't get the computer code to settled. And the treasury actually missed a treasury bill payment. And there's a good academic research that showed just that little misk resulted in tens of billions of dollars of taxpayer costs because of the, you multiply one basis point, one 100th of a percentage point times 31 trillion in debt. That's real money. That's real money.

David Wessel:                   No, no. There's a GEO report about the last, I think it was 2011, where they actually didn't go over the thing, but the speculation meant that people were afraid to buy really short bills and that the yield on those went up and that's lasting cost. And of course the whole thing is outrageous. I mean, Congress has approved the spending and taxes and now the credit card bill is coming. They say, well, maybe we won't pay it. Just if you want to do something...

                                             When I find most frustrating is we do have some fiscal challenges and Congress should address them, but this becomes an excuse not to address them. We'll fight about the debt ceiling and we won't talk about how do we put social security and Medicare on a sustainable path or whether our revenues are sufficient to pay the expectations of what we want government to do. And that's what unfortunate. And this does not look like the Congress that will be having thoughtful, long range fiscal planning discussions.

Mark Zandi:                      Yeah, unfortunately. I mean, going back to the platinum coin in the 14th Amendment, even if the president decided to go down that path, two big problems. First is investors aren't going to take much solace in that because they're going to say, good chance that gets struck down pretty fast by the Supreme Court then what? And by the way, I'm out of here now because I'm not going to stick around for that. So you're going to see markets lose their minds anyway. And the second thing is, you're mucking with the DNA of our entire political system because it goes to the checks and balances between the executive branch and the Congress around who has the power of the purse and also the independence of the Fed.

                                             Can you imagine asking them to cash in a platinum coin and then what happens to the Fed in that situation? So you're really messing with the DNA here. So the unintended consequences of all of that would be, I think pretty consequential. I can't imagine that happening. But that's interesting. I think if we had that tarp moment, they kind of went across and someone did not get paid, my guess is it would be the electric company that wouldn't get paid if they can do it, you're right. If they can do the switch to the code.

David Wessel:                   It's sort of interesting to think about, so what's a smart strategy if you're a Democrat on this thing? We know that when the government shuts down that the Republicans have learned that it's hard to blame that. They got blamed that to famous times in the past. And so the Democrats will be in a very interesting political strategic position. To what extent do we say, oh, this is too dangerous, it's going to cost the federal government money for the rest of our lives, we're going to make the treasury security look less secure, so we're going to help them out or do they sit there and say, okay, let's watch you guys twist slowly in the lens and then after 36 hours, we'll rescue you.

                                             I mean remember, that's essentially what happened with tarp and they made a few cosmetic changes and then they passed it. But honestly, I don't know. But it's going to be such a waste of time. I mean, I've already started getting questions about this and we've dusted off all the explain. The only good thing is, we wrote all the explainers before. I just send them. We updated some numbers and dates in here. You could read this. But it's very frustrating. And I know that Treasury Secretary Janet Yellen, she's just frustrated and we have to constantly-

Mark Zandi:                      Go down this path every time. Yeah. Well, I think Jay Powell, the chair of the Fed, actually became a fixture in Washington in 2011, wasn't it? Around the debt limit. He went around explaining to the Congress of the time.

David Wessel:                   He was at the Bipartisan Policy Center.

Mark Zandi:                      Not Brookings.

David Wessel:                   No. He was at the Bipartisan policy center and they've done a really good job over the years of keeping track of the cashflow of the government and putting dates on when does it really run out, and Powell was there, and the Obama people realized that if they needed someone to go talk to Republicans, that he'd be a good candidate to do that. So he did spend a lot of time trying to convince Republicans that this is nuts. And I think that's one reason why the Obama put him on the Fed, that Geitner was impressed with how well he handled that. So just interesting how moves like that can change your career. Now look at him.

Mark Zandi:                      Right or change the nation's history.

David Wessel:                   I'm sure that at the time if you said to Jay Powell, what are the chances that you'll someday be chairman of the Fed? He's say a number less than zero.

