Listen On:
Moody's Talks - Inside Economics
Gangbuster GDP
The inside Economics team takes up the gangbuster GDP growth in the third quarter. Marisa walks the group though the GDP identity C+I+G+net exports and concludes that while the report overstates the case, it makes a strong case that the economy is on solid ground. Cris gives Marisa an A+ for her exposition. Good thing given their history.
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 my two trusty co-host, Marisa DiNatale, and Cris deRitis. Hi guys.
Cris deRitis: Hey Mark.
Marisa DiNatale: Hi Mark.
Mark Zandi: How are things?
Cris deRitis: Okay, okay.
Mark Zandi: Good, good. This is a little unusual for us because it's late, well not late, but early evening on a Thursday. We typically record our podcast on a Friday, but we're doing it late Thursday. I have a board meeting all day tomorrow. Can't do it then, but we could have done it Saturday. Why didn't we do it?
Cris deRitis: You tell me.
Mark Zandi: Really?
Cris deRitis: You chose it.
Mark Zandi: I chose it?
Cris deRitis: I think we're doing it next Saturday.
Mark Zandi: Oh, is that what it is? Okay. Maybe [inaudible 00:00:58].
Cris deRitis: We can compare.
Mark Zandi: Okay. All right. Very good. But here we are, and this is an important day because on this Thursday, what is this, October 26th, we received the GDP report for the third quarter of 2023, the GDP being the value of all the goods and services we produced. And it was, I don't think there's any other word for it, but gangbusters. I mean, you guys have any better word for it? I mean, pretty amazing kind of growth. Yeah. Okay.
Cris deRitis: Yeah.
Marisa DiNatale: It's a good word.
Cris deRitis: Surpassed all expectations.
Mark Zandi: All expectations. Okay. Well, let's dive into it in some detail, and hey Marisa, maybe I can call on you to do a deep dive here. Give us a sense of the numbers and your interpretation of the numbers.
Marisa DiNatale: Sure.
Mark Zandi: Yeah.
Marisa DiNatale: So well above expectations, growth in third quarter. Growth was 4.9% Q2 to Q3, and we were expecting something in the high threes and most forecasters were not expecting something of this magnitude. This is the strongest rate of GDP growth that we've had since the end of 2021. You have to go back to the fourth quarter of '21 to see growth this strong. And it was really quite broad based amongst all facets of the economy, and I'll go through what those are. C plus I plus G plus net exports, right? We'll go in that order talking about the different components of the contributions of GDP.
Mark Zandi: Is that econ 101? C plus I plus G?
Marisa DiNatale: This is macro 101.
Mark Zandi: Macro. Macro. When I was in university college, it was econ 101. When you were there, was it was econ 101 or it was called macro 101?
Marisa DiNatale: I think we had to take macro and micro were separate. I don't think we had a general econ.
Mark Zandi: Oh, is that right?
Cris deRitis: Yeah. For me it was econ 102 was [inaudible 00:02:47].
Mark Zandi: What happened to 101?
Cris deRitis: 101 was micro.
Mark Zandi: Oh, okay. Well, that makes sense, actually. You should do the micro before you do the macro.
Marisa DiNatale: [inaudible 00:02:57] zoom out, right?
Cris deRitis: I'll let them know you approve.
Mark Zandi: Okay. Was this at Johns Hopkins? No, you got your PhD?
Cris deRitis: No, that was at Michigan State.
Mark Zandi: Oh, that figures. Michigan State. Oh, so you're a Wolverine, aren't you? No, no, wait, a spartan. You're a spartan.
Marisa DiNatale: Oh boy.
Cris deRitis: A spartan. A spartan.
Mark Zandi: You're a spartan. Sorry about that.
Cris deRitis: I couldn't care less.
Mark Zandi: Okay.
Marisa DiNatale: Did you know that Cris was my econometrics professor at Johns Hopkins?
Mark Zandi: No, I didn't know that.
Marisa DiNatale: Did you?
Mark Zandi: No. That is really amazing.
Marisa DiNatale: Yeah.
Mark Zandi: Johns Hopkins, Mercer?
Marisa DiNatale: Yeah.
Mark Zandi: Undergrad?
Marisa DiNatale: No, no, no, graduate school.
Mark Zandi: Oh.
Cris deRitis: Master's program.
Mark Zandi: You got your master's from Johns Hopkins?
Marisa DiNatale: Yeah.
Cris deRitis: Yeah.
Mark Zandi: I've known you for so many years and somehow I didn't know that. That is bizarre.
Marisa DiNatale: And Cris was my-
Cris deRitis: Go Blue Jays. Go Blue Jays.
Mark Zandi: And was Cris a good professor?
Marisa DiNatale: He was great. Yes.
Mark Zandi: He was great. I can imagine that. Yeah. That I believe. And Cris, was she a good speaker?
Cris deRitis: Thank you, Marisa.
Marisa DiNatale: He probably doesn't even remember me.
Cris deRitis: Absolutely, absolutely.
Marisa DiNatale: You're a liar.
Cris deRitis: The addendum to the story is that I show up for a job interview at Moody's Analytics years later, and who's in the room interviewing me?
Mark Zandi: Oh no. That is so cool. That is so cool. What a great story. How did he do on his interview? It must've been pretty good.
Marisa DiNatale: Oh yeah. He wowed us, I guess. Yeah.
