INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. I'm joined by my two co-hosts, Cris deRitis, Cris is the deputy chief economist, and Marisa DiNatale, Marisa manages our global forecast process. Hi, guys, how's it going?

Marisa DiNatale:              Hi, Mark.

Cris deRitis:                       Doing all right, Mark.

Marisa DiNatale:              Hey, Chris.

Cris deRitis:                       Before we begin, I was wondering if I could ask you something, Mark, because I think it's important we get this out of the way here. I know you're a big Phillies fan, so will you be willing to accept the results of the World Series should in fact the Astros win more games than the Phillies?

Mark Zandi:                      That is a really difficult question to answer, Chris. I did take some real satisfaction though, in the Phillies being able to figure out the signs in that game where they had five home runs. I think they figured out the signs between the pitcher and the catcher. Unlike the Astros back in the day stealing the signs. I think they've actually figured out this time. So some satisfaction in that. But yeah, I mean the Astros are a great team. Come on. I mean gee wiz their pitching is unbelievably good, but-

Cris deRitis:                       All right. I don't need any contest in World Series.

Mark Zandi:                      What about you? Are you a Phillies fan?

Cris deRitis:                       Yeah, I'm a fair weather fan. I want the Phillies to win because all my neighbors want them to win, but.

Mark Zandi:                      Right. What about you Marisa, are you a Phillies fan?

Marisa DiNatale:              Not so much anymore. I mean, when I lived there I was. It's harder out here to follow them. I've actually, you're probably not going to like this, I've actually become something of a Dodgers fan since moving out here. I know, I know, I know, I know. But I am definitely rooting for the Phillies in this World Series. Absolutely.

Mark Zandi:                      Yeah. Well I think all of America is, except for people with-

Marisa DiNatale:              I would imagine, yeah.

Mark Zandi:                      [inaudible 00:02:18] Houston. Yeah. But it doesn't look good. We're down to three, two, and then the last two games are in Houston. Right? So it's going to be pretty tough.

Marisa DiNatale:              That's right.

Mark Zandi:                      Yeah. Anyway, but a great question, Chris. Really good question. And I should say we're all out and about. I mean it's interesting since really over the last three months it feels like we're all back on the road again traveling. And you can hear I'm away right now and Marisa is away and Chris, you've been on the road a lot.

Cris deRitis:                       Yeah. Yeah, it's-

Mark Zandi:                      And you told me yesterday you were in West Palm, Palm Beach?

Cris deRitis:                       I've been down in Florida. The day before that I was in New York City. So yeah, getting around.

Mark Zandi:                      Yeah, everyone is very busy. Everybody wants in-person. They want to see people.

Cris deRitis:                       Absolutely.

Mark Zandi:                      Yeah. Well I've had my fill-

Marisa DiNatale:              Mark and I saw each other in person the other night-

Mark Zandi:                      Oh yeah, that's right.

Marisa DiNatale:              For the first time in years.

Mark Zandi:                      Yeah. We had a great dinner.

Cris deRitis:                       Since the pandemic or even before?

Mark Zandi:                      Well I can't remember last time, Marisa, can you? The last time we saw each other in person.

Marisa DiNatale:              I mean it must have been 2019.

Mark Zandi:                      Yeah, it must be. Yeah, it was a very-

Marisa DiNatale:              Maybe 2020. Actually, I think I came to Westchester February of 2020, so perhaps then.

Mark Zandi:                      Okay.

Marisa DiNatale:              But yeah-

Mark Zandi:                      Yeah, we had a great dinner with clients in San Francisco, Marisa and I, we had a dinner. I think there was, I don't know, 12, 15 clients there. And I'll have to say they're pretty lugubrious, meaning pretty pessimistic, wouldn't you say Marisa?

Marisa DiNatale:              They were really pessimistic, yeah. Yeah, we asked them what their own subjective odds of recession were and with maybe one exception, everybody was well over 60%, somebody was 85%.

Mark Zandi:                      Yeah. I mean I was the most optimistic, well I wasn't the most, there was one other person there that was more optimistic than me, but they're pretty down. I mean obviously San Francisco, I think one could argue is the weakest large metro area economy in the country. It's getting creamed by tech layoffs and it's the only industry that are really suffering layoffs up to this point.

Cris deRitis:                       Well, mortgage, housing-

Mark Zandi:                      Oh, yeah, mortgage, yeah. That's small. But yeah. And house prices are down a lot in San Francisco. I mean by our measure, 7-8% already. So I think it's kind of coloring people's view, but nonetheless, they were pretty pessimistic-

Cris deRitis:                       They were pessimistic down in Florida too.

Mark Zandi:                      Oh, really?

Cris deRitis:                       Yeah, I'd asked the same question down there. 80, 90, the 90 to a hundred percent category for probably recession was the most popular. But they're risk managers, right, that's by nature. They never go below 50, so.

Mark Zandi:                      Yeah, yeah, yeah. Good point. But still, wow.

Cris deRitis:                       Still they're convinced next 12 months we're going in.

Mark Zandi:                      Going into recession, huh. Well let's get down to business then. I mean today's Friday we got the jobs numbers for the month of October. And you want to give us a rundown, Chris, that give us a sense of the numbers?

Cris deRitis:                       Yeah, I'd consider this a bit of a cloud employment report. You can see what you want into it. Most overall good. We added 261,000 jobs to the economy or to the payrolls. Unemployment rate did tick up to 3.7%. So payroll growth is still positive, it's still stronger than what we need for population growth, but it is slowing. So that downward trend, and that you could argue is by fed design. So I don't think the report itself changes policy. I think it's well within what the fed's expectations were or what other investors were expecting was stronger than consensus. But I think the consensus range was fairly large. There were some parts of the report that were more or less positive than others. Again, depending on what your point of view is, the labor force actually declined by 201,000, right? So you have an unemployment rate that is going up, maybe for the wrong reasons from that standpoint. The employment to population raise shows for-

Mark Zandi:                      When you say wrong reason, you mean just a weaker job market?

Cris deRitis:                       Weaker job... Well you have people actually stepping out, right? That-

Mark Zandi:                      Yeah, which that's the bad news is good news though, right?

Cris deRitis:                       Yeah. But you could have people coming in and just not finding jobs or you could have them stepping out, right?

Mark Zandi:                      Yeah. But in this case, but we had participation rates declined. The labor force participation in unemployment actually rose and it goes to decline in household employment in the month. So employment by the household survey measure that declined.

Cris deRitis:                       Correct. Correct.

Mark Zandi:                      So in most times you'd say, "Oh, that's bad news, jobs decline." But in the current context you say, "That's good news because-"

Cris deRitis:                       Then the fed won't-

Mark Zandi:                      Yeah, it means the lend market's easy and cooling off and obviously we need that for inflation to come back down. So that feels like bad news is good news.

Cris deRitis:                       Exactly. Well, yeah, exactly. So it depends on your perspective-

Mark Zandi:                      Just to clarify. Just to clarify.

Cris deRitis:                       Yeah, yeah, no, thank you. So yeah, so you also had the employment population ratio for prime age workers falling to 79.8 and that's the biggest drop since, what is it 2017? Right? So again, good news, there's bad news type of situation there.

Mark Zandi:                      No, no. Bad news is good news. I know it's mind numbing. Bad news is good news. So yeah, typically if employment the population is declining, that means there's more slack in the labor market. Typically that would be, well we don't want that, we want a full employment economy, but in the current context where the labor market's very tight, wage growth is strong and inflation is high, you go, okay, that bad news typically is now good news. I know, very mind numbing.