Mark Zandi:                      Yeah, especially because he would've said, oh, I'm a lawyer. I'm not one of those PhD economists. So when does that happen? But very interesting. Okay, let's play the statistics game. I think this is a good place to do it. And the game for listeners is everyone puts forward a statistic. The rest of the group tries to figure that out through questions and clues and deductive reasoning. The best statistic is one that's not so easy, we get it immediately and not so hard that we never get it. And if it's approbated the discussion that that's a bonus. So that's the statistics game. And I think, Marisa, it's now tradition for me to start with you when Dante's not on. So, Mesa, would you like to go?

Marisa DiNatale:              Sure. Can you hear me okay? I had to switch my mic.

Mark Zandi:                      Yeah, you sound great.

Marisa DiNatale:              Okay. All right. I have some construction going on behind me. All right. So my number is-

Mark Zandi:                      Literally behind you? Construction's literally going on behind you?

Marisa DiNatale:              Yeah. I'm renovating my house outside of my house and they're here. And they're power washing something. Yeah.

Mark Zandi:                      Got it. Okay. Car washing, it's Mark's favorite. Power washing. David, do you have a power washer?

David Wessel:                   I do not. Why?

Mark Zandi:                      I highly recommend you get a power washer, particularly, you probably can get it cheaply at the moment. And then for the summer months, it's a very therapeutic thing, blasting water, because-

Marisa DiNatale:              At anything.

Mark Zandi:                      At anything. You get instant gratification because, you got to be careful not to destroy things. But highly recommend it. But anyway. Go ahead, Marisa.

Marisa DiNatale:              That's neither here nor there. So there's actually two that I like, and I'm having a hard time deciding. Okay, I'll do this one. Seven in December.

Mark Zandi:                      Whoa, whoa, whoa. Seven no units, just seven?

Marisa DiNatale:              Seven.

Mark Zandi:                      Is it an economic statistic?

Marisa DiNatale:              7%.

Mark Zandi:                      Oh there.

Marisa DiNatale:              Yeah, sorry.

David Wessel:                   I thought it was be seven. The number of eggs I could find in the box.

Marisa DiNatale:              I was thinking the number of eggs now and a dozen eggs.

Mark Zandi:                      A new dozen seven.

Marisa DiNatale:              Sorry about that 7%.

Mark Zandi:                      No, no, 7%. Is it an inflation statistic?

Marisa DiNatale:              No, it's not. Oh, it's not in the CPI report.

Cris deRitis:                       Not in the CPI. Okay.

Mark Zandi:                      But it's not an inflation statistic.

Marisa DiNatale:              No, it's not.

Mark Zandi:                      Okay. All right. 7%. Is it a statistic that came out in the last week?

Marisa DiNatale:              Yes, of course.

Mark Zandi:                      Oh, of course. Okay, you play both the rules not like me.

Marisa DiNatale:              Of course. The one time I did, I heard about it. So yes, it came out this past week.

Mark Zandi:                      Oh, interesting. What do you guys think, Cris? I didn't see the University of Michigan survey, and I know that has nothing to do with 7%, I don't think. But what did-

Cris deRitis:                       Oh, there're inflation expectations there.

Mark Zandi:                      But if that was seven, we'd run for the hills.

Marisa DiNatale:              It's not it's not directly tied to inflation.

David Wessel:                   It's the wage increase that Marisa wants Moody to give us.

Marisa DiNatale:              Yeah. And David, how did you know we were in the middle of our compensation planning?

Mark Zandi:                      That is interesting you said that. Yeah. It shows insider information, doesn't it?

Marisa DiNatale:              It does, yeah.

Mark Zandi:                      This weekend, that's exactly what we're doing, which is incredibly painful let me tell you is setting wage increases. Give us a clue, Marisa.

Marisa DiNatale:              Okay, if I give you this clue I think you're going to get it. Well, you'll get the report. So it's a net percentage increase.

Cris deRitis:                       Small business?

Marisa DiNatale:              Yes. So it comes from that survey. Comes from the NFIB small business survey.

Mark Zandi:                      Well, it's not compensation, it's not price increases because I know that's higher, the net of that is higher. 7% of reporting. They're having difficulty getting credit.

Marisa DiNatale:              You got it.

Mark Zandi:                      Ooh. David, did you see how I did that? That's amazing. Just saying it's amazing.