Mark Zandi: Yeah, yeah. Wow.
Marisa DiNatale: I will say he gave me an A minus on my econometrics final paper.
Mark Zandi: Don't say Marisa holds a grudge, Cris.
Cris deRitis: Wow.
Marisa DiNatale: I remember where minus.
Mark Zandi: Where did that minus come from? It's probably because you got the C plus I plus G plus net exports wrong. Anyway, all right. Well, we're going to test you now.
Marisa DiNatale: Okay, let's go back to C. Let's go back to C.
Mark Zandi: Let's go back to C.
Marisa DiNatale: Okay. Over half of the growth in GDP in the third quarter came from personal consumption expenditures. Personal consumption expenditures grew 4% on a quarter over quarter basis. And again, you have to go back to the end of 2021 to see growth in consumer spending that strong.
We talked about this on the last podcast, right? We did our whole podcast last week about how strong the consumer is and how strong spending has been. And here it is in black and white in this release. You see spending on both goods and services by consumers was quite strong. We've seen that consumers were spending very strongly on goods during the pandemic because they couldn't spend on services, and this was starting to come back to some normalcy with more spending on services, but they're still spending quite strongly on goods, both durable and non-durable goods.
Two of the categories within good spending that were strong over the quarter were on the durable side, recreational vehicles, which are RVs, right? I don't know, is there anything else in that category like jet skis and things?
Mark Zandi: Yeah, yeah.
Marisa DiNatale: And then on the non-durable side, spending was very strong on prescription medications. Services spending was also quite strong. You have to go back to the third quarter of 2021 to see spending on services that was this strong. If you go back to the third quarter of '21, you're talking about sort of that post-pandemic, post-COVID lockdown reopening of the economy, right? Service spending was strong. Service spending was strongest on housing services, on insurance and on healthcare spending. Those were the strongest service categories.
Cris deRitis: No Taylor Swift effect, no Beyonce?
Marisa DiNatale: Oh. Actually, yes, yes. There is potentially a Taylor Swift effect. Spending on leisure goods, leisure hospitality, entertainment was also one of the very strong components. Yeah. You think that's what it is, Cris? You think it's Taylor Swift's tickets?
Mark Zandi: Did you go see her, Cris? Are you a fan?
Cris deRitis: I did not, no.
Marisa DiNatale: Cris is a Swiftie. He's blushing. I think he actually did go see her.
Mark Zandi: You're like a serial Taylor Swift fan. You go to all her concerts, [inaudible 00:07:24]? No?
Cris deRitis: I wish I had the time. Wish I had the time.
Marisa DiNatale: Yeah, or the money, apparently.
Mark Zandi: I don't know, Marisa, that felt a little disingenuous, that laugh. What do you think?
Marisa DiNatale: He's hiding something.
Mark Zandi: He's definitely [inaudible 00:07:39].
Marisa DiNatale: Adding to the Cris lore, lover of cryptocurrency and Taylor Swift.
Cris deRitis: And Taylor Swift.
Mark Zandi: Yeah, we haven't talked about crypto in a while, but nevermind.
Cris deRitis: Oh, please don't. Please don't.
Mark Zandi: Okay. All right. Well, the consumer obviously is hanging tough. Hey Chris, remember last podcast, you were kind of worried about the consumer? Any feeling better after this report or not so much?
Cris deRitis: Feeling better that last quarter. The consumer was having it tough.
Mark Zandi: Right. Okay. Last quarter [inaudible 00:08:08].
Cris deRitis: Great news. Last quarter [inaudible 00:08:11].
Mark Zandi: Got it.
Cris deRitis: Let's see what happens next.
Mark Zandi: Okay, so C. Now we're on to I, investment.
Marisa DiNatale: Yeah, let me just say one more thing about C, which is the only category that actually declined in terms of consumer spending over the quarter was gas and energy goods.
Mark Zandi: Okay. And that's on a real basis, so that means the actual amount, I guess gas prices were up and we just conserved. We drove less or something. Okay. All right, got it. Less gas.
Marisa DiNatale: Okay, so now we're onto I, so private investment was up 8.4% annualized over the quarter. Again, the fastest rate of growth in that category since the end of 2021. Fixed investment was up just under 1% over the quarter. Non-residential fixed investment was just about flat. Residential fixed investment, however, was up for the first time in nine quarters.
Mark Zandi: The non-res fixed investment, that's investment done by businesses, right?
Marisa DiNatale: That's right.
Mark Zandi: And the residential obvious is housing, single family, multifamily housing and home improvement.
Marisa DiNatale: And within, if you want to break down the spending by businesses, spending on equipment by businesses declined over the quarter and spending on equipment has declined in two of the last three quarters. It was up in the second quarter, but it also declined in the first quarter of the year. But spending on structures, so buildings and spending on intellectual property were both up. It was pretty much a wash between the structures and the IP offset the spending on equipment, which was down.
Mark Zandi: I think the [inaudible 00:10:01]. Oh, sorry, go ahead, Cris.
Cris deRitis: Do you think that's CHIPS Act related, some of that non-resi structural spending or building semiconductor plants and whatnot? That could be a contributor.