Cris deRitis:                       Yes. Yes indeed. And then I think probably perhaps the most important number from the fed's perspective is actually the wage number of wage growth. And we've mentioned multiple times on the podcast the issues in terms of average holiday earnings and whatnot. But nonetheless, it is a number that folks do focus on and that actually was up 0.4% on the month over month basis, had been growing at a 0.3%. So that may be a case where good news for the household is actually bad news for the Fed. Right?

Mark Zandi:                      Although your [inaudible 00:09:37]

Cris deRitis:                       On a year over year basis-

Mark Zandi:                      It's close.

Cris deRitis:                       Yes, correct. 4.7%. So it is coming in on a year over year basis. But these month to month trends, there's lots of movement. You don't want to read too much into them. But nonetheless it is something to note.

Mark Zandi:                      Would you say though, Chris, I mean just taking a step back on the month to month movement, it does feel like, and also bringing in all the other wage data that we are east employment cost index, everything else we look at feels like wage growth is topped out. That's what it feels like. It doesn't feel like it's accelerating anymore.

Cris deRitis:                       Yeah, I don't think it's accelerating, it might not be going down as fast as we otherwise might like. That's perhaps the bigger issue here. But yeah, I don't see many signs of it continuing at the pace it was previously.

                                             Beyond that, what can I say? There were some revisions for August and September, so some movement around. So net we actually added more jobs than we had previously thought. In terms of the sectors, the wage or the job growth was actually fairly widespread. Leisure hospitality rose by 35K, which is positive, but that industry in particular is still low relative to what it was pre-pandemic. So we're still about a million or so short relative to February. So we might have expected a little bit more growth there. But nonetheless it was positive.

                                             The only negative that kind of stuck it out was warehousing. But I don't think that's terribly surprising in terms of what we're hearing from Amazon and others in terms of the over-hiring they may have done previously and now shedding some jobs given the overstock or the shift in demand really for services versus goods that is going on. So there was a job loss of about 20,000 in warehousing, but that had been a very strong grower to begin with. So I'm not terribly-

Mark Zandi:                      I haven't had a chance to dig deep, are there any sector showing any declines? Any major industry that showed declines in employment or it's just slower job growth?

Cris deRitis:                       Correct. The warehousing was really the only one that showed anything of significance in terms of declines. The others were just not growing as quickly as they had in the past.

Mark Zandi:                      Yeah. Okay. Hey Marisa, anything to add to Chris's pricing of the report?

Marisa DiNatale:              The one thing that stuck out to me in terms of the sectors was construction. It had a very small job gain of 1000, which is tiny compared to what it had been doing. And there were actually job losses throughout some of those sub-components of construction, like contractors and residential, non-residential contractors. But I think I agree with the overall take, I mean it's still a pretty solid report. It was better than people were expecting. I don't really know how much stock or what to make of the household survey side of things. Just the big loss in jobs. And actually if you adjust the household survey to the payroll survey definition and methodology, you would get an even larger loss on the household survey side so it's a much smaller survey. The sampling error is much, much larger. So it's hard to know if we should put a lot of stock in that, especially because this is the first month that that's happened. But yeah, I mean it's still, at least on the payroll side, looks pretty solid, right?

Mark Zandi:                      Yeah. One thing that the BLS did mention that I want to call out because I know you're down in Naples, Florida, is Ian the hurricane that kind of blew through according to BLS, it didn't have any impact on the job numbers or I think that's what they said, BLS said.

Marisa DiNatale:              Yeah they did. And we might see it when they release the data for states and metro areas later. Maybe there's something there. And you do see a little bit of it in the jobless claims data, in the initial claims for unemployment insurance, we saw some effective Ian there. But yeah, I mean according to BLS it had no their exact words were, "It had no discernible effect on this report."

Mark Zandi:                      Interesting. Well my take is that it definitively shows the labor market is cooling. I mean if you go back to the beginning of the year, the economy was creating 600,000 jobs on average per month. This would indicate and even with the revisions and everything, it feels like we're at 300K. So having of the job growth. Now still stronger than what-

Cris deRitis:                       Than we need.

Mark Zandi:                      Than we would like to see to make sure that we start generating some labor markets, slack and weight, allowing wage growth to moderate more sufficiently, which is critical to getting inflation back in. The rule of thumb is a 100K per month. So if you're north of a 100K and say we're at 300K, if you're north of a 100K, then in typical times it's given typical labor force growth, you would see unemployment continuing to decline. If you're below a 100K, that would be slow enough that you start to see some slack develop unemployment moving higher.

                                             I will say though, that threshold feels a little higher to me right now because underlying labor force growth feels like it's more like 250K. I mean if you look at overall labor force growth, even with the decline in labor force participation this month, it's almost 2% year over year. So that's more than double the growth in the labor force typically. And so it feels like we're getting really good solid labor force growth here. Then it goes back, if it's not the labor force participation rate, that goes back to working age population. In fact, it goes more specifically in foreign immigration. If you look at the employment of foreign born workers, that is now rising very rapidly and continue to rise in October. So it feels like the threshold for getting unemployment moving south in the context of current labor force growth is higher. Feels like it's a couple hundred thousand, maybe 250,000. I think we're pretty close to that if we're not there already.

                                             The other thing I'd say is household employment and generally I agree we should be focused on establishment. But I would just point out household employment has gone nowhere since the beginning of the year. It is, it has flat lined. So no growth that's more volatile because it's based on a smaller survey of households compared to the establishment survey than surveyed businesses. So don't want put too much stock in into it. Certainly not on a month to month basis, but if you take a step back, it really hasn't grown at all, increased at all since the beginning of the year. And that goes to labor demand.

                                             So labor supply is pretty good. Labor demand feels like it's weakening and it does feel like we're starting to see some signs of slack building into the labor market. I mean the unemployment rate did rise, it's no longer falling, that's for sure. It went from 3/5 to 3/7, that may overstate the case, but it's definitely not falling. And employment to population, which you pointed out for prime age workers, that does feel like it's rolled over. It's now below that key 80% threshold that we consider at least historically to be consistent with full employment. We're now at 79.8, still very high, but definitely definitively moving down. And then the wage growth, yeah, I mean I don't think it's rolled over but it's definitely stopped accelerating. We've seen 5% seems to be kind of the ceiling for wage growth and if anything it feels like it's starting to top out and start to come down.

                                             So I don't know. I look at this and I come away with this, it's not where we need it to be. It's not where the Fed would want it to be. So more rate hikes coming, we need to see more slowing and growth. But it feels like it's moving definitively in the right direction here. And I wouldn't be surprised if we have a labor market that's kind of where the Fed would want it by early next year. At least that's my takeaway. So how would you guys, and Chris, how would you react to what I just said? I saw you when I said labor force growth, I surprised you with that statistic. You're going, that can't be right. I saw it on your face, but it is right.

Cris deRitis:                       For the household, yeah, okay-

Mark Zandi:                      No, labor force growth, think the labor force, that's labor supply. Just look at the year over year growth. So rock solid 2%, give or take, it might be, I don't know, 1/9 or whatever, but it's 2%. And typically in a typical economy it's no more than one. And you could argue given demographics, it should be closer to a half a point. So something less than. So we're getting pretty sizeable labor force growth. And again, it's not because of participation because that declined and it's still more than a point below it was pre-pandemic. It's all about working age population and right now all about foreign immigration. So how would you react to what I-

Cris deRitis:                       Well I guess I come back to the cloud, you kind of see what you want to see in it.

Mark Zandi:                      Do you see something different? I mean you're right, you see what you want to see. But I mean-

Cris deRitis:                       I mean, it's still quite strong in terms of the payroll growth and although again, I don't think this changes the Fed's decision at this point in terms of a 50 basis point hike in December. But it's not helping the case either. I think the preference would've been something softer here.

