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Moody's Talks - Inside Economics
Ho-Hum Savings and Happy Holidays
Colleague, Scott Hoyt, joins to discuss where the American consumer stands and how that differs by income group. A shrinking savings rate and sputtering retail sales won't break the American consumer or Mark's good mood. The group differs on the odds of recession, but is in agreement a slowcession is underway. Happy Holidays to all our listeners.
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-hosts, Chris deRitis and Marisa DiNatale. Hi, guys.
Cris deRitis: Hey, Mark.
Marisa DiNatale: Hi, Mark.
Mark Zandi: This is the Friday before Christmas weekend, and I can see we're all very festive today, especially Chris. Look at that. Wow! What's that all about? You've got... Oh, they're Christmas trees. They're blinking Christmas trees.
Cris deRitis: Blinking Christmas trees. Yes.
Mark Zandi: Very cool.
Cris deRitis: Thanks to my son. Thanks to my son.
Mark Zandi: Was that a Christmas present?
Cris deRitis: No, it was the school play.
Mark Zandi: Oh, school play. Okay.
Cris deRitis: It comes from the school play. Right.
Mark Zandi: Okay. So is that battery operated, or are you plugged in somewhere?
Cris deRitis: It is. I'm not plugged into the wall. No. Don't worry.
Mark Zandi: Okay. You're climate-change compliant. That's good. Yeah, very good. And of course, Marisa DiNatale, did I introduce you already? I think I did, didn't I, already introduce you? I'm a little punchy. Let me just say up front, I had a really tough day yesterday, tough in the sense that I drove from the suburbs of Philly to South Florida, and it took 20 hours to drive.
Cris deRitis: You [inaudible 00:01:31].
Mark Zandi: I'm not kidding. And I drove the entire way.
Marisa DiNatale: All the way through, or did you-
Mark Zandi: All the way through.
Marisa DiNatale: ... stop somewhere?
Mark Zandi: All the way through. All the way through. Arrived at 1:00 AM last night. So it was... And you know what happened? It was bizarre. It was just bizarre. You know that we had this... I'm sure you're getting the bad weather or you got the bad weather in PA. But I drove right into it, and it was a real... No snow or anything, but it was just a downpour, and traffic was horrendous. But I got to South Carolina. I don't know if you've ever been on 95 in South Carolina, but it's pretty bad.
Cris deRitis: Yes.
Mark Zandi: It's two lanes each way. It's really... These guys need to invest in their highways. But anyway, there was just a string of accidents, overturned tractor-trailers, and it was just a nightmare getting through all that and getting down here. So I'm pretty punchy at this point, but here I am.
Marisa DiNatale: So you're delirious, is what you're saying.
Cris deRitis: Yeah, sounds like it.
Mark Zandi: I really am. I'm a little delirious. I'm a little delirious. But Marisa, you look festive there too. You've got your-
Marisa DiNatale: Yeah, I've got my Santa hat on.
Mark Zandi: Santa hat on. That's very cool. And you were telling me your Game of Thrones Christmas garb.
Marisa DiNatale: That's right. That's right.
Mark Zandi: What does that mean exactly?
Marisa DiNatale: It's a Christmas sweater that says, "Christmas is coming," and it's got some various Game of Thrones house emblems on it.
Mark Zandi: Yeah.
Marisa DiNatale: You can't see it, but trust that it's there.
Mark Zandi: Yeah, yeah. Well, did you see the prequel, the HBO series that... I think it came out this year.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah. What'd you think of that?
Marisa DiNatale: The House of the Dragon?
Mark Zandi: The House of the Dragon, yeah.
Marisa DiNatale: It's okay.
Mark Zandi: It's okay.
Marisa DiNatale: It's no Game of Thrones. Nothing's going to be.
Mark Zandi: It ended interestingly, enough to make you want to watch the next-
Marisa DiNatale: Yeah, it got better as it went along.
Mark Zandi: Yeah, exactly.
Marisa DiNatale: Yeah.
Mark Zandi: Right. Exactly. And we've got Scott Hoyt. Scott, welcome.
Scott Hoyt: Thank you. A pleasure to be here.
Mark Zandi: Where's your Christmas garb, my friend?
Scott Hoyt: I didn't get the memo. I'm sorry.
Mark Zandi: Oh, we missed that.
Scott Hoyt: I didn't get the memo to put that on. At least I have a green sweater, so...
Mark Zandi: Oh, that's true. That's true. It looks very Christmas tree-ish. Yeah, very good. So if we had given you the memo, what would you be wearing right now?
Scott Hoyt: I'm not sure. I think we have a hat like Marisa's around the house somewhere that I might have been able to find. But yeah, I don't have too much-
Mark Zandi: Paraphernalia?
Scott Hoyt: ... of that type of festive attire. So I'm not sure.
Mark Zandi: Oh, well, we'll have to... Hey, Chris, maybe you can donate the blinking trees.
Cris deRitis: Yeah, next time, I'll ship it over.
Mark Zandi: Ship it over. Yeah. FedEx needs the help. Very good. Well, this is a great time to have Scott on. We're going to be talking about the American consumer, and Scott is our resident subject-matter expert. Scott, you came from, before you joined us, just to remind everyone, JCPenney, right? You were in their economics group.
Scott Hoyt: Correct.
Mark Zandi: Yeah. And how long were you there?
Scott Hoyt: I was there for just about five years, exactly.
Mark Zandi: Oh, is that right? Five years?
Scott Hoyt: Yeah.
Mark Zandi: Oh yeah, I remember having this conversation. Ira Silver, he was the chief economist at the time.
Scott Hoyt: Yes.
Mark Zandi: Yeah, a really nice man. Yeah, a very good guy.
Scott Hoyt: Yes, he was.
Mark Zandi: So we're going to talk about Christmas sales, consumer spending more broadly, and what it means for the economy and the economic outlook, that kind of thing. And I think this is kind of key to the economic outlook. Correct me. Any of you push back. And Scott, feel free to push back as much as you want, because I'm, depending on your views, I'm going to be either very easy on you or very hard on you. I'm not sure yet. I have to figure that out. But I think it's fair to say that, at the end of the day, the key to whether the US economy suffers a recession in the next few months, next year depends on the consumer.
If the American consumer hangs tough and continues to just do their part, continues to spend... Nothing crazy. They don't need to spend with abandon, but just kind of do what they typically do, and we can talk about what that means, it feels like we're going to be able to navigate through it without a recession. But if consumers pack it in, go into the bunker and stop spending, there's no way out. We're going into a recession. So the consumer, it feels like, they're key here. Would anyone disagree with that?
Cris deRitis: Is that controversial? It's like-
Mark Zandi: No, no. I'm just laying the groundwork.
Cris deRitis: Consumers are two-thirds of the economy.
Marisa DiNatale: It's two-thirds of the economy. So yeah.
Mark Zandi: Yeah. Just laying the groundwork. People say often the consumer accounts for two-thirds of the American economy. Is that kind of roughly right, Scott?
Scott Hoyt: It is if you look at it as the components of GDP, certainly. I think actually, in real terms, it's a little higher than that, maybe closer to 70% right now. But yeah, from a C + I + G + Net Exports basis, then it's correct. Now, obviously, if you're looking at it from income or some other way, then it differs.
Mark Zandi: Yeah. Okay. Let me ask you this. Bottom line, is the American consumer going to hang tough or not?
Scott Hoyt: I am not worried about the next nine to 12 months. I'm worried-
Mark Zandi: Nine to 12, that's pretty precise.
Scott Hoyt: I'm worried about late next year and maybe even early '24.
Mark Zandi: Oh, interesting. Oh, all right. Can you give us a sense of as to why that's the case?
Scott Hoyt: Yeah, I think the saving rate is low right now. We're burning through the excess savings. Consumers are borrowing more.
Mark Zandi: Can I ask... Just define terms. Just pretend that you're talking to not me, Marisa, and Chris. But excess savings, what the heck is that, and why is that important?