Mark Zandi: Yeah, absolutely, right, because that's manufacturing construction, and that's in the non-res structures. I think that's the CHIPS Act. I mean, I think if you look at manufacturing construction put in place, so that's nominal dollar, actual value of construction and manufacturing facilities, factories, which would include fab plants, chip plants. I think if you go back a couple of years ago, it was 75 billion per annum. That was roughly where we were. I think we're now over 200 billion annualized and it's still going up, still going straight. I think that's a big part of it. Yeah. Yeah.
I was going to say on the equipment side, I think one thing to note, and I think I had this right, I haven't looked recently, but if you take a step back and look at a chart of that business investment spending on equipment, so that's computers and that kind of thing, it's surged as you would expect in the pandemic because of remote work. We all bought stuff and businesses bought a lot of stuff for their employees to do remote work. And even though things have kind of leveled off here more recently, the level of investment spending is still quite high by historical standards. It doesn't feel like it's normalized back to what it would've been if there had been no pandemic. That's in my mind's eye. I'm not sure if that's exactly right, but I think it's pretty close to right.
Cris deRitis: Yeah. Now, [inaudible 00:11:43].
Marisa DiNatale: That is right.
Mark Zandi: That is right, Marisa? Okay.
Marisa DiNatale: Yeah. I mean, if you go back and you look at spending on equipment, and especially computer equipment was like in 2020, I mean, it was off the chart, right, in the third quarter of 2020. Once we realized everybody would be working from home for some time, businesses, exactly right, went out and spent. And so there's been recent weakness over the past year and equipment spending that could just be this cycle of not having to replace stuff you just bought two years ago.
Mark Zandi: Yeah, exactly. Okay. Anything else on the I, the investment? Oh, I meant to ask on the residential investment, single family, multifamily, home improvement, it was plus an aggregate. Was there anything going on underneath? I mean, what was driving that? Do you know, Cris?
Cris deRitis: I don't know. I didn't have an opportunity to look it up.
Mark Zandi: Okay. All right. Maybe I'll do that as we move along here and try to figure that out. Okay, so that's I. Basically C, big time source of growth, I, a source of growth in aggregate, not business investment, but in aggregate, a source of [inaudible 00:12:55].
Marisa DiNatale: In aggregate, it added one and a five percentage points to the GDP.
Mark Zandi: Oh, it did? That also includes inventory investment, right?
Marisa DiNatale: It does. That's true.
Mark Zandi: It does?
Marisa DiNatale: Yes, it does. And inventories were a positive contributor this quarter for the first time.
Mark Zandi: Pretty big, too. Do you want to explain that one, inventories?
Marisa DiNatale: Yeah. Inventories, it's the change in inventories that matters to the calculation of GDP growth, so the change from the prior quarter. This is the first time in three quarters where inventories have contributed positively to GDP growth. Last quarter, in the second quarter it was flat, no contribution. In the first quarter, it was a fairly big detractor, took about 2.2 percentage points off of first quarter GDP growth earlier this year. This time, it added 1.3 percentage points to GDP growth. Businesses have a lot of inventory, even though people are spending a lot and buying a lot of stuff, right? We see that with the consumption of goods, but nonetheless, they have a lot of inventory and that inventory grew over the quarter, which implies that production has been strong, I think.
Mark Zandi: Yeah. I'm so weirded out by that because boom time consumption inventories increased. That implies, as you say, a big increase in production. But actually, manufacturing industrial production has been pretty flat. It's not like it's booming. It could also be imports or importing stuff that goes into inventory before it's actually sold. And imports were up, but it didn't feel like it was up a lot. That just feels weird to me. When something feels weird to me, generally, it's revised. I'm just thinking this might get revised. We'll see. We'll see. But I guess the point is we get 4.9% GDP growth. What was the contribution from inventory investment? Was it like 1.3?
Cris deRitis: 1.3.
Mark Zandi: Yeah. Okay, so subtract that, that's 3.6. Even if that's the reality of what happened, 3.6 is-
Cris deRitis: That's still-
Mark Zandi: Still pretty good?
Marisa DiNatale: That's still really .... right.
Mark Zandi: By the way, that was pretty close to our estimate for the quarter, right? Our tracking estimate-
Marisa DiNatale: That's right.
Mark Zandi: ... was 3.6. But okay, so that's C plus I, now G.
Marisa DiNatale: G, government spending, was also a positive contributor to growth over the quarter. Government consumption added about, let's see, an eighth of a percentage point, 0.8 percentage points to GDP growth over the quarter. It was both federal spending and state and local spending grew over the quarter.
Within the federal spending, defense spending was up very strong. It was up 8% over the quarter. You have to go back to the end of 2020 to see defense spending that big. Non-defense spending was also up. That was up 3.9%. And state and local government spending was up 3.7%, which was a bit softer than it's been all year. But still, all branches of government spend out their spending money and adding positively to GDP growth.
Mark Zandi: And that goes to CHIPS Act, the infrastructure law, maybe the Inflation Reduction Act, although it might be premature for that, and of course defense spending. It feels like that's going to continue for some time here given geopolitical events. Yeah.
Marisa DiNatale: Right. I mean, we've had a lot of aid going to Ukraine and now we're likely to get even more of that with Israel.
Mark Zandi: Israel. Yeah. Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Okay, so a lot of juice from C, some juice from I, fair amount of juice from G. What about net exports? That's the last term in that identity.
Marisa DiNatale: Net exports were the only detraction here from growth. Of all of these categories, net exports were detracted a very small amount though. We're looking at 0.08 percentage points from growth.