Marisa DiNatale:              So net 7% saying that credit is harder to get. And I picked this because it's the highest percentage since 2014.

Mark Zandi:                      But it's still like, no-

Marisa DiNatale:              It's still...

Mark Zandi:                      It's 7%?

David Wessel:                   It's a diffusion thing. It's a net, right?

Marisa DiNatale:              It's a diffusion. So more companies are saying it's harder to get credit than are saying it's the same or it's easier. So it shows for small businesses at least credit is, they're feeling a tighter credited environment more so than they have in almost 10 years.

Mark Zandi:                      But you wouldn't characterize it as tight though, would you? 7%. What was it in the teeth of the pandemic or just the context?

David Wessel:                   Tighter. She's saying tighter.

Mark Zandi:                      Tighter.

Marisa DiNatale:              Tighter than the prior month. So it's not a metric of how tight credit is, it's their perception of their ability to get credit compared to the previous month.

Mark Zandi:                      Would you guys mind if I take a quick tangent with Cris on a topic that's related and it goes to bank earnings that were release are being released. All these banks, JP Morgan at the top of the list is now putting aside very large reserves for loan losses. And JP Morgan just adopted a recession forecast. They call it a mild recession. I think the unemployment rate goes to almost 5% in this forecast. So mild. And they put aside a pretty large, I think it was three billion. I'm making that up so I might not have it right, but roughly right. And they're doing this under the reasonably new CECL accounting standards. It was implemented by the big banks back in early 2020 during the teeth of the pandemic. And the idea is that you as a bank look forward, you have scenarios for where things are headed for the economy and everything else.

                                             And based on that, you come up with your loan loss provisions, what your losses are going to be and what your lo... And there's been this debate, longing debate even before CECL was adopted, that this would be around countercyclical procyclical. The former way of loan loss provisioning was definitely procyclical. You only took a loss in your provisions if you actually experienced the loss or it was staring you in the face. In this case, you're forward looking. But this feels like, I'm not so sure. Do you think what's going on now, Cris is procyclical or countercyclical, you see what I'm saying?

Cris deRitis:                       I guess it depends on if you think their forecast is an accurate representation or not.

Mark Zandi:                      But now they're tightening down on credit now in anticipation of a recession in the future and that is forcing slowing in the economy, right? That's procyclical isn't it or is that not?

Cris deRitis:                       I think it's a matter of a degree. Certainly it could be, right? If you turn it off completely anticipating a recession, you turn off all credit, You're going to induce a recession. I don't think even with Marisa's 7% figure, I don't think that's the case. We're moderating credit availability, we're cutting off some of the more risky lending that's going out there. But I don't see a full scale shift in terms of really cutting off a source of credit to most businesses.

Mark Zandi:                      Yeah. So I think it's it... Oh sorry, go ahead.

Cris deRitis:                       So I would say it's still, to my mind, I guess because of my recession outlook, I would say it's more countercyclical than procyclical still.

Mark Zandi:                      But by the way, I think it's countercyclical in the sense that the JP Morgans of the world aren't going to be taking loan loss provisions later this year because they already took them, right? So that allows them to continue to provide more credit for longer and may be a reason why we don't actually experience a recession because they're taking their lumps up.

David Wessel:                   Wait a minute, I'm confused. So just because JP Morgan is setting aside a lot of money for loan loss reserves, does that tell me that they're going to be tighter in their credit? I thought it was kind of more almost like an earnings in a good sense, earnings management thing. We have a lot of profits now. Let's settle aside money for the worst case. Of course, if we don't need it, we can always put it back into the income stream. That's what they do. So is there a relationship between loan loss reserves and what their willingness to land?

Mark Zandi:                      Well, in theory, kind of sort of. If I'm taking loan loss provisions, I'm lowering my earnings, I have less capital. If I have less capital, then I'm going to be tighter in my underwriting. That's the idea. But in the case of JP Morgan, they're not capital constrained so probably not.

Cris deRitis:                       Right. This might be for someone else I guess.

Mark Zandi:                      Someone else who probably would, but at least in theory. But anyway, sorry to take you on that tangent. That was bothering me given these big loan loss provisions at the bank taking. Cris, you want to go next? What's your statistic?

