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Moody's Talks - Inside Economics

Episode 102
March 10, 2023

Full Employment, Failing Banks

It’s another Jobs’ Friday and colleague Dante DeAntonio is here to discuss February’s employment report. Wage growth is moderating and the unemployment rate ticked up, but labor supply among prime age workers reached a post-pandemic high--is that enough evidence to say we are at full employment? Also on the agenda is discussing the failure of Silicon Valley Bank, the 2nd largest bank collapse in U.S. History. We are already seeing the disruption in financial markets but what does it mean for the broader economy?

Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn 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 three of my colleagues, which is tradition on Jobs Friday. This is Friday, March the 10th, and we got the jobs numbers for February today, and that would include Mr. deRitis, Cris. Dr. deRitis, how are you?

Cris deRitis:                      Doing well. How you doing, Mark?

Mark Zandi:                     I'm okay. And Ms. DiNatale.

Marisa DiNatale:            Hello.

Mark Zandi:                     How are you?

Marisa DiNatale:            I'm great. How are you?

Mark Zandi:                     And Mr. DeAntonio, how are you?

Dante DeAntonio:          Doing well, as always.

Mark Zandi:                     Oh, I always say this.

Marisa DiNatale:            All these Italian last names?

Mark Zandi:                     That's what I was going to say. Nothing-

Cris deRitis:                      The three Ds.

Marisa DiNatale:            All D. Yeah.

Mark Zandi:                     Yeah, the three Ds. Yeah. Well, very good. And well, we made our way back from Phoenix. We had the summit. How'd you guys think it went? What do you think?

Cris deRitis:                      I thought it was great.

Marisa DiNatale:            It was, yeah.

Mark Zandi:                     Yeah? Would you'd said otherwise? You would never say otherwise. "Oh, that was awesome."

Marisa DiNatale:            Probably not.

Mark Zandi:                     Probably not.

Cris deRitis:                      I'm unvarnished. I would tell you the truth.

Mark Zandi:                     Okay.

Marisa DiNatale:            No, you wouldn't.

Mark Zandi:                     That's good to know. I certainly would have said the truth. No way. That's fabulous. It was fabulous. No, it actually was pretty good, I thought. I thought it went very well.

                                           Marisa, how was your sessions? Okay?

Marisa DiNatale:            Yeah, it was good. It was pretty well-attended. Cris helped moderate it, and it was really interesting. We had Ronnie Momen from LendingClubs, so it's nice to have sort of a FinTech voice there. Yeah, it was really good. We talked about household finances, which is what we talked about on the last podcast. Yeah.

Mark Zandi:                     Last podcast, yeah. And we had our own podcast there. We recorded a podcast session. Is that going to go up on Apple and Spotify and everything else? Does anyone know, or did we record it for that or not? Which is special to the conference? Does anyone know? [inaudible 00:02:02].

Marisa DiNatale:            I don't. I was wondering the same thing.

Cris deRitis:                      I don't know.

Mark Zandi:                     Is that coming up, Sarah? Sarah runs the show here. Sarah, does that go?

Sarah:                                It will take a week before we get it back and we'll be posting it then.

Mark Zandi:                     But it is going up on Spotify and Apple and everything?

Sarah:                                If you approve, we'll put it up.

Mark Zandi:                     Okay. Yeah, I think we should. I don't know if I call it a classic, but it was quasi-classic. Yeah. And good.

Cris deRitis:                      We broke new ground.

Mark Zandi:                     What's that, Cris?

Cris deRitis:                      We broke new ground with the live studio audience.

Mark Zandi:                     Yeah. If I were going to do it again, I have some ideas about how I would change it, though, because we were a little removed, felt physically removed from our audience, and we needed to be with our audience. So maybe [inaudible 00:02:44].

Cris deRitis:                      Even from each other.

Marisa DiNatale:            Yeah. And with each other, we were very far apart on the stage.

Mark Zandi:                     We'll be in the round. We need to do it in the round, you know what I'm saying?

Cris deRitis:                      Yeah.

Mark Zandi:                     Yeah, yeah. With cameras and everything. Yeah. That's Mr. DeAntonio that's-

Cris deRitis:                      Snickering.

Mark Zandi:                     Snickering is the word.

Dante DeAntonio:          I just wish I could have been there to see it.

Mark Zandi:                     Oh, yeah.

Dante DeAntonio:          It sounds like a great time.

Mark Zandi:                     Yeah, it was good. Hey, we got to do two things in this podcast. Number one is the jobs numbers. We've got to go through that, but we also need to talk about this failure of Silicon Valley Bank, SVB, which is causing a bit of agita in markets today. So, what should we do first, guys? The jobs numbers or SVB? Dante, what do you say?

Dante DeAntonio:          Always-

Cris deRitis:                      Your preference.

Dante DeAntonio:          ... vote for jobs.

Mark Zandi:                     Always vote jobs. Okay. We're doing jobs first, so we'll do the jobs. We're going to go through those numbers. And, by the way, I think that those numbers are right down the strike zone. I'm just saying. Inside joke.

Marisa DiNatale:            Stuck to script.

Mark Zandi:                     Inside joke. Stuck to script. Yeah. Inside joke.

Dante DeAntonio:          Exactly to script.

Mark Zandi:                     Yeah. Well, but let's talk about that and then we'll do the statistics game, and then we'll come back and talk about SVB, Silicon Valley Bank and its failure and what it means. Okay.

                                           Dante, you're up. Give us a rundown on the jobs numbers for February of 2023.

Dante DeAntonio:          Sure. So, we got another, we call it strong jobs report for February. We added 311,000 jobs. Three month moving average is now just over 350,000, which is up from a little over 280,000 at the end of the year. Pretty broad based gains across industries. There were a couple pockets of weakness, transportation and warehousing, manufacturing decline for the first time in quite a while. Information was down again for the third month in a row, which tech related layoffs, obviously having an impact there, but also some, I think good news if you're thinking about maybe a little bit of softening in the labor markets, average hours came down a little bit. Average hourly earnings was a little bit softer than I think we were expecting it to be, given the strength of the labor market recently, the unemployment rate ticked a little bit higher back up to 3.6% because the labor force growth was very strong.

                                           We added over 400,000 people to the labor force in February. Labor force participation edged higher to its highest rate for the cycle at 62-and-a-half percent. Prime EPOP, the employment population ratio, hit back to its February 2020 level again. The highest that it's been-

Mark Zandi:                     Oh, I didn't see that.

Dante DeAntonio:          ... in the cycle. So, I think you all in all, like you said, it was a good report. If anything, I think maybe bordering on stronger than we'd want it to be, but certainly I think a better read than January, not as sort of overly strong as what we saw last month.

Mark Zandi:                     Okay. So, obviously labor demand's still very strong, 311K. So, I saw some small downward revisions to the gain in January and December, but still strong demand, 300K plus on a three-month moving average basis, as you say.