Mark Zandi: 0.08, 0.08.
Marisa DiNatale: Yeah, 0.08.
Mark Zandi: I think I'd round that to zero, just saying.
Marisa DiNatale: You could. Yes.
Mark Zandi: Okay. Fair enough. Okay, got it.
Marisa DiNatale: This was the only category where this wasn't a help to GDP.
Mark Zandi: It wasn't a help. Okay.
Marisa DiNatale: Yeah, yeah.
Mark Zandi: And is it imports plus ... I mean, both were up. Exports were up, imports were up, but the net of that was no change.
Marisa DiNatale: That's right.
Mark Zandi: Okay.
Marisa DiNatale: Yeah.
Mark Zandi: Good. Okay. That's the nuts and bolts of it. What's your interpretation of it? What does it mean for where the economy is and where it's headed?
Marisa DiNatale: Oh, and I should also say year over year, GDP was up 2.9%. We're looking at growth that is well above the economy's potential here. My interpretation is the same thing we were talking about last week, right? I mean, consumers still have a lot of spending power here and they are propping up much of the economy. I think the fact that inflation is on a clear downward trajectory and has been moderating for now the past year plus is giving them more of a wherewithal to spend. And I think that's what we've seen over the last couple quarters here. I mean, even just compared to where we were a year ago or at the beginning of this year, inflation is down significantly.
Mark Zandi: Just to summarize, you're saying, okay, inflation was a problem, it still is a problem, but it's much less of a problem. It's come in and that's helped to support the purchasing power of American consumers and they're using that to continue to spend and they spent strongly in the third quarter, and that's the key reason why, and really, in the first half of this year, the key reason why the economy is growing as well as it is. That's the fundamental reason for that strong growth.
Marisa DiNatale: That's what I believe. Yeah.
Mark Zandi: Yeah, okay. Okay. Fair enough. Cris, what do you think? You want to fill in any gaps there in Marisa's rundown of the GDP and what's your interpretation of the numbers?
Cris deRitis: Well, first of all, I think it was A plus report.
Mark Zandi: There you go.
Cris deRitis: Marisa.
Marisa DiNatale: Oh, not an A minus, huh?
Cris deRitis: And I honestly do agree that it reflects the strength of the consumer. Consumers really are continuing to drive the bus. The inventories number, kind of mentioned, it's a little bit of noise to me. Even if it's right, it tends to be volatile. I worry about the shopping cycles being scrambled here, so who knows, right, what's going on there, clearly relying on the consumer here.
That's somewhat troubling I guess in the sense that you do want investment to pick up more of the water, carry more of the water, I guess here. I don't see that as a negative, right, because the residential investment actually picked up after a long string of negative growth, so something to watch. But if we're thinking about more of a sustainable growth path, right, you do want to see investment kicking in a bit more so because we are so heavily leveraged on the consumer right now.
Mark Zandi: Right.
Cris deRitis: Good report.
Mark Zandi: Yeah.
Cris deRitis: Absolutely.
Mark Zandi: Right.
Cris deRitis: But it does hang very heavily on consumers and was the third quarter a summer of spending, right, where we did go to the Taylor Swift concert and do a lot of other spending and that will pass now as we can start to face more and more headwinds? I think that's the case. For me, it's a one-time burst of activity here. We should be prepared for some slowing, not negative necessarily, but certainly a repeat of this would be a heroic assumption.
Mark Zandi: That's a good way of thinking, a good frame in terms of thinking about it. I mean, obviously, the C, the consumer is the key, right, 70% of the economy that drives the train. If consumers are doing their part, the rest of it doesn't matter nearly as much. I mean, it's a necessary condition. Okay.
And on the I, business investment, that does feel flat-ish. I'm not sure we're going to get a lot of juice from there one way or the other. I think that's, from memory, 10% of the economy effectively, so a relatively small part. The G though, that feels like there's some more [inaudible 00:22:01]-
Cris deRitis: Something there.
Mark Zandi: Yeah, that's not over. I mean, because that goes back to the infrastructure legislation, that goes to the CHIPS Act, that goes to the Inflation Reduction Act. I think we've done a lot of work in this area that the maximal impact from those pieces of legislation on the economy on GDP isn't for another year, maybe even as you move into 2025. That could be a pretty significant tailwind for most of '24 going into '25.
On the net exports, that I think is a wash. One quarter might be up a little, one quarter down a little bit, maybe because the US economy is so strong and the rest of the global economy not quite so much and the US dollar is very, very strong against most currencies. It might be a small drag on growth, but I don't know that it's going to be a factor one way or the other in driving things.
Cris deRitis: Going back to the G, [inaudible 00:22:59] the government side of this, I believe it was about a 50/50 split between federal and state and local contributions to the 0.8% growth. Given your analysis here of the federal contribution, do you expect ... That's what, about 0.4%? Do you expect that to actually increase going into 2024 here substantially?
Mark Zandi: Yeah, meaningfully. I think we're going to get more. We'll probably get less out of state and local. The state and local I think is benefiting from the American Rescue Plan that was passed back in the early part of the Biden administration. There was 500 billion in aid to state and local government. 550 billion, if memory serves, was for schools, education, but you still had a ton of cash going to state and local governments that they could spend I think all the way through ... I think it's through the end of this year, maybe even 2024. I think that's what we're seeing in the state and local government numbers, but that all will start to fade. But the federal government, I think we got more coming there, more support coming there at least through the end of '24 going into '25.