Cris deRitis:                       Sure. It's two statistics, really geared towards you and Marisa. That's my clue. 4.9% and 9.9%.

Mark Zandi:                      Is it related to-

Marisa DiNatale:              The raise I'm getting and the raise Mark's getting.

Mark Zandi:                      No, no, no. That is dead wrong, dead wrong. You're not going down that path. But you shouldn't shed any tears for me but maybe a tear. Is there some inflation related, cris?

Cris deRitis:                       It is inflation related.

Mark Zandi:                      Is it in the CPI numbers?

Cris deRitis:                       Indeed, yes.

Marisa DiNatale:              Is that a-

Mark Zandi:                      Go ahead.

Cris deRitis:                       What's that?

Marisa DiNatale:              Yeah. Is it a month over month and the year over year of the same thing that you're saying?

Cris deRitis:                       Nope.

Marisa DiNatale:              They're two different things.

Cris deRitis:                       They are both year over year statistics.

Mark Zandi:                      They're different components of CPI.

David Wessel:                   We know it's not eggs because we've already established that.

Mark Zandi:                      It's not eggs.

Cris deRitis:                       It's not a component. It's not an individual price. Next hint.

Marisa DiNatale:              Okay. So it's an aggregate of something. Say the numbers again four?

Cris deRitis:                       4.9 and 9.9.

Marisa DiNatale:              Positive Cris, not negative.

Cris deRitis:                       Obviously.

Mark Zandi:                      I'm just checking given I would throw in the negative. So it's something like 4.9 is-

Cris deRitis:                       Year of your growth in prices-

Mark Zandi:                      Of commodities, less energy or something.

David Wessel:                   How about is it geographic?

Cris deRitis:                       It is geographic.

Mark Zandi:                      David's good at this game.

Cris deRitis:                       He is very good.

Mark Zandi:                      What are the two geographies?

Marisa DiNatale:              The west and the northeast.

Mark Zandi:                      Even more specific.

David Wessel:                   How so?

Marisa DiNatale:              Los Angeles is 4.5.

Cris deRitis:                       4.9 yep.

Marisa DiNatale:              4.9 and Philadelphia.

Cris deRitis:                       Yeah. Miami is 9.9.

Mark Zandi:                      Makes sense. Cool.

Marisa DiNatale:              You're associating Mark with Miami.

Cris deRitis:                       Well, Vero Beach specifically.

Mark Zandi:                      Yeah. That's what I'm telling you. My inflation rate's a lot higher than you guys, and my pain increase is lower. So what's that?

David Wessel:                   Oh, now you're giving him fodder.

Mark Zandi:                      Exactly.

David Wessel:                   Cris, you got a cut of this?

Cris deRitis:                       Yeah. Oh, that's funny. Well, those are also the low and the high across metropolitan areas just to give you some sense.

Mark Zandi:                      I did notice that if you look at regions, the four broad regions, so overall inflation's six and a half percent year over year through December. The high is the south at seven. That goes to your Miami and the Midwest was the low at six. And you said the low was who?

Cris deRitis:                       LA and San Francisco.

Mark Zandi:                      Okay.

David Wessel:                   Are these trends persistent over time or not? So is one region consistently at the high end?

Mark Zandi:                      No, I don't think so. I mean, a lot depends on housing rents, because it's a third of the CPI. So if you're in a part of the country where rent growth is weakened in the, I'm sure that's happening in California right now. In Miami, I bet it's still booming. People are still moving into Miami. So I think a lot of it goes to rent. Some of it goes to gas prices and how much you drive, right? So if you're in New York, you don't drive, but if you're in North Carolina you do.

David Wessel:                   Wait a minute. So they have a different market basket for each region? I don't think so.

Mark Zandi:                      Yeah, I thought they did. Did they? I thought they did.

Cris deRitis:                       I thought that's how they came up.

Marisa DiNatale:              Yes. They used the consumer expenditure survey to weigh each component.

David Wessel:                   I got it.

Mark Zandi:                      I'm pretty sure they do. Yeah. Okay, that was a good one. Yeah, that was a good one. Very good. Why did you say it was from me though?

Marisa DiNatale:              Miami.

Mark Zandi:                      Miami and la, right?