                                           But the good news is more labor supply. We got increased labor force participation, and as you say, labor force increased by over 400K, and that's why the unemployment rate notched a bit higher. So, we were at 3.4%, I think as low as it's been since 1969 in January. Now we're back up to three six, although I did miss. I didn't ... Look. Employment to population ratio for prime age workers 25 to 54, which is another good measure of slack in the labor market, that rose to a new high this cycle.

Dante DeAntonio:          Yeah. It's up three-tenths of a percent to 80-and-a-half percent, which matches exactly what it was in February of 2020.

Mark Zandi:                     Oh, if I go back prior to the pandemic, now we're back to where we were prior to the pandemic?

Dante DeAntonio:          Correct.

Mark Zandi:                     Okay, which that was also a pretty obviously tight labor market at that point in time. Okay.

                                           And you mentioned average hourly earnings wage growth in the report. You want to provide any more granularity there on that number because that seems to be important number going. If you're thinking about it through the prism of the inflation, the cost of services, the price for services, which are labor intensive goes to wage growth. So, all eyes on wage growth. You want to just provide a little more granularity there?

Dante DeAntonio:          Sure. A few ways to look at it. It was up 0.2% month over month, up 4.6% year over year. My guess is your preferred way to look at it will be the three month annualized rate, which is 3.6%, which seems to be right in that sort of sweet spot of where you'd want it to be. I do have a little bit of caution. I think maybe there could be some composition issues there that are sort of keeping it down a little bit in recent months. So, you've obviously seen some pullback in information, which is obviously a high wage industry and you've seen big job gains in leisure hospitality and of retail over the last few months. So, yeah, I think there could be a little bit of compositional effect, helping keep it lower than it maybe really is.

Mark Zandi:                     Yeah. Your point is the average hourly earnings measure does not control for the mix of occupations or industries. So, if you get strong gains in lower paying industries like leisure, which we did in leisure, hospitality, and retail, that might bias down the number, but abstracting from that.

                                           Okay. Can I ask before I ... Marisa and Cris, I'm going to come to you next and kind of ask you to fill out the storyline here. But on wage growth, and let me just frame it this way. If I go back a year ago or so, wage growth was a lot stronger than it is today. Pick your measure, average hourly earnings, the employment cost index, the Atlanta Fed Wage Tracker. You looked at the plethora of data and you say, "Okay, wage growth is over 5%, maybe as high as five-and-a-half percent year over year."

                                           I look at the data now and it feels like it's closer to four-and-a-half percent. So, not maybe. Give or take down about a point, and, as you said, the kind of the benchmark where we need to go, or at least where we think we need to go to get inflation back in the bottle is three-and-a-half percent wage growth because that would be 2% inflation, the Fed's target plus one-and-a-half percent underlying productivity growth, which is kind of the productivity growth that we've been getting for the last few years abstracting from the ups and downs in the data.

                                           Why do you think wage growth has come in by a point in that kind of stylized frame that I just articulated when the labor market has been so strong, lots of jobs, continued low unemployment, EPOP, as you pointed out, is now at a new cyclical high. So, labor market has not eased by any meaningful measure that we look at, but wage growth has moderated. So, what do you think is going on? How would you explain that?

Dante DeAntonio:          I'm not sure that I have a good explanation for it, to be honest. I mean, yeah, it doesn't feel like they-

Mark Zandi:                     I've got one, by the way. I've got one.

Dante DeAntonio:          I figured you had something in your pocket. As you said, there's not any significant loosening in the labor market by any measure that we look at. So, I don't know that there's a great sort of underlying story as to why we would have seen wage growth come in, other than I think obviously inflation has come in some, I think maybe the sort of demands from workers have eased off a little bit. We've seen the quit rate come in a little bit. Workers don't feel quite as comfortable jumping from job to job, which will take some pressure off of wage growth. So, we have seen a little bit less movement. A little bit more uncertainty I think, in the labor market, but it's still incredibly tight by pretty much any measure you look at.

Mark Zandi:                     Okay. Cris and Marisa, do you want to answer that? Do you have a view on that particular question before we move on back to the report on why wage growth has moderated over the past year, despite continued very tight labor market conditions? Marisa, do you have a perspective?

Marisa DiNatale:            Yeah, I think I agree with Dante. I mean, there is evidence that hiring has-

Mark Zandi:                     Do you ever disagree with Mr. DeAntonio? is this an Italian thing going on here?

Marisa DiNatale:            I don't think so. No. It's not an Italian thing.

Mark Zandi:                     That's okay. I'm just making sure.

Marisa DiNatale:            What are you implying?

Mark Zandi:                     Exactly what it sounded like.

Dante DeAntonio:          It's the three of us against you, Mark is-

Mark Zandi:                     Yeah, exactly. You Ds against the Z. Yeah. Go ahead.

Marisa DiNatale:            So, yeah. I mean, there's some evidence that hiring has softened, that the quit rate has come down a little bit. I don't know that that explains a full percentage point decline in wages. I think if you look back at the peak of where wage growth was, you can see that there's some industry composition factors going on.

                                           So, initially coming out of the pandemic, the hiring was all these in-person things. It was restaurants and bars and entertainment and retail that were really struggling to convince workers to come back to those sorts of jobs. And they had to offer very, very high wages. Wage or employment levels in those industries are still in leisure hospitality, it's still below where it was prior to the pandemic, but hiring has been very, very strong and it doesn't seem like there's quite as much of a labor shortage as there was back then.

                                           So, I think some of that pressure to offer very, very high wages has come off the boil. I mean, if you look at wages in leisure hospitality in, I think it was the summer of '21, wage growth was 15% above where it had been a year prior, and now that's back down to something that looks more average like 5%. So, I think some of it can be explained by just a broader base of hiring across different segments of the economy.

Mark Zandi:                     Yeah. Okay. So, what I took away is you're pushing back a little bit on my stylized fact of no easing in the labor market, and you're saying, "Oh, it has eased up a little bit most notably through the quit rate, the number of people who are quitting their jobs." Still a bit elevated, but it's definitely down from where it was a year ago. And that closely is correlated with wage growth because it's the switchers that people move in jobs where they get the big pay increases. So, yeah. That makes perfect sense.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Cris, do you have a pet theory as to what's going on here?

Cris deRitis:                      I would've pointed to the quits as well. The other aspect I can think of is compensation in a nonpecuniary way. So, people still preferring to have flexibility in their schedule or, "Give me Friday off," or some non-monetary incentive or benefit versus demanding a higher wage gain. But it's just a pet theory, right?

Mark Zandi:                     Yep.

Marisa DiNatale:            I think there's definitely something to that. I mean, I know people that have been looking for jobs than are willing to take less money if it means they can work from home three days a week and they don't have to go into an office. So, I think that there is something to that workers valuing non-monetary compensation.

Mark Zandi:                     Yeah. That's something we might want to try to test looking across industry because different industries have different kind of remote work dynamics, and you can look at that compared to what's happened with the wage growth in those industries. That might be something worth that.