Okay. Yeah. It just feels like a very ... It's hard not to take solace in the report, right? I mean, it's really strong growth. It's very broad based. It feels like it's on pretty solid ground. It just feels like we're in a pretty good place. The one potential concern is in the context of the worries about inflation and the fact that the economy is at full employment is actually now it's flipping around.
It's not the recession immediately, it's the potential for the economy heating back up again, the fed having to raise rates again. And of course, that would be a problem down the road for the economy, but I don't think we're there yet because the inflation numbers were pretty good. They felt pretty good. I took a lot of solace in the report. Of course, I've been taking a lot of solace in all the reports recently, but I think that it's hard not to like what we saw here. It was pretty darn good.
Okay. Anything else on the GDP report we want to bring up? You did mention in our conversation before we went on about the income side of the GDP accounts. We've got some data with regard to personal income and [inaudible 00:25:23].
Marisa DiNatale: Oh, that's right. Right.
Mark Zandi: Did you want to just mention that before we move on?
Marisa DiNatale: The personal disposable income actually fell-
Mark Zandi: Real?
Marisa DiNatale: ... over the quarter. Real personal disposable income fell over the quarter, which seems to be somewhat at odds with the boom in consumer spending that we got, and this also implies that the savings rate also fell over the quarter.
Mark Zandi: Right. Okay. I mean, because your argument was that real incomes have been rising, but that one quarter, you're not putting that much weight on, right?
Marisa DiNatale: Yeah, yeah. Yes. And I'll also say if you look at the personal consumption expenditures, deflator, I mean, again, if you strip out food and energy from it, it was 2.4% in the third quarter. It is clearly on a downward trajectory, core inflation. That's good news.
Mark Zandi: Okay. Okay. I don't know if I mentioned this up top, but I did say it was Thursday evening and we're all pretty hungry. I don't know, did you guys eat dinner yet? I know Marisa, it's early for you.
Marisa DiNatale: Yeah, it's not [inaudible 00:26:38].
Mark Zandi: He's European. He eats at 10:00 PM anyway.
Cris deRitis: No problem. Let's keep going.
Mark Zandi: But I'm starving. I'm starving.
Cris deRitis: Let's go the distance.
Mark Zandi: And I know Franco and Sarah are like, "What's going on? This is crazy you guys are doing it this way." We'll keep this as a short podcast.
Let's move on to the game, the stats game. We each pick a statistic, the rest of us figure it out through cues and deductive reasoning and clues. The best statistic is one that's not so easy we get it immediately, one that's not so hard, we never get it, and if it relates to the topic at hand, that's great.
And we always begin with you, Marisa. Marisa, you're up. What's your statistic?
Marisa DiNatale: Okay, it's 3.9%.
Mark Zandi: Okay. This is definitely some kind of [inaudible 00:27:31] It's in the GDP number.
Marisa DiNatale: It is in the GDP number, and we talked about it.
Mark Zandi: And we did talk about it, the 3.9%. 3.9% positive. That was our tracking estimate for GDP, wasn't it?
Marisa DiNatale: It was, but that's not what I'm thinking.
Mark Zandi: That's not what you're thinking. Is it a component of GDP? It is a growth rate and a component of GDP?
Marisa DiNatale: That's right.
Mark Zandi: It is. It isn't consumer consumption part of the accounts? No?
Cris deRitis: No? Oh wow. That's where I was going.
Mark Zandi: Okay. We can do the C plus I plus G. Is it in the investment part of the account?
Marisa DiNatale: It is.
Mark Zandi: Okay. Okay. 3.9%. Is it [inaudible 00:28:22]?
Marisa DiNatale: We did talk about it. Yeah.
Mark Zandi: We did. In the residential investment?
Marisa DiNatale: That's what it is, right? It's the [inaudible 00:28:31].
Mark Zandi: Oh, residential. Okay.
Cris deRitis: Ding, ding, ding.
Mark Zandi: Ding ding. There we go.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Why'd you pick that?
Marisa DiNatale: I picked it just because it was kind of this outlier in terms of recent history. It was strongly positive for the first time in nine quarters. You have to go back to the beginning of 2021 to get positive contribution from housing from the GDP report. And I also picked it because we've gotten a lot of listener questions about housing and what our outlook is for housing. I mean, we've been saying it looks like housing has bottomed and there's some signs of renewed strength in housing, and perhaps we're not going to see a 5 to 10% decline in house prices. Here's some confirmation that housing did perk up a little bit, at least from where it was off of a bottom over the summer.
Mark Zandi: Got it. But this is definitely not going to continue, right, Cris?
Cris deRitis: Definitely not.
Mark Zandi: Yeah, definitely not.
Marisa DiNatale: What with mortgage rates flirting with 8%.
Mark Zandi: Yeah. After we play the game, I want to come back and I want to talk about the outlook and the context of this.
Marisa DiNatale: Yeah.
Cris deRitis: Okay.
Mark Zandi: Yeah, of all this. Yeah. But that was a good one. Okay. Cris, you're up. What's your stat?
Cris deRitis: 28%.
Mark Zandi: 28%?
Cris deRitis: Yes.