Mark Zandi:                      Yeah, but here's the other thing, how can we expect a labor market that's ripped roaring coming into the year creating 600,000 jobs a year, It's just not going to turn on a dime. So I mean it's hard to, yes, we want to slow even further, but is that even realistic or reasonable to think that would be possible?

Cris deRitis:                       Well I think we've been at this for a while, we had expected that these mega rate hikes would've had some more pronounced effect now I think, right?

Mark Zandi:                      No, no. I mean what was the funds rate at the beginning of the year?

Cris deRitis:                       0.

Mark Zandi:                      0. 0, 0, and they were QE. We're not even a year into these rate hikes. When did they start raising rates? It was probably, I think it was March, yeah. We're seven months in. I mean come on-

Cris deRitis:                       But at a very aggressive pace, right?

Mark Zandi:                      Well yeah, sure. But still seven months in, seven months in. You take these... Here's the other thing, companies, particularly large companies that employ a lot of people, where the bulk of the labor market is, what's the word? It's a container ship, it's not a speed boat. You go this way and then you go that way, it takes time to move the ship. And so you're telling your HR department at the beginning of the year, let's hire and we're full more higher, it's impossible to say, "Now stop hiring and now start laying off workers quickly." It takes time for that to happen. And my sense is if you're listening, talking to clients and talking to everyone else, that is happening. So we will see this more clearly going forward. Job growth will slow, we're expecting to happen way too quickly. I mean seven months into the rate hikes, I don't know. It just doesn't feel like that's realistic to think we'd be seeing something meaningfully weaker than this at this point. I don't know, Marisa, given this conversation, how do you react to it?

Marisa DiNatale:              Yeah, I mean I think that, right, we started at zero on the Fed funds rate. So I mean even though they've been aggressive, it's taken time to get to where we are now. And I think now we're really seeing, even in the housing market, that was the most sort of immediate impact of the rate hikes that we saw. And we're still not even really seeing layoffs related to housing yet. At least not significant ones.

                                             It seems like we're at an inflection point I would say in terms of the labor market, I think it does seem like wage growth is still solid but it's not accelerating. We want to see it slow down. I mean we saw it a little bit with the last release of the employment cost index, but I mean it was a touch slower and certainly, yeah, job creation. Job growth is much slower than it was earlier in the year. But again, still pretty decent. In normal times, if you get a gain of 260,000 on the payroll survey, that would be considered a boom report, right, prior to the pandemic. So I think the Fed keeps doing what it said it's going to do and is going to keep raising and is going to be aggressive about fighting inflation.

Mark Zandi:                      Oh yeah, no argument there. But I'll just keep pushing a little bit more. Going back to labor supply, if it's 2% growth, that's 3 million added to the labor force every year, divide by 12, what is monthly labor force growth? It's pretty close to what we got for the employment number today, 260,000, right? So I mean by that measure we're there, we're already there. I mean labor demand is already now on top of labor supply and given the trend lines, it's very clear labor demand's going to weaken. Now, I don't know, I'm assuming labor supply continues to remain roughly where it is for a while and we're going to get higher unemployment, we're going to get lower employment to pop, we're going to get fewer unfilled positions.

                                             Here's the other thing, I'm just curious in your reaction. All of this slowdown that we've observed so far is on the hiring side. We know layoffs are not up. We know initial claim front unemployment insurance are just over 200,000 per week. That is record low despite tech layoffs, there's no layoffs in mortgage finance as you pointed out. It's obviously nowhere else. I mean we're not seeing layoffs yet. We're not even seeing typical layoffs yet. Typical would be UI claims that what, 250,000 per week, something like that? So all of this slowdown that we've observed is around hiring. And so we know the layoffs are coming, they're definitely coming. You can see, for example the challenger numbers, which is announced layoffs, their rise are starting to come in, they have the strongest increase last month in a long, long time. And that's going to start showing up in the data.

                                             So it just feels like to me labor demand, which has been growing much stronger than labor supply, is now pretty much closed the gap because we've gotten some premium in supply and demand is definitely weakening and they're going to cross now that we're just going to see layoffs start to kick in and at least normalize to something we've seen in store. Okay. I'll stop again. I'll turn it back to you Chris, what do you think of that?

Cris deRitis:                       How can I dispute it? You craft such a beautiful story. The only thing is that I worry again that the Fed is going to overstep here. It's not fast enough, inflation doesn't come in fast enough, the wage pressures continue for a while and they overshoot, right? That's the fear to my mind, right?

Mark Zandi:                      Yeah, sure. I mean-

Cris deRitis:                       You have this nice glide path and I believe the glide path, right? And if we didn't have this inflation issue in the background, very, very likely that we could land this plane so gently on the tarmac. But I just see an overreaction being a likely scenario.

Mark Zandi:                      That's great point. Okay, so obviously all this conversation is around can the Fed land the plane on the tarmac, can it soft land? Actually, that's a bad description because no one's saying soft landing, under any scenario it's going to be uncomfortable. And uncomfortable landing-

Cris deRitis:                       Soft-ish, I guess is the-

Mark Zandi:                      Yeah, just less bad than a hard landing, a crash landing. But there's three ways it feels like we can land in recession. One is if the economy doesn't cooperate, if I'm wrong, about the story as you put it that I described is incorrect, that we're not going to see the labor market ease sufficiently to bring in wage growth and inflation. That's one way because then at that point the Fed, it's not the Fed's making a mistake, they have to get... It's not a mistake. It's, they've got to push us into-

Cris deRitis:                       It's a reaction. Yeah.

Mark Zandi:                      Yeah. And what I'm arguing is I don't think that right now, given the data we have to date, it doesn't feel like that's what's going to push us into recession. It feels like the economy is cooperating with what the Fed wants. But the second way you get into recession is the one you just said, the Fed can make a mistake. They could misinterpret what's going on or be impatient with what's going on and then they don't pause at any point they keep going and then they push the economy into recession and they didn't have to. Of course we will never know whether that was a real mistake or not. Because you don't know the counterfactual if they actually do that?

                                             And then the third way you go into recession is, okay, the economy cooperates, the Fed does everything right, but the economy's still going to be very weak and fragile. Again, it's not going to be a, soft landing doesn't describe it, it's going to be uncomfortable. And when you're in that situation, you are vulnerable to anything else that can go wrong, even a small thing. And that seems very plausible. I don't know how to forecast that, but that's obviously significant that me. Marisa, what do you think of that frame? What I just said?

Marisa DiNatale:              Yeah, I think that makes sense. And I mean the Fed has explicitly talked about this too. They have said that they would rather overdo it. They would rather over tighten monetary policy than not go far enough. Because if they overdo it, then they can course correct pretty quickly. They can lower rates quickly, they could do QE again. I mean there's a lot of tools that they can use if they over overdo it. But if they under do it then it's harder to get entrenched inflation under control if they don't go hard enough. So they've explicitly talked about this. I mean I think they talked about it in the past week. I think that we know that monetary policy happens with a lag. It'll take time to show up, but it seems like it is. I mean, it seems like it's not happening quickly, but it seems like we're at some inflection point here with both inflation and with the job market. So I think they stay the course.

Mark Zandi:                      Right. Hey Chris, can I ask you because I haven't looked, but maybe you have, feels like the market... I saw the stock market, stock market was up. It looked like bond yields, long-term bond yields were up a little bit as well. What do you think investors' reaction was to the job numbers. You heard my reaction, we heard yours, and Marisa's. What do you think the investors' reaction is to the job numbers? How are they interpreting?

Cris deRitis:                       I think it's in line with the script that they had in mind in terms of the Fed with a 50 basis point hike in December. I don't think this changes the direction one way or the other, right?