                                           What about, remember when Bill Spriggs, the chief economist of AFL-CIO was on, he was talking about the minimum wage hikes across the country, that they've had some additional ones this January, but much less so than last January and the January before. Maybe that's taking a little pressure off. Does that resonate with anybody? We need to go investigate that a little bit. [inaudible 00:14:40]-

Marisa DiNatale:            It could, especially just given the industries, because most minimum wage workers work in retail or leisure hospitality, which is where you saw this job growth and demand for labor, too. So, that could have been exacerbating that for sure.

Mark Zandi:                     Well, and I'm surprised no one took my pet theory. Maybe you guys don't buy into it, and that's-

Marisa DiNatale:            Inflation expectations.

Mark Zandi:                     ... inflation expectations. Yeah. I mean, inflation expectations took off this time last year when Russia invaded Ukraine, gas prices went north, and workers' inflation expectations jumped. They went to their employer and said, "Hey, you got to pay me more to get to work because inflation's going to be higher." But now, we're on the other side of the fallout from the Russian invasion, gas prices will come back down. People are less up in arms. You can see it in the inflation expectations data, and that's caused wage growth to moderate. Does that resonate with anybody?

Dante DeAntonio:          Yeah, I think it fits into the story. I think it's certainly a piece of the puzzle. I think all of the things we mentioned probably come together to give you that percentage point.

Mark Zandi:                     That percentage point. Okay. All right.

                                           Okay. Let's go back to the report. There was a little bit of a sidebar, and let me turn to you, Marisa next. Anything that you want to fill in with regard to the story around the jobs numbers that you think Dante missed or you want to highlight?

Marisa DiNatale:            One thing Dante and I were talking about before we started recording was the demographic composition of the household survey and what the increase in unemployment looks like across different groups. So, I noted that over the past year, almost all the increase in unemployment has been among foreign-born workers as opposed to native-born workers. That means anybody who wasn't born in the United States, regardless of when they were born. So, I mean, doesn't necessarily mean it's a recent immigration. And it looks like a lot of the increase was among younger workers, too, this time like the teen under 24, under 20 unemployment rate went higher. Also among Hispanics, it jumped quite a bit. And what else do I want to say? I mean, I think you know that this ... Yeah.

Mark Zandi:                     I think you noticed on that one, on the foreign born, that I've noticed, and correct me if I'm wrong, I didn't look at today's numbers, but all of the increase or the vast bulk of the increase in the labor force since the pandemic yet has been among foreign born.

Marisa DiNatale:            That's right. So, that makes sense why you would see the-

Mark Zandi:                     That's where all the labor supply is.

Marisa DiNatale:            Mm-hmm. Why you would see the increase in unemployment there. And he noted the ... I also was looking at the labor force flows, and there was an increase in the labor force last month of over 400,000 and more of those people went from out of the labor force into unemployment, meaning they entered and they started looking for jobs, then people getting laid off, going from employed to unemployed. So, it's a mix of people. Yeah. There is evidence that people lost jobs or were laid off. We see that in the duration of unemployment and the reasons for unemployment. But a lot of it was new supply into the labor force, which Dante noted with the EPOP ratio rising.

Mark Zandi:                     Got it. Got it. Cris, anything you want to add?

Cris deRitis:                      I looked at those demographics as well, and the one that stood out to me is that on disproportionate share of the new labor market entrants, the increase in the labor force that we're talking about, the 400,000 or so, came from folks with less than a high school education. So, 350,000 people within that category entered the labor force. So, that's consistent, at least with the narrative that it's really folks at the bottom end who are getting a lot of financial stress and maybe being forced to pick up another job or see how they can supplement their incomes.

Mark Zandi:                     Can you repeat that again? I missed that. So, what age group have seen the biggest increase in labor force?

Cris deRitis:                      No, yeah. Education, less than high school education.

Mark Zandi:                     Oh, less than high school. That's where the biggest increase in the labor force has been?

Cris deRitis:                      Last month.

Mark Zandi:                     That's right.

Cris deRitis:                      Yeah, no, there's some volatility there, so you don't want to read in too much, but yeah. It just stuck out.

Mark Zandi:                     Right. So, Cris, can I ask you? You're sitting at the Federal Reserve Board and you're making a decision around monetary policy and you get this report. All else being equal, what kind of impact does this have on your thinking?

Cris deRitis:                      So, interesting question. So, I think overall, this report, you can see what you want to see. It's a little bit of a Rorschach. So, you could justify a 50 basis point if you just looked at the top line and said, "Oh, 311,000 jobs is still way too hot in terms of labor market." Or you can justify 25 basis points because the wages seem to be coming in, even accounting for the compositional effects. So, for me, right now, I'm kind of in that second camp.

                                           I don't know that I need to be quite so aggressive because we do see some signs that there is some softening here going on. So, I would go with the 25 basis point at this point.

Mark Zandi:                     Yeah. And I guess, and we'll come back to this, given what happened with Silicon Valley Bank and-

Cris deRitis:                      Yeah. That's-

Mark Zandi:                     ... the kind of the angst now and the financial and the Stock Market Act just took it on the chin, and there's a lot of angst about the banking system. A lot of questions, which we definitely will come back in, but now, having seen that, that would probably push you to 25, right?

Cris deRitis:                      Yeah. That's right. And that's on top of it. But if I'm just looking at the labor market report.

Mark Zandi:                     Yeah, that's what I said. All else being equal. Yeah. Yeah.

Cris deRitis:                      Yeah. And like I said, you could certainly make the case to be more aggressive, but I don't think it's needed at this point.

Mark Zandi:                     Yeah, okay. That's my sense of it, too. I mean, the 311,000 job gain is still too strong. I mean, I think a good rule of thumb is if you want to get unemployment kind of moving north a little bit, and I think we want some easing in the labor market. We want unemployment to get closer to four than three and a half. You need need less than a hundred thousand jobs per month. So, if underlying job growth is 300K, which is kind of sort of what it feels like, that's still way too much relative to what I think we'd be looking at at this point to ease up the labor market and get it moving in the right direction.

                                           So, to me, that does signal more rate hikes. But then I look at labor supply, and that's actually pretty good. Labor force participation. I think we went to 62.5%, which is a new high since the pandemic hit. The peak before the pandemic was 63.3, so we're down eight-tenths of a percent. But that now is pretty much what you would've expected if there had to been no pandemic. So, labor force participation is right where it should be, and we're getting more working age population. We were talking about foreign-born workers coming in. Immigration has picked up.

                                           So, if you look at labor force growth, it's about 200K per month. So, it could be the case that, if labor demand comes down to a little south of 200K, we could be okay. We could see some easing up in the labor market if this continues. And, at least so far, it continues.

                                           Here's the other thing on the labor supply that and labor demand that has kind of been bothering me, and I just, I'll throw it out there and see if anyone's got to kind of have a view on this, is how can the labor market, how can one think the labor market's at full employment if we're creating consistently so many jobs?