Marisa DiNatale: Is it from the GDP report?
Cris deRitis: Nope.
Marisa DiNatale: Oh.
Mark Zandi: Is it a government statistic?
Cris deRitis: It is.
Mark Zandi: Did it come out this week?
Cris deRitis: It did. It came out today, if I'm ... yeah, earlier today.
Mark Zandi: It's not fair because I've been traveling and in board meetings all day. What else [inaudible 00:30:15]? The UI claims came out. Oh, durable goods came out.
Cris deRitis: Oh no, I'm sorry, yesterday. Not today.
Mark Zandi: Oh, okay.
Cris deRitis: It's fair game.
Marisa DiNatale: Is it housing related?
Cris deRitis: It is. Very good.
Mark Zandi: 28%.
Marisa DiNatale: What came out? New home sales and [inaudible 00:30:30]?
Cris deRitis: New home sales.
Mark Zandi: Right.
Cris deRitis: Related to new home sales.
Mark Zandi: They were strong actually.
Cris deRitis: Very strong. It's [inaudible 00:30:37] strong.
Mark Zandi: It's not the increase in new home sales, is it?
Cris deRitis: No, no.
Mark Zandi: No, no. That'd be-
Cris deRitis: Crazy.
Mark Zandi: Yeah.
Cris deRitis: It's very specific. Do you give up? You got the new home sales. That's really where ... No, you're not ready yet?
Marisa DiNatale: Is it on the single family side?
Mark Zandi: Well, it's new home sales.
Cris deRitis: It is, yeah. It's new home sales.
Mark Zandi: By definition, yes, it is single. She's stalling. Can you tell that?
Cris deRitis: I got it. I got it.
Mark Zandi: Yeah.
Marisa DiNatale: Is it the share of first time home buyers?
Cris deRitis: It is a share. It is not first time home buyers.
Mark Zandi: Oh, is it a share that are-
Cris deRitis: That are?
Mark Zandi: Regional? Is it regional or is it price point?
Cris deRitis: Price point.
Mark Zandi: Oh, 28% are above-
Cris deRitis: Below.
Mark Zandi: Oh, below. That's what I meant. Below 300,000, 500,000.
Cris deRitis: 500,000. Very good. Perfect. You got it. You got it.
Mark Zandi: Oh wow.
Cris deRitis: 28% of new home sales below 500,000. That's up from 24% last year.
Mark Zandi: Wow.
Cris deRitis: We're moving in the right direction in terms of the new home sales. The new construction we have is shifting a bit towards the lower end of the market, which we absolutely need. I took some encouragement and some solace in that.
Marisa DiNatale: Prices are coming down of new homes.
Cris deRitis: Right. Well, the distribution is shifting, right? But yes.
Marisa DiNatale: But also prices have come down.
Cris deRitis: Prices of new homes, even on the same [inaudible 00:32:16], right? Because of the higher interest rate, you do have more buy downs and concessions being made.
Mark Zandi: Do you know builders are using so-called interest rate buy downs to try to sell homes. They take a point or two off the mortgage rate for a year or two to effectively lower the cost, at least initially to the borrower or to the buyer and try to sell the home. It's effectively cutting price.
Cris deRitis: Yes.
Mark Zandi: Is that in these prices, do you know? Does the census, which is the source of the data, Bureau of Census, do they capture the buy downs in the price or is this kind of the list price?
Cris deRitis: That's my understanding that it is captured.
Mark Zandi: Oh, it is captured?
Cris deRitis: [inaudible 00:33:00] because that the concessions are-
Mark Zandi: Are in there. Okay.
Cris deRitis: I guess controlled for, I should say.
Mark Zandi: This might be a good time. Shandor, one of our colleagues, sent an email today with our September house price index estimates across states and metropolitan. Maybe you want to mention that, Cris.
Cris deRitis: Yeah. Showing renewed strength or continued strength in the housing market. What was it, up about 0.99%?
Mark Zandi: Yeah, in the month, right?
Cris deRitis: A month, and I believe on the year over year, it was close to four and a half percent, if I'm not mistaken. You do have renewed strength in the housing market given the limited inventories. I chalk it up to the very low levels of homes available for sale. There are buyers still out there, of course, who may pay in cash or who can afford the higher interest rate and they are still bidding up the prices for the homes that do hit the market. It is a bit of this tug of war now between first time home buyers, other home buyers that are locked out of the market because of the high interest rate and the limited inventory because of the lock-in effect of homeowners. You've got these two forces playing against each other.
I still believe that provided the interest rates remain elevated, that eventually you will see more and more sellers having to make price concessions because you just won't have the pool of buyers out there willing to pay top dollar. I'm still of the belief that we'll see some slowdown in home prices, but clearly right now, you're continuing to see some strength out there in the current market.
Mark Zandi: Okay. Okay. I'll give you my statistic. Two numbers, 4.9 and 2.4.
Cris deRitis: 4.9 is the GDP growth rate.
Mark Zandi: It is indeed. Is that your guess?
Cris deRitis: Yes.
Mark Zandi: Okay. That's right.
Marisa DiNatale: Poor Mark.
Cris deRitis: 2.4, I think we mentioned. Isn't that the core PCE-
Marisa DiNatale: Yeah.
Cris deRitis: ... inflation?
Marisa DiNatale: It is.
Mark Zandi: Is that your guess?