Scott Hoyt: Excess savings is the savings that was done by the consumers during the pandemic when they were getting lots of stimulus and they weren't able to spend because of restrictions on their activities, and so they saved a boatload of money. I think that our number was what? $2.6, $2.7 trillion more than-
Mark Zandi: At the peak.
Scott Hoyt: ... they would have normally at their peak. At the peak.
Mark Zandi: And that was back in September, about a year ago in September of '01, right?
Scott Hoyt: Correct.
Mark Zandi: Okay.
Scott Hoyt: And so now they're starting to burn through that savings. And the saving rate in recent months has been near its record low seen prior to the financial crisis. Now, that's not causing any great concern because consumers have all this excess savings that they can draw down. So consumers aren't overextending themselves now like they were in 2005, 2006 today. But the question sort of is, do we start down that path in the second half of next year?
Mark Zandi: What path? You mean they've blown through all their savings, and therefore, they have to stop spending as aggressively?
Scott Hoyt: Correct.
Mark Zandi: Or they stop spending?
Scott Hoyt: They either have to stop spending or they start overextending themselves. They start borrowing more. They keep going if lenders will let them, and they keep spending, and they start getting themselves into the financial difficulties that there's absolutely no signs of today.
Mark Zandi: Okay. So I asked you about the consumer broadly, and there's many things that influence the willingness and ability of people to spend money. The first thing you went to to explain your broad view of the consumer, no problem next six, nine months, but maybe a year from now going into 2024 we've got a problem, is excess savings. So they built up all the savings during the pandemic as they couldn't go out and spend. And also, we got a lot of government support that was helpful to people, and they put some of that away, socked that away and put it in their checking account. And we've got 2.5, 2.6 trillion at the peak back a year ago. We're down to 1.7, 1.8 right now, trillion dollars, which is still a considerable amount of money.
And you're saying if you kind of do the arithmetic, the trend lines a year from now, maybe it's down to a trillion or something if it's the same rate of burn, which we can come back and we should talk about, because I don't think that's going to be the case given the path for inflation. But anyway, we still have a trillion in excess saving. And you're saying, "Oh, at that point, maybe that's not enough to kind of cause consumers to stay in the game. That they're going to pack it in at that point."
Scott Hoyt: Well, at some point... I mean, consumers are not going to spend all of the excess savings that they accumulated. Some of it is going to be set aside for longer-run purposes: baby boomers' retirements, education for children, emergency funds that consumers may see a greater need for now than they did prior to the pandemic, those types of things. So I don't think we're going to burn through all of the excess savings. I think some of it's going to go into long-term savings that consumers are not going to view as spendable. If you recall, prior to the pandemic, there was periodically articles you'd see about the adequacy of retirement savings by baby boomers. In fact, I saw a Bloomberg piece just in the last week. Or no, it wasn't Bloomberg. I saw a piece just in the last week that said that the majority of baby boomers still feel their retirement savings is inadequate. So some of the excess savings is going into long-term savings. They're not going to spend it all.
Mark Zandi: Yeah, although they could.
Scott Hoyt: They could, yes.
Mark Zandi: Pretty easily, because it's cash. It looks like, based on data we're getting from the banking system, it's all sitting in people's checking accounts.
Scott Hoyt: Right, although-
Mark Zandi: It's not like they put it into stocks or bonds or housing. It's very liquid. It's sitting there.
Scott Hoyt: Today, it is, yes, although with the markets down over the next year, they may see a buying opportunity, and that may change.
Mark Zandi: Oh, well, okay, good luck with that. Yeah, yeah, yeah. I don't know anyone who's calling for the stock market to come back very quickly. But okay. Okay, fair enough. So when you say-
Cris deRitis: [inaudible 00:11:52].
Mark Zandi: Yeah, Chris, I was going to bring you in. How would you characterize this, and what do you think about this?
Cris deRitis: I'd agree. One thing I'd underscore from Scott is that last point about the wealth, right? People have lost a lot of stock wealth. Housing wealth is destined... If you believe our forecast, it's destined to decline as well. So with that loss of wealth, the excess savings is going to be used to plug some holes here. I don't see certainly the higher-end consumer homeowners being terribly excited about spending if they're simultaneously seeing the value of their homes dwindling here.
Mark Zandi: Yeah, although we've not seen... That's the so-called wealth effect, right? My wealth is I'm less wealthy because stock prices have declined, housing prices are declining. Therefore, I save more to cushion the blow. I spend less. But so far at least, there's no evidence at all of that. In fact, the saving rate continues to decline. I mean, it's at a very low level, as Scott pointed out.
Cris deRitis: Correct, but at some point-
Mark Zandi: Maybe that's going to happen, but that definitely has not happened yet. It hasn't happened in 2022. Just the opposite, right?
Cris deRitis: That's right. But I think that argues why that 1.8 trillion that Scott mentioned, I don't see all of that as being really available for spending. People are going to start increasingly look at that and say, "Well, this is now... I have to take more of this and start..." You expect that trend to...
Mark Zandi: But what you're saying is that 1.7, 1.8 trillion isn't going to continue to decline. It's going to start to rise, is what you're saying.
Cris deRitis: That's right. It's not going to... Yeah, that's right. At some point, people are going to change their behavior.
Mark Zandi: They're not only not going to draw it down. They're going to add to it, is what you're saying, right?
Cris deRitis: That's right. That's right.
Mark Zandi: Okay. Well, yeah, I'm not so sure. I'm not so sure. Marisa, do you have anything to say?
Marisa DiNatale: Why do you think they're going to add to it? You think-
Mark Zandi: Yeah, why would they add to it? I think the argument is, to put words in their mouths-
Marisa DiNatale: They're going to restrain their spending at some point, and they're going to... That savings rate is going to start to climb up once again. Right?
Mark Zandi: Well, Scott said it: inadequate savings. So boomers are saying, "I have inadequate savings." And it's even going to be more inadequate now that stock prices are down at this point 20%. I think that translates into $10 trillion from the peak in stock market valuation to the current valuation. And if house prices decline, that's going to be an additional trillion. And if it's a 10% decline, that's 5 trillion that's going to come off. So the argument is that, "Oh, I'm worth a lot less than I thought I was. Therefore, I need to save now to rebuild that stock of wealth so I am prepared when I go into retirement." And then they'll rebuild savings. Yeah, that just does not... I'm not sure. I mean, who knows? We'll see how consumers behave. It just feels like to me, if it's sitting in the checking account, it's very difficult not to spend that money to simply do what you typically do, right? Something else is going on.
Marisa DiNatale: I really think that will also vary across the income distribution.
Cris deRitis: Absolutely. Absolutely.
Marisa DiNatale: I mean, you might find that high-income households view that as saving, and they don't touch it for those reasons you just laid out. But at the lower end of the income spectrum, where you're more likely to have renters, not homeowners, they're less likely to be exposed directly to stock-market wealth or even indirectly, frankly, that's where I think they're going to spend. If they haven't already spent all of that, which I think there's-
Mark Zandi: Who? Low-income households?
Marisa DiNatale: Low-income households. I think that's coming next year. So I think there's going to be very different behavior across the income spectrum.
Scott Hoyt: But I think that's the key, though, to some degree. The low-income households are going to burn through it.
Mark Zandi: They already have, haven't they, to some degree?
Scott Hoyt: Well, to a... Yeah.
Mark Zandi: We're now a little confused by that because the data we just got, it's hard to know now.
Scott Hoyt: Right. But I think-
Mark Zandi: We're not really sure.
Scott Hoyt: Yeah. Presumably, if the low-income households haven't burned through it, they're going to by, let's say, the middle of next year. So they're not going to have any more that they can have in savings.
Mark Zandi: And by the way, I'd even push back on that. But I'll just put that aside for a second. Go ahead.