                                           How is that possible? If you're at full employment, that means there's nobody out there to take a job at the same time that wage growth is moderating. So, doesn't the fact that we're creating 300K jobs per month mean we're not at full employment? What am I missing? You get my point?

Cris deRitis:                      Well, full employment's dynamic, right?

Mark Zandi:                     Yeah. Well, what does that mean?

Cris deRitis:                      So, the goalpost keeps shifting, so you just keep adding to satisfy it.

Mark Zandi:                     Yeah, but you get my point though, right?

Cris deRitis:                      I do. I do. Yeah.

Mark Zandi:                     You do. Dante or Marisa, do you have any insight on that? I mean, this is something that's been bothering me for a while. Just how can those two things be true? How can you be at full employment still generating so many jobs?

Dante DeAntonio:          Yeah, I don't know that you can be. I think part of the answer to that is that maybe we're not at full employment. And I think that's your point, is that we're probably not there yet, even though it seems like, by a lot of measures we are, but maybe the goal post, as Cris said, have moved since the pandemic started, and we need to be at 3.2% unemployment to get to actually be full. Or we need the prime EPOP ratio to be 80.8 to be full now instead of what we used to think of as 80%. So, maybe the goalposts have moved a little bit.

Mark Zandi:                     Or I'm not even arguing it's lower. Maybe it's not as high as people think. Most people think it's over four, closer to four and a half. That doesn't feel right to me in that kind of ...

                                           Here's the other possible explanation. The employment data is going to get revised down. We're not creating many of these jobs as we think we're creating, right? I mean, that feels like even a more likely scenario.

Cris deRitis:                      Yeah. Lots of questions about the data these days.

Mark Zandi:                     Yeah. The response rates and everything else.

Cris deRitis:                      Seasonal factors.

Mark Zandi:                     Seasonal factors. So, the data just doesn't square. It never does, obviously. That's why Dante gets paid the big bucks trying to square that data. But yeah.

Cris deRitis:                      Okay.

Mark Zandi:                     Okay. Marisa, do you have any perspective on that?

Marisa DiNatale:            Yeah, I think we might see revisions and the household survey has not been as robust, generally speaking, as the payroll survey has been.

                                           So, even this report, yes, there was a big increase in the labor force, but you see maybe the absorption of people into the labor force is taking a little longer than it had been before. And so, that would suggest that, yeah, maybe the payroll survey data are overstating a bit. And then your point about full employment, I mean, the unemployment rate, if we go back prior to the pandemic, was also very, very low. And we're having the same conversations about what full employment was. I mean, we had an unemployment rate back then of three-and-a-half percent. We were saying, "How are we still creating jobs?" So, I think it's very likely that we have to revise what we think full employment is. Demographics have changed. I think the pandemic probably kind of screwed things up in terms of who's available for work and who's still out. And it could very well be that there's more supply out there.

Mark Zandi:                     Yeah, okay.

Marisa DiNatale:            I mean, clearly there is, right?

Mark Zandi:                     Yeah, right?

Marisa DiNatale:            Because we see it.

Mark Zandi:                     We see it, right. Okay. Anything else on the jobs number that people want to bring up before we move on? Going, going, going, gone.

                                           Okay. You can always come back later whenever you want, but-

Cris deRitis:                      Well, there's the stats game, too, right? I don't want to give it away, right?

Mark Zandi:                     Oh, that's true. That is true. And I have a confession to make on the stats game.

Dante DeAntonio:          You don't have it.

Mark Zandi:                     I don't have a stat.

Marisa DiNatale:            Okay.

Dante DeAntonio:          You can just [inaudible 00:25:59].

Marisa DiNatale:            I have plenty to talk about.

Mark Zandi:                     Actually, I can come up with one while you guys are gabbing away here.

Marisa DiNatale:            Yeah.

Dante DeAntonio:          I'm sure.

Mark Zandi:                     Yeah, while you guys are gabbing away. All right, let's play the stats game. The game is we each come up with a statistic. The others try to figure that out through questions, clues, deductive reasoning. The best statistic is one that is not so easy we get it immediately, not so hard we never get it, and is apropos to the topic at hand, which is jobs, and also what's going on in the banking system today.

                                           So, with that, this is now firmly tradition. We're going to begin with Marisa. What's your statistic?

Marisa DiNatale:            Okay, my statistic, and this straddles both topics, I'll say-

Mark Zandi:                     Ooh!

Marisa DiNatale:            ... I think.

Mark Zandi:                     That's a big hint. Oh, wow.

Marisa DiNatale:            It is a big hint. I shouldn't have said that.

Mark Zandi:                     I know!

Marisa DiNatale:            Well, all right. You might get this. Minus 54,000.

Mark Zandi:                     Jobs in finance?

Dante DeAntonio:          Information job losses over the last three-

Mark Zandi:                     Information job loss.

Marisa DiNatale:            You got it. You got it. Yeah.

Dante DeAntonio:          It's one of my stats, Marisa.

Mark Zandi:                     I would-

Marisa DiNatale:            That was your stat?

Dante DeAntonio:          I mean, it was one of the ones I had on my list. Yeah.

Mark Zandi:                     Yeah. That's a good one though. So, you want to explain, and can you tell us the importance?

Marisa DiNatale:            Yeah. So, the information sector, which includes a bunch of stuff, but it includes most of these tech companies, software publishing, kind of the traditional tech, but it also includes things like newspapers, online publications, the movie business. This has lost jobs for each of the last three months. So, lost jobs. In December, January, and February, we've been talking about why these tech layoffs haven't been showing up in the jobless claims data. They are showing up in the payroll survey. So, over the past three months, the industry has lost 54,000 jobs since November, and if you abstract from the pandemic, you have to go back several years prior to the pandemic to get consecutive losses that were that big in the industry.

Mark Zandi:                     That's a good one. Very good.

                                           Okay. Dante, you're up.

Dante DeAntonio:          Go to the second one. 56.

Mark Zandi:                     56.

Dante DeAntonio:          56.

Mark Zandi:                     Is it related to jobs?

Dante DeAntonio:          It is.

Mark Zandi:                     Is it in today's employment data?

Dante DeAntonio:          Yep.

Marisa DiNatale:            Oh, is that gain in retail employment?

Dante DeAntonio:          Nope. I think that was about 50. Close. And this is not thousand. It's just 56.

Mark Zandi:                     Yeah. That's what I was going to say.

Marisa DiNatale:            Oh! Oh, okay.

Mark Zandi:                     He hasn't stipulated the units yet. I mean, usually you say, "56,000," if it's that.

Dante DeAntonio:          Yeah. That would be ...

Mark Zandi:                     That would be really rude if you, you know.

Dante DeAntonio:          It's not 56,000, just-

Mark Zandi:                     It's 56. It's actually 56.

Marisa DiNatale:            It's 56. Okay, okay.

Dante DeAntonio:          Yeah.

Mark Zandi:                     Is it in the household survey?

Dante DeAntonio:          It is not. It's payroll, sir.

Mark Zandi:                     It's in the payroll survey. 56.

