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Moody's Talks - Inside Economics

Episode 68
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July 22, 2022

Firewall and Faltering Feelings

Mark, Ryan, and Cris welcome colleague, Scott Hoyt, Senior Director at Moody's Analytics, to dissect the state of American consumers and how they are the firewall to avoiding a U.S. recession.

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

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and I'm joined by, per usual, my two co-hosts, Ryan Sweet. Ryan's the director of real-time economics and Cris deRitis. Cris is the deputy chief economist. How are things this week?

Cris deRitis:                       Hanging in there.

Mark Zandi:                      You always say that, Cris. You're always hanging in.

Cris deRitis:                       Someday I'll be on one extreme or the other, but today it's hanging in.

Mark Zandi:                      Zero is bad. 10 is good. Where are you this week?

Cris deRitis:                       I'd say a nice six.

Mark Zandi:                      A nice six. Okay. I'm going to ask that every week and see where he lands.

Ryan Sweet:                      He's normally probably at a five, because he's middle of the road, right down the middle.

Mark Zandi:                      I know, he wanted to say five.

Ryan Sweet:                      He did.

Mark Zandi:                      But knew we were going to rib him if he said five so he said six. Am I reading you right, Cris?

Cris deRitis:                       I come on here for the therapy.

Mark Zandi:                      Right. And of course the fellow who's chuckling over there is our other colleague, Scott Hoyt. Scott, good to have you on.

Scott Hoyt:                        Thank you. My pleasure to be here.

Mark Zandi:                      This is your first time on Inside Economics.

Scott Hoyt:                        Yes, it is.

Mark Zandi:                      Well, good luck with that. We'll see how that goes. Scott is a consumer expert, an expert on particularly the American consumer and you've been with us for how long, Scott?

Scott Hoyt:                        A little over 20 years now.

Mark Zandi:                      Is that right? 20 years.

Scott Hoyt:                        Yeah.

Mark Zandi:                      I did not know. I thought somehow it was 10, but it's... Oh my goodness gracious. Did I hire you? Who hired you?

Scott Hoyt:                        You did.

Mark Zandi:                      I did. I hired you. Of course. That was a great hire 20 years ago. And you came from J. C. Penney as I recall.

Scott Hoyt:                        That's correct.

Mark Zandi:                      Does anyone remember J. C. Penney?

Cris deRitis:                       Of course. Come on. Really?

Scott Hoyt:                        There's still a few stores around.

Mark Zandi:                      Are there really? I did not know that. Is there?

Scott Hoyt:                        Yes.

Mark Zandi:                      They're still kicking? I thought they went bankrupt for some reason.

Scott Hoyt:                        Well they did, but they've come out of it with new ownership and they do still exist.

Mark Zandi:                      I did not know. Any J. C. Penney's here in the Philadelphia region?

Scott Hoyt:                        I'm not sure. There're certainly none particularly close. I haven't been to one in a long time, but I read about them periodically. I track how they're doing. They're definitely still around.

Mark Zandi:                      So Scott, your boss at J. C. Penney, he was a really good economist. I can't remember his name. Who was that?

Scott Hoyt:                        Ira Silver.

Mark Zandi:                      Ira Silver. Ira. You chatted with him at all or is he...

Scott Hoyt:                        No, I lost touch with him.

Mark Zandi:                      Good guy. Very good guy. But it's good to have you on because we're going to talk about the American consumer. In my mind, the key between continued expansion growth and a recession, the firewall, so to speak. So we're going to talk about that in depth. Just as a side point, we were supposed to have a Princeton University professor, Alan Blinder on. Great guy, done a lot of work with Alan over the years and he lost his voice or came pretty close to it. And he has a sonorous... That's a word, right? Sonorous.

Ryan Sweet:                      I don't know. I had to Google that. I was like, "This is another Zandi word."

Mark Zandi:                      No, but it's a real word. It's a real word. Yeah. sonorous. He's got a very sonorous voice and we wanted the world to hear that. So we postponed till next Friday. So next Friday and very much looking forward to that. I think I might have said this in the past, but there's some economists that no matter what they say pretty much, I disagree with, Ryan's going that [inaudible 00:04:21] number one. Yeah. I'm only kidding. And there's some economist, no matter what they... Almost, no matter what they say, I say, "That makes sense. That's right." And Alan blinder is like, I don't think I've ever heard him say a thing that I disagree with. It's really weird bizarre. I don't know if he would take comfort in that or not, but it's true.

                                             And I can't wait to have him on that would be really fun to have a conversation with him, but let's talk about the American consumer and maybe can I do it this way? Can I hog the mic for... Of course, I've been hogging the mic, but can I continue to hog the mic here for just a few minutes, lay out a case and then turn to each of you guys to push back, disagree, agree, provide color, flesh it out, all those things sound okay?

Ryan Sweet:                      When we say no.

Scott Hoyt:                        Yep.

Mark Zandi:                      [inaudible 00:05:13] because I don't have a plan B, you got a plan B.

Ryan Sweet:                      Okay. All right. Great. [inaudible 00:05:17].

Mark Zandi:                      I like your plan B. What's your plan B. Okay. And of course we're going to do the game, the statistics game. And I think we should spend, a little bit more than we typically do on recession probabilities. I'm just getting a little nervous.

Ryan Sweet:                      You should be.

Mark Zandi:                      I should be.

Ryan Sweet:                      Yeah.

Mark Zandi:                      But it depends on the day and the time of day, how I feel about things and recession odds. But let's talk about that. And I think we need to resurrect, I think maybe it was you Ryan, he suggested we resurrect some of those statistics we've been looking at back a year ago or so when the podcast started to gauge where we are in the business cycle, that would be helpful. Okay. All right, here, this is the case. So, my view and the baseline outlook that we continue to hold to the baseline being the most likely scenario in the middle of distribution of possible outcomes is a non-recessionary scenario, right? The US economy.

                                             And we're focus on the US economy here is, obviously going to struggle already growth is weakening, but it's going to make its way through without going into a full blown, outright economic downturn. And there's a number of arguments as to why that's the case. But the argument at the top of the list is the American consumer. And the consumer is the firewall in my mind between continued economic growth albeit week and a recession and outright recession. And the firewall, the consumer feels like they're in good shape, moral less. I mean, yes, the firewall is on fire. That's the inflation and high inflation is cutting into real incomes. People's purchasing power. And most times that would be a real problem. 8%, 9% inflation, would be wage growth, 5%. That would be pretty tough to digest. Consumers would be pulling back, but less of a problem in the current context because households, consumers have a lot of extra savings.

                                             Savings they built up during the pandemic either because if you're on the high income side, you were sheltering in place and not spending a lot of money or as much money as you typically do. You couldn't travel. You couldn't go to ball games. You couldn't go to restaurants, you saved it. And then for lower income households, low middle income households, you have excess saving. Cause of all the government support that was provided during the pandemic $5 trillion worth stimulus checks, three rounds of stimulus checks, unemployment expanded, enhanced unemployment insurance, rental assistance. A long list of things. Also, the firewall feels strong. The consumer because a lot of jobs we're still creating at least through the month of June, a lot of jobs. And we should come back to that. Unemployment is low three, six. Wage growth has not kept up with inflation, but it's not.

                                             It has accelerated, it's five, 6%. So depending on... And for low wage workers, the lowest wage workers is actually has kept up with inflation. The wage gain, there have been more significant. Leverage is low households de levered, they reduced their debt loads during the financial crisis in the post crisis period. Leverage is starting to pick up again. People have been borrowing, but pretty consistent with incomes and no nothing. I mean, if you look at household debt relative to income, that feels declined after the crisis is now pretty stable. And debt service is very low because interest rates up until recently have been very low. Consumers have done a good job of locking in the previously low interest rates, record low interest rates through refinancing waves. So, if you're a homeowner, you probably have a mortgage with a three and half to 4% mortgage rate go and that's 30 year fixed or 15 year fixed. It's not going to rise.

                                             So leveraged debt service is low and yeah, the stock market is down. Although I don't know if you guys have noticed, but set a good couple weeks here, come back a bit, but say it's down 20%, but the house prices are up 20%. So the net is consumers are as wealthy today as they were a year ago. And they're a lot wealthier than they were three years ago or five years ago or 10 years ago. So, you add it all up. And it seems to me that it suggests that the consumers going to hang tough. They're not spending with abandoned, they're not going out there and partying hard. In fact, you remember back about a year or two ago, there was a lot of speculation that they would be at this point in time because they have all that excess saving. That doesn't seem like that's what they're doing. They're just doing what they do. Spending at a pace is consistent with a more typical economic environment, the pre pandemic environment, not too much, not too little, just enough to keep the economy going.

                                             Okay. As long as that continues, as long as the consumer hangs tough, that firewall stays up, the economy should continue to navigate through, because the consumer drives the train. They're the biggest part of what goes on in the economy. And if they're doing their thing, we should be okay. By the way, just as a side point, then I'll stop. Get your reaction to all this is that the... It feels like the American consumers driving the train for the entire global economy, right? They're buying everything we produce here in the US and a lot from overseas. The US trade deficits been gaping out. In fact, the biggest drag on GDP growth in the last... Certainly since the beginning of this year and probably for the entire... Since this time last year is the gaping out of the trade deficit, which goes to the consumer American consumer hanging tough. Obviously the strong dollar also is contributing to that, but the consumer's driving is a firewall for the US economy.