Mark Zandi:                      So right now in our forecast for the Fed, we have another half point, 50 basis point increasing the funds rate when the Fed meets in December, and then another quarter point in January when they meet at the end of the month. And that would put the federal fund rate target at 4.5 to 4.75, the range for the fund rate. And then we assume that they stop at that point and keep the funds rate at that so-called terminal rate. That's the highest the rate will get during the cycle through 2023 goes into 2024. And by 2024, there's enough evidence that inflation is coming back to the pitch target that they can slowly allow the funds rate to normalize beginning in the second half of 24 going into 2025.

                                             And in our baseline, that's the baseline, the scenario in the middle of the distribution, the economy comes close to stalling out, but doesn't go into recession. Not an actual broad based persistent decline in economic activity is defined by the business cycle dating committee, the National Bureau of Economic Research. What do markets saying right now? Where do you have a sense of what investors are saying about the terminal rate and how long the funds rate's going to remain at that terminal rate?

Cris deRitis:                       Yeah, I looked at the futures earlier, but these things are changing all the time, but a little bit of higher, right? So terminal right around four and three quarter, to 5% I think was the median. Maybe a little bit higher than that even maybe the next one up, the five to a five and a quarter. So what's that two more rate hikes than what we have-

Mark Zandi:                      Adding another half point to the-

Cris deRitis:                       Current, yeah.

Mark Zandi:                      Half point, right.

Cris deRitis:                       That's the median. Obviously there are investors that are on the other side of that they could even higher and others that are more aligned in line with us.

Mark Zandi:                      Do you know how long the markets are anticipating the rate to stay at that terminal rate? I mean, before the FOMC meeting this week when they raised rates, three quarters of a point, I think markets were expecting the funds rates to start coming back down in late 2023. Do you know?

Cris deRitis:                       Yep. I'm pulling it up right now. I see that it looks like December they start to-

Mark Zandi:                      Come down.

Cris deRitis:                       Moderate a bit.

Mark Zandi:                      Interesting. Okay.

Cris deRitis:                       So I think the timing is actually quite similar to what we've or what you've outlined here in terms of holding throughout 2023 and then a little reduction at the end as the economy is weakening.

Mark Zandi:                      Okay. Okay. Okay. So right now, and I think the market's moved with the meeting when, right? At the Fed meeting, the Fed announced the 75 basis 0.34 point hike in the funds rate, in the statement they released with that decision, that actually felt to my read, a little bit what you might call dubbish, that they were going to start winding, they were going to scale back than future rating freezes. And it was felt consistent with our four and a half to four and three quarters. But then when bed chair Powell gave his press conference, he sounded a lot more, as they say, hawkish. And certainly that was the markets interpretation and they marked up the funds rate to terminal rate to five and a quarter another half a point. Is that the correct interpretation of events?

Cris deRitis:                       Yeah, that's what I saw. And I think he's fighting a battle with the financial markets-

Mark Zandi:                      I agree with you.

Cris deRitis:                       Right? That seems to be his battle all year. No matter how hawkish he seems to come across, it seems that the markets digest that and then another rally ensues. So I think he's having to be even more hawkish than he otherwise would be to make sure that those financial conditions remain tight.

Mark Zandi:                      Yeah, it seems to me if I were in his shoes, I'd be doing the same thing, right? I mean, I don't want the stock market to come back. I don't want corporate credit spreads to narrow. I don't want mortgage rates to decline. I'm okay with the strong value of the dollar. I don't want banks to ease up on their underwriting or I want them to be really tight here in their underwriting to slow credit [inaudible 00:35:08]. And so if I were him, I'd be talking a big game too. And regardless of whether I thought I'd actually get to that interest rate, the five the five and a quarter, it doesn't really matter. I don't care. I'm not worried about my forecast for the federal funds rate, but what I want, the fact that he's talking as tough as he is now reduces the odds that he actually has to raise rates that high in the future because he gets the tightening in financial issues. That sound right?

Cris deRitis:                       Yeah, That's right. He needs to... And I think he is sincere that he will do what it takes, right? I don't think he's bluffing here. But yeah, I think it's part of, the narrative is to convince everyone, establish that credibility so that he doesn't actually have to use that tool at the end of the day.

Mark Zandi:                      Right. Okay. Hey, let's play the statistics game. You guys ready to play?

Cris deRitis:                       Sure.

Mark Zandi:                      Marisa, you ready?

Marisa DiNatale:              Yep, I'm ready.

Mark Zandi:                      Okay. Just to summarize, the statistics game, we each put forward a statistic. The rest of us try to figure that out through questioning, and clues, deductive reasoning. The best statistic is one that's not so easy. We get it right away, not so hard that we never get it. And it'd be nice if it's apropos to the topic at hand. In this case, the labor market or some economic information that came out over the past week since the last time we played the game. Okay. You're up, Marisa. What's your statistic?

Marisa DiNatale:              29,000.

Mark Zandi:                      29,000. Is it in the employment report?

Marisa DiNatale:              Yes.

Mark Zandi:                      Is it in the establishment survey?

Marisa DiNatale:              Yes.

Cris deRitis:                       Is it employment in a sector then-

Marisa DiNatale:              No.

Cris deRitis:                       No? Oh.

Mark Zandi:                      Oh, it's not an employment in a sector or industry.

Marisa DiNatale:              Nope.

Mark Zandi:                      Is it a change in something?

Marisa DiNatale:              Not in the way you're thinking about it.

Mark Zandi:                      Oh.

Cris deRitis:                       Oh, wow.

Mark Zandi:                      Is it... Oh my gosh. Okay. It's not some measure of employment?

Marisa DiNatale:              It is. It is related to the measure of payroll employment.

Mark Zandi:                      Okay.

Cris deRitis:                       Is it a difference between [inaudible 00:37:46] I got that it's a difference, that's important.

Mark Zandi:                      You ran out of steam there.

Cris deRitis:                       We've established, I'm trying go through with the list of what could be 29,000.

Mark Zandi:                      29,000, that seems so low for-

Marisa DiNatale:              Shall I give you a hint?

Mark Zandi:                      Yeah.

Cris deRitis:                       Yeah.

Marisa DiNatale:              Chris, you talked about this when you gave the thumbnail sketch of the jobs report. You talked about this.

Cris deRitis:                       Oh, revisions. Is that the-

Marisa DiNatale:              Yeah, yeah. It's the combined revisions to the August and September employment report. So August was revised down by 23,000 and September was revised up by 52,000 for a net positive 29,000 revision between August and September.

Mark Zandi:                      Okay. Okay.

Cris deRitis:                       Okay. Nice.

Mark Zandi:                      Okay, fair enough. But why did you pick that? Except that you wanted to stump us? Other than that, why did you pick that?

Cris deRitis:                       Which is a good reason, is a good reason.

Mark Zandi:                      Which is a good reason, yeah.

Marisa DiNatale:              Well, the stumping, it also just shows more strength in the job market, right? I mean it's the revisions like yes, August coming down with revisions, but September-

Mark Zandi:                      Come on, hand me a break, 29K.

Marisa DiNatale:              September being revised up by 52,000 is pretty significant. So you went from a job gain in September that was under 300,000 to one that was over 300,000.

Mark Zandi:                      Well, let me ask you this-

Marisa DiNatale:              Basically a 300,000 for those two months.

Mark Zandi:                      What is underlying job growth? Abstracting from the revisions up and down in the monthly data. What do you think underlying job growth is now, in the establishment survey, the survey of businesses?

Marisa DiNatale:              Now?

Mark Zandi:                      Yeah.

Marisa DiNatale:              What do I think it is now?

Mark Zandi:                      Yeah.