Dante DeAntonio:          Is it a percentage-

Marisa DiNatale:            Is it the diffusion index?

Dante DeAntonio:          It is an index, you're correct. Yeah.

Mark Zandi:                     It is.

Dante DeAntonio:          It's a diffusion index.

Marisa DiNatale:            It's the employment diffusion index?

Dante DeAntonio:          Yeah. For total private industries. Yep.

Mark Zandi:                     Oh!

Marisa DiNatale:            So, I got it.

Mark Zandi:                     Yeah.

Dante DeAntonio:          Yes.

Mark Zandi:                     Ding, ding, ding, ding. Where's that cowbell?

Cris deRitis:                      Who has the bell?

Mark Zandi:                     Yeah, we're kind of bell-less this time. Very good. So, you want to explain?

Dante DeAntonio:          Yeah. So, that's the lowest that it's been since April 2020 when obviously we had tons of job losses. The diffusion index measures the percentage of industries that are adding jobs. So, that means that 56% of industries were adding jobs in February. Again, that's the lowest it's been in the first half of 2022. It was all the way up at 73, even in the second half of 2022. It had come down a little bit, but it was still 65. So, it certainly suggests that the strength of job growth, even though the headline number is still pretty strong, the strength of job growth, the breadth of job growth is definitely diminishing, and I think certainly sets us up for a situation where we could see job growth slow pretty dramatically if you continue to see weakness broadening out across more industries.

Mark Zandi:                     Now, that's an interesting statistic. That's a real sign of, I think, cooling off in the labor market, don't you think?

Dante DeAntonio:          I think so.

Mark Zandi:                     Yeah. So, it's 56, and if it goes below 50, is that consistent with recession or not necessarily? What's consistent with recession, do you know? Probably around a third or something.

Dante DeAntonio:          Yeah, I'd have to go back and look historically to see. Yeah, I mean, just because it's under 50 doesn't mean that you're losing jobs necessarily. Obviously, the size of the gain or loss is not factored in there.

Mark Zandi:                     Right. And how many industries are in the ... Is it two? I keep on saying 250, 300 industries that they provide data for?

Dante DeAntonio:          Yeah, something like that. It's several hundred industries in the [inaudible 00:30:43]. Yeah.

Mark Zandi:                     Several hundred, okay. Yeah, that's a really good one. Can we keep track of that going forward? I that's think a pretty good window into what's going on in the labor market. Yeah.

Dante DeAntonio:          Yep.

Mark Zandi:                     Okay. Okay. Very good.

                                           Cris, you're up.

Cris deRitis:                      All right. Two related numbers. 105,000 and -1.4%.

Mark Zandi:                     Are they the job numbers?

Cris deRitis:                      They are. They're in the report. Yeah. Payroll survey.

Mark Zandi:                     Really?

Cris deRitis:                      Yeah. Yes.

Marisa DiNatale:            Oh! He's not sure.

Cris deRitis:                      Yes, yes. Yeah.

Marisa DiNatale:            Oh!

Mark Zandi:                     Both are in the payroll survey.

Dante DeAntonio:          Its' 105,000, is that leisure hospitality job gain?

Cris deRitis:                      It is. It is.

Mark Zandi:                     -1.4%. So, is that related to leisure hospitality?

Cris deRitis:                      It is.

Marisa DiNatale:            Is that wage growth?

Mark Zandi:                     Is the slow in the wage growth?

Cris deRitis:                      No.

Mark Zandi:                     No. The hours worked-

Marisa DiNatale:            It's related to leisure hospitality?

Mark Zandi:                     Hours worked.

Cris deRitis:                      Weekly hours worked index, aggregate index of weekly-

Mark Zandi:                     Yeah.

Cris deRitis:                      Yes, that's it.

Dante DeAntonio:          That's exactly right.

Mark Zandi:                     That's exactly what I meant.

Cris deRitis:                      You got it.

Marisa DiNatale:            You guessed your own statistic.

Mark Zandi:                     Yeah. That's so funny. Yeah. Oh, good. Well, okay. Well, you want to explain that one?

Cris deRitis:                      Yeah. So, 105,000 people, right? Jobs added.

Mark Zandi:                     That's a lot.

Cris deRitis:                      That's a lot. But in terms of the weekly hours, so we get the aggregate weekly hours, that actually declined.

Mark Zandi:                     Interesting.

Cris deRitis:                      So, you have more people that have been hired, but the average work week is shorter for them. So, in total, you actually have fewer hours in the leisure and hospitality industry [inaudible 00:32:23] or the last-

Mark Zandi:                     Is that a trend in the industry, or is that just-

Cris deRitis:                      It had been going up.

Mark Zandi:                     Okay. So, it could be just a February data point, you think, or ...

Cris deRitis:                      Yes. It could be. It could be, but I really just wanted to underscore that-

Mark Zandi:                     Yeah, the difference.

Cris deRitis:                      You got to look behind the numbers because you might be hiring a lot of people, but they might be part-timers.

Marisa DiNatale:            Yeah. Part time.

Mark Zandi:                     Well, Dante mentioned this, but just to call out again, the other sign of a bit of weakness in the report was hours worked declined again.

Cris deRitis:                      Right.

Mark Zandi:                     So, that's a key statistic, both overall and in manufacturing. And that's a good leading indicator historically of job growth. So, if businesses generally cut hours back before they cut jobs, and so that might be another indication that things were cooling off.

                                           Okay. I got a statistic. I lied. I got it on the fly here. It's actually a pretty good statistic, but it's going to be hard. Going to be hard. I'm going to say zero. Zero is the number.

Cris deRitis:                      Was it in the jobs report?

Marisa DiNatale:            Is it from the jobs report?

Mark Zandi:                     No. It's apropos to the next part of this conversation around the Silicon Valley Bank. That's a big hint, by the way.

Cris deRitis:                      The share value of Silicon Valley Bank.

Mark Zandi:                     That's pretty good. I don't know because you think it's exactly zero right now?

Cris deRitis:                      No.

Mark Zandi:                     Yeah, probably part could be. That's a good answer, but that wasn't what I had in mind.

Cris deRitis:                      Okay. Yeah.

Marisa DiNatale:            Is it a financial market statistic?

Mark Zandi:                     No. I'll give you another statistic that very, very related that might help you with this. 4,700.

Marisa DiNatale:            The market, S&P 500.

Mark Zandi:                     No.

Cris deRitis:                      No. That's 3,900 now.

Mark Zandi:                     Yeah. 3,900, maybe lower than that last I looked. Yeah. Yeah.

Marisa DiNatale:            4,700.

Mark Zandi:                     What else can I tell you without giving it away? What happened to Silicon Valley Bank today?

Cris deRitis:                      It failed.

Mark Zandi:                     It failed.

Marisa DiNatale:            It went into receivership at the FDIC.

Mark Zandi:                     Yes. That's another fancy way of saying it went kaput.

Marisa DiNatale:            There was a run on it.