Marisa DiNatale:              Miami and LA.

Mark Zandi:                      No, Vero Beach. Anyway. David, you're up. What's your statistic?

David Wessel:                   Minus 1.7%.

Mark Zandi:                      Is it an inflation statistic?

David Wessel:                   It's inflation related, but it's not a price statistic.

Mark Zandi:                      Minus 1.7%.

Marisa DiNatale:              Is it a statistic that came out recently?

Mark Zandi:                      Yes, it is. It's one we should know. Would you be surprised if we knew it?

David Wessel:                   Yeah, but I'm not going obscure here.

Mark Zandi:                      You're not going to obscure. Okay. It's not like a Estonia exports to Russia or something.

David Wessel:                   It's the United States. It's a year over year figure that came out in the last few days.

Mark Zandi:                      Interesting. Is it related to house prices? No, because they're falling. Is it related to financial markets in any way? Equity prices or-

David Wessel:                   No.

Marisa DiNatale:              Is it related to energy prices, David?

Cris deRitis:                       No.

Mark Zandi:                      Can you give us a clue?

David Wessel:                   Yeah, you guys don't think enough about people. So we have workers in the economy.

Mark Zandi:                      We do have workers.

Marisa DiNatale:              We do.

Mark Zandi:                      Yeah, we do. Question mark. So is it related to jobs?

David Wessel:                   Yes.

Mark Zandi:                      Employment. It is related to jobs.

Cris deRitis:                       UI claims came out yesterday.

David Wessel:                   No. It's related to jobs, but it's not a jobs count.

Mark Zandi:                      It's not a jobs count. Related to jobs.

David Wessel:                   It's in the Labor category.

Mark Zandi:                      Oh, is it real wage declines real wages?

David Wessel:                   Exactly, exactly. Minus 1.7% the year over year decline in average hourly warnings for all workers.

Mark Zandi:                      I'm beating you guys badly here. I'm just saying. I'm beating you guys bad. That's a good one. So how did you measure that? Is that average hour earnings less CPI inflation? Is that what that is?

David Wessel:                   I took the real earnings release from the, which is average hourly earnings minus inflation.

Mark Zandi:                      CPI Inflation. Okay.

David Wessel:                   So in December, it was actually positive because obviously we had a negative CPI. So average hourly earnings for all employees increased four tenths of a percent between November and December. But over the year, wages have not kept up with inflation on.

Mark Zandi:                      Yeah, of course. That certainly has been a big weight. Fortunately we've had all that excess saving that people have been drawing down to kind of supplement their real declining real incomes to maintain their spending. But that's a good one. Okay, I got one. It's three statistics, all related. It might be a little unfair, but I'm going ahead and do it anyway.

Cris deRitis:                       Is it this week?

Mark Zandi:                      This week.

David Wessel:                   A little unfair. I like that.

Mark Zandi:                      A little unfair. Three statistics. 1.8% and if you get the first one, that should help you with the rest of them. 3.1% and 4.1%, 1.8, 3.1, 4.1%.

Cris deRitis:                       Inflation related?

Mark Zandi:                      Yes. They're all inflation related.

David Wessel:                   It's the three months moving average for of CPI, something in CPI, right?

Mark Zandi:                      That's very good. I'll definitely give it to you. It's the annualized change in overall inflation over the past three months. 1.8%. Okay. That's a big tell. What's 3.1? That's overall-

David Wessel:                   That's the core. I only know this because this is one of my candidates for a number.

Mark Zandi:                      Oh, that's good. That's really good.

David Wessel:                   I don't know what the four point.

Mark Zandi:                      You know what? That's a little tougher and yeah, he definitely gets a cowbell. In fact, we're going to send this to you, David.

David Wessel:                   Please don't. I'm trying to figure out what do you do all these mugs that people give me?

Mark Zandi:                      This is a cowbell, David. It's not a mug.

David Wessel:                   It's a mug and Ohio State mug.

Mark Zandi:                      David please don't.

Marisa DiNatale:              David, do you want one with Mark and Cris's face creeply painted on it?