Marisa DiNatale:              Probably 250 ish.

Mark Zandi:                      Oh, really? Okay. How do you get to 250? Because we're at-

Cris deRitis:                       261.

Mark Zandi:                      260 and then before that we were at 350. How do you get to 250?

Marisa DiNatale:              I'm just thinking of revisions that may be coming and I think it's a little weaker than what we see now. I mean now that we've seen this household survey data for the month and we've seen the unemployment rate go up, I would not be surprised if we get it downward revision to the payroll survey.

Mark Zandi:                      Interesting, Interesting.

Marisa DiNatale:              And it'll get revised twice too, right?

Mark Zandi:                      Yeah, you did say something that maybe earlier that I didn't ask for explication, but maybe I should. You said that on the household survey, that's the survey of households, there is an adjustment that the BLS does to make it apples to apples with the establishment survey because these are two different ways of measuring what's going on in the job market and they're conceptually a little bit different, exactly what's included in each. And did you say that the household employment numbers are actually even, the changes are even weaker more recently, once you make that adjustment to be apples to apples with the establishment survey, is that right?

Marisa DiNatale:              Yeah, that is right. I'm trying to find what the number was, but it would've been an even bigger decline in household employment if you do this to apples to apples comparison. So BLS doesn't publish this in the news release, but they do, if you go to their website, they have a section where they make this adjustment, they go through how they adjust it. So they add in multiple job holders, they take out family workers, they take out the self-employed, those sorts of things. And when you make all of these adjustments to make the concepts the same, yeah, it would've been an even larger decline.

Mark Zandi:                      Yeah, and I don't want to stretch this too far, I don't want to make too big a case, but there has been academic research that shows that big movements in the household survey tend to lead movements in the establishment survey, which is kind of saying the same thing you just said about future job growth, maybe revisions to the establishment survey, is that right? Do I have that right?

Marisa DiNatale:              Yeah, I don't know how much research there is out there that's really definitive that shows that household employment might be leading payroll. I haven't looked at it in a while and I don't know what's recently out there, but yeah, I have heard that as well.

Mark Zandi:                      Okay. All right. Chris, you're up. What's your number?

Cris deRitis:                       All right. Little bit of a stumper, I think, 4.63 million.

Mark Zandi:                      Say that again?

Cris deRitis:                       4.63 million.

Mark Zandi:                      Okay. It feels like it's in the employment data.

Cris deRitis:                       It is.

Marisa DiNatale:              Is it in the household survey?

Cris deRitis:                       Not exactly, but-

Mark Zandi:                      Oh my gosh.

Marisa DiNatale:              Not exactly.

Mark Zandi:                      So is it in the BLS employment report that came out today?

Cris deRitis:                       Yes. Yes. It was released today. Yes.

Mark Zandi:                      Okay. is it something related to COVID and the impact of COVID?

Cris deRitis:                       No.

Mark Zandi:                      No. Is it related to, there a lot of people who were out sick, no, that sounds, no, that can't be it.

Cris deRitis:                       No.

Mark Zandi:                      That was too high. It's too many people.

Cris deRitis:                       If I told you it came from the current population survey, does that help you? Okay.

Marisa DiNatale:              Yeah. But I asked that and you said not exactly. You said-

Mark Zandi:                      Yeah, that's the household survey. CPS, isn't that the household survey? CPS?

Marisa DiNatale:              Yeah.

Mark Zandi:                      Yeah, Current Population Survey, as opposed to the CES, the Current, What's the CES? Current... Geez.

Marisa DiNatale:              Current Employment Survey.

Cris deRitis:                       Employment survey.

Mark Zandi:                      Current Employment Survey, right. Okay. So-

Marisa DiNatale:              Is it the number of people... Does it have something to do with category... Does it have something to do with unemployment?

Cris deRitis:                       Does it have something to do with unemployed?

Marisa DiNatale:              Yes. The unemployed.

Cris deRitis:                       Well-

Mark Zandi:                      You're really hesitating on this?

Cris deRitis:                       It is.

Mark Zandi:                      Wow, this is really weird.

Cris deRitis:                       I don't want to give it away.

Marisa DiNatale:              Tell me what the number was again.

Cris deRitis:                       4.63 million.

Marisa DiNatale:              4.63 million.

Cris deRitis:                       There are people who are not employed. How about that?

Mark Zandi:                      Say that again.

Cris deRitis:                       People who are not employed or who were not employed.

Mark Zandi:                      Is it something like the number of people that are not in the labor force but who want a job?

Cris deRitis:                       Oh well, so close. I'll give it to you. They're not [inaudible 00:44:45] What's that?

Marisa DiNatale:              Marginally attached.

Cris deRitis:                       No, no, you're very close, Mar, it's people who were not in the labor force last month who became employed this month.

Mark Zandi:                      Oh, okay. Well that was different than I was thinking, yeah. Okay. That's interesting. Okay.

Cris deRitis:                       It is interesting, right? So, it's larger than the number of people who go from being unemployed to employed, which is about 1.5 million. So it's a significant chunk and I wanted to highlight it, not because it changed all that much, but just to demonstrate how difficult it is to actually measure the labor market. Because you have these fairly sizable group of people who just is not actively looking for work, they're not in the labor force and then the next month they are so they transition directly.

Mark Zandi:                      Well that brings up an interesting point. I mean one of the reasons for lower participation is a low level of number of retirees coming back into the workforce. So interestingly enough, when the pandemic hit we didn't see a lot more people retire than typical. Maybe a little bit more early on, but that didn't stand out. What stood out was the number of people who have retired that actually come back to work, which is actually quite considerable in any given month. And that has been very depressed since the pandemic hit and goes a long way to explaining some of the shortfall in terms of participation. And I've always thought it was unclear what's going on there. Some of it have been stock prices were high, housing values were high and these folks felt like, well I don't really need to go back to work. And part of it might have been COVID, I don't want to, I'm a little nervous about going back into the workforce and getting sick.

                                             But if those are the explanations, then both of those seem less of a factor today. I mean stock market is down a lot. Housing values have rolled over, so people surely are feeling less wealthy and maybe starting to feel, oh, maybe I don't have the kind of nest egg I thought I did in retirement. And clearly COVID, still out there, but people likely are becoming less nervous about that given it's less virulent and more people have vaccinations and that kind of thing. So it feels like your statistic kind of highlights that we are starting to see some of those retirees that weren't in the labor, they're not in the labor force starting to come back into work. Does that resonate with you, Chris, that story?

Cris deRitis:                       Yeah, I think that data's also reported by the BLS directly just in terms of the number of folks in different age cohorts that are rejoining the labor force. But I think that's right though. I think that the inflationary environment certainly is causing people to rethink and the markets falling so clearly that is going to motivate more people to return to labor force who may have retired early. And I also think they're more flexible work arrangements today as well. So you don't have to commit to a full-time job necessarily. You can pick up some gig work, you could probably do some part-time or consulting work, right?

Mark Zandi:                      Remote work.

Cris deRitis:                       Remote work, exactly. So there's more flexibility there as well. That should lead to some opportunities.

Mark Zandi:                      Right. Well that was a good statistic. That was a good one. No way we would've gotten that though. That'd have been pretty amazing.

Cris deRitis:                       Well I didn't give you a really fighting chance with the hints.

Mark Zandi:                      Yeah, but a very good one. Okay, I'm going to mix it up a little bit. I'm going to mix up a little bit and that's a clue. Okay-

Cris deRitis:                       Jolts.

Mark Zandi:                      What's that?

Cris deRitis:                       Jolts report.

Mark Zandi:                      Well there's a lot in that jolts report we didn't talk about, which I'd like to talk about. But no, this is not in a jolts report, but I'm going to give you it to you. Ready?