Mark Zandi:                     Yeah. Yep. Yeah, there was a run. That's true, too.

Cris deRitis:                      So, is that the number of bank failures?

Mark Zandi:                     Oh! Yes, yes. Great. That's it. Exactly. Number of bank failures in 2022.

Cris deRitis:                      [inaudible 00:34:46].

Mark Zandi:                     Zero, also zero apparently in 2021. No bank failures in '21.

Marisa DiNatale:            What's the 4,700?

Mark Zandi:                     What do you think that is? Bonus.

Cris deRitis:                      The number of banks.

Mark Zandi:                     Number of banks, yeah. Very good. Well, number of FDIC-insured institutions to be precise, because Marisa's saying receivership. So, yeah, yeah. 4,700. Zero. Isn't that fascinating? Yeah. And now I'm speaking from memory, but memory of about five minutes ago when I looked, but still memory, so I probably have it wrong, but I think in the teeth of the financial crisis, I think it was '09, maybe 150 banks failed, to give context. Something along those lines. Yeah.

                                           Okay. Let's now turn to Silicon Valley Bank. And, of course, the other bank that failed, or I think it is failing or they're winding it down is Silvergate. That's the crypto bank, the bank that was lending to the crypto industry. I think it is winding down. I don't know if it's actually been put into receivership. Has it? I don't know. I don't the answer to that question. Do you guys because-

Marisa DiNatale:            I don't know.

Mark Zandi:                     Okay.

Cris deRitis:                      I haven't seen that.

Mark Zandi:                     Doesn't matter. But we now have two ... These aren't, I would call big banks, but they're not small, either.

Cris deRitis:                      Small.

Mark Zandi:                     Yeah, they're not small.

Cris deRitis:                      Silicon Valley is 200 billion, right? That's ...

Mark Zandi:                     Okay. Yeah, that's a big bank.

Cris deRitis:                      Yeah. [inaudible 00:36:14].

Mark Zandi:                     200 billion, that's a big bank. Yeah.

                                           All right, Cris, well, I'm going to turn to you. Maybe you can kind of summarize what's going in here. And then the next question will be, well, what do you think it means? But what exactly is going on here in the case of SVB?

Cris deRitis:                      Yeah, so the bank failed earlier this week, right? They are undercapitalized. They are-

Mark Zandi:                     Failed today. It failed today, didn't it? On Friday?

Cris deRitis:                      Yeah. Okay. But they were unable to successfully raise capital over the last day or so. And that's what ultimately caused the failure.

                                           I guess a couple of things went on here in terms of ... There was a run aspect to this. So, depositors started getting concerned about their deposits and pulling them out. And that certainly hurt the financial position of the institution even more. The value, they had a lot of bonds on their balance sheet, and with the run up in interest rates, the value of those bonds has it been marked down. So, as they tried to sell those bonds, the value or the price was actually lower than what they paid, and that certainly helped hurt their capital position as well.

                                           So, just in some sense, classic bank failure. In the sense they just were undercapitalized. But then, I think what's unique about this institution is that they have a lot of exposure to, of course, the tech industry, a lot of venture capital.

                                           So, they may have been taking collateral shares in pre-IPO businesses. So, they were really trying to facility their help, the tech industry in a major way. They had a lot of exposure there. And with all the weakness that we were seeing in tech, that only snowballed into the broader weakness that they face today.

Mark Zandi:                     Yeah. Can I take a crack at that just because it's complex and-

Cris deRitis:                      Yeah.

Mark Zandi:                     ... let me put it in my words and tell me if this consistent with what you said. So, the problems really began a little over a year ago when the Fed started raising interest rates and the value of tech stocks fell sharply. So, if you go back January, February, March, April of last year, that's when the stock market went south. And that was led by a big decline in the stock of technology companies.

                                           And that goes, too, the fact that these are generally growth companies. The investors invest thinking that they're going to make money long into the future. So, if interest rates rise, the present value of that future earnings is a lot lower. And so, the valuations get dinged very significantly so that they got marked down.

                                           So, because the stock market's down and that affects the ability of tech companies to raise capital to go out and issue new equity and new debt, because they're now worth a lot less. So, they can't raise as much cash. But you have got all these companies out there that, they're losing money, they have negative cash flow, they're burning through their cash. And a lot of these tech companies do business with Silicon Valley Bank, and they started drawing down the deposits that they held at the bank because they needed the cash to keep their business going and try to get across the finish line and produce something that investors are invested in.

                                           As the deposits started to run off, and, of course, there's already pressure for deposits to run off because rates are up and there's more competition for those deposits from other banks. And so, there's runoff from that as well. But this puts pressure on Silicon Valley Bank to having to raise cash. They have to turn to the assets they own, which, and they want to sell the most liquid assets, and that's treasury securities. I don't know if they held any mortgage securities, but treasury securities. But the problem there was the value of those treasury securities was now significantly lower because of the run up in rates. A lot of those treasury securities they invested in back when interest rates were very low. Think back a year, year and a half ago, we were at record low interest rates, but now those bonds are worth a lot less in this higher rate environment. So, now they're having difficulty raising the cash they need to pay off the depositors.

                                           That's a classic kind of mismatch between assets and liabilities that banks often are struggling with. And then, of course, you have depositors in those banks, particularly those that have deposits that are over 250,000 because then they don't have FDIC insurance. Very sensitive to this. They get a whiff that there's an issue here, and they start moving their money out of the bank. And then we get into the classic bank run, everyone kind of Jimmy Stewart, Wonderful Life running for the door. And the FDIC says, "Oh, my gosh. I better shut the door shut before all the cash is gone." And so, they shut the door and they said, "Okay, now we're just going to sort this out. The bank is now under receivership."

                                           They came up with another ... Bank of Santa Clara or something. They come up with a different name. Now, for people with insured deposits, 250K or less, they're fine. They may have to wait till Monday to be able to get their money out, but if you had more than 250K in the bank, now you got to get in line with all the other creditors, the bank, the bond holders, and everybody else. And that gets to get sorted out in the process of receivership.

                                           I'm sure I repeated a lot of what you said, but just to repeat it because it is so complex. Did I get that roughly right, Cris? Does that narrative sound right to you?

Cris deRitis:                      Yeah, yeah.

Mark Zandi:                     Perfect. Okay. Perfect. Okay. Okay. Very good.

                                           Okay. And Marisa, Dante, anything you want to add to thinking around how Silicon Valley Bank got into this mess? Anything else to add?

Marisa DiNatale:            I understand that they kind of took on the role as almost like a venture capitalist in a lot of tech startups and tech companies in the area. And as you said, we've seen what's happened to the tech sector in the past year. So, I guess my thinking about it is that it's sort of idiosyncratic to the kind of lending and the customer base that it had. I think the question that everyone will ask, is this a sign of something more systemic in the banking system to come? It seems to me like perhaps this is not, and that it's idiosyncratic to the industry in which it was heavily invested in.

Mark Zandi:                     I was going to go there next, but before I do, Dante, anything else to add?