Scott Hoyt: Okay. But I guess my point is, but then the higher-income households, those are the ones that are going to be subject to the wealth effect and are going to want to hang on to some of what they saved during the pandemic for their retirement, for their kids' education. I'm not sure I'd go as far as Chris and to say that they're going to necessarily add to it. But I think by the end of next year or early '24, we're going to have to get the saving rate at least back to an equilibrium level, that they're not going to be drawing down anything that was built up during the pandemic any longer.
Mark Zandi: Well, I mean at 2.3%, they were still saving. It's not dis-saving, right? So we're not...
Scott Hoyt: No, but that's not... I mean, our assumption of the equilibrium saving rate is over 7.
Mark Zandi: Yeah. Okay. So you're saying we go back from 2.3 back to something close to pre-pandemic, 7%-ish, something like that?
Scott Hoyt: Yes.
Mark Zandi: Okay. That doesn't feel like a recession. That feels like maybe a moderation in spending.
Scott Hoyt: It depends on the strength of income. But I mean, if you're trying to go from a 2.5% saving rate to a 7.5% saving rate, just to keep the numbers simple, at the same time the job growth is near zero, and therefore, growth in income is very weak, then you're not adding much to spending during that period.
Mark Zandi: Hey, one more thing about the excess saving before we move on. Back to you, Chris. We have been calculating, and to you, Scott, we have been calculating this idea of excess saving by income, where people are on the income distribution. And this is based on data we're getting from the Federal Reserve, their survey of consumer finance data, their financial accounts data, and I think they combine that into something they call the distributional financial accounts. Pretty cool data. And through the second quarter of this year, it felt like we were seeing very-low-income households, folks in the bottom quintile, bottom 20% of the distribution, it felt like they had blown through their excess saving. And then the folks in the middle and top part of the distribution, they still had a boatload of excess saving. They're starting to draw it down, but still a lot of savings.
And that was kind of consistent with what else we were observing. We were observing a pickup in credit-card use, a pickup in the outstandings of unsecured personal lines. And we could even see based on the Equifax data, the credit-file data, it looked like folks with lower scores and potentially lower incomes were the folks that were taking on this credit-card debt and these personal loans, which again makes sense. They had drawn down the excess saving. Their incomes were under pressure. Their purchasing power was under pressure because of the high inflation. They wanted to maintain their spending, and they could turn back to their cars and personal lines because they had paid a lot of that off. I mean, they had come way down during the teeth of the pandemic. But in the data we just got, Q3, things got really confused, because the data we got...
Cris deRitis: They changed their methodology. Yeah.
Mark Zandi: They changed their methodology. Is there any way to interpret that data at all, to shed light on this discussion around low-income households and the savings they're doing?
Scott Hoyt: Not really.
Cris deRitis: I guess I'll speak to this. Not really to the financial accounts. Scott has a little bit different methodology as well, but I was really... The problem with this data... The distributional cuts are great. You can cut the data by income. You can cut it by age. You can cut it by a number of different dimensions, and that's helpful. The problem is that with the Fed combining categories... Now they've taken all cash and currency accounts and combined them with other deposits, and it's now an amalgam of CDs and checking accounts and currency.
So when you do that, it mixes a number of life-cycle effects as well, to my mind. So in that lower-income category, you have low-income prime-age consumers, households, plus you have retirees who may be on fixed incomes, low income, right? They may have CDs. They may have other deposits that get commingled here. And now, it's difficult to understand if the deposit trends that we're seeing are a function of people really drawing down, or is it a mix of generational or life-cycle effects here with that older population still having a lot of savings? So the data in its current form makes it very difficult to understand what actually is going on.
Mark Zandi: What's going on. Bummer. We've got to talk to the guys at the Fed and say, "Hey, what's the deal?" Why'd they do that, I wonder? Why'd they combine the checking accounts with the-
Cris deRitis: The time deposits, yeah.
Mark Zandi: ... the time deposits, the CDs? It makes it really complicated. Scott, you also construct estimates kind of in a similar vein based on similar data, and you recently updated it for Q3. What does it show? Does it shed any light on this question about what folks are doing across the income distribution?
Scott Hoyt: Not a lot. I mean, we're seeing drawdown in all the income tiers. It does seem to be the highest in the top 10%, at least in Q3, and somewhat less drawdown, at least relative to the amount outstanding, in lower income tiers. We are seeing a fair bit still hanging around in the bottom quintile. But I think, to Chris's point, I think a lot of that may be retirees rather than what we think of as low income, because we did do... I mean, we're using the Survey of Consumer Finances to allocate things, and we know that that low-income tier has a very high share of retirees, higher than any of the other income groups. So there definitely is confusion in the interpretation of that bottom income group as to whether it's what you think of when you say low income or whether it's retirees.
Mark Zandi: The interesting thing is the quintile, the second-from-the-bottom quintile, not zero to 20, but 20 to 40, they still have excess, at least by your estimate, significant excess saving as of Q3 2022.
Scott Hoyt: Correct.
Mark Zandi: Which is September really, September of 2022.
Scott Hoyt: Yes.
Mark Zandi: Yeah, right. As did the middle quintile and the top two quintiles. And the guys in the top quintile have a lot of excess saving.
Scott Hoyt: Yep.
Mark Zandi: Yeah. Okay. Here's a couple of other things I want to talk about in the context of this idea of excess saving and what it means for spending, is one reason, at least in my interpretation of things, for the drawdown in excess saving over the past year... Remember, a peak back September of '01, 2.6 trillion. 2.5, 2.6, 2.7, I can't remember that kind of number. Now we're down to 1.7, 1.8 as of September of this year. So a drawdown of 70 to 100 billion. Of course, that was a period when inflation was taking off, and inflation peaked back in the summer of 2022, a few months ago. So people clearly, I think, were supplementing their purchasing power that was under a lot of pressure because of the high inflation. I've got to pay more to fill my gas tank and put food on the table and pay my rent, but I want to maintain my overall spending. So they were using that excess saving, what was sitting in their checking accounts, to help supplement that, and that's why you saw that drawdown.
But now we're seeing inflation come in pretty quickly, and we've got another data point today, the Consumer Expenditure Deflator data, which are very consistent with the Consumer Price Inflation data. It's pretty good. It shows a deceleration. And here's the thing that I saw in today's numbers, and I hope I'm not... We're going to play the statistics game soon, but hopefully, I don't steal anybody's numbers. But if you look at real disposable income, that's their purchasing power. Disposable after-tax income after inflation, that's now rising again. It's been rising for the past few months, and that goes to relatively strong wage gains and income growth and the deceleration, sharp deceleration in inflation. So it may very well be the case, if that continues, which I would expect inflation to continue to throttle back, that real incomes remain positive, and they don't need to draw down their excess saving. They can continue to spend like they typically spend because their purchasing power is now improving because of the improvement in inflation. What do you think of that argument, Scott?
Scott Hoyt: I don't disagree with it, but I guess my concern is that you do have conflicting forces moving growth in real disposable income. I mean, yes, lower inflation is a clear positive. No question about that. But slower job growth is a clear negative, because growth in wage and salary income and benefits and related things are going to slow. It may even affect proprietors' income. So you've got conflicting factors here that are going to at least reduce any additional growth in disposable income. And at the same time, if you buy into my prior argument that the saving rate needs to rise, you need to have real spending growth less than growth in real disposable income in order to raise savings and get back to equilibrium. So yeah, the question is how do all these balance out, and is it enough? And I guess to some degree, I come back to Chris's argument.
Mark Zandi: All I'm saying though, Scott, is in the last year, a massive hit to purchasing power. Massive. Almost unprecedented because of the surge in inflation. Go look at real disposable income growth back in the spring/summer of this year. It was getting crushed. Crushed. And now it's positive. It's positive. Not big positive, but positive. So you're right, there's a lot of cross currents, but that's a very significant shift here going forward, compared to where we were over the past year. So maybe we get some excess savings drawn down, but it doesn't feel like it's going to be as big as what's experienced over the past year, which would allow the saving rate to easily normalize, right? The reason the saving rate went to 2.3% is because of that huge drawdown in the cash. So if they're not drawing down the cash to nearly the same degree because they don't have to, that saving rate will go right back up to that 7% pretty gracefully. No?