                                             And it's driving the train for the global economy very different than was the case during the teeth of the pandemic. We're back in the financial crisis when Chinese businesses were driving the train that's China has been struggling because of the COVID lockdowns, but the US is leading the way here. Okay. I just laid it out there for you that long soliloquy and maybe not a Shakespeare soliloquy, but Zandi soliloquy. And what do you think? And let me turn first to Scott because he's our guest and the consumer expert. What do you think Scott?

Scott Hoyt:                        I think fundamentally I agree with your conclusion, although I'm a little concerned that you may be downplaying some of the risks and I guess I'll start with your discussion of debt because I was looking at that recently. And if you look at the trend in the growth in consumer debt prior to the pandemic and look at the level, now we're actually above where that trend would've suggested. Now debt burdens are very low because the composition of debt has changed a lot during the pandemic, credit card balances, which are among the highest interest rate debt and out there plunged and mortgage debt started taking off, which of course has relatively low required payments because it's lower rate and longer term. So debt burdens are low, but the level of debt is actually if anything, a bit higher than a trend analysis prior to the pandemic.

Mark Zandi:                      But wait a second. So, Scott, so you're saying you agree with the conclusion that the American consumer is doing what they need to do to keep the economy moving forward? You agree with that?

Scott Hoyt:                        Yes. I agree.

Mark Zandi:                      But you're saying there's a lot of risk to that. And the first thing you go to highlight the risk is debt the borrowing, the leverage.

Scott Hoyt:                        Yes. Well, a lot of it ties back to inflation. Well, I mean, we're obviously going to spend a lot of time on that because the inflation is now forcing the big increase in credit card borrowing and we don't know for sure yet how much of that is transactional and how much of it is actually evolving. But if we shift the composition of debt back towards consumer debt, when the level's already high, then you potentially do run into a rapidly rising debt burden.

Mark Zandi:                      Let me turn to Cris, because Cris spends a lot of energy and his time on consumer credit household credit. Does that ring true to you Cris? [inaudible 00:14:17]. I mean of all the things I just laid out, the thing I felt most strong and good about was debt and leverage. That was not where I would've gone, if I was going to push back on kind of the narrative laid out. But what do you think, is that something we should be concerned about the household leverage and debt?

Cris deRitis:                       I think so. I tend to agree with Scott and I think [inaudible 00:14:36]. My perspective and just more generally with your comments, I think it's a bit sanguine in terms of looking at the average... If you think of the consumer, average consumer, it obscures a lot of things that are going on underneath and that I think the debt issue is particularly heartfelt by the lower income part of the population. So you do see debt rising, you do see bank card usage, what up 16% year over year. We have another category in our Equifax credit forecast database called consumer finance, which are unsecured loans. That's up 22%.

Mark Zandi:                      Yeah. But that's a hundred billion dollars, right?

Cris deRitis:                       But that's where a lot of those lower income households are in terms of accessing credit. Right? If you have a lower credit score, if you don't have all the ability to access a home equity loan or even a credit card, you go to these other debt sources. So seeing that rise very rapidly, I think is an indication of the weakness, certainly of that part of the consumer segment.

Mark Zandi:                      So you're focusing on and we have great data here. So the data is fabulous, right? We get the data from credit bureau, Equifax every month, all the credit files in the country. So we know exactly, for the month of June, how much debt is outstanding. Much better than the Fed's data, by the way, which, you want to get into the Wes and Cris can do it. Our data is saying something different than the Fed data, right? The Fed data's been showing very strong increases in consumer credit, revolving credit. And our data shows an increase, but not nearly the same degree as the Fed data. Is that's correct. Did I have that right?

Cris deRitis:                       That's probably you're talking about the G.19.

Mark Zandi:                      The G.19.

Cris deRitis:                       The Federal Reserve Series.

Mark Zandi:                      Yeah.

Cris deRitis:                       Yeah. I mean, trend wise, they're both showing increases.

Mark Zandi:                      Yeah.

Cris deRitis:                       But in terms of the levels, there's some differences there. And I think ours is because we have a little bit more detail. We're going back to the actual source of credit report information. I do think it's more accurate from that perspective.

Mark Zandi:                      Let me push way back though.

Cris deRitis:                       Yeah. Okay.

Mark Zandi:                      I'm going to push really hard back on this.

Cris deRitis:                       All right.

Mark Zandi:                      So if I add a total revolving credit. Revolving is bank card debt, retail card debt. And then I throw in your consumer finance just for you, I'll throw that in a hundred billion. Is it a hundred or maybe it's 200 billion. I can't remember for context, a listener that total household debt is $16 trillion. Right. So we're talking, very, very...

Cris deRitis:                       Yeah. You're throwing in mortgage, home equities.

Mark Zandi:                      Yeah. The whole shooting match. But okay. But if I take all revolving bank card, retail card and consumer finance, the level today is only now back to pre-pandemic. Right?

Cris deRitis:                       Yeah.

Mark Zandi:                      If you take a look at that chart, it's only... So the level is no higher than it was in early 2020 before the pandemic hit. Here's the second thing.

Cris deRitis:                       But it's rising rapidly, right?

Mark Zandi:                      Well, okay. But inflation is rising rapidly. So if I'm just buying the same stuff that I was buying a year ago, it's going to be up in the 8, 9. It's going to be up 9% by definition. Right. Because inflation's up 9%. I'm going to paying 9% more for gasoline, food, rent, airline tickets, that kind of stuff. Right?

Cris deRitis:                       Well, incomes are not up eight, 9%.

Mark Zandi:                      Oh, that's a different story.

Cris deRitis:                       Well, I think it's germaned to the story, right? Yeah, you're right. If prices were going up, That should go up at the same rate. No problem. As long as incomes are offsetting that as well.

Mark Zandi:                      Yeah.

Cris deRitis:                       The disconnect is the problem. Right? You do have accelerating inflation. Debt's going up rapidly.

Mark Zandi:                      That goes back to real income shock. It's not leveraged per se. It's the fact that my purchasing power is reduced. Right? So I guess, they're related. But here's the other thing. And Scott alluded to it. How much of what we're saying is simply I'm borrowing or simply I'm revolving more, I'm just using my card more. I've got a lot of cash in my bank, bank account from the excess saving and I feel more... And I'm now spending more on things that would require, or you would generally use for a card. Like if I get on an airplane, I'm going to use my card. Right? Because I want those miles on my card.

Cris deRitis:                       Yeah. So at the higher end, we do see a credit card debt accelerating there as well. But I'm not as concerned about that population. I think it's for the reasons that you mentioned. People are going back to business travel or personal travel. They are using their credit cards more at that end. But the nice thing about our data is that we can break it out by credit score band.

Mark Zandi:                      Yeah.

Cris deRitis:                       And so we see that not only is the debt rising rapidly in that killer, but it's also rising very rapidly at the lower end of the credit score distribution. And that I associate with people not so much using the credit card for these other discretionary items, but because of necessities. Prices are going up and they have to tap into credit because their incomes are not sufficient.

Mark Zandi:                      Here's the other thing I've heard. And it's just anecdotal. And maybe we have data and I'm just not aware of it. The payment rate, that is what percent of the card bill you get every month you pay back. And that's been very, very high. People are paying back on their cards. And at least through the month of may, June, and this is anecdotal that just talking to people in the industry, those payment rates remain really high, for the folks in the industry, uncomfortably high, because they want people to revolve. That's how they make... Significant way, how they make their money. When they lend you money at a high interest rate, that's where they're making money. So, they don't want you to default. They don't want that, but they'd love for you to revolve that amount outstanding, so that you pay interest on it. Is there any data out there? Have you seen any data on that particular statistic? I don't think it's in our database from Equifax. Is it Scott? Do you know?

Scott Hoyt:                        I thought it was, I haven't looked at it recently, but I did.

Mark Zandi:                      Oh, is it?

Scott Hoyt:                        I thought it was in the Equifax database. I mean, I think that was one of the ones that at least back in the day when I followed it more closely was perhaps viewed as with a little more suspicion, less reliability than some of the hard numbers. But because they were estimating it. They didn't Equifax doesn't receive payment data. They have to estimate it.

Mark Zandi:                      Yeah. So do you know Cris? You know that data really well?

Cris deRitis:                       It is in there? I haven't looked at it. We haven't looked recently either, but I will take it. It wouldn't surprise me though. It wouldn't surprise me if now up till now, people are. To your point, if you look in aggregate as well, people do have savings at the higher end, certainly.

Scott Hoyt:                        And a lot of it is going to be at the high end. I mean the folks on this call for example, were all, probably spending more at the gas pump and we're paying it all off.

Mark Zandi:                      Not me. I'm not driving it all. I got my least car. I'm telling you, I got it. I'm talking like 20 months ago and guess how many miles I had on it? Just guess how typically [inaudible 00:21:50] 12K a year something I believe. Right? You can drive up to 12K.

Ryan Sweet:                      Are you taking this one up and back from Florida?

Mark Zandi:                      I have not. No.

Ryan Sweet:                      That changes the calculation right there.

Mark Zandi:                      Yeah. But even that, I mean my other car where it would... I'm racked up a lot of miles on-

Cris deRitis:                       But this is your commute-

Mark Zandi:                      ... 7,000 miles. 7,000.