Dante DeAntonio:          No. Go ahead.

Mark Zandi:                     Okay. Okay. Let's go back to that. So, the obvious next question is, well, what does this mean? I mean, is this a fissure in the financial system? Is this a fault line in the financial system? Is this an earthquake that's coming? I mean, are we going to see a lot of banks get into trouble and we see a lot of bank failures. And your sense, Marisa, is no, that won't be the case. Why?

Marisa DiNatale:            Yeah. Tentatively no because of-

Mark Zandi:                     Yeah. Tentatively no. Tentatively no?

Marisa DiNatale:            Just because of the nature, as I explained, of who they were lending to and the kinds of positions they appear to be taking, somewhat different than your other traditional regional bank that has a broad-based portfolio lending to consumers and businesses and credit card lines, auto lines, mortgages. I'm sure Silicon Valley Bank had all those things as well. But they also took somewhat of almost like providing seed money to a lot of tech startups, too, which I think is unique, which is why I'm not as worried about something more broad based. And you had mentioned another bank that looks to be in trouble that was heavily invested in cryptocurrency or-

Mark Zandi:                     Silvergate. Yeah.

Marisa DiNatale:            Yeah. So, again, that seems a bit idiosyncratic and not truly representative of what most community or regional banks look like.

Mark Zandi:                     Yeah. Well, Cris, same view? What do you think?

Cris deRitis:                      Yeah, I would concur. At this point, it does look like it's the exposure to the tech industry itself, but I'd be a little cautious that the valuation problem in terms of the assets, that could be universal. So, you don't have a problem until you have a problem in a lot of institutions.

                                           So, if there was some other industry, for example, that started to show some signs of stress and the banks serving that industry may very well experience a similar type of issue in terms of their asset base and what the true value of the securities that they're holding actually is if they have to suddenly liquidate and try to raise capital. So, that would be the major concern I would have that, yeah, I think in terms of the direct exposure to tech, I don't see many other banks in a similar situation, but there are banks that are very exposed to energy or very exposed to car manufacturing. So, there could be some other areas if indeed we get into more of this rolling recession type of idea.

Mark Zandi:                     Right, right. I do worry about the very large security holdings the system has. I think in the wake of the financial crisis, one of the reforms was to have the banks hold more in securities, more treasury securities, more mortgage securities, Fannie Mae, Freddie Mac, Ginnie Mae that are government-backed securities thinking, being that they're more liquid, that if a bank gets into trouble that they could easily get cash to help them out if they had a lot of treasury and mortgage securities. And this is obviously, I guess a potential problem with that strategy is that the value declines.

                                           Significantly in this world that we are just going through. I mean, if you go, again, back a year, year and a half ago, I think the 10-year treasury yield at one point was below 1%. So, now it's four. That's a pretty big difference in a very short period of time.

                                           The one thing that gives me a little bit of solace there is that banks do need to stress test their balance sheets and their income statements to different interest rate scenarios. I mean, what I just articulated is not surprising. It's not news. And the banks have been required to stress against different interest rate assumptions. So, it feels like the system should be able to digest this. It's not great, but it should be able to digest this without this becoming a bigger issue.

                                           Here's the other thing that I think might be useful, just I'm going to throw it out there. It's a bit of a non sequitur, but I think important. The one sort of institution out there that can really help with this is the Federal Home Loan Bank System.

                                           The Federal Home Loan Banks were put on the planet back in the '30s to try to help banks with their liquidity issues. The banks can use their securities on their balance sheet, particularly mortgage securities, to provide collateral to get so-called advances from the Federal Home Loan Bank to provide them with liquidity through tough times like this. And that should be helpful here. You can see advances by the Federal Home Loan Bank have picked up quite meaningfully here over the last six, nine months, and that should help to support the system. But I agree with you. I think at this point it feels like this is more, as you said, Marisa, idiosyncratic. Something related back to the tech industry.

                                           What about though, if interest rates ... I guess it's a question of how high rates go and how long they stay there. So, this gets back to monetary policy. Do you think that, now that we're starting to see some more stresses developing here in the system, that this might be a reason why the Fed might not raise rates as much and keep them as high as long as they would? Or what does that mean exactly? Cris, do you have a view on that?

Cris deRitis:                      It's got to figure into the calculus because they don't want ... It's the cutting your nose to spite your face. If you raise rates so much, yeah, you might get inflation down, but then you've introduced all sorts of other financial system issues that the Fed is responsible for as well. So, I think it certainly has to enter the calculus. I don't know that this event alone takes precedent now, and they call off the inflation fight, but I think it certainly will be in the back of their minds. And if they're on the precipice of, "Oh, is it 25 or 50," kind of undecided, could go either way. This certainly would be perhaps an additional weight to take a policy or maybe just take the 25 basis point hike versus the 50.

Mark Zandi:                     Yeah, I mean, this is part of financial conditions, is it not?

Cris deRitis:                      Yeah. Right. Absolutely.

Mark Zandi:                     So, when the Fed makes a decision around interest rate policy, it has a so-called reaction function. It sets policy based on a number of variables. One, obviously being inflation relative to its target. Two, inflation expectations. Three, the strength of the labor market. How close are we or are we not to full employment, the kind of unemployment rate, and then financial conditions. What's going on in the equity market? What's going on in the corporate bond market? And here, what's happening with the banking system would be kind of key to those financial conditions.

                                           So, if banks are running into some trouble here and financial conditions are tightening, meaning they're tightening down on credit availability and raising interest rates on the loans that they're making, that would be a reason. All else being equal, given what's going on with inflation, inflation expectations, the labor market for the Fed to be less aggressive in raising interest rates, raise rates less than otherwise would be the case, or perhaps not keep them there as long.

                                           So, it would seem to suggest that here's another thing they need to be considering when they're setting policy here in the next couple weeks when they meet again.

Cris deRitis:                      Along that lines, do you think the Fed should take into account the debt ceiling debate? If they see that there's no resolution coming, should they preemptively adjust their monetary policy or what's your ...

Mark Zandi:                     Yeah, I think it should be in their calculation in the following way. It might go to timing. If you're going to raise rates, we think the X date on the debt limit, this is based on really good work Bernard Yaros is doing, is mid-August. So, things are really going to start getting tense, probably beginning around July 4th. You get to come back from July 4th holiday, things are really going to get tense, and hopefully the Feds finished with its rate increases at that point in time, and it doesn't try to raise rates in that period because I think it would be highly counterproductive.

                                           So, yeah, I don't know that it affects the terminal rate, the highest rate that gets, or how long rates stay at the terminal rate, but certainly should affect the timing, I think. If they want to get their rate increases in, let's get it done March, May, and June, and that's the end of it for a while. So, that'd be my thinking. What do you think?

Cris deRitis:                      Yeah, I can ask to be part of the calculus as well but it certainly gets a little sticky in terms of [inaudible 00:52:01].