Cris deRitis:                       Yeah.

Mark Zandi:                      6%. 6%.

Cris deRitis:                       And it's from the employment report today?

Mark Zandi:                      It is not.

Cris deRitis:                       It is not.

Mark Zandi:                      I'm mixing it up.

Cris deRitis:                       It's employment related?

Mark Zandi:                      Nope.

Cris deRitis:                       Labor market. Okay.

Mark Zandi:                      Nope.

Marisa DiNatale:              It's not employment related?

Cris deRitis:                       Not employment. 6%.

Mark Zandi:                      It is a statistic that came out this week though. So it's not the topic at hand but it... Go ahead.

Marisa DiNatale:              Is it growth and unit labor costs?

Mark Zandi:                      No, that's actually pretty interesting. No, unit labor costs being compensation growth, less productivity growth, which is very high because productivity growth has been weak and waste growth strong. But no, that's not it. But that would've been a good one.

Cris deRitis:                       Yeah.

Marisa DiNatale:              I think that was around 6%.

Mark Zandi:                      I think it might have been even higher. Yeah, it's around six. Yeah, but that's not what I had in mind.

Marisa DiNatale:              Okay. It's not it.

Mark Zandi:                      Yeah. Which other favorite market that we tend to always talk about?

Cris deRitis:                       Housing?

Mark Zandi:                      The housing market. Okay. That's a big hint. 6%, came out this week.

Cris deRitis:                       Came out this week? Mortgage to MBA?

Mark Zandi:                      No, no, no, no, no. Yeah, it's actually-

Cris deRitis:                       Oh, home ownership, vacancy.

Mark Zandi:                      Exactly. So which vacancy?

Cris deRitis:                       I'm trying to remember which one. Rental?

Mark Zandi:                      Rental vacancy rate. That is the rental vacancy rate 6%. Yeah. Well, okay, bonus, you tell me what is the homeowner vacancy rate?

Marisa DiNatale:              Lower than 6%.

Mark Zandi:                      Yes indeed it is.

Cris deRitis:                       I think that's a cowbell right there.

Mark Zandi:                      It's a cowbell right there.

Marisa DiNatale:              Thank you.

Mark Zandi:                      A mini cowbell. No, it's 0.9.

Marisa DiNatale:              Is it two-

Mark Zandi:                      0.9.

Marisa DiNatale:              Okay. Yeah. I thought it was 1 or 2.

Mark Zandi:                      And the reason I bring this up is, they're both very low. The rental vacancy rate at 6% is well below what I would consider to be the so-called equilibrium vacancy rate. And that's the vacancy rate that's consistent with zero real rank growth. So rent growth that's equal to inflation, zero real rank growth that vacancy rate seven. So we're below that. So that's a very tight rental market and we're getting strong rent growth, but it went from 5.6% to six in that quarter. In the quarter it came out, this is data for the third quarter of 2022. It does indicate as we have been expecting that the rental market is going to start easing up here because we're getting more supply because supply chains are easing and units in the pipeline going to completion are starting to get completed and less demand because of the strong rent growth and the hit to the ability of households to form.

                                             So that is a good sign in the sense that, again, in the spirit of bad news is good news, vacancy rate is up, but that suggests that we're much more likely to see more moderate rent growth growing forward. And that's obviously very critical to getting the growth and the cost of housing down and getting inflation back down is something opposed to target.

                                             The 0.9 that is the homeowner vacancy rate. That too is very low. I think the equilibrium homeowner vacancy rate is probably 1.3, 1.4. So it's still a tight single family market no doubt. But that's up from where it was and was at a record low in the previous quarter. So the bad news, which is good news, is it feels like the housing market, which has been incredibly tight in generating these very strong rent gains, which is adding to the inflationary pressure, is starting to move in the right direction in terms of getting those inflation. Getting rent growth to slow and getting inflation back to something that we can feel more [inaudible 00:52:54] what do you think?

Cris deRitis:                       That is good news. That is good news. Well in the sense of the problem the lags, right? The lags are an issue, right? Inflation is still going to be high.

Mark Zandi:                      I think this is going to be a shorter podcast because as I said we're all kind of out there running around traveling a little bit. But let's end the conversation like we've ended it a number of times since the beginning of the year and that is, what does this all mean for recession in the coming year? So what is your probability of recession beginning at some point in the next, well, so say through the end of 2023, a little over through the coming year and what is it today and how has that changed? So Marisa, how do you handicap things?

Marisa DiNatale:              I'm at 60% and actually I've come down a little bit on that I think in the last few months. Mostly because like I said, I kind of feel like we're at an inflection and we're starting to see the results of monetary policy cooling things down, but not totally crashing it. And inflation expectations are well tethered. Yeah. So I'm at 60.

Mark Zandi:                      Oh okay. So you said it's come down, so you mean you were at what, 65 or 70?

Marisa DiNatale:              No, I think my high point was 65, 66 a few months ago.

Mark Zandi:                      So you're coming back in. So everyone in the world is becoming more pessimistic, you're becoming less pessimistic. Oh, interesting. Interesting.

Marisa DiNatale:              So are you.

Cris deRitis:                       You've had an effect on her Mark.

Marisa DiNatale:              Yeah.

Cris deRitis:                       You've had an effect.

Mark Zandi:                      Oh yeah. Finally I've had an effect on somebody. No one's listening to me. And the reason you say this is because, to paraphrase what you said, you're now seeing evidence that the rate hikes are having an impact, growth is slowing, which is necessary to get inflation back down and avoid a recession. You're starting to finally see it, that's making you feel a little bit more optimistic.

Marisa DiNatale:              Yeah, and I feel like it is going kind of to script, the Fed script, right? There is of course, as we talked about earlier, there is at least we're expecting three more rate hikes through the end of January. So there's a possibility that it could be overdone. I mean there is a possibility that depending on what the data look like, that they do send the economy into a recession or they have to send the economy into a recession in order to get inflation under control. So I still think that's a big risk, which is why I'm at 60%. But so far I think it's going the way they want it to go.

Mark Zandi:                      Yeah. Okay. I hear you. Chris, okay, where are you?

Cris deRitis:                       I'm sticking with 70%. I've been there for a while now. So 30% chance that we navigate the narrow path that you've laid out. So I think that's still pretty high.

Mark Zandi:                      Can I ask you this? When people put down like these probabilities, they have an arrow pointing up or pointing down to indicate where the risks lie with regard to that probability. So you're at 70, is the arrow pointing up, more risk that it's going to rise, or pointing down more risk that it's going to fall?

Cris deRitis:                       Up.

Mark Zandi:                      Oh, okay.

Cris deRitis:                       Up.

Mark Zandi:                      All right. So you're pessimistic and the risk is that you're not pessimistic enough?

Cris deRitis:                       Enough. Right.

Mark Zandi:                      Interesting. And you don't take any solace in the numbers that they are not, as Marisa said, they feel like they're sticking the script? That doesn't give you any solace, or it gives you solace, but it doesn't really matter?

Cris deRitis:                       They are going to script, but I had already had a counter for that script. It's not deviating from my thinking to this point. I didn't expect a very significant change in terms of the employment picture for example. So it doesn't really influence anything. But I certainly react to the data. But I'm also looking at oil prices, I'm looking at the yield curve, of course. There are still many factors here that are dangerous in terms of recession risks going forward. And the wages are not coming in as quickly as I think would be necessary for the Fed to really take their foot off the brakes here.

Mark Zandi:                      Right. Let me ask you this. Going back to that frame I provided on how we get into recession. One way is the economy doesn't stick to script, it doesn't slow sufficiently and wage price pressures remain intense and the fed appropriately pushes up interest rates and pushes into recession to get rid of that inflation. There is no other way to do it. The economy's ongoing.