Cris deRitis: That is my guess.
Mark Zandi: That's right. That's right. Yeah. I guess that was too easy.
Cris deRitis: A little bit of a layup there, I would say.
Mark Zandi: I'm getting tired.
Marisa DiNatale: It was so easy that it was difficult for me.
Mark Zandi: That's right, that's right. That's the only way I can punk Marisa is like-
Marisa DiNatale: It was totally stumped.
Mark Zandi: Totally stumped. Yeah. 4.9, 2.4. Here's why I picked it. Strong growth, low inflation. We can have both. Of course, we can't maintain 4.9. That I'm not arguing, but it does highlight why the prospects of recession feel like they're receding, and that is inflation is coming in despite strong growth. We're getting pretty solid growth. You can see it in the GDP number. You can see it in the labor market. You can see it in a lot of different statistics.
But despite that, inflation is coming in, and that goes back to something we've been talking about for a long time, and that is the reason for the high inflation was the supply shocks of the pandemic and the Russian War, and as those the economic fallout from those two shocks continue to fade, and people forget they're still having impacts. I won't go into how, but in lots of different ways, but they are fading and as they fade, inflation can come in and we don't need to see a weak economy or even certainly not a recessionary economy or even a weak economy. I think that's highlighted quite nicely in the third quarter GDP report.
Okay. Let's go back, and I know I did promise we're going to end this at 7:30 PM Eastern time. Let's power through for another 5, 10 minutes because I do want to talk about what does this all mean for the future, the economic outlook. And Cris, let me turn back to you and let you lead the way here. You've been more worried about the economy's prospects and recession risks. Has anything changed here because of the numbers we've been getting in recently in the GDP? Are you still relatively pessimistic or nervous about the economy's prospects going forward? By the way, I just wanted to point out this. I just saw this. Someone texted me. Do you remember back when Bloomberg said 100% chance of recession?
Cris deRitis: Yeah, a year ago.
Mark Zandi: Yeah, it was exactly a year ago. And it said in the coming year, there's 100% probability of recession. We got to be humble, but definitely-
Cris deRitis: Absolutely.
Mark Zandi: ... very wrong. With that as a preface, turn back to you, just saying, has your thinking here changed at all because of the numbers we're getting or are you still feeling like things could go off the rails here?
Cris deRitis: There's clearly more resilience in the numbers than what I had seen originally. I think even more than the GDP report from today is more what did we see in the income and the savings previously, right? We found that there was more income, there's more access savings out there. That would argue that the consumer is in better shape overall than what had previously been thought, but I guess I still remain nervous.
Delinquency rates, some of the other things we talked about last week in terms of there are some cracks in the foundation here, and we are calling for a slowdown in the economy, and I do fear that it wouldn't take much of something else, right? If nothing else changes and we're continuing on this path, no problem. But again, I come back to this idea that there are other things out there that could hit the economy. You don't have a lot of ammunition to fight them in terms of either additional fiscal policy or monetary policy, really, and so we are vulnerable over this next, say, 6, 12 months here. I would mark down my recession odds, but still, I think they're likely still a bit higher than yours.
Mark Zandi: Here's the weird thing. The concern that I had was coming into the current quarter, the fourth quarter, given those headwinds that are out there in developing, you mentioned student loan payments, the UAW strike, potential government shutdown, the run-up in long-term interest rates, mortgage rates at 8%, oil prices. That feels a little less threatening at the moment, but that's always a threat.
Cris deRitis: Yeah. Anything could happen.
Mark Zandi: The economy would really slow here towards the end of the year going into next, and it would be vulnerable, as you said, to anything else that can go wrong. But it almost feels like the risks are on the opposite end of the spectrum, that the economy, what if it just-
Cris deRitis: Takes off?
Mark Zandi: ... stays really strong? Because things could break a different way. There's some more positive talk coming out of the UAW negotiations with the automakers. Didn't they just come to terms with Ford or something?
Marisa DiNatale: With Ford.
Mark Zandi: Yeah. I saw that while I was in transit. There may not be a federal government shutdown given the new house speaker. Still a lot of risk around that, but maybe not. And so far, the student loan payments, it's already happening, and I don't sense it. I don't see it. I don't feel it. Now, maybe it's premature. It probably is, but maybe not.
And I mentioned oil prices, they're back into the mid 80s and gas prices, right, are actually down, right, because of seasonality and crack spreads coming in. The only thing that's moving in the wrong direction here in terms of growth is long-term interest rates. But as we talked about last week, maybe it was a couple of weeks ago, it feels like the economy is more resistant, for lots of different reasons, to the higher interest rates, at least for a while. Maybe the concern shouldn't be that the economy slumps here. Maybe the worry should be, it stays too strong here. We're not going to get 4.9 in the fourth quarter, but what if we got 3.0 and unemployment started going down again, and the fed felt like inflation stopped improving and the fed felt like they had to raise interest rates? It's almost like the risks are kind of shifting here. What do you think of that?
Cris deRitis: Yeah, so still risk of recession, but maybe fed-induced at that point, right?
Mark Zandi: Further down the road, maybe.
Cris deRitis: Further down the road, right, right.
Mark Zandi: Further down the road.
Cris deRitis: Timing gets pushed out.
Mark Zandi: And all those economic forecasters, and you would've been one of them, my friend, would've had negative numbers that keep pushing them out, pushing them out, right, and they'll have to push them out some more.