Mark Zandi:                      Actually, it's pretty scary looking. Of course, our faces are, my face is-

David Wessel:                   All right. Well, 4.1. I don't know

Mark Zandi:                      Okay. 4.1. It's not in this inflation CPI report, but it's inflation related. It's important. Three month annualized change in, Marisa?

Marisa DiNatale:              Average hourly earnings.

Mark Zandi:                      Average hourly earnings. Okay. Think about those numbers for a second. Think about Cris, you think about them for at least three seconds. Yeah, 1.8 golden, 3.1, that's core CPI Inflation. That's within spitting distance of target, which by my guesstimation is two and a half percent and 4.1 clear deceleration critical to getting service price inflation down like the Fed one. So this is the last three months. The last three months, the economic statistics have been fabulous. I mean, it's not perfect but pretty darn close.

David Wessel:                   Yeah. One of my colleagues, Wendy Berg pointed out also that when inflation was running really high, we didn't have to think about the gap between the CPI and the PCE price index. But since the fed's target is PCE, you don't have to get CPI down to 2% for the Fed to declare victory. So yeah, I think the question is really whether, these things tend to move around and three months is encouraging, but we don't know what the next couple months will be.

Mark Zandi:                      Absolutely.

David Wessel:                   And I don't think the Fed is going to relax until they see something. They don't want to make the mistake of having stop too soon.

Mark Zandi:                      Totally, totally agree. And also, they're not even going to let on that they're going to do that because they don't want markets to think this is over or therefore go buy stocks.

David Wessel:                   I know. It's like they have to be hawkish in order to get the markets to help them deliver on their target. Give me a headache. It's like a hall of mirrors.

Mark Zandi:                      Oh yeah. They're all looking at each other, but okay. Very good. Okay, so let's wind up the conversation. And David, I alluded to this earlier and we've been doing this regularly just to kind of sum up things, to give people a sense of where we stand. What is the probability that the economy is going to go into a recession? Kind of a national Bureau of Economic research defined recession, broad based to cause lots of industry persistent more than a few months, at least a couple three quarters in economic activity in 2023. And maybe I'll throw in going into 2024, let's say over the next year. So go with you and Marisa. What's your probability of recession?

Marisa DiNatale:              50%.

Mark Zandi:                      Oh, that's a change.

Marisa DiNatale:              It is yeah.

Mark Zandi:                      You want to explain? Yeah. Go ahead and explain.

Marisa DiNatale:              It's come down a bit. 55. Yeah. I mean, I agree. I just think all the data, the job market is to script, for lack of a better term. I mean, it's clearly slowing but it's not collapsing. Inflation is clearly coming in. The 50/50 again is because some wild thing can happen and often does that we don't see coming. And like I've said, I worry about the rest of the world when I think about what could go wrong. I worry about some geo geopolitical events, some escalation and what's happening in Ukraine, something that crimps supply chains again, how China's going to come out of the COVID situation they're in. So yeah, I'm down to 50% Mark. I'm with you.

Mark Zandi:                      And last week you were at 55. The high point for you I felt, I think I was 60% at one point, weren't it?

Marisa DiNatale:              I think it was 65, I think it was right at like two thirds at one point.

Mark Zandi:                      Oh, so you come weigh in here?

Marisa DiNatale:              Yeah, I have.

Mark Zandi:                      Yeah, you're very data oriented as the data comes in. Yeah. You're not a hedgehog. Remember these hedgehog versus a fox? She's kind of-

Marisa DiNatale:              Yeah. I think I was a hedgehog.

Mark Zandi:                      You were a hedgehog? Okay.

Marisa DiNatale:              I'm becoming more fox like since the podcast I think.

Mark Zandi:                      Yeah. There you go. Very good. Cris is the bear of the group. Where are you now, Cris?

Cris deRitis:                       Two-thirds.

Mark Zandi:                      Oh, so he's down again too. Yeah, because-

Marisa DiNatale:              He pretty significantly.

Mark Zandi:                      And he is a hedgehog.

Cris deRitis:                       Significantly, it was 68 now it's 66.

Marisa DiNatale:              Oh, you were at 60. You were at 75 at some point though. I was not that long ago.

Cris deRitis:                       I was at 70. 75 shadow but 70 was my official.

Mark Zandi:                      Now you're down to 66.