                                             And you could argue that's an unreasonable scenario because going to the job market, it feels like businesses are very reluctant to lay off workers, right? They know that their number one problem now and for the foreseeable future through thick and thin is I can't find workers because it's just demographics, right? Okay, my sales are off, the economy's soft and there's a lot of risk, I'll stop hiring, which is what we're observing, but I'm not going to lay anyone off because I know I'm going to need them two years from now and getting them back can be very difficult. Therefore-

Cris deRitis:                       Especially given the pandemic, right? This is what-

Mark Zandi:                      Yeah, right. And they don't lay off workers and therefore the Fed says, "Oh my gosh, I got to completely crush this psychology and I got to raise interest rates." So that's one way we get into recession.

                                             The second way, again, is economy is cooperating, but the Fed misjudges and keeps on raising interest rates, doesn't pause and pushes us in or just makes a mistake. Again, we'll never be able to prove it because you don't know what the counterfactual is, but they make a mistake.

                                             And the third is everything sticks roughly script or very weak and then some shot comes along, oil prices go back over a hundred because the EU botched It's implementation of sanctions or something. I'm just making that up. Or OPEC says, "I'm going to cut another 2 million barrels from my production quotas." That kind of thing.

                                             So what I heard you say is you don't think the reason we go into recession is for the first reason that the economy doesn't cooperate. It could be the case, but that's not the reason why you're saying this. Your probability is a recession is so high. You're saying my probability as a recession are so high is because of the other two factors. The Fed makes a mistake or we get hit by a shot. Am I am saying that right?

Cris deRitis:                       Possible. I guess it depends where you put the investor community. If indeed the financial markets investors are not cooperating, they're not tightening the financial conditions, they keep rallying. Right? Do you consider that the economy not cooperating and therefore the Fed has to be more aggressive? Or is that an-

Mark Zandi:                      That's tertiary, at the end of the day, it's the economy that matters. What happens with financial condition doesn't... That's a driver of whether the economy is cooperating. So under the first scenario, financial conditions are sufficiently tight that the economy slows in a way that inflation is going to go back to the feds target in a timely way.

Cris deRitis:                       Okay, so you would throw that into the third category. If investors just throw characters to the wind and they just are fighting the Fed at every instance and the Fed really has to-

Mark Zandi:                      The economy doesn't cooperate, doesn't slow, that's number one. The economy doesn't cooperate.

Cris deRitis:                       Okay. I guess it's the combination of both then.

Mark Zandi:                      Well no, number three is a shock. It's a negative shock.

Cris deRitis:                       Yeah, but I guess you're saying the investors are not part of the shock either, right?

Mark Zandi:                      They could be if [inaudible 01:01:50] be sold off 40% for whatever reason, that could be... But usually there's a reason for that. There's a shock.

Cris deRitis:                       No, I'm saying the opposite. Right? We've been talking about the need for financial conditions to come in and if they don't right, the Fed is going to have to come in harder. Right?

Mark Zandi:                      Yeah, but that means the economy's not slowing sufficiently because financial conditions are too easy. The only reason why it matters is because it matters what it means for the real economy.

Cris deRitis:                       Correct. Okay. Okay.

Mark Zandi:                      Yeah. So it's all part of number one. I mean, it doesn't matter-

Cris deRitis:                       Okay. It is part of the number one. Okay.

Mark Zandi:                      Yeah, sure. I mean the stock market can go up and down all around. Who cares in the context of what it means, for inflation, unless it's influencing the economic conditions.

Cris deRitis:                       Yeah, but it's not just the stock market, right? It's lending conditions are also easing, right? That's what I'm saying, right? If the rest of the economy reads the situation incorrectly and starts easing right, loosening up and the Fed is going to have to come in much more harshly-

Mark Zandi:                      Because why?

Cris deRitis:                       Right, because it's all psychological, right-

Mark Zandi:                      No, but why? I mean, so supposed stock market rose 30% tomorrow, why did this Fed have to respond to that? Why?

Cris deRitis:                       Oh, because the other conditions-

Mark Zandi:                      The economy is not going to respond. The economy's going to now weaken, right?

Cris deRitis:                       No, but I'm presuming that they're [inaudible 01:03:18]

Mark Zandi:                      Monetary policy because of what it means for the economy, right?

Cris deRitis:                       Correct. But so lending standards are easing, right? There's loosening going on in the economy. All right that's going to, yeah, create inflationary pressures. It's going to add to it, right?

Mark Zandi:                      Why?

Cris deRitis:                       Why is it adding inflationary pressures?

Mark Zandi:                      Yeah. Why?

Cris deRitis:                       It's increasing demand.

Mark Zandi:                      Stronger economic growth, right?

Cris deRitis:                       Correct. Correct.

Mark Zandi:                      Okay, so the economy's not cooperating. Right? I mean, financial conditions only matter for monetary policy in that they're not weighing on the economic growth. The economy is not cooperating with what the Fed needs for it to happen, right? I mean, financial conditions by themselves don't matter. What really matters is the economy, jobs, wage growth, inflation, right? The financial market-

Cris deRitis:                       Right. But those all respond to the financial conditions, right? We just established that. If lending standards are easing, if we're putting more impetus into the economy, right, there's going to be faster growth. There's going to be higher-

Mark Zandi:                      Yeah. Okay. Maybe we're just talking over each other. I mean, at the end of the day, the reason we go into recession on number one is because the economy doesn't slow sufficiently for whatever reason, financial conditions, whatever it is, it doesn't matter. But the economy doesn't slow sufficiently to bring in wage growth and inflation, that's number one. But you're saying that you don't think that's the case. That's not the reason why we go into... I have a reason to press this because I have actually a question I want to ask you, but I'm just trying to understand your thinking around this.

Cris deRitis:                       I don't think it's the main reason. I think it is a potential reason though, right? There's that psychological piece of it that causes businesses to expand.

Mark Zandi:                      But you're saying the more likely reason we go into recession is not because the economy doesn't cooperate, it's because the Fed misjudges going on. Or that we get shot, we get hit by another shock.

Cris deRitis:                       Yeah. I would say it's more likely another shock. They could certainly be related though, right?

Mark Zandi:                      Yeah. Okay-

Cris deRitis:                       One could cause the other.

Mark Zandi:                      Okay. So this is the reason why I'm pressing you.

Cris deRitis:                       All right.

Mark Zandi:                      And it gets down to the forecast, the forecast philosophy. If your thinking is we're going to go into recession because we get a shock, another shock, how do you bring that into a baseline forecast? What do I do with that? I mean, am I just assuming a shock occurs at some point in time and it's big enough that it's going to push us into recession? How do I actually make that work operationally, in terms of producing a forecast?

Cris deRitis:                       So I'm submitting that the economy is in a very vulnerable, weak position. It's extremely sensitive to any type of shock. I don't know exactly what that shock may be, but the probability is pretty high we'll get some type of shock, right?

                                             Most likely. The supply shock of some sort. I can put that into the assumptions. I'm going to have to choose something at the end of the day. So I'll choose an energy price shock here that would ultimately tip us in. Right?

Mark Zandi:                      Okay. So what do I say? That's going to happen in the second quarter, or the third quarter, fourth quarter? What do I do with that? I mean, I'm just making some kind of assumption around that, that there's some event that I don't know what it is exactly, but it will happen, and therefore we're going into recession?

Cris deRitis:                       Yes, that's right.

Mark Zandi:                      So I'm going to make something. In the case of an oil shock, what would you say that would generate a recession in 2023? And when would it generate it?