Cris deRitis: Hey, you either get the magnitude or you get the timing. Choose one.
Mark Zandi: Fair enough. Fair enough. Oh, I should ask, just to make it concrete, I think you've been at 45% probability recession through the end of next year. Is that still the case?
Cris deRitis: I would knock it down to 40.
Mark Zandi: 40. Okay, 40.
Cris deRitis: Because of those timing issues.
Mark Zandi: All right, Marisa. What do you think?
Marisa DiNatale: It's been a while since you asked me this. Through the end of next year-
Mark Zandi: Yeah, that's not much harder than through this time next year, I'm just saying. I mean-
Marisa DiNatale: Something's going to blow up in December 2024.
Cris deRitis: Let's see. This is right before an election.
Mark Zandi: Oh, that's interesting.
Cris deRitis: I didn't factor that in. Maybe I need to factor that in.
Mark Zandi: That's interesting.
Cris deRitis: I may need to adjust.
Mark Zandi: Yeah.
Marisa DiNatale: I'll say 30%.
Mark Zandi: 30. Okay. All right.
Marisa DiNatale: And even that feels a little high to me.
Mark Zandi: At this point, it feels high to you?
Marisa DiNatale: Yeah.
Mark Zandi: Yeah. Right. Right. Okay. Anything you're particularly looking at that has made you feel a bit more confident or it's just the plethora of data out there?
Marisa DiNatale: Yeah, it's the plethora of data. I think the fed is done and the economy just seems to be just absorbing all of this with a ton of resiliency, and it's pretty remarkable actually. Now, I don't think that that's going to last, right? I don't think the growth that we're seeing right now, the labor market strength, I don't think that that we're going to be talking about these same numbers a year from now. But recession outright, recession just seems very ... It's very difficult in my mind to get there from where we are right here in the span of a year, unless something really goes terribly awry.
Mark Zandi: Here's the reason for a little bit of optimism. And by the way, I'm down to 25% this year. That's the lowest I've been in a long time.
Marisa DiNatale: Yeah.
Mark Zandi: It's still high. Typical economy would be 15. We get a recession once every six, seven years, but 25 is still high, but it's [inaudible 00:44:34]. Here's the other thing. We could be surprised on the upside here. It feels like for the longest time, we're always focused on the downside risks to the economy. Could be that things turn out to be much better than anticipated, and it goes to the supply side ... we talked about this too ... the supply side of the economy. You can feel it. You can see it clearly in the labor supply data. Labor force growth has been very strong. About 250,000, 275,000 people every single month are coming into the labor force. That supports a lot of job growth and keeps unemployment low without labor markets tightening and wage and price pressures developing.
But take a look at that GDP number, 4.9, and then calculate the number of hours work. It's nowhere even close. That means productivity growth really increased pretty dramatically in the quarter. And that's on top of some better productivity numbers we've been getting over the past several quarters. It feels like we're getting some real pickup here in underlying productivity growth. And it may go to the fact that we saw so many people quit their jobs back a year or two ago, and now they're in jobs that they're more suited to.
There's surveys from the conference board that show people are really happy with their jobs, the highest level of job satisfaction in the history of the survey. And that goes to people getting jobs that are suited to their skill sets and better pay. It may go to remote work. I know there's a lot of debate and we need a lot more data points, but I just feel like that's got to be productivity-enhancing, especially as new businesses form and they optimize around remote work as opposed to working in the office.
I'm sure it's too early, but AI has got to also be important. Artificial intelligence also has got to be important in terms of this. This feels like we're getting some real positive news coming out of the supply. After all this very negative supply side news because of the pandemic and Russian War, now we're getting some really positive supply side.
And what that means is, couldn't ask for better, right? That means more growth without inflation. It means exactly what you want. It's almost like we got to start thinking about the upside scenarios here. It's not just about the downside. It's not asymmetric risk. There's also a risk to our ... In fact, it's so weird. For the longest time, I've been berated for being too optimistic. Now I'm starting to get criticized for being too pessimistic. It's really an interesting phenomenon, a really interesting phenomenon. Anyway, so I'd say I'm feeling pretty good about things at this point. I think we're in a pretty good spot.
Okay, I promised this is going to be a short podcast. I did down this beer as we were chatting.
Marisa DiNatale: On an empty stomach.
Mark Zandi: Yeah. And you can feel I was quite lugubrious. Not lugubrious. I was quite loquacious is the word. Loquacious? No? You think so? No?
Marisa DiNatale: Yeah, in a good way.
Mark Zandi: In a good way. Exactly. Okay. Anything else you guys want to say? You let me go on a bit of a rant there.
Cris deRitis: Well, and the Phillies lost, so that's another [inaudible 00:47:59].
Marisa DiNatale: Oh, that's right.
Mark Zandi: That's right.
Marisa DiNatale: No recession.
Cris deRitis: Another reason to be optimistic.
Mark Zandi: Another reason.
Marisa DiNatale: That's the reason that GDP grew-
Mark Zandi: Exactly.
Marisa DiNatale: ... 4.9% in the third quarter, because we're not in a recession.
Mark Zandi: Yeah, we could have predicted that. Okay. Alrighty. Okay. Hearing nothing else, I think we're going to call this a podcast. Talk to you next week, dear listener. Take care now.