Cris deRitis:                       Yes. Two-thirds.

David Wessel:                   Outreach is finally.

Mark Zandi:                      Can I ask you, Cris, if you were chief economist and it was on you to decide whether we should have a baseline forecast that had a recession in it, would you have one in it?

Cris deRitis:                       I would. But I don't know that it would be an MBER declared official. I would have the unemployment rate a little bit higher than what we have. And with our slow session vocabulary, that's really what I'm advocating. But data dependent, yield curve, leading economic indicators, consumer sentiment differential. You have a lot of negative red flags still out there. That's why I'm sticking with a higher level.

Mark Zandi:                      Right. Okay, very good. David, what's your probability of a recession?

David Wessel:                   Well, if you'd asked me a couple months ago, I would've been in the 65% thing, but I've also come down. But I'd be more pessimistic than Marisa. I'd say 55% range. So if I were doing your forecast, I would put a recession in. But I'm less confident that we're going to have one than I was before for all the reasons we've been discussing,

Mark Zandi:                      Just the data's stream-

David Wessel:                   And the inflation is cooling off and the job market's pretty strong. So the softish landing thing scenario looks a little better.

Mark Zandi:                      And is your thinking that we go into recession just because of what's already written in reality here that we're going to 5%, five and a five and a quarter percent and that's enough by itself to push us in.

David Wessel:                   And the kind of stuff we're talking a bit of self-fulfilling prophecy here. If every business or if two-thirds or 70% of businesses think we're going to have a recession, and so each of them does a little less hiring, a little less expansion, if consumers get a little more cautious that's why I think it's likely. But I'm much more optimistic today than if you'd asked me two months ago.

Marisa DiNatale:              And David, when do you think that would happen? When do you think is the most likely point that we go into a recession?

Mark Zandi:                      Of course, the natural next question. What day David, please?

David Wessel:                   August 13th, 2023.

Mark Zandi:                      That works.

David Wessel:                   Yeah, something like that.

Mark Zandi:                      That's when the debt limits.

David Wessel:                   The NBR, they don't have to have a date. They do have a month, right?

Mark Zandi:                      Month, yes.

David Wessel:                   And whether the NBR thing is kind of interesting. I mean, we had a couple quarters of negative GDP growth. It clearly wasn't a recession. The COVID recession is so abrupt, so sharp. So I'm glad I'm not on that committee.

Mark Zandi:                      Yeah, they got a great group folks on that.

David Wessel:                   One thing that I thought was interesting is if you read the latest Fed Minutes, the staff says something like, we don't see a recession but a recession is equally likely to our baseline forecast. So they're pretty much in the-

Mark Zandi:                      They're doing what I'm doing. Exactly.

David Wessel:                   Yeah, exactly.

Mark Zandi:                      Yeah, 50/50. I have not changed and I still land on no recession. But I feel more confident than I felt in a long time that the data is holding up pretty well here. Sticking to script as someone is prone to say. Well, I think we're going to call it a podcast at this point. I do want to mention one thing that's key important. We have a summit coming up, the Moody's Analytics Summit. This is going to be in early March. I believe it's March 5th through seventh. Someone can check that out for me.

Marisa DiNatale:              That's right.

Mark Zandi:                      Is it in Scottsdale and you're going to be there, right Marisa?

Marisa DiNatale:              And Cris.

Mark Zandi:                      And Cris is going to be there. So we're going to be in Scottsdale. And we're talking about having this podcast at the summit. I don't know if we're going to pull that off. Maybe I even shouldn't have mentioned that because I'm not sure. But that would be fun if we could do this podcast.

Marisa DiNatale:              A live podcast.

Mark Zandi:                      We've done one of those and that was a blast remember Cris?

Cris deRitis:                       Yeah.

Mark Zandi:                      That was a lot of fun. We really enjoyed.

Cris deRitis:                       But without an audience, this would be...

Mark Zandi:                      Oh yeah, this would be with an audience. That would be really cool. But we hope to see you there. A lot to talk about and first in person summit since the pandemic, I think. So this is a pretty big deal for us. So we're looking forward to it. So hopefully we'll see you there. So with that, dear listener, we'll call this a podcast. Talk to you next week. Take care.