Scott Hoyt: I agree that's the baseline forecast. I'm very nervous. I think we're on a knife edge.
Mark Zandi: Fair enough.
Scott Hoyt: And I guess to some degree, I accept Chris's point that it wouldn't... If everything goes right, yes. But it wouldn't take much of a shock to push us over the edge.
Mark Zandi: No argument there. No argument there. If we get hit by something else, then yeah, because... We'll come back to consumer sentiment in a little bit, but... Marisa, you just heard my pushback to Scott on that. Do you have anything you'd like to add there? Or Chris?
Marisa DiNatale: Well, so I agree you have these cross currents with inflation coming in, but also job growth moderating and presumably wage growth will follow. It's moderated a little bit, but...
Mark Zandi: No, we want that, right?
Marisa DiNatale: That's really sticky, and inflation has been outpacing wage growth for the past year plus. So I think you can still see inflation come in without wage growth moderating. It's not like the two are going to be proportionate, right? I mean, if we think wage growth right now is 5% year over year, and total inflation is something like 7%, core is six-ish, I think you can get to 3%, 4% inflation by the end of next year. And I don't think wage growth is going to come in that much, assuming we don't go into a recession.
Mark Zandi: Well, it just sounds like you're supporting my perspective on things.
Marisa DiNatale: I am. Yeah. I mean, yeah.
Mark Zandi: Oh, okay. Okay, keep talking.
Marisa DiNatale: I just didn't want to say it explicitly.
Mark Zandi: Very good. Okay, Chris, what do you say about all that?
Cris deRitis: It's a nice dream. I want to believe the dream. I'm in the Christmas spirit here.
Mark Zandi: Although you took your Christmas tree lights off. What's that's all about?
Cris deRitis: Yeah, it was a little distracting to me.
Mark Zandi: Oh, got it. Right. Yeah, you've got to be on your game.
Cris deRitis: I'll put them back at the end. How about that?
Mark Zandi: All right. Yeah.
Cris deRitis: Yeah, I still see another shoe to drop here. Even with what's already baked in the cake, as we think about some of these lower-income, middle-income households that have borrowed, rising rates, those debt service payments are going to start to come due as well, and that's going to put additional pressure that they're going to have to fight against. The borrowing costs are only going up. I don't see any relief on that side, and that's another additional factor that's going to make it difficult for them to do any additional spending going forward.
Mark Zandi: Got it. That's an interesting point. But let me push back again. And here, I don't want to sound callous. Now, I'm putting on my clinical hat as a macro-economist and talking about things in a very clinical way. We're just talking about what it means for the economy. And obviously, we've got a lot of pain, financial pain and suffering among low-income households. There is absolutely no debate about that. That's the case.
But at the end of the day, and I'm going to turn to you, Scott, to give me a statistic to prove this statement, the bulk of spending is done by the folks in the top part of the distribution. And the rule of thumb I've been using... again, you can correct me if I'm wrong, Scott... is that folks in the top third of the income distribution account for about two-thirds of the spending, about two-thirds of the spending. So even if low-income house... Now clearly, the economy can't flourish, and it's not equitable, and there's nothing to like about it. But the American consumer en masse, in totality, can continue to drive the economy moving forward even if low-income households are struggling.
Cris deRitis: True, but the-
Mark Zandi: Scott?
Scott Hoyt: Yeah.
Cris deRitis: Oh, sorry. Go ahead.
Mark Zandi: No, go ahead. Go ahead.
Cris deRitis: No doubt there. It's true. Middle and higher-income households certainly account for the high dollar volume of spending, but they also tend to finance a lot of that spending as well traditionally, right? So I still see that as being a barrier to them really opening up the flood gates. Even if they have a sufficient kitty in terms of excess savings, they're still going to be very reluctant to, at least to my mind... And I guess this is the debatable point. This is the crux of the argument.
Scott Hoyt: Can I toss another point in here that comes to the timing of this and why, at the start, I said my biggest concern was late next year and early in '24? And that is the remnant effects of the high inflation on income. I mean, we're going to get big government cost-of-living adjustments at the start of 2023. A lot of employers are giving bigger pay raises right now and early next year because of the high inflation, because of the tight labor market, because they need to meet... They feel like they need to meet their workers' needs. However, come the start of '24, if you believe our forecast, the labor market is going to be less tight. The unemployment rate's going to be a bit higher. Inflation will have been significantly lower. There's going to be a lot less pressure. Where we're going to get a bump that's going to help consumers probably, particularly at the low end, at the start of '23. There's going to be no such bump to income, or at least it's going to be massively smaller, at the start of '24.
Mark Zandi: Right, right. Yeah, fair enough. I mean, it just feels like we had this massive hit to purchasing power, real incomes, and that drag is... It's a debate as to how much it goes away. But there's no debate; it's not going to be what it was going forward. It's just not going to be. Here's the other thing I want to talk about in the context of this discussion. Right now, we've been focused on the ability of consumers to spend. It's also about their willingness to spend, and one aspect of that is so-called pent-up demand. So here's what I can't get my mind around. Typically, in every recession, a big part of the downdraft in consumer spending and thus recession is a collapse in spending on vehicles, a big-ticket item. People have to feel reasonably confident to go out and buy a car. At least, that has been the case historically.
And also typically, not every recession but most, leading into that recession, you had seen a period of very strong vehicle sales. So you could argue people... And there was a lot of discounting going on by the vehicle manufacturers to get people into cars and keep the vehicle sales numbers up. And you could argue coming into the recessions, you had what I would call spent-up demand, meaning consumers had spent ahead of what they would typically, given where they are in their life cycle, their age, and if they have teenage kids that are starting to drive and so forth and so on. And then when you get into the recession, because you had that spent-up demand, that really put into super-drive the decline in spending that occurred during the recession. You work that off.
Coming into this period, not only is there no spent-up demand, there feels like there's a meaningful amount of so-called pent-up demand because of the pandemic and the collapse in the production of vehicles. And you can see that in the surge in new vehicle prices. I mean, vehicle manufacturers across the globe, US, Japan, Germany, everywhere, could not produce cars because they could not get the things they needed to produce the cars, from chips to equipment to everything in between. And therefore, you've been seeing vehicle sales that are well, well below what we've long estimated to be kind of the underlying trend for sales given demographics and incomes and everything else. So that suggests there's a lot of pent-up demand going into this period.
And as supply chains ease and vehicle production picks up and new vehicle prices start to come down, it feels like they're already starting to roll over, we're going to get an increase in vehicle sales going forward. Not a decline, not even a small increase. We're going to get a meaningful increase in vehicle sales in 2023, 2024 compared to what we've been getting since the pandemic. And that is a very large share of overall consumer spending and what it means for the economy. So this feels like something that would suggest that the consumer's going to hang tough and do their part. What did I get wrong, or what am I missing? What am I missing? Or maybe I'm not missing anything. What do you think?
Cris deRitis: Not everyone drives 20 hours to go to Florida, right?
Mark Zandi: True.
Cris deRitis: I think there's actually some pullback now post-pandemic, right? So I do agree you will get some increase in vehicle sales, but I think there is some structural shifts here, where you might not see the bounce-back quite as aggressively as you otherwise would expect. So I think it adds, but...
Mark Zandi: So you're saying there's not as much pent-up demand out there? There may be some, but it may not be that much.
Cris deRitis: Because of some structural shifts people have adopted.
Mark Zandi: Right.
Scott Hoyt: And I guess the other question I would add to that is timing again. When does the supply come back online? And I haven't researched this carefully. I'd like to hear what Mike Brisson and some of our experts think, but I guess-
Mark Zandi: And I'll tell you what he tells... You go ahead and talk, but I'll tell you exactly what he told me. You'll get it right from the horse's mouth.
Scott Hoyt: Okay. My thought is that we get a lot of that in '23. And if anything, by the end of '23, early '24, we may be starting to come back off of it and come back down.