Cris deRitis:                       So, this is the daily commute to Walla to get the coffee and back.

Mark Zandi:                      That's it. Yeah. I might one sundry. I have to get wine, every so often. So do that. What else do I do? I go to the gym.

Cris deRitis:                       I'm constructing your CPI basket.

Ryan Sweet:                      Right. On the fly.

Cris deRitis:                       On the fly.

Ryan Sweet:                      Still add hos to it.

Scott Hoyt:                        So some of us still have kids that were either taxing or who were driving themselves all over creation and on our... And then using our credit card when they go to the gas pump. And so I can tell you, my transactional balance is up a lot from a year ago just for that.

Mark Zandi:                      What was that whole thing about? Hoy's I missed that.

Ryan Sweet:                      No, I was just saying not to include that in your basket for the CPI, since you are anti Hoy

Mark Zandi:                      I'm well, I'm not anti Hoy. I just can't eat Hoy's I'm very pro Hoy actually. I just wish I could eat them, but they don't agree with me unfortunately. Yeah. Anyway, back to leverage and debt. Okay. So you guys are saying that maybe the firewall, the consumer isn't quite as strong as I think... Here's the other thing on debt. I want to just throw out. Delinquency rates are low, right? I mean, they're going up, but they're what I consider to be normalizing back to pre-pandemic, because they had fallen dramatically during the pandemic because all the government support. Right. All of the forbearance and student loans and mortgages and rental payments and all kinds of things that allowed people to not pay on their debt. And the result is measure delinquency rates, at least from the credit bureaus, because you couldn't report someone on forbearance as being delinquent on the credit file. They're just normalizing. Or am I missing something? There's something in the data that you're observing that I'm not observing on the delinquency side, which be a real sign of stress, obviously.

Cris deRitis:                       They are low, but they are rising and I would point out the denominator effect. Right? We just said that they're could point bank card balances are going up 18, 20%. That's going to suppress the delinquency rate.

Mark Zandi:                      But we can look by vintage. I have not done that. Like what is the delinquents rate on all loans originated in 2019. I have you even looked at that, anyone looked at that, we probably might. That'd be a good thing to take a look at just to see. But anyway, yeah.

Cris deRitis:                       I mean they're all across the... It's not like anything is really screaming at this point, but just something to bear in mind that-

Mark Zandi:                      Bear in mind. Okay.

Cris deRitis:                       It could rise. I don't know [inaudible 00:24:50]

Mark Zandi:                      Hey Ryan. Oh sorry. Go ahead. Go ahead Cris.

Cris deRitis:                       Anything to add to that, Scott? I know you look at the data pretty carefully.

Scott Hoyt:                        Yeah. Well I guess my thing with this, like so much else in the economy today is, can we make the smooth landing or as the delinquency rates rise, are they just going to blow through equilibrium and turn into a problem that's going to be a threat, say sometime next year. I mean, I wouldn't worry about credit quality this year, but how much room do we have and can we really level it off? And again, it's going to depend to some degree on inflation relative to incomes and how that plays out over the next 12 months. But in a relatively high, if inflation remains above, incomes, then I worry about the strength of this piece of the firewall over time.

Mark Zandi:                      Totally. In my mind that is the chink in the firewall. I mean, if inflation doesn't come in, if it stays high and real incomes remain under pressure and low middle income households run out of that excess saving, then we got a problem. But that's not our baseline, but that is definitely a problem. Yeah. But you put your finger right on it. I think that broadly, why my feeling about what's going on ebbs and flows daily, hourly month, week, minute by minute because the plane is coming into the tarmac. It's coming in, it's coming slow, growth is slow and as scripted, that's exactly what it's supposed to do, but is it going to actually land or is it going to skid off the runway or crash or what? And that's where we are and the winds are blowing. The cross currents are blowing here. So it makes it very, very nerve-wracking. Hey Ryan, on this debt issue, anything else you want to add on that?

Ryan Sweet:                      No, I think we covered it all. I think the key thing is inflation. I mean it's $493 additional cost for the average household to buy the same basket of goods this year, as they did last year. That's an enormous burden, particularly on Cris pointed out lower income household. So I think, in aggregate it looks like everything's okay. But I think with up and down the income distribution, there's some stress points.

Mark Zandi:                      Okay. Now, so going back to the frame, there's the consumer, the firewall things that are supporting the consumer. We just talked about letting debt and leverage, and that's the last thing I would've gone to, but that's the first thing Scott went to, but okay, fair enough. The first thing I would've gone to is what you just did and that's real incomes. The high inflation rate. So if inflation stays at nine on CPI and wage growth stays at five and that's where it feels like it roughly is in aggregate that's minus for real income, you can only do that for so long.

                                             We're fortunate that households, including low income households had a lot of excess saving built up during the pandemic. So they seem to be supplementing the hit to their real purchasing power by drawing down on their savings and that you can see it in the data in terms of saving rates. But you can only do that for so long. And so this feels like the most serious thing, but on that front... So, let's talk about that for a second, because I think that's key that goes to the rate of inflation. You have this great chart that decomposes or great data that decomposes. Actually I will say Cris improved on your...

Ryan Sweet:                      He did.

Mark Zandi:                      He did.

Ryan Sweet:                      That was a good point to add rent. Yeah.

Mark Zandi:                      Now I stall Cris' chart and I tweeted it. Did you guys notice this? You didn't find my Twitter feed? No.

Cris deRitis:                       I'm having Twitter problems.

Mark Zandi:                      You're having Twitter problems. What do you mean?

Cris deRitis:                       I can't get no, I can't post.

Mark Zandi:                      You got [inaudible 00:28:51].

Cris deRitis:                       Apologize to everyone who's tweeting. I can't actually respond.

Mark Zandi:                      Oh, that's Ryan.

Cris deRitis:                       [inaudible 00:28:56] IT issues here.

Mark Zandi:                      He's all over your Twitter feed. I've noticed.

Ryan Sweet:                      Now my work is doubled. I got to keep up with both of you on Twitter.

Mark Zandi:                      I know it's crazy. This whole thing. This whole Twitter thing, but where was I? Oh, so the decomposition of inflation and take the 9% CPI inflation through June, actually precise... Just to be precise to everybody 9.1, but let's just say it's nine to round, of that five percentage points roughly is energy, right? And then you got another percentage point or so that's food, which is also mostly energy because of diesel prices. Then you got another one and a half percentage points due to supply chain disruptions that still are creating havoc in some industries like the vehicle industry and high vehicle prices.

                                             You net all that out, you're down to two and a half percent and that's the Fed's target two and a half percent. So if energy prices simply go flat, they don't even have to decline. They go flat. And food prices go flat, which seems more than likely if energy prices do. And the supply chain disruption. I know there's a lot of ifs, but just go with me. I could see everyone. It's like a volcano ready to burst. The supply chain issues continue to improve and they've been improving.

Ryan Sweet:                      They are.

Mark Zandi:                      Then we go to two and a half, right? No. Okay. So that's the baseline forecast. What do you think of that? And obviously the risks around. Cris, let's go back to you because you're the one who's most... I think you, it seems like you're the most skeptical of that outlook.

Cris deRitis:                       We will get back to two and a half I'm not doubting that. It's just a question of timing and how right. So, those are a lot of ifs and I think there are other ifs that are not included there. Right. You're assuming everything moves in that one direction. Yeah. But another disruption ECB hikes, 50 basis point, right. There are lots of things going on here that can impact the outlook.

Scott Hoyt:                        Yeah. But is that consistent with high rent inflation because I mean rental price inflation tends to be persistent and house price growth hasn't come in yet. I mean, I'm sure it's going to, but it hasn't yet. So it needs to come in and then that's going to take some time before it feeds through to rent. So, rental price inflation's going to stay high for a while and doesn't that... Can you really get to two and a half if you've got rent price inflation at, I don't know what four or higher.

Ryan Sweet:                      It's five and a half. Isn't it?

Scott Hoyt:                        Okay. Five.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Yes. That's a good point. So, so rent inflation is a CPI shelter, which is tied to rent growth has been accelerating and adding more and more to inflation going back to the low vacancy rates across the housing stock, the severe shortage of homes. But as in that decomposition, I just did that's through June and it includes the contribution of higher rent inflation to CPI. So I'm assuming that remains the same going forward about the same. And it probably will rise a little bit more before it comes back in. But my guess is by 2024, it'll start coming back in and be pretty consistent with where it is today. Still contributing a lot to inflation, but still consistent with 2.5%. And by the way, 2.5%, that's kind of the high end of what I consider to be the Feds truck.

                                             They never said two and a half. They say two, which is the core consumer expenditure. But given the CPIs mostly around housing, it's much higher weights on housing and other measurement issues, two and a half seems to be the high end of the range. That's my take on things. So yeah, I am counting for the higher rate rent inflation, but Cris, back to you.

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay. You're right. I mean, there's all kinds of risks to what I just said about where inflation is headed, but those are risks, right? You can't forecast those things, right? I guess you can forecast there's something that... Or some period of time, there's something else that's going to go wrong by definition almost by just probability draws. You're going to get that. And therefore you're going to get something along the way. And therefore we're not going to get inflation coming in as fast as we think.

Cris deRitis:                       Yeah. I don't know where the next disruption in the oil market is going to be, which specific country, which specific area, but pretty good chance. There's just going to be one in the next six, 12 months. This takes a hurricane.

Scott Hoyt:                        Well, I was just thinking that you get a big hurricane in the Gulf that disrupts production for a while. And I think they're forecasting an active season.

Mark Zandi:                      Yeah. Okay. All right. Fair enough. So that's an interesting problem as a forecaster though, right? Because your baseline can't include or jet could it or should it?

Cris deRitis:                       It should. Right?

Mark Zandi:                      How? I mean, because you don't even know what it is. If it's one thing, if it's a hurricane to wipes out a refinery on the Texas coast, it's another thing. If the EU decides to actually implements sanctions on oil, it's another thing. If the Russians stop shipping natural gas to, or in stops, ag shipments coming out of Ukraine and Russia. So, how do you account for that?

Cris deRitis:                       Well implicit in your oil price forecast, you're making some assumptions about those other, you can keep the forecast oil prices higher than what you would otherwise expect. Assuming that there will be some other. You attach some high probability, some to one of these other events.

Mark Zandi:                      Well, we're basically doing that though. Right? Because we have we're at $100 oil and that embeds market expectations for all the risks you just articulated. Right? So presumably, maybe it doesn't capture it fully, but presumably they attach some... Traders are attaching some probability to all of those different scenarios. Right?

Cris deRitis:                       That's right. Yeah. I guess I'm attaching an even higher probably probability than they are.

Mark Zandi:                      Yeah. All right. Okay. I mean, that to me, you're right. That is the biggest chink... Potential chink in the firewall and that is, inflation remains higher for longer. Yeah. Because if that's the case, then we blow through that excess saving and consumers have to pull back and the firewall comes down. All right. Okay. So we talked about leveraging debt. We talked about real income purchase power inflation. What about... Ryan, I'll turn to you next. You brought up the real income. I should turn to Cris next. Cris, what would you point to. Well, of all those things I just said, in my rank ordering the least thing I'm worried about is leverage. The most thing I'm worried about is inflation. What about you? Or did I even miss something that you would point out when thinking about the consumer and how consumer's going to spend going forward?

Cris deRitis:                       Well, I think it's a question of timing, right? In terms of the most immediate threat, I would agree with you. If inflation remains high, real wages are low or negative, consumers are going to pull back in the short term immediately. Right? But I think Scott is thinking three steps ahead of us here with the debt saying, "Even if we get through this patch here, on the other end of this, as we get into early 2023, we may still have a debt issue." Right? If consumers are piling up, all this variable rate debt, interest rates are rising, that's going to put even more pressure on their balance sheets later on. So, I think both matter, I think it's a question of what's your time horizon, what you're most focused on.

Mark Zandi:                      Interesting. So, your inflation and leverage would be at the top of your list of concerns, but depending on your horizon, your timing.

Cris deRitis:                       That's right.

Mark Zandi:                      Inflation most immediately. And then if you look out a year or two leverage becomes more of an issue if current trends continue correct.

Cris deRitis:                       Right. Because it takes times for the... If you're talking about leverage in terms of the problem, right? You can put on some additional debt. Now you can keep making your payments for a while, but when it becomes an issue, we'll be later on when things slow down perhaps and when the rates are continuing to rise, that's when the debt burden will become more.

Scott Hoyt:                        And when you've flow through your excess savings.

Cris deRitis:                       Exactly.

Scott Hoyt:                        Which at the low end, particularly, probably isn't going to take that long.

Mark Zandi:                      Well, I don't know about that. So let's turn to excess saving. I mean, obviously it's hard to estimate, right? But we do our calculation, you do them Scott, right?

Scott Hoyt:                        Yep.

Mark Zandi:                      You and Matt Walsh do these estimates based on the survey of consumer finance and the financial accounts, the Fed data. And it's lagged because... The data here is lagged. We have data through the first quarter of 2022. So let's say March, because I think it's year it's month ending data. So it's a little bit lag. But when you look at that data, it gives you the sense that people have a lot of excess saving across an income distribution. Even those folks in the bottom part of the distribution, I think the bottom quintile, we estimated excess saving at about $5,000. So, just take that group, which it's a little bit weird to look at that group, because I don't know that there's a lot of things going on there, retirees and students and other stuff, but let's just use that group 5k.

                                             If Ryan's calculation is that the higher inflation is costing the typical household 500 bucks more a month to buy the same goods and services as they were a year ago. That's probably on the high end for those folks in the bottom quintile but let's just go with it. That gives them 10 months of cushion until hopefully inflation comes in and then they start to have a real problem. If you do that's... By the way guys, that's what economists or listeners, that's what economists call a back of the envelope calculation. But would you concur with that analysis or anything to say about that on the excess saving side and by the way, just to round it out for the typical American household. So kind in the middle of the distribution of income, excess saving is probably closer to 7,500, 8,000. And for the folks it's the high end, it's like crazy high it's like the top quintile is 100K in excess savings. So a lot of savings. But is that the way I characterize things on the excess saving consistent with the way you think about it, Scott?

Scott Hoyt:                        Yeah, I think that's fair. I guess my concern though, is that, I mean your 10 month number is on average. You're going to have an increasing share of consumers that have used it up as time passes. And when you get to that average number, you've probably got something on the order of half or maybe even a little more because we know distributions tend to be skewed. So, you're starting to see folks in trouble before that. And I also, while I think our excess savings estimates are good, I do worry about some of the underlying assumptions. And I wonder if we may not be overestimating how much the low income folks have. Because a lot of our assumptions are that shares that were in place in 2019 have been maintained and nothing much was maintained in 2020 from 2019.

Mark Zandi:                      Although, we know the aggregate. We're pretty well.

Scott Hoyt:                        Yeah. We're pretty comfortable. Well-

Mark Zandi:                      Well, even there maybe.

Scott Hoyt:                        Yeah, because given the magnitude of revisions to savings [inaudible 00:41:06].

Mark Zandi:                      Saving gets revised up, not down, but regardless, right. 2.5 trillion, an overall excess saving.

Scott Hoyt:                        Yeah.

Mark Zandi:                      That's a lot of excess saving.

Scott Hoyt:                        No, I agree. I think that's a huge buffer and I think that's... And that's why I said at the start, I think the risks maybe higher than what you portrayed in your opening monologue, but I agree with your forecast because [inaudible 00:41:27].

Mark Zandi:                      So what do you think Scott, not monologue.

Scott Hoyt:                        I'm sorry. Solo. Forgive me. Please. But I mean, that's why I agree [inaudible 00:41:34].

Mark Zandi:                      I respect that please to someone.

Scott Hoyt:                        I do think because [inaudible 00:41:36].

Mark Zandi:                      Little modicum of respect, I don't get it from my two co-host, but my guest please.

Scott Hoyt:                        My trouble is more whether you're underplaying the risks than with the baseline, because I agree with the baseline. I think there's a lot of excess savings out there. And I think that will... Under baseline assumptions that will cushion us through. So, I'm not challenging the baseline, I'm just questioning whether you're underplaying the risks.

Mark Zandi:                      Got it. And Cris, you looked at the... Which is a goes back to this question about how much excess saving is available for low income households, particularly the bottom quintile.

Cris deRitis:                       Yeah.

Mark Zandi:                      You looked at the distributional financial accounts. You want to explain that analysis? Because I thought that was pretty cool.

Cris deRitis:                       Yeah. So it's a bit of a narrow definition that I use and it paints a different picture here. So the Federal Reserve does put out a data set of distributional accounts where they go through, they have a process for taking their income product data, the national accounts, and distributing them across different deciles of income of wealth by age cohort by race. Right? So they're a number of different cuts that they provide. If you look at the income distribution and I focus just on the liquid assets. So look at checkable deposits and currencies. How much cash on hand do people actually have in their accounts. If you look at that series and you break it out by income, you actually see that the bottom 20% of households have less cash on hand than they did prior to the pandemic.

                                             So, that's where I come up with the conclusion that they are... That group is really suffering much more than what you see at the other end of the distribution. And it also explains why they would be going out and getting more credit, right? Accessing more credit to supplement incomes because they don't have the buffer that the other groups do.

Mark Zandi:                      Yeah. And that was a really cool analysis because you're just looking at things that deposit accounts, as you say. And you can measure that, right? The banks report that and the Fed brings that into the data.

Cris deRitis:                       That's hard data, if you.

Mark Zandi:                      Hard. Quote unquote, hard data. But across all the other income groups, the top 80% or quintile. Yeah. 80% of the distribution deposit the amount of cash sitting in those accounts is higher.

Cris deRitis:                       Much higher.

Mark Zandi:                      Much, much higher.

Cris deRitis:                       Especially [inaudible 00:44:13].

Mark Zandi:                      Really the bottom 20% is what you're saying is it's actually lower than... It did rise because you did...

Cris deRitis:                       It did.

Mark Zandi:                      You looked at it a year ago and it was higher a year ago and it has come in over the past year for that bottom quintile.

Cris deRitis:                       That's right.

Mark Zandi:                      So, that's different than what we, or Scott and Matt figured out using the other methodology that... Of course, you're looking at liquid accounts. [inaudible 00:44:39] Yeah. They could have paid down debt. They could have, who knows, but nonetheless, so they're not necessarily inconsistent.

Cris deRitis:                       Correct. We just don't know. But yeah, that's a good point.

Mark Zandi:                      The other thing I'd point out in this regard, because we're focused on the income distribution and I agree, I do think low income households are got to be under pressure here. Right? Particularly you're not working, if you're in got folks that have been pushed out of the workforce because of the pandemic and other things, you're really having a hard time here. No doubt about it. And this sounds a little cold hearted, but the vast majority of the spending that's done, is done in the top part of the distribution of income. I think the top... Correct me if I'm wrong, Scott, and this is kind of a heuristic, a rule thumb. The top third of the income distribution accounts were almost three fourths of the spending. I believe, something like that.

Scott Hoyt:                        Yeah. I think I had two thirds in my head. Yeah. It's definitely something... I haven't checked that number in a few months, but yeah. It's definitely something like that. It's very disproportionate. But I guess that brings up another issue that I've been wondering about and that's... Well, I'll probably tie two things together. One is the stock market and the other is confidence, because we know the confidence has come down. Stock market has come down and especially, I mean, I was just looking at your forecast for the stock market and you do have it rebounding at least a little bit going forward now. Because [inaudible 00:46:13].

Mark Zandi:                      It's basically flat though, Scott, right?

Scott Hoyt:                        Yeah.

Mark Zandi:                      I wouldn't characterize it. It's basically we're down to 4,000 on the S and P, which by the way is where we are today. And it basically goes sideways here for a while until the Fed stops raising interest rates.

Scott Hoyt:                        But if that's the case, if the stock market goes sideways for a while and then stock market gains go further and further into the past for high income consumers. Does that, especially in an environment where confidence is falling and it's falling. I mean, probably more at the low end, but across the income distribution. Do we have to worry about the high end consumers continuing to draw down their excess savings and spend as opposed to saying, "Okay, the rest of my excess savings is my retirement savings or my kids' college savings or some other long term savings that I may not have done enough of prior to the pandemic. And I'm going to tighten my belt and pull things in a bit." And again, that's probably not my baseline forecast, but I worry about it.

Mark Zandi:                      Yeah. You're a warrior I can tell. Yeah, well, that makes a lot of sense. There's two things. One, if you go back to Cris' data on what's sitting in deposit accounts, it's shocking how much cash is sitting in those deposit accounts. And it's not like it's gone into another asset, right? A home, or... It probably has done that too for the high incomes. Because they've had so much cash, but they got a lot of cash sitting in the bank account. And my guess is if you get into a scrape or your income is impaired, you'll draw that down pretty quickly. Because you don't need to sell an asset. You don't need to sell stock. You don't need to sell [inaudible 00:48:12]. You don't need to borrow money. You got the cash sitting right there [inaudible 00:48:15].

Scott Hoyt:                        But I guess my feeling is that spending by high income groups is never a question of access to cash.

Mark Zandi:                      Right.

Scott Hoyt:                        They always have that. It's a question of confidence and desire to spend relative to concerns about future needs.

Mark Zandi:                      Yeah. But they even high income go get cautious. Right? I mean, it's not like they don't get cautious. And I just said, I just wonder [inaudible 00:48:42].

Scott Hoyt:                        I guess that's like-

Mark Zandi:                      If you look at your bank account, you got so much cash sitting there, but it's less likely you're going to turn cautious.

Scott Hoyt:                        Unless you are putting that cash into a different bucket. If you're saying, "Yes, I have this cash, but I consider this cash, my retirement savings. And the only reason it's in cash is because I'm scared, the market's going to go down more and interest rates are going to go up more and I don't know where the heck to invest it. So I'm going to leave it in cash until I figure out where to invest it. But I don't consider that part of my cash. I consider that part of my retirement fund."

Mark Zandi:                      Yeah. Is that how you think about things?

Scott Hoyt:                        That is to a fair degree?

Mark Zandi:                      Oh, it is.

Scott Hoyt:                        How I think about things.

Mark Zandi:                      Okay.

Scott Hoyt:                        Yes. I do bucket money. I do tend to bucket money like that.

Mark Zandi:                      Even in your checking account, you're bucketing that money.

Scott Hoyt:                        Well, I tend to have a separate checking account for each bucket.

Mark Zandi:                      Okay.

Scott Hoyt:                        And it won't be a checking account. It'll be an online savings account. So I get at least an epsilon of interest, but a tiny bit of interest.

Mark Zandi:                      After 20 years of working with you, that sounds like Scott would do that.

Scott Hoyt:                        Yes.

Mark Zandi:                      Right? Yeah. Smart. That's actually smart. Very smart. But you brought the other thing I wanted you brought up in, we should explore and maybe I'll turn to you. Ryan is consumer sentiment. I didn't bring that up in my frame. I was going to the fundamentals, but people are really doer down pessimistic blue. Maybe you can think of a few more words to describe how they feel, but it's pretty bad. My asthma.

Ryan Sweet:                      Oh, there's a good one.

Cris deRitis:                       That's a great one.

Mark Zandi:                      There's asthma hanging over consumers. How do you think about that? I mean how in the context of their spending and the firewall feels like it's pretty strong, but you got pervading all of that. This pessimism. What do you think about that? How do you think about that in the context of consumers hanging tough?

Ryan Sweet:                      So I'm less worried about sentiment because the relationship between consumer spending and sentiment is pretty loose in the short run. So, people can say one thing, but they do another. And also it depends on what measure of confidence you're looking at. So the conference board, consumer confidence index, which is very sensitive to labor market conditions is holding up relatively well. It's not as depressed as the University of Michigan survey. And that's the one that gets all the headlines in the press and that one's sensitive to the stock market and gasoline prices. So, last month gasoline prices, peak stock market was tanking and it fell to the University of Michigan's area fell to a historical low. So that's not too surprising, but in the end... In the short run, people can say one thing and do another. So, that's why I prefer to watch what they do rather than what they say.

Mark Zandi:                      Yeah. I got to fear for you guys. I'm curious what you think of it. My sense of it is that if consumer sentiment was more typical, it is bad is really bad. I mean, conference board survey better than the University of Michigan survey, but it's still pretty low.

Cris deRitis:                       Yeah.

Mark Zandi:                      That if it was more typical, that consumer spending actually would be a... The counterfactual would be a lot stronger consumer spending people would be spending more aggressively, but because sentiment has been so low, they've only been spending at a more typical pace, you know exactly what they would've spent without the pandemic. I mean, I could take real consumer spending, pre pandemic up through this current time, draw a trend line through the spending before the pandemic and consumer spending today is exactly where that trend line is today. Does that make sense? What I just said?

Cris deRitis:                       Yeah.

Scott Hoyt:                        Yes.

Ryan Sweet:                      Yep.

Mark Zandi:                      So they're spending, it went down, obviously during the pandemic, it's come back up and it's like exactly where you'd expect it to be, which is weird, given all the other things going on here. The excess saving, we just talked about. A lot of jobs, low unemployment leverage is low. It's starting to rise, but it's low. People are wealthy. You would expect a lot more spending. And that goes back to all the concerns about, demand side inflation. That inflation is being driven by demand. And they were, people were concerned that it was because cause the consumer had all this extra cash that they were going to spend, but they haven't done that. They have not done that. And maybe that's because of this low sentiment. So what, what do you think, does that make any sense to anybody that theory?

Ryan Sweet:                      I would push back.

Mark Zandi:                      Huh?

Ryan Sweet:                      I would disagree.

Mark Zandi:                      You would disagree.

Ryan Sweet:                      When you model like consumer spending and you just you can look at leverage real disposable income include different measures of consumer confidence. Sentiment explains very little of the near term fluctuations in spending its real disposable income that drives the train.

Mark Zandi:                      No. I totally agree that you're but that's you just estimated an equation over some lengthy period of time. And I would argue that there are periods of time.

Ryan Sweet:                      Oh, I see what you're saying.

Mark Zandi:                      When that matters a lot, particularly around recessions and [inaudible 00:53:52]environment, I agree with you. Typically, sentiment reflects the economy. Doesn't drive the economy, doesn't drive consumer spending, but there are times when that's not true, the causality shifts and maybe that's something... That's what's going on here. It matters, but it the counterfactual is we would have a lot stronger spending if not for the very weak sentiment that exists.

Scott Hoyt:                        But, but I guess the concern then is that sentiment appears to be still declining, especially the conference board measure. I mean, maybe Michigan ought to be bottoming now just because it's.

Mark Zandi:                      I think it bottomed out well.

Scott Hoyt:                        Yeah. It went up at out trivial amount in the last reading, but I mean, if you do something like the average between the two or something like that, to get something that's a little more blended and sensible than the trend is down. And so, if that trend remains in place, then don't you have to worry... If you are arguing that it's mattering, then you have to worry about that impact growing.

Mark Zandi:                      Oh yeah. I mean, I do. But fortunately gas prices are down and Ryan's right. That has a big impact on sentiment. Stock prices are up, that has an impact on sentiment. And that's why the University of Michigan probably will improve relative to the conference board. Because the job market is definitely good. So by the way, we should go to the job market, no one brought up the job market. Are we all assuming that.

Ryan Sweet:                      I was waiting for the stats game because I, we know that's-

Mark Zandi:                      We're going to wait for the stats game on the job market. Okay.

Ryan Sweet:                      But one thing with sentiment, they break it up usually into consumers assessment of present conditions and expectations. And the expectations continue to deteriorate and that's pulling down leading indicators and then that's a little cause for concern.

Mark Zandi:                      Yeah, no, no, no. Yeah. I mean at some point actually just throw it out there. And hopefully, I don't take anyone's statistic, but one of the best leading indicators of recession is the change in the conference board survey of consumer sentiment. If that falls by more than 20 points, it's an index. So if it falls more than 20 points in a three month period, we always have recession and it's never falsely predicted recession. And the intuition is clear that... Again, back to the causality at some points in time, particularly around recessions, causality shifts and sentiment drives spending decisions in the economy, people run for the bunker, so to speak and stop spending, because they're panicked by whatever's going on. And the conference word survey is down about 10 points over the last three months. So I'm watching that pretty careful as the job market is going to weaken here. Right? By definition, it's going to.

Scott Hoyt:                        But just to add to that, Mark it's down all 10 points over the last two months.

Mark Zandi:                      Well, I thought it was over the... What is it over the last three? I thought it was 10.

Scott Hoyt:                        Yeah, but two or three months ago, we're about the same list.

Mark Zandi:                      Oh, I see what you're saying. I get one more really bad month. I could be down 20 is what you're saying?

Scott Hoyt:                        Yes.

Mark Zandi:                      Yeah.

Scott Hoyt:                        Yeah. You get a 10 point drop in the next month and you're down 20.

Mark Zandi:                      Yeah. And that leads recessions by the way, just point of interest by I think 4, 5, 6 months, something like that. So anyway. All right,

Ryan Sweet:                      Cris, I have a feeling his probability recession moved up.

Cris deRitis:                       You would think [inaudible 00:57:20] got to be consistent.

Ryan Sweet:                      [inaudible 00:57:22] himself higher.

Mark Zandi:                      It has moved up. Yes it has. Yeah. Do you view that as a victory, by the way?

Ryan Sweet:                      No, I do not want a recession, but-

Mark Zandi:                      Yeah. But he also wants to be right. You got to call.

Ryan Sweet:                      Yeah. I also want to be right.

Mark Zandi:                      Also, want to be right? Yeah. Okay. Let's play the game unless there's anything else... There's a gazillion of things, we can talk about the consumer, but I think we've been at this almost an hour. We got the game and we got to talk about probabilities of recession. So anything else on the consumer Scott I missed or Cris, Ryan that...

Scott Hoyt:                        No. I don't think we got it.

Mark Zandi:                      We covered a lot of ground. We didn't talk about... We indirectly talked about wealth. We didn't talk about house prices, but that's we'll save that for another day. Maybe that's part of the statistics game that's coming up, could be because a lot of housing statistics came out this past week. Okay. The game. Statistics game. I know you guys get annoyed when I repeat the rules of the game, but we have to do this because Ryan cheats. I know he cheats. You got to tell him, how this game is played. And that is, you want a statistic that's not too easy so that we all get it all once. Not too hard that forget about it. Of course, we all come up with the statistics and each of us try to figure that out through detective reasoning, questions and clues, that kind of thing. And you want a statistic if you can that's topical recent last week or two topical, which would be the consumer. Okay. That's the game. All right.

Ryan Sweet:                      Cris, you catch onto that. You changes the rules every time.

Cris deRitis:                       Last week or two.

Ryan Sweet:                      Last week or two.

Cris deRitis:                       Yeah.

Ryan Sweet:                      It's always been the last week. See, he's ill prepared.

Scott Hoyt:                        No. And actually he's bailing me out because I've been on vacation most of this week. And I wanted a consumer related statistics. So the one I have in my hip pocket actually is from two weeks ago, weeks back.

Mark Zandi:                      You're gain too much information. Way too...

Ryan Sweet:                      Yeah. You just gave it away.

Scott Hoyt:                        [Inaudible 00:59:18] must baby. I thought I should.

Mark Zandi:                      [inaudible 00:59:20] too much credit. That has nothing to do with you.

Scott Hoyt:                        Didn't know that, but you are bailing me out.

Mark Zandi:                      That's so funny. Okay. All right. Who wants to go first?

Ryan Sweet:                      Well, let's Scott go first.

Mark Zandi:                      Okay. Scott, go first.

Ryan Sweet:                      Since we know two weeks ago.

Scott Hoyt:                        Yep. Two weeks ago I have two numbers which are from different releases, but I think should be tied together. It's 8.4% and 13.4%.

Mark Zandi:                      Consumer related.

Scott Hoyt:                        Consumer related.

Ryan Sweet:                      Is 1.4 mortgage balance increase over the last year.

Scott Hoyt:                        No.

Ryan Sweet:                      He's more close to that though.

Cris deRitis:                       I think it's close to that.

Mark Zandi:                      Yeah. No, I think it is. Yeah. It might be stronger actually. 13.4 would be more like a mortgage debt growth, I think.

Cris deRitis:                       Over the last year?

Mark Zandi:                      Okay. I bet you on that. Side bet.

Cris deRitis:                       Dollar bet.

Ryan Sweet:                      There we go.

Mark Zandi:                      Above 10, below 10% bet.

Cris deRitis:                       Year over year mortgage debt's outstanding.

Mark Zandi:                      Yes. Through the month of June. I bet it's over 10. Anyway. Back to the main show.

Ryan Sweet:                      Is this related to buying plans in the University of Michigan survey?

Scott Hoyt:                        No.

Ryan Sweet:                      Okay.

Mark Zandi:                      Is is consumer related? Is it related to jobs in any way?

Scott Hoyt:                        No.

Mark Zandi:                      Is it related to spending retail spending?

Scott Hoyt:                        Yes.

Mark Zandi:                      Okay. Are we looking at growth and specific categories of spending?

Scott Hoyt:                        No.

Mark Zandi:                      That've been too easy.

Ryan Sweet:                      Is this a calculation you got to do? Is it like above or below? Pre [inaudible 01:01:01].

Scott Hoyt:                        Both numbers are year over year growth rates.

Mark Zandi:                      And they both come from... They come from different reports.

Scott Hoyt:                        Yes.

Mark Zandi:                      And they're both positive. You said 8.4 and 13.4.

Scott Hoyt:                        And 13.4? Yes. They're both positive.

Mark Zandi:                      Yeah.

Scott Hoyt:                        I'm not following into Marisa's trap.

Mark Zandi:                      Right? The negative sign. Because I was going to say like Walmart sales or something, but well it could be, is it a retailer's sales growth?

Scott Hoyt:                        Nope.

Mark Zandi:                      Oh geez. Gee. Oh man. Let me ask you this. Are we being idiots? Should we know this? Do have a chance.

Scott Hoyt:                        The 8.4. I am very surprised. You don't know? The 13.4 is a little more subtle and that one I would not that one's hard.

Mark Zandi:                      Oh, I see. Okay.

Ryan Sweet:                      All right. This is just a guess 8.4. Is that just total retail sales year over year?

Scott Hoyt:                        Yes.

Mark Zandi:                      Oh.

Ryan Sweet:                      I think we're overthinking it.

Mark Zandi:                      We were overthinking it.

Ryan Sweet:                      So 13.4 comes from something different. It's not retail sales.

Scott Hoyt:                        Just from a different report.

Mark Zandi:                      Okay. You were being a little sheepish because you thought that couldn't be the answer, right?

Ryan Sweet:                      Yeah.

Mark Zandi:                      That's so funny. And so what's the 13.4? I'm going to just a corollary. Is that service spending growth?

Scott Hoyt:                        Nope. Well, we wouldn't have that yet. Actually. Because I'm looking at June.

Ryan Sweet:                      Next week.

Mark Zandi:                      Is it next week? Okay.

Ryan Sweet:                      Yep.

Mark Zandi:                      But it's spending, it's growth in some form of spending.

Scott Hoyt:                        No.

Mark Zandi:                      Oh it's not.

Ryan Sweet:                      Is this something from Michigan?

Scott Hoyt:                        No.

Ryan Sweet:                      No.

Mark Zandi:                      A lot of nos coming out of that. I don't know. What do you guys give up? You want to hear it? Because he said it is subtle. I think he used the word subtle.

Ryan Sweet:                      Yeah. Are we doing...

Scott Hoyt:                        It's not a high profile. It's not a whole high from the [inaudible 01:02:58].

Mark Zandi:                      It's not something like... I was going to say red book.

Ryan Sweet:                      Can't be red.

Scott Hoyt:                        No. Because it's not a spending number.

Mark Zandi:                      It's not like a visa [inaudible 01:03:06].

Scott Hoyt:                        Okay. It's a price number.

Mark Zandi:                      Huh?

Ryan Sweet:                      It's a price?

Scott Hoyt:                        It's a price number.

Mark Zandi:                      [inaudible 01:03:10] 13.4.

Scott Hoyt:                        But I tie the two together.

Mark Zandi:                      Is that retail? The inflation for retail goods.

Scott Hoyt:                        We don't have that yet. And what came out last week?

Ryan Sweet:                      CPI.

Scott Hoyt:                        Did you guys talk about last week?

Mark Zandi:                      CPI.

Ryan Sweet:                      CPI.

Scott Hoyt:                        So what component of the CPI would I be looking at?

Mark Zandi:                      Some kind of retail good. Goods CPI.

Scott Hoyt:                        Commodity CPI.

Mark Zandi:                      Okay. All right. Fair enough. All right. Fair enough. That's not so-

Scott Hoyt:                        But the point I want to make is that spend it-

Mark Zandi:                      Do you have a point.

Scott Hoyt:                        I do.

Mark Zandi:                      We don't have points in this game.

Scott Hoyt:                        Spending was up 8.4%, prices for a roughly comparable basket of goods is up 13.4%. What does that say about real spending?

Mark Zandi:                      Yeah. That's good point. Yep. But I got pretty close when I said inflation for retail goods. Right? I mean, come on.

Scott Hoyt:                        You're at the ballpark.

Mark Zandi:                      That's rude, but no, that's a great point. So even though retail sales was, I think it was up 1% in nominal. So includes inflation. You're saying real after inflation, it was down. Negative.

Scott Hoyt:                        Yeah.

Mark Zandi:                      Yeah. And people took solace in the 1%. I mean, markets did because it was stronger than anticipated, but it was.

Scott Hoyt:                        But the trend in real now, obviously a lot of it is energy. I mean, if you do the same thing for core, the gap between the two is less than half a percentage point.

Mark Zandi:                      Okay. That's good to know.

Scott Hoyt:                        Yeah. So, it's food and energy, but it's still taking a bite out of consumers budgets. Because that, the point I always make is that, while economists care about core, consumers buy food and energy every week and that's what they care about a lot. So it really matters to consumers.

Mark Zandi:                      Yeah. No, that's good. That was a good statistic. Okay. We better move forward, Ryan. You want to go next

Ryan Sweet:                      Minus 18.6.

Mark Zandi:                      Minus 18.6

Ryan Sweet:                      Came out this week. Note this week.

Mark Zandi:                      It did come out this week. It's not housing related? It could be everything's down in housing. Is it from the Philly Fed Survey?

Ryan Sweet:                      It is. Close to our home.

Mark Zandi:                      It's one component of the Philly Fed Survey. Because Philly Fed Survey is down like negative 12 or something. So it's not that-

Ryan Sweet:                      This is the lowest since 1979.

Mark Zandi:                      And it's that survey's been done since 1968, I believe.

Ryan Sweet:                      Yeah. [inaudible 01:06:07].

Mark Zandi:                      Yeah. So a long time.

Ryan Sweet:                      It's a long time.

Mark Zandi:                      By the way, on the Philly fed, it used to be when I was a young economist, that was the full proof leading indicator of recession, because it... Philly Fed is manufacturing activity in the third district of the Fed system, which is Philly it's small, but it was a very good leading barometer and you had this long time series and I think to this day, it's still excellent at... I think it has to fall more than to a negative 20 though for it to be a strong signal or so-

Ryan Sweet:                      The headline,

Mark Zandi:                      The headline. Yeah. Okay. So what's down 18 is one of the components. Is it orders? It can't be orders.

Cris deRitis:                       The orders. Yeah. No. It's too much.

Mark Zandi:                      Prices received. Prices paid still got to be high, but they're coming in. Supplier deliveries they're coming in, but they're still high. I think employment. No, can't be employment. I mean, you-

Ryan Sweet:                      Guys you're getting really close. You're dancing around it.

Mark Zandi:                      Yeah. What else is in that survey that I'm missing there? What other components or investment somehow, investment spending. No. Inventories, office space use. That's not [inaudible 01:07:23].

Ryan Sweet:                      Remember the general business conditions index is its own question. A measure-

Mark Zandi:                      Yeah, exactly.

Ryan Sweet:                      Right. So when you're thinking component, there's something else they ask that's the lowest since 1979 and it gets back to recessions.

Mark Zandi:                      Expectations. It's the expectations. Oh yeah. It should have known that. Right?

Ryan Sweet:                      Good job. Yeah.

Mark Zandi:                      Yeah. Expectations they're down. Yeah. Like everything like all these surveys, right?

Ryan Sweet:                      Yeah. It's really bad. I mean look at the NAHB that fell a lot this week. Across the board confidence, small business confidence, our weekly business confidence survey. Everything is just down in the dumps.

Mark Zandi:                      Yeah. But a lot of, I mean, sentiment is down, right? I mean there's a lot of sentiment built into these kind of surveys, these effusion industries. Don't you think? It's generally the question is, are we going up? Are we going down? Are we staying the same? Right?

Ryan Sweet:                      Correct. Yeah. Specifically the regional Fed manufacturing surveys.

Mark Zandi:                      Yeah.

Ryan Sweet:                      The ISM, you can break out the ISM into like the hard ISM component. So you can look at the details of ISM and map it to like the hard manufacturing data and then back out the sentiment component. But yeah, the regional, Philly, New York, Richmond, all these are driven by sentiment.

Mark Zandi:                      Yeah. I think the Philly that again was the first survey done back... First one done. And it really... Again, when I back 30 years ago, that was like a really key indicator. People really made a lot attention to it much less. So now. All right. We're going to do one more because we're going to move on. Let's go, Cris. What's your statistic for the week. All right.

Cris deRitis:                       Two for. 824,000.

Mark Zandi:                      I know it. Stop.

Cris deRitis:                       What's the second one? You have to give [inaudible 01:09:15].

Mark Zandi:                      Wait a second. Okay. 824,000 is the single family homes under construction. Okay. Ryan, are you taking this in? Are you taking and then... I'm going to [inaudible 01:09:30]. His next question was going to be 868,000.

Cris deRitis:                       No.

Mark Zandi:                      Okay.

Cris deRitis:                       841,000.

Mark Zandi:                      Huh?

Cris deRitis:                       841,000.

Mark Zandi:                      840 that's multifamily.

Cris deRitis:                       Yeah. Okay. Look.

Ryan Sweet:                      That's impressive.

Mark Zandi:                      Scott. That's how it's done. It's done. That's like what was that movie with Tom Cruise where he could predict the future? The guy's going to... The talk was a minority report.

Ryan Sweet:                      Yeah.

Mark Zandi:                      That was like minority report. They should put like little electrodes on my brain, because I could predict.

Ryan Sweet:                      And you could swim in a VA all day.

Mark Zandi:                      I can swim that.

Scott Hoyt:                        I didn't hear the cowbell though. I gave you cowbell for the first one.

Mark Zandi:                      [inaudible 01:10:10] I don't know why I had to get my own cowbell out and do it.

Ryan Sweet:                      Yeah, you can get it.

Mark Zandi:                      Yeah. I'm sorry. I was just gloated so much.

Ryan Sweet:                      We downplay collusion.

Mark Zandi:                      I blew by what the statistic was and why it matters. Go ahead, Cris. By away.

Cris deRitis:                       Yeah. So these are homes under construction, both single family and multi-family, they are still higher than last year. So they're still elevated. So I view this as a positive in the short term, there's a lot still a lot of homes to be built in the pipeline. Right? So over the next few months, that should continue to support the housing construction industry. And that offsets some of the negative sentiment we've been talking about here. But if you look deeper in the report, permits are down and starts are down so longer term. There's some concern about the strength of the housing market. I don't think that's a surprise given what's going on with rates and expectations for pricing. So yeah, short term, housing's going to continue to support longer term. It's going to be not a drag, but less of a positive for economic activity.

Mark Zandi:                      Cris one thing that I've wondered about, because you got a record number of homes under construction.

Cris deRitis:                       Right.

Mark Zandi:                      And they've been delayed, I guess, presumably because of the supply chain issues around billing materials and labor issues related to the pandemic.

Cris deRitis:                       Yeah.

Mark Zandi:                      And by the way in the Philly Fed Survey, correct me wrong around one positive thing was supplier deliveries are improving here very rapidly. So it feels like the pressure's coming off the supply chain's pretty, quite fast. So if that's the case, then you would expect these homes to go to completion. And it's really completion that matters most for output GDP and jobs because you're working on them. The starts and the permits that's the future down the road. But these are here and now over the next few months, at least over the next 6, 9, 12 months. Presumably builders could stop building those homes. Right? They could put them in deep freeze and say, I'm just not going to go to completion. Because I don't know if I can sell it at the price I wanted, I think is reasonable on the other side of this.

Cris deRitis:                       Yeah.

Mark Zandi:                      Right? They could do that?

Cris deRitis:                       They do that with foundations from time to time. Right. They pour the foundation and they stop for whatever reason. Once the house is under underway though-

Mark Zandi:                      They're not going to do that. You don't think-

Cris deRitis:                       If they've already put up the frame insulation, then it's harder to mothball that.

Mark Zandi:                      And they got money tied up. They had to they're financing it in some way.

Cris deRitis:                       Yeah.

Mark Zandi:                      You think they'll complete it no matter... Well, it had to be pretty bad for them not to complete it.

Cris deRitis:                       I think so. As long as they've poured... If they haven't poured the foundation yet, then they could. Or even if they have poured the foundation, they could stop at that point. Cover it up and just wait.

Mark Zandi:                      Is there date on that? Do we know where in the pipeline those homes are? Can we figure that out? I mean, but that'd be good to know.

Cris deRitis:                       I think there's some private sources.

Mark Zandi:                      Yeah, there might be. Yeah. That'd be really good to know. Because that's really key to the near term here, which is important. Okay.

Cris deRitis:                       Well, there's a big risk of that though. Right? There's still.

Mark Zandi:                      Yeah. You're right. Prices are still up. They're discounting, but still, they can make a good return on their investment. I think.

Cris deRitis:                       Yeah. I think later on though, I think you're right. If things soften here, if demand falls off and they're in the middle of the permitting process, let's say then they might pull back from there.

Mark Zandi:                      Yeah. Okay. All right. We're going to move forward. I'm going to skip mine just because for sake of time, because we're getting close to time here. Let's talk about recession odds. And let me begin with you, Ryan. What are your probability recession for the next year, next two years. And has that changed from last week?

Ryan Sweet:                      Hasn't changed. It's still 65%

Mark Zandi:                      For both one year ahead and two year ahead. Here's the thing I want to ask you. How in the world could this recession happen to... If it's going to happen, isn't it going to happen? Feels like it's going to happen soon. Isn't it?

Ryan Sweet:                      The next year?

Mark Zandi:                      Even like next six months, it doesn't feel like.

Ryan Sweet:                      I agree with you.

Mark Zandi:                      Right?

Ryan Sweet:                      Yeah. I mean, if we get through early next year, then we're going to avoid it. But if there's going to be a recession, it's going to be soon. It's going to be short. But it just seems like everything's pointing towards a recession on the horizon.

Mark Zandi:                      You don't see the excess savings providing some lifeline here and pushing things out. You don't-

Ryan Sweet:                      It hasn't really come down that much though. I mean the last few months, I would've thought we've got high gasoline prices. You'd see that excess savings be worked down more.

Mark Zandi:                      No, but what he's saying is that [inaudible 01:15:01].

Cris deRitis:                       That's a buffer.

Ryan Sweet:                      Yeah. It's a buffer. Yeah, no [inaudible 01:15:04].

Scott Hoyt:                        Point is it could be worked down delaying things. If job growth were to stop or something you consumers could still carry on for a little while and delay you really entering the recession because of the excess savings.

Ryan Sweet:                      Yeah. Well that gets back to the argument. Do they treat it like cash or wealth.

Scott Hoyt:                        Right. No, it does.

Ryan Sweet:                      Yeah.

Mark Zandi:                      So Ryan, what [inaudible 01:15:30].

Cris deRitis:                       And then Scott's leverage point, right? If they build up the balances today, then the trouble may actually reveal itself.

Scott Hoyt:                        Some of it is not cash excess savings, it's that they increase their borrowing and get themselves trouble by mid to late next year.

Cris deRitis:                       That's True.

Ryan Sweet:                      I think there's plenty of lifelines for the economy. I just think it, at the end of the day, it's going to come down to inflation and what the fed does and they could face Hobson's choice of rather do they push us into a recession now or wait longer and have to push us into a deeper recession. And I think if you ask Powell and twist his arm, he would say, I'll take a short recession now to break inflation.

Mark Zandi:                      I think that's a great point. It's about inflation here and now. And if it doesn't come in, he's going to keep pressing harder, harder on the brakes and then the economy's going to break.

Scott Hoyt:                        But then again, if Fed moves, operate with long and variable lag. So, how quickly can he bring us in?

Mark Zandi:                      And so people say, but it feels like it's working awfully fast.

Ryan Sweet:                      Yeah. I think that time horizon is shortened.

Mark Zandi:                      Yeah. The housing market's caving. I mean, you see, I mean, demand is caving existing home sales, 5.1 million units in June. That's that's all. It was six and a half I think start of the year. That's falling fast here anyway. Okay. What one statistic are you focused on when you say 65% probability? Like just give us one statistic you're looking at,

Ryan Sweet:                      I don't want to steal Cris's but it's jobless claims.

Mark Zandi:                      Okay.

Ryan Sweet:                      So the trend not week to week, because they're very volatile, but the four week moving average in initial jobless claims. So they are pretty telling.

Mark Zandi:                      Yeah, but they're 250. They've moved up to where you'd want them to be. Right? If you were the Fed.

Ryan Sweet:                      No 250 is roughly the average that you see before recessions. Now that 250, isn't the line in the sand, actually one number I was going to use it's 275. That's the break even level of jobless claims right now, which would be consistent with no monthly job growth. So we got a little bit of a buffer. OK. If we get up to 270, 275, then we get a problem.

Mark Zandi:                      So we go north of 275, no job growth. We're going negative and that's probably we're going in.

Ryan Sweet:                      Yep.

Mark Zandi:                      Yeah. All right. Okay. Scott, do you have a probability of recession in mind? I haven't asked. You've not been on before, so I've not asked, but do you have?

Scott Hoyt:                        I am sort of struggling to come up with one. I think I'm probably a little more optimistic than, Ryan is and [inaudible 01:18:07].

Ryan Sweet:                      My goodness. That's not hard. It's not hard to be more optimistic.

Scott Hoyt:                        But I struggle with the timing. I'm really struggling whether to put it into the next year or the second year out because I don't think it's going to happen this year. I think I do believe the consumer buffer is too much, but I'm not sure if it can happen as soon as the first half of next year.

Mark Zandi:                      What's your probability though? Over the next year, do you have one or not? It's okay [inaudible 01:18:38].

Scott Hoyt:                        Well, I'm almost talking myself through to try and get to it. I'd say probably a little under half, maybe 45%. In the next year. And then maybe a little over half, maybe 55 in two years. Because I am more worried about that sort of 12 to probably 18 months out horizon.

Mark Zandi:                      Right. Is there one statistic you kind of focus on, look at trying to gauge recession risks.

Scott Hoyt:                        No, I don't know that I have a single statistic. I'd go to at this point.

Mark Zandi:                      Okay. All right, Cris, where are you?

Cris deRitis:                       Unchanged from last week. 50% in the next year. 65% chance in the next two years.

Mark Zandi:                      Right. Okay.

Cris deRitis:                       And there's only one statistic. Can you? It's the [inaudible 01:19:33].

Mark Zandi:                      Yeah. It's the [inaudible 01:19:35].

Cris deRitis:                       How are you not hire.

Ryan Sweet:                      Well, I'm waiting for 10 year, three month yield curves to invert, once that goes, then I'll up my odds.

Mark Zandi:                      Yeah. Okay.

Ryan Sweet:                      Well the difference between the ten, two was the largest since the early two thousands.

Cris deRitis:                       Yeah. And [inaudible 01:19:52].

Mark Zandi:                      It's going so narrow though. It's only 15, 20 basis points. 0.15, 0.2% points. Right? I mean it's not that big. It's been two weeks now, roughly.

Cris deRitis:                       I think it's going on three, right?

Mark Zandi:                      I don't think so. I think it's, I think it's going to be two weeks today. I believe inverted. Right? Ryan?

Cris deRitis:                       I thought I was around the first.

Mark Zandi:                      I'm just reading Ryan's. [inaudible 01:20:11] Yeah. Work every day he sends out a really cool missive every day. It's better than am missive. It's a...

Ryan Sweet:                      You can say it's admissive.

Mark Zandi:                      It can be admissive okay. It's admissive and he, at the end he does talk about the ten, two year spread and he says four 13 trading days. I think today you're right 14 days.

Cris deRitis:                       Oh, trading days. All right.

Mark Zandi:                      14 trading days. Yeah. I sorry. Yeah.

Scott Hoyt:                        I was putting in the weekend. But that is about three weeks, right? Because you have five trading days a week.

Mark Zandi:                      Wait. Yeah. You're right. Exactly. I was thinking two weeks. Yeah. Right. It is almost three weeks on trading days. Yeah. You're right. Sorry Cris.

Cris deRitis:                       Okay. That's okay.

Mark Zandi:                      What are you at recession?

Ryan Sweet:                      This is the big reveal.

Mark Zandi:                      Yeah. So I had been at 40%, one year recession, odds and 55%, two year recession odds. And I'm now going up to 45%, one year 55, 2 year. So I'm exactly with Scott, I think. Yeah. And I'm looking at the 10 year, two year and that's why my recession odds have gone up. If that doesn't write itself here in the next week or two, then I'd have to go up to at least 50%. And I do agree the 10 year, three months would be real ratification of what the 10, two year is saying.

                                             I do look at the UI claims and I thought 275 to 300 would be problematic. I mentioned the Philly Fed down 20. I think that would be an issue. The conference board survey down 20 points over a three month period. That would be quite bothersome. We're awfully close to going recession, but that's where we've been, right? That we're going to get right on the precipice and pull back before we actually fall over. And while you're on the precipice, it feels pretty uncomfortable. Like you are going to fall over, but that's completely understandable. That's what you would expect. So this is the script so far, I will say. I agree with you Cris, that if anything else goes wrong, we're done. And the probability is something can go wrong. Here is not inconsequential. So, risks are awfully high. So I agree with you. But the consumers, the firewall got to hang tough and you're wrong about debt. That's all I got to say on that issue at least so far. Any other pearls of wisdom before we move on before we call it a podcast?

                                             No. Okay. We're going to call it a podcast. And this was a long one. Come back next week, we've got professor Alan Blinder. That should be a good conversation, but thank you. Have a good weekend. Talk to you soon. Take care now.