Cris deRitis:                       Oh, so we go through the winter, I think I've mentioned this before. Europe makes it through, they're trying to refill the tanks come spring and summer. Ukraine conflict is continuing. Oil prices, gas prices, energy prices go up once again. That's sufficient given the vulnerability in the economy to tip us into recession. Combined with the fact that we will have also increased the Fed funds rate.

Mark Zandi:                      And you would make that the-

Cris deRitis:                       And slow down the economy.

Mark Zandi:                      Forecast? That be your baseline forecast? You would say that's what's going to happen, we're going to have that kind of a shock and that's what's going to push us into recession in the second quarter of next year. You would make that your biggest-

Cris deRitis:                       Yeah. If pressed to say what specific event, yeah, that's what-

Mark Zandi:                      No, no, no. Okay. But here we have a forecast, we have a baseline forecast and now Chris, it's your job. You are now the [inaudible 01:08:00] you would do that? You would say, "Okay, we're going to have an oil price shock in the second quarter that would be sufficient to push the economy into recession." And you would have that as your baseline quarter?

Cris deRitis:                       That's my most likely-

Mark Zandi:                      Okay. I'm just saying. But that's what you would do. You would actually have a forecast baseline that has a recession beginning in the second quarter of next year because of an oil price shock.

Cris deRitis:                       Yeah, your point is that there must be a narrative that-

Mark Zandi:                      No, I'm just saying it's... Because I don't know what the narrative is and you're saying there's going to be some kind of other shock. You're forecasting another shock. Or maybe It's something like, it's really matter. The economy is going to be so fragile, at the end of the day, it doesn't really matter. And right now the maximum vulnerability is going to be in the middle of next year. So whatever it is, it doesn't matter, that's when we're going in.

Cris deRitis:                       That's what I originally was saying, yes. But you're not satisfied with that, you want something. I understand that you need to make it's an actual forecast. It has numbers in it. You have to make something, you have to make it work. You have to choose something.

Mark Zandi:                      Well, and also it's very explicit because now we're going to say oil prices jump and it has very different locations for different industries, different regions. And we're saying this is how we get into recession, which feels like a difficult thing to do. You see what I'm saying?

Cris deRitis:                       Yeah. But I think the... Of course I see what you're saying, right. But there are risks on the other side as well, to assume if you do believe that the economy is vulnerable to shock and that the likelihood of... I'm saying that the probability of some shock is significantly high that it warrants being included in the baseline.

Mark Zandi:                      And I totally get that. I totally get it. I totally get it. Except as-

Cris deRitis:                       If you don't pick-

Mark Zandi:                      Reality is, you've got to pick a shock and you got to put it into the forecast. And you almost know by definition that that's going to be wrong. Maybe the highest probability, but it could be a gazillion other shocks that come along, it could be anything.

Cris deRitis:                       It could, if I'm thinking about the end user of the forecast, why are they consuming this? What are they doing with it, right? They're trying to forecast some type of something else. A portfolio of loans performance or sales, revenues, what have you, right? To exclude that possibility that there will be a shock, a recessionary type of event. I think you're biasing in any other direction or you're certainly running the risk that you're not putting enough to help it slow down.

Mark Zandi:                      No, it just feels uncomfortable forecasting in shock.

Cris deRitis:                       I can sense that-

Mark Zandi:                      Forecasting in shock-

Cris deRitis:                       And I can sense that.

Mark Zandi:                      But by definition of shock is pretty hard to forecast. You can't forecast it. You see what I'm saying? But I hear you. It's a very-

Cris deRitis:                       I mean we have, in all fairness, our alternative scenarios do have shocks in them, right?

Mark Zandi:                      Oh, no, no. That I get.

Cris deRitis:                       Right? So we do forecast shots, we do forecast shots in other scenarios. You're just saying the baseline you're not willing. Right?

Mark Zandi:                      All right. Okay. All right. Great discussion, but you see it's mind numbing how difficult this is, to go down the path of forecasting recession based on a shock. Now, if you had said to me the reason we go into recession is because the economy doesn't cooperate. That I get, that's pretty straightforward. But a Fed mistake that's pretty hard to do and a shock is pretty hard to do. But nonetheless a very good discussion.

                                             So I'm at 50% and I was at 55. I'm actually growing more optimistic to, and I do agree with Marisa, it does feel like we've been kind of forecasting the script, but now it feels like the script is actually unfolding and it feels pretty much too script to me. This is what I would've expected if you wanted a soft landing, again, that's not the right word, but if you wanted a non recessionary forecast. But obviously the risks are very high because we could suffer a shock and the Fed could make a mistake, because they have obviously made mistakes. But anyway, okay, I thought this was going to be short. No, go ahead.

Cris deRitis:                       So inflation remains high right? In the first... For whatever reason, I won't even give, if you want a reason, I'll give it to you. Right? So I agree with you, saying mistake seems as though we are really accusing the Fed of negligence. If they're reacting to persistently high inflation for whatever reason, right? That's not a mistake per se, that's the right response. You see that as a low probably type of event though, that by your forecast inflation will be coming down significantly that the Fed will feel comfortable not having to hike once again.

Mark Zandi:                      Yeah, I mean you got to be humble. I mean this is not easy. And in fact, when I talk about the economy avoiding recession, I say recession risk are uncomfortably high, and the only way we're going to avoid recession if we have a little bit of luck, meaning no shocks and some debt policy making no mistakes.

Cris deRitis:                       So you are incorporating it into the forecast. You are incorporating a negative shock.

Mark Zandi:                      Well, no, only because I can't incorporate a shock, and I can't incorporate a fed mistake. I don't know how to do that. That's like-

Cris deRitis:                       But implicitly you are. You're assuming there is, a little bit of luck means no shock, right?

Mark Zandi:                      Yeah, yeah. No shock. No shock. Because to say that there's going to be a shock seems, first of all, very hard to do to say there is a shock. And then the second thing you have to ask yourself, well, what kind of shock? What is it exactly? Because that has very different locations for your baseline forecast, depending on-

Marisa DiNatale:              And when is it?

Mark Zandi:                      What's that, Marisa?

Marisa DiNatale:              And also when does it happen, right? I mean-

Mark Zandi:                      Yeah. When does it happen? Right, yeah.

Marisa DiNatale:              You're kind of just picking a date.

Mark Zandi:                      Yeah. But on the other hand-

Cris deRitis:                       It argues for more scenarios, not-

Mark Zandi:                      You can see I'm being tortured here. I'm being tortured. This is torturous. Torturous. Yeah. But anyway-

Cris deRitis:                       The problem is the risks are asymmetric. Right? That's-

Mark Zandi:                      That's true too. The risk charge asymmetric, absolutely agree. Yeah, absolutely agree. They're asymmetric, yeah. But again, you got to pick a baseline forecast. Anyway-

Cris deRitis:                       It also depends on what are you using this forecast for, right?

Mark Zandi:                      Yeah. We flogged this to death. We'll come back to it. I'm tired.

Cris deRitis:                       We will.

Mark Zandi:                      I'm tired. Okay. I thought it was going to be a short podcast, but it turned out to be a long one. Hopefully people find this, do you think... I hope they find this interesting because I don't know if it's too deep into the weeds, but-

Cris deRitis:                       Our bickering is entertaining, I guess.

Mark Zandi:                      Oh, definitely entertaining. Yeah. Okay. Anything else? Last words of wisdom? Okay.

                                             Marisa, thanks for joining. I know a little bit more difficult for you on the road.

Marisa DiNatale:              Oh sure. Yeah, no problem. No problem.

Mark Zandi:                      Yeah, I appreciate that. With that, we are going to call it a podcast. Talk to you next week. Thank you.