Mark Zandi: Oh, that's interesting. There's definitely a theme in Scott's-
Marisa DiNatale: There's a timing theme.
Cris deRitis: Consistency. He has a very consistent view.
Mark Zandi: Interesting. Well, that's possible, but that's not Mike's forecast. I mean, sales do come back in '23, but they keep coming back in '24.
Scott Hoyt: Okay.
Mark Zandi: And Chris, I agree with you. I don't think the so-called trend level of sales, the underlying level of sales given demographics and everything that go into determining whether people should be buying or not, is as high as it was pre-pandemic. It's probably lower because people just didn't use their car during the pandemic. So if you didn't use your car, you don't need a new car. So that definitely has brought it down. So pre-pandemic, we would've said trend sales was 17 million units. By the way, we're like at 14 million, and we've been 14-ish since the pandemic hit. So if you do that, if you said 17, 14, three years, that's a boatload of pent-up demand. I don't think that. So maybe the trend level of sales is 15 million. I don't know. Just cut it in two-thirds. That's still a lot of pent-up demand, a meaningful amount of pent-up demand. Over a three-year period, 2020, 2021, and 2022, that adds up to 3 million... 14 million sales, 15 million trend. That's 1 million in pent-up demand. Over a three-year period, that's 3 million in pent-up vehicle sales. That's a lot of vehicle sales when the producers can actually produce it.
Marisa DiNatale: What was the substitution of used cars, though, during the pandemic for new cars?
Mark Zandi: Yeah. Well, again-
Marisa DiNatale: Because there-
Mark Zandi: You're saying the trend level of sales is actually lower than it has been historically.
Marisa DiNatale: Yes. But I'm also saying that perhaps the pent-up demand for cars, some of that was satisfied in the used-car market, so it may not be as large. Right?
Mark Zandi: Exactly. Right. Another potential reason. I'm just saying... Okay, maybe. But instead of 17, let's say 15. Say 14.5. Say it's 14.5. That's 500K.
Marisa DiNatale: Which is kind of where we are right now. I mean, we're not that far from that right now.
Mark Zandi: Yeah, we're at 14 million, 14-ish. It depends on the month, right? Right. Anyway.
Scott Hoyt: Also, keep in mind, there was a period in late 2020 and early 2021 when we were over 16.
Marisa DiNatale: Yeah, you had a surge in sales.
Scott Hoyt: Yeah. We haven't been low the whole time. It wasn't for the supply constraints.
Marisa DiNatale: No, no, no. Trust me, trust me, trust me. Do an average, monthly average, annual average. Go calculate it. It's been about 14 million on average, 2020, '21, and into 2022. Up and down and all around, you're right. But something like that. Here's the other thing with pent-up demand. It feels like people are going to spend, because they couldn't for a long time, on travel, restaurants, ball games. We've been focused on the good side of the spending. We haven't really focused on the service side of spending, but there's a lot of... It feels like a lot of pent-up demand. I don't think people... When you say people, the wealth, the households at the top end in the income distribution, they view that as wealth and they're not going to spend it? Yeah, maybe. But I think they're going to spend a fair share of it because they've been bottled up for a long time, and they're going to spend it. You can feel it now, right? I mean, Christmas sales feel like they're punk, a little punk, right? Correct me if I'm wrong, Scott. We don't know. It feels like... The data, it feels like basically flat on a real basis, probably.
Scott Hoyt: Yeah, yeah.
Mark Zandi: After inflation, no real growth in Christmas sales. But on the service side, we're getting plenty of growth. People are spending. And I don't know, it just doesn't feel... Maybe this goes back to... Scott, this reinforces your argument. If they blow through it by this time next year, by next Christmas, they're done. I've traveled. I've gone to five restaurants every week. I see. Okay.
Scott Hoyt: Yeah, I guess I'd make two points, one in regards to services. I do think there is less of a degree that you can have pent-up demand for services. I mean, yeah, you could take an extra vacation this year to make up for missing one if you've got the vacation time from work and you can navigate it around kids' schooling and all that kind of stuff, but it's hard. There's a limit to the number of times you're probably going to go out to eat. You certainly aren't going to get your hair cut or your nails done or whatever any extra just because you didn't do it a year ago. So there's less room for pent-up demand on the service side of consumer spending than there is on the goods side.
The other argument I would make is back on the goods side. Ex vehicles, I think you can argue that durable goods right now are spent up, that consumers bought like gangbusters during the pandemic. They did everything they could to equip their homes, and they don't need nearly as much of that kind of stuff right now as they would in a normal situation. So while I won't argue that there isn't pent-up demand out there in pockets, I think there's also spent-up demand out there in pockets. And while there's probably more pent-up demand than spent-up demand, I think that's an empirical question that I'm not sure we can definitively answer, and I'm not convinced how big the difference is.
Mark Zandi: Yeah, good point. Good point. You're saying, "Okay, well, Mark, fine. There's pent-up demand for vehicles. Fine, Mark, there's pent-up demand for travel. But I'm not so sure about the rest of goods that I spend my money on: clothing and consumer electronics, all the stuff we were spending our money on during the pandemic."
Scott Hoyt: Certainly electronics, furniture, all the stuff that was in short supply because consumers were buying so much of it during the pandemic.
Mark Zandi: Which, by the way, it brings to the fore an important point that we just should call out, and that is there's a massive shift. There's been a massive shift in the preferences of consumers during this pandemic. Early on, we were stuck at home. We were buying stuff, and couldn't travel, couldn't go see the Eagles play, couldn't go to a restaurant. And now, that's all shifting back, and that's why Christmas 2021... If you go back a year ago, Christmas 2021, that was gangbusters. That was probably one of the best Christmases we ever had in terms of sales growth. And this one is, as I said, is punk because of the shift in preference.
Cris deRitis: How's your exercise bike, Mark?
Mark Zandi: I love that bike. I love that bike.
Marisa DiNatale: Is it a Peloton?
Mark Zandi: Yeah, it's a Peloton. Go buy the Peloton. I love that bike.
Marisa DiNatale: Everybody bought a Peloton in 2020 and '21.
Mark Zandi: Yeah. Apparently, they're not using them as much.
Scott Hoyt: Peloton's struggling now because everybody's got them, and so demand is so weak.
Marisa DiNatale: And they're trying to sell them and get rid of them.
Scott Hoyt: Yeah.
Mark Zandi: Yeah. And mine actually... I've had it for two years, and it's functioning just fine. So now it's going to break now that I just said that. Yeah, yeah. Okay, one more thing, and then we're going to play the game. We talked a bit about the household balance sheet from the perspective of what people own, stocks and housing. And clearly, people are worth less today than they were a year ago. And probably barring a rally in the equity market, a year from now, they'll be worth even less because house prices are going to come down. They're still wealthier, much wealthier than they were before the pandemic hit, I mean, because asset values, stock prices, housing values went skyward during the pandemic. So we're retracing some of the increase in, at least on paper, in wealth during the pandemic.
But nonetheless, we haven't talked about, at least not head on, the liability side of the balance sheet: what people owe. And there, we talked a little bit about low-income households and the borrowing they're taking on. But if you look at, again, across all income groups, it feels like leverage is low, that consumers have been very cautious in taking on debt, and that debt service burdens, the proportion of income that's going to servicing their debt, at least what they need to to remain current on that debt, is low. It's not at a precise record low, but it's pretty damn close to that. I take solace in that. Should I be taking solace in that in terms, again, of what it means for consumers and their ability and willingness to spend going forward? Scott?
Scott Hoyt: I would say yes. I mean, you know I'm a big believer in the debt service burden, and that's the important thing to watch in terms of what debt means for consumer spending. So I totally agree with you, although, again, my concern is down the road. I mean, the debt service burden is clearly rising with interest rates up a lot. And so much of the debt right now that consumers have on their balance sheet is fixed rate. As that debt rolls over, the debt service ratio is going to rise. Plus consumers are taking on more debt. I think Chris alluded to that earlier. There's a lot more credit-card borrowing going on right now. And that actually is the one element that's variable rate, so that's getting more costly very rapidly. So yes, debt burdens are low, but they're not going to stay low. And the question, I think, is, and this comes back again to income as well, how fast do they rise, and when might that become a problem? And again, I'm going to-
Mark Zandi: Late '23 and early '24.
Scott Hoyt: You got it.
Mark Zandi: Interesting. Chris, are you concerned about what's going on. Aside from the low-income households that we discussed earlier, do you broadly have any other concerns about household liabilities, the leveraged debt, debt service?
Cris deRitis: No. As you mentioned, the debt service ratios are low, and that certainly is a positive. It is one of the reasons why I think a recession, should it occur, would be short and shallow, right? Because there is some room there to get the economy going again as credit would open up and start to spark the economy forward or spark spending forward. So I see that as a benefit. But also, to Scott's point, things are trending upward, right? Rates are only going up at this point, and the borrowing should also increase here. So those debt service ratios are going to continue to creep up.
Scott Hoyt: If I can jump in for a second, Mark, if you're right about pent-up demand for vehicles and a surge in vehicle sales that's coming, that's virtually all on credit and at high rates.
Mark Zandi: Yeah. Yeah. Okay, but debt service is very low. The other thing I'd point out is the share of household liabilities debt that adjusts with market rates, at least over a period of a year, is actually very low. About maybe 20% of... By my calculation, 20% of debt outstanding. That's because households refinanced and locked in and paid down with their mortgage... They increased the size of their mortgage to pay down their higher-cost credit-card debt or personal loans or things. That's why even today, if you look at the amount of credit-card debt plus all the unsecured personal lines outstanding, it's a little bit above what it was pre-pandemic, but not a lot above pre-pandemic. And we're talking, the numbers are maybe a trillion two, something like that, which compared to outstanding mortgage debt... What's outstanding mortgage debt right now? 12 trillion, something like that. And that's all 30-year, 15-year fixed-rate debt. So yeah, it's going to go up, but it's off of incredibly low levels, and it's going to take some time for that to happen.
By the way, just as a point of interest, that share of debt that adjusts with market rates in the US is low compared to most other places in the world. If you go look at... David Muir, one of our colleagues in Europe, did a really good piece trying to calculate the share of debt that adjusts throughout Europe, and it's meaningfully higher. In Canada, it's much higher, just because we are very unusual here to have the 30-year, 15-year fixed-rate, pre-payable mortgage. It's a very unusual product across the world and makes us very different in that regard. Okay, let's play the game, the statistics game.
Scott Hoyt: Can I just... I just want to make a couple more points here. I mean, you have to keep in mind that the term on consumer debt is a lot shorter. So I mean, if you look at the Fed's breakdown of the debt service ratio, the consumer component is about a third higher than the mortgage component, even though mortgage debt outstanding is way higher than consumer debt outstanding. So when you're talking about payments, the consumer side is actually more important than the mortgage side, even though from a balance perspective it's much smaller. So don't discount the impact of consumer debt on debt payments quite so quickly.
Mark Zandi: Okay. You said you had a couple points. What's the other one?
Scott Hoyt: Well, actually, I've forgotten what the other one was, so I'll stop there.
Mark Zandi: Okay. That was a good point. That was a good point. So you're just saying the debt service burden is going to go up faster than you might think, looking at the fact that only 20% of the debt is tied down to market interest-rate shifts. Yeah. Okay.
Scott Hoyt: Right. Because I don't have the exact figure, but probably somewhere north of 60% of payments is on the consumer side.
Mark Zandi: Got it. Got it. Okay. The game. We each come forward with a statistic, and by the way, I think I've got a pretty good one here. We try to figure out the statistics by clues and questions and deductive reasoning. The best statistic is one that is not so easy. We get it right off the bat. Not too hard so that we never get it, and one that's apropos to... A bonus if it's apropos to the topic at hand. Should guests go first here? Scott, you want to go first?
Scott Hoyt: Okay.
Mark Zandi: Okay. Fire away.
Scott Hoyt: I have a tricky one. So it's tricky. I have two numbers. They are both changes in rates.
Mark Zandi: Oh, changes in rates. So it's like a second derivative?
Scott Hoyt: Yes.
Mark Zandi: Okay, go ahead.
Scott Hoyt: Okay, so one is positive 0.2 percentage points, and the other is down 0.3 percentage points.
Mark Zandi: Okay. Does it go to today's report, today being Friday the 23rd. The BEA, Bureau of Economic Analysis, released data on spending, incomes, and inflation?
Scott Hoyt: Yes.
Mark Zandi: Is that from that report? Okay.
Scott Hoyt: Yes, it is.
Cris deRitis: Is that services versus goods inflation?
Scott Hoyt: No.
Cris deRitis: No? All right.
Mark Zandi: So in that report, a growth rate accelerated by-
Cris deRitis: 0.2.
Mark Zandi: ... 0.2 and something decelerated by 0.3?
Scott Hoyt: Yes.
Mark Zandi: Is that year over year, or is that month to month? Their change, the percent change. Year over year or month to month?
Scott Hoyt: Month to month, although one of them is not a growth rate. One of them is a rate, but not a growth rate.
Mark Zandi: The saving rate. The saving rate went from 2.2 to 2.4. So that's the one that went up 0.2.
Scott Hoyt: Yep.
Mark Zandi: And what went down 0.3? Would that be... That's a growth rate?
Scott Hoyt: Yep.
Mark Zandi: A year-over-year growth rate?
Scott Hoyt: No. Period to period.
Mark Zandi: Oh, period. I'm sorry, month-to-month growth rate?
Scott Hoyt: Yes.
Marisa DiNatale: Goods prices?
Scott Hoyt: Yep.
Marisa DiNatale: Spending on goods?
Scott Hoyt: No.
Mark Zandi: Spending on goods?
Scott Hoyt: No.
Marisa DiNatale: Goods prices?
Scott Hoyt: No, overall prices. The PC Deflator went from 0.4 to 0.1.
Mark Zandi: Yeah. Right. Okay.
Marisa DiNatale: Okay. Gotcha.
Mark Zandi: Interesting. Interesting. Were you surprised at how fast we got that, Scott?
Scott Hoyt: Yeah. Well, I gave you some good clues, so...
Marisa DiNatale: We really talked our way into it.
Mark Zandi: Okay. Okay. Well, okay, why? Why did you pick that?
Scott Hoyt: Well, my point is that over the last year, year and a half, consumers have been using their savings as an offset to movements in inflation. And there are a lot of months where you can see this, where if inflation jumps, the saving rate went down or down more than it had been. If inflation came off, the saving rate either went down less or it went up more. And this month fell right into line with it. So I thought it was a good thing to talk about. I haven't computed correlation coefficients, but if you just eyeball the graphs, the correlation between savings and inflation is stronger than the correlation between changes in real spending and inflation, because consumers are using the savings-
Mark Zandi: That's interesting.
Scott Hoyt: ... to offset the movements in inflation.
Mark Zandi: They're just smoothing their purchasing power given the shifts in-
Scott Hoyt: Yep.
Mark Zandi: That makes sense, but that's interesting to hear. Yeah. Very interesting to hear. Okay, that's a good one. Marisa, you want to go next?
Marisa DiNatale: We skirted around talking about this, so I think you guys will get it pretty easily. 14.49% in the third quarter.
Scott Hoyt: Now that you said we're going to get it easily...
Mark Zandi: Is it from a release that came out this week?
Marisa DiNatale: Yeah.
Mark Zandi: Today's number?
Marisa DiNatale: By the way, which it's hard to find a release that Scott didn't write this week.
Mark Zandi: Oh, right. That's true. That's true.
Scott Hoyt: Yeah. I'm assuming this is in the GDP release yesterday.
Marisa DiNatale: It's not. It's not.
Scott Hoyt: Oh, it's not. Oh.
Mark Zandi: Is it in today's consumer spending data?
Marisa DiNatale: No.
Scott Hoyt: That was all monthly, not quarterly.
Mark Zandi: 14 point-
Marisa DiNatale: This is-
Mark Zandi: You said 14.49?
Marisa DiNatale: Percent in the third quarter. It's a quarterly number.
Mark Zandi: Okay, a quarterly number. And it's not the GDP number.
Cris deRitis: It's not GDP.
Mark Zandi: It's not the spending number. Oh, vehicle sales?
Marisa DiNatale: Oh, no.
Mark Zandi: No, it's a percent. It's a percent. Not 14.49 million.
Scott Hoyt: Oh, the financial obligations ratio.
Marisa DiNatale: That's right. It's the financial obligations ratio that we were just kind of talking... We were talking about the debt service ratio. So this is a broader measure that includes rents and car leases. This is the highest it's been since the first quarter of 2020 when the pandemic started. So it's kind of approaching its pre-pandemic rate, but to your point, it's still very, very low. And if you look at the average of debt service or financial obligations ratio, they were very low in 2019 relative to historical levels. Our forecast is that this is going to rise over the next year to somewhere around 16%, which would be the highest it's been back... You'd have to go back to like 2010 or something to get back to that level. So this is consistent with rising interest rates, people having adjustable-rate credit cards, and other shorter-term debt that they're going to have to finance at higher rates, despite the fact that we think inflation is coming down.
Mark Zandi: What is the average over, do you know, over the entire... Because I think this is data from the Federal Reserve back in 1980.
Marisa DiNatale: That's right.
Mark Zandi: Do you know what the average has been over that period?
Marisa DiNatale: I don't. But I mean, in sort of the post-inflation targeting period, it was much, much lower. If you look at back what it was in the '80s when we had very high interest rates and a very high Fed funds rate and very high inflation, it was somewhere up in... I don't know, Scott. It was like 17% or something like that.
Scott Hoyt: Yeah, it was around 17. Yeah.
Mark Zandi: I see.
Scott Hoyt: In the late '80s, it was around 17. And then prior to the financial crisis, it was-
Mark Zandi: Way high.
Scott Hoyt: Yeah, over 17.
Mark Zandi: Yeah. That also includes rent too, doesn't it?
Marisa DiNatale: That's right.
Mark Zandi: Yeah, that's a big part of it.
Marisa DiNatale: The financial obligations ratio does. Yeah.
Mark Zandi: Because rents have gone way up, right? So that includes part of the inflation that we're discussing.
Scott Hoyt: Although the interesting thing about that is that the debt service ratio actually reached its pre-pandemic level in the third quarter, whereas the financial obligations ratio is still a little bit below. So by that measure, we've had a full return to pre-pandemic, which admittedly was record low, in the debt service ratio, but we're not quite there yet in the financial obligations ratio.
Mark Zandi: Yeah, it's a little hard to disentangle things in that one because you've got the rent in there, which is-
Scott Hoyt: Yes.
Mark Zandi: It makes it a little complicated to interpret. But that's interesting. That's very interesting. Good one. Okay, Chris, you're up.
Cris deRitis: All right, this one's for you, Mark.
Mark Zandi: Oh.
Cris deRitis: $3.78.
Mark Zandi: Is that gas prices?
Cris deRitis: Nope. I knew you were going to go there, but it's not.
Mark Zandi: No? Oh, because we're lower than that now. We're like at $3.12 or something nationwide, aren't we, on gas? It's not diesel prices. Diesel is higher than that.
Cris deRitis: No. Higher, yeah.
Mark Zandi: Is this something that came out this week, Chris?
Cris deRitis: Oh, it's... Yeah.
Mark Zandi: Copper prices? It's not copper prices.
Cris deRitis: Copper prices. There you go. Yeah.
Mark Zandi: Oh, it is?
Cris deRitis: Yep.
Mark Zandi: Oh, so $3.38, that's still above $3.
Cris deRitis: 78 cents. $3.78.
Mark Zandi: Oh, 78. Okay, that's right. I thought you said 38. That's why I didn't get it, Chris, right off the bat.
Cris deRitis: Of course, of course.
Mark Zandi: You're right. You're right. $3.78. Okay. So the rule of thumb I often use, although I'm not sure it's good anymore, is three bucks. If it's over three bucks, we're okay. The global economy's not... It doesn't mean it's booming, but it's not going into recession. If it's below three bucks, that's recession-like. So why'd you pick that? Does that rule of thumb still hold in your mind? Is that pretty good?
Cris deRitis: Well, I don't think it does.
Mark Zandi: Oh, it doesn't? Okay. Well, okay.
Cris deRitis: Well, but it's to be determined, right?
Mark Zandi: Yeah.
Cris deRitis: The demand for copper is going to be higher, structurally higher in '24, at least to my mind, right?
Mark Zandi: Yeah.
Cris deRitis: So the reason I chose it is clearly it's above the $3.00 threshold, which would argue for your position that we're not going into recession. We're actually booming, if that's the case. But I think that the goalposts haven't been reset here, and copper's down about 15% year over year. So how do you square that circle, as well, in terms of the future outlook? I think that's actually more telling in terms of the direction of the economy than the absolute level.
Mark Zandi: Oh yeah. So the change in it, it's actually come down-
Cris deRitis: Quite a bit.
Mark Zandi: It's still high by historical standards, but you're saying it's high because there's now a new source of demand and that's-
Cris deRitis: Correct.
Mark Zandi: ... anything related to EVs, and so anything climate-change related. Yeah.
Cris deRitis: That's right.
Mark Zandi: Yeah, got it. Interesting. Good. That was a good one. Anything else you wanted to add there?
Cris deRitis: Nope. Nope.
Mark Zandi: Yeah, so I don't know. The so-called Doctor Copper, I haven't really been focused on because I'm not sure what the right rule of thumb is anymore. Do you have any sense of... If it fell below $3.50, would it be-
Cris deRitis: I was thinking $3.50, round numbers, but...
Mark Zandi: $3.50.
Cris deRitis: Who knows what the right number is?
Mark Zandi: Yeah. Who knows what the right number is?
Cris deRitis: Yeah, because we have to...
Mark Zandi: Yeah.
Cris deRitis: But clearly, I don't think it's $3.00. Right? We were below $3.00 prior to the pandemic.
Mark Zandi: I think you're right. It doesn't feel like three bucks is the right number anymore.
Cris deRitis: No.
Mark Zandi: Yeah, yeah. Okay, I've got a series of numbers.
Cris deRitis: Of course. You had a lot of time on the road.
Mark Zandi: And these are growth rates.
Cris deRitis: Which state had the cheapest gas, by the way?
Mark Zandi: Pardon me?
Cris deRitis: Which state had the cheapest gas in your-
Mark Zandi: I think South Carolina did.
Cris deRitis: Yeah?
Mark Zandi: Yeah. They've got the worst highways, and they've got the lowest gas prices. I think-
Marisa DiNatale: Those things might be correlated.
Mark Zandi: I'm guessing there might be a correlation there. I'm not sure. I'm just not sure.
Scott Hoyt: Did you stop south of the border?
Mark Zandi: Frankly, my preference, I'd pay a little higher gas tax to get a... I only spent 20 hours on the road. Please. So anyway, nothing against South Carolina. Great state.
Marisa DiNatale: Come to California. You'll pay astronomical gas tax.
Mark Zandi: And you still get bad roads.
Marisa DiNatale: And really nice roads.
Mark Zandi: Oh, really nice roads? Yeah.
Marisa DiNatale: But horrible traffic nonetheless.
Mark Zandi: Yeah, right.
Cris deRitis: Yeah. Really nice parking lots, you mean.
Mark Zandi: Okay, these are growth rates, and I'm going to give you... There's going to be three... How do I describe this? So I'm going to give you three shots at this, three different statistics, all related. And it should get a little easier as we go here. In fact, I'm going to give you the easiest one first. So here's the two growth rates for the first series that I would like you to figure out. 3.6%. I don't know if that made any sense whatsoever, but you'll get the hang of it here in just a second. 3.6% and 4.7%. What are those two growth rates? 3.6 and 4.7.
Cris deRitis: Came out this week?
Mark Zandi: It did.
Marisa DiNatale: 4.7 is the core PCE year over year.
Mark Zandi: Correct. So what's the first number? This is a little harder. It's related to the core PCE, but a growth rate over a different period of time.
Marisa DiNatale: Is it the past three months?
Mark Zandi: Got it. Ding, ding, ding, ding, ding. Excellent job, Marisa. Yeah. So the core consumer expenditure deflator, of course, that's the inflation measure the Fed is targeting, and their target is 2%, was 3.6% over the past three months annualized and 4.7% over the past year. 3.6% is still and 4.7 is still high, very high. That's well above the Fed's target of 2%. But that's down considerably from where it was. In fact, the last time core PCE growth over a three-month period was as low was all the way back in early 2021. So this is clearly, definitively a slowdown and a turning point. I used a three-month percent change annualized because that gives you a real sense of turning points. The year-over-year number gives you a sense of the underlying rate of growth, but it doesn't capture the turning points when things are accelerating or decelerating. And it feels like increasingly clear, definitive that inflation is moderating. Still a long way to go to get back to the Fed's target, but moderating significantly nonetheless. Okay, with that as a guide, here's the next two set of numbers. Ready?
Cris deRitis: Yeah.
Mark Zandi: Two-
Marisa DiNatale: We're ready.
Mark Zandi: I'm gearing up for it. Actually, I have two sets of numbers, so I was trying to figure out which one I would go with next. But okay, 2.5% and minus 2.5%. This goes to the conversation we've been having. The same-
Marisa DiNatale: Oh.
Mark Zandi: Go ahead. Same report.
Marisa DiNatale: Is minus 2.5% real disposable income?
Scott Hoyt: Disposable income.
Mark Zandi: Oh, she's-
Scott Hoyt: Year over year. Yeah.
Mark Zandi: Oh, she's on.
Marisa DiNatale: Year over year.
Mark Zandi: Yeah. Way to go, Marisa. And what's the 2.5%?
Marisa DiNatale: It must be...
Scott Hoyt: The last three months annualized.
Marisa DiNatale: Three months annualized?
Mark Zandi: Three months annualized. To my point, that we had this massive headwind to consumer spending and declining purchasing power, which didn't completely undermine spending because of all that excess cash people had in their checking accounts. By the way, thank you, American Rescue Plan. I mean, that was really important to building those cash cushions to allow consumers to hang in there despite the higher inflation, although some people would argue the high inflation is due to the American Rescue Plan, which I would definitively push back on, but nonetheless. And now 2.5% over the past three months. So we are now seeing... And 2.5% is right down the strike zone. That's exactly what you want to see in terms of real disposable income growth that's consistent with consumers going to hang in there. As long as they spend that, they're able to spend that, they don't need to draw down any excess saving. They don't need to do any of that. We'll see reasonably good consumer spending.
Scott Hoyt: I don't argue with that, Mark, but I do think the minus 2.5 is a little distorted because there was a level shift in disposable income in January of this year when all the stimulus and unemployment insurance benefits and stuff like that that had been paid out last year ended at the start of this year. And so there's a bit of a cliff in real disposable income between December and January that I think is still distorting the year-over-year comparisons to some degree.
Mark Zandi: Okay, but undeniable, real income's got crushed for lots of reasons, including the winding down of the support, but also the higher inflation. But okay, fair enough.
Scott Hoyt: Yeah, no, I'm not going to argue that. It was trending low through about June, and then it started trending up.
Mark Zandi: Now in the last few months, it's been positive. Real disposable income has been positive.
Scott Hoyt: Yep.
Mark Zandi: Okay, here's the last one: 3% and 2% on the nose. 3%, 2%.
Scott Hoyt: Real spending.
Mark Zandi: Real consumer spending. 2% is year over year. 3% is the last three months. 2% is exactly, exactly what you'd want to see, right? That's not too much, not too little. That's the American consumer hanging in there, doing their part up through this period of time. I'm just saying.
Cris deRitis: So stop here.
Mark Zandi: Huh?
Cris deRitis: So stop here. End the script here.
Mark Zandi: I'm just saying, the more the data comes in, the more I feel confident that this economy's going to make its... It's going to be a tough year. I'm not arguing that, but it's going to make its way through without sinking into some recession. And last, to everyone's point, and I totally agree, if something else goes wrong, if something else goes wrong, yeah, absolutely, we go in.
Cris deRitis: So is that a slow-cession?
Mark Zandi: Oh, I've been looking for a word to describe how to-
Cris deRitis: Yeah, I've been thinking about it.
Mark Zandi: Slow-cession. That's a great way of describing it. Slow-cession. It's not a recession. Recession is going backwards.
Marisa DiNatale: Did you make that up, Chris?
Cris deRitis: Yeah. Well-
Mark Zandi: I love it.
Cris deRitis: I think I did, but you know.
Marisa DiNatale: You should trademark it.
Mark Zandi: No, I'm going to steal it immediately. I'm definitely going to steal it.
Scott Hoyt: With or without attribution?
Mark Zandi: It depends. Maybe. I don't know.
Marisa DiNatale: It depends if Chris is in the room when he uses it.
Mark Zandi: Yeah, I don't know. Yeah, it depends on who's in the room.
Scott Hoyt: We're all a team here.
Mark Zandi: That's a really good way of describing it, I think, the next 12 months. Not a recession. This is my view, my forecast, the baseline forecast. No recession, but definitely slow-cession. Yeah, I like that a lot. Okay.
Marisa DiNatale: I'm curious to know what Scott's odds of recession are.
Mark Zandi: I was just going to go there.
Cris deRitis: Me too. I kept him down.
Mark Zandi: I was just going to go there because we all know yours. Well, I think you're 55%, right, Marisa?
Marisa DiNatale: Yeah.
Mark Zandi: And you were a little higher than that in recent weeks, and you've come down.
Marisa DiNatale: It's come in. It's come in. Yeah.
Mark Zandi: Chris is 75%, Chris, or 70%?
Cris deRitis: I'm going to stick with 70.
Mark Zandi: 70%.
Cris deRitis: I'm tempted by 75.
Mark Zandi: And the arrow's pointing up. If there's any risk to that, it's higher than 70%.
Cris deRitis: Yeah. I need another data point here.
Mark Zandi: Yeah. Yeah. Okay, Scott? And you know my view. My view is kind of 50-50, but as you can tell, I'm laying on the side of no recession.
Cris deRitis: Your arrow is pointed down.
Mark Zandi: My arrow is pointing definitively down. I'm on the verge of dropping it. But Scott, what's your probability of recession? Well, maybe for Scott, he's going to say, "Look, it's the end of next year," and turn like this.
Scott Hoyt: I was going to say, "Over what time period?"
Mark Zandi: Over what time period?
Marisa DiNatale: I have varying odds.
Mark Zandi: Okay. Let's say over the next 2023, and then let's go to 2024 to get the full picture of what you're trying to say. So what's the odds of recession in 2023?
Scott Hoyt: That's tough. I'd probably-
Cris deRitis: Well, give us the two-year then.
Mark Zandi: Give them the two year.
Scott Hoyt: Yeah, I was going to say I'm probably in your camp over through the end of next year. 45, 50.
Mark Zandi: Okay.
Scott Hoyt: But if you add in the first six months of '24, then I'm going to go to around 60.
Mark Zandi: Oh, you see how he does that? That's really sly on his part.
Cris deRitis: Yeah, yeah.
Mark Zandi: He's getting his cake and eating it too. You know? That's interesting, very interesting. All right, well, it makes sense. This is very consistent with all the things you... Okay, just an open-ended question, Scott, because I kind of directed the conversation in a very deliberate kind of way, which is not entirely fair. So I may not have allowed you to