Mark Zandi:                     Right. Okay. Let me ask you this, and Cris, I might be pushing you too hard, but let me just ask anyway, because I push you all the time. So-

Cris deRitis:                      I'm used to it.

Mark Zandi:                     ... what should I be watching to gauge whether what's going on here is idiosyncratic to SVB or something that is more systemic, broadening out, a problem that's broadening out across the banking system? What would you be watching?

Cris deRitis:                      I guess I would be looking at debt spreads or looking for market signals, how are investors reacting here? Presumably they have more information about individual banks and are factoring that into their calculus so I [inaudible 00:52:44]-

Mark Zandi:                     Used to be, I'd say, "Go look at the TED spread, LIBOR. You remember LIBOR, the London Interbank Offering Rate versus three month treasury bills?

Cris deRitis:                      Is that still around?

Mark Zandi:                     There's no LIBOR anymore, right?

Marisa DiNatale:            SOFR.

Mark Zandi:                     You got SOFR. So what would you look at if you can't ... You're not looking at LIBOR. There's got to be something out there that you would look at because SOFR doesn't have any ... That's the substitute for LIBOR. LIBOR used to be the rate that banks would charge each other for borrowing and lending to each other. So, if there was a lot of angst in the banking system and banks got nervous about lending to another bank, they'd say, "You got to pay me a higher interest rate." So, LIBOR rates would go up relative to the risk-free three-month treasury bill. And that was a pure read into kind of the angst in the system around these issues. But LIBOR was discontinued. You may remember back there was a scandal around LIBOR fixing because they came from dealers and they lied about LIBOR during the financial crisis.

                                           So, the replacement is the so-called, SOFR, the Secured Overnight Funding Rate. I think I got that right, SOFR. But there's no credit risk there, so it doesn't represent the same thing. Is there some other measure out there, Cris, that's similar to that that we can look at?

Cris deRitis:                      Can I think of a single measure or because the-

Mark Zandi:                     Or anything.

Cris deRitis:                      ... credit department flops or EDFs or ... Right?

Mark Zandi:                     Yeah.

Cris deRitis:                      Or the individual.

Mark Zandi:                     Expected to fall frequency on the banks.

Cris deRitis:                      Yeah, the individual. But you're thinking more of an aggregate. Is there something like that you can [inaudible 00:54:18]-

Mark Zandi:                     Yeah. Yeah. I'm just not sure. I mean, something I hadn't thought about until just today when, well, SVB failed. But what should I be looking at to gauge whether this is broadening out? So, maybe we can work on that.

Cris deRitis:                      Good question. Yeah. I'll think about it.

Mark Zandi:                     I'm not sure what we should be looking at, but anyway. Okay. Anything else on that topic anyone wants to bring up?

Dante DeAntonio:          Yeah, I don't know if you saw how dramatically market expectations for what the Fed's going to do in a few weeks shifted today.

Mark Zandi:                     No, no. I didn't see that. What'd they do?

Dante DeAntonio:          It's in a big combination of the jobs report and SVB, but it was a pretty dramatic shift. Yesterday was about a two-thirds odds of a 50 basis point hike in a few weeks, and that shifted basically the other direction. Now there's about a two-thirds probability on a 25 basis point hike in a few weeks.

Mark Zandi:                     Makes sense.

Dante DeAntonio:          It was a pretty dramatic one day shift and with the market's expecting the Fed to do. And I don't imagine that comes just from the jobs report alone. I mean, that might have boosted a little bit, but ...

Mark Zandi:                     I was going to go to recession probabilities again in the context of all this. So, let's do that quickly and then we'll call it a podcast. Let me begin with Marisa because she's always straddling the middle, 50/50.

                                           So, Marisa, and I'm going to ask this question one last time and then I'm going to change it next time I ask it. But what is the probability of recession over the next 12 months?

Marisa DiNatale:            Seems a bit higher now. I'm a little worried, a little more worried than I've been.

Mark Zandi:                     You heard in Phoenix, because in Phoenix you were a little less worried.

Marisa DiNatale:            Right. So, now I'm on the other side of 50.

Mark Zandi:                     Oh, you're on the other side of 50, but you're still at 50?

Marisa DiNatale:            I'm still at 50 with risks to the upside.

Mark Zandi:                     Risk to the upside.

Marisa DiNatale:            Or the downside, depending on how you-

Mark Zandi:                     And what bothered you the most? The job number or the SVB?

Marisa DiNatale:            I think, despite what I just said about it being idiosyncratic, that worries me in the context of generally this is a difficult environment for banks with rising rates. So, I think, to Cris's point, which I hadn't really thought about in that way, I mean this could be emblematic of just stresses in other parts of the economy if they were to come and just banks struggling to get funding and financing. So, if we do go into a recession, I mean, there could be more financial stress coming. I still think this is idiosyncratic, but I'm a little more worried than I was yesterday, for sure.

Mark Zandi:                     Yeah. Mm-hmm. Reasonable. Dante?

Dante DeAntonio:          I would say I think I've been between 45 and 50 mostly. I would say I'd probably edge at 45. I think I feel like a little bit better. If anything, I think SVB is concerning, but I think you also might get the sort of weird benefit that maybe it has the Fed back off a little bit sooner than they would have otherwise, which maybe-

Mark Zandi:                     Interesting.

Dante DeAntonio:          ... provides a little bit of upside. So, I'd go 45%.

Mark Zandi:                     Yeah, that's interesting. Cris?

Cris deRitis:                      I'm going to stick with 60 with an arrow pointing up, more nervous.

Mark Zandi:                     Because of SVB?

Cris deRitis:                      I guess both the job report and SVB.

Mark Zandi:                     And the jobs report. Really? Oh, okay. Interesting. Okay.

Cris deRitis:                      Yeah, the Fed will look mostly at the top line.

Mark Zandi:                     Top line is 311,000 jobs. Yeah's. It's interesting.

Cris deRitis:                      Yeah. Let's see CPI next week and ...

Mark Zandi:                     Yeah. CC, obviously that's going to be really important. Yeah, really key.

                                           I'm still at 45% probability recession in the next 12 months with the arrow pointing down and then pointing down because I thought the jobs numbers were, on balance, pretty positive that the labor market is easing up here. And wage growth is the bottom line, for me is the key. And that moving definitively in the right direction, even with the measurement issues and also SVB, I think that's got to play a role in their thinking.

                                           There's got to be some uncertainty with regard to what kind of pressures are developing in the securities portfolios of banks. FSBB got turned upside down and all around in its asset liability management. There may very well be that in other institutions as well. So, something to watch. So, I'd say the arrow is pointing down at this point, but next time I ask, I'm going to ask for probability recession in 2023 and then probability recession in 2024. I think we need to do that. We need to do that.

Cris deRitis:                      All right. Then it gets interesting.

Mark Zandi:                     Yeah. Then it gets interesting. Yeah. Very good.

                                           Okay. We're going to call it a podcast at this point. I think we covered a lot of ground and looking forward to next week, but take everyone. Have a good weekend. Talk to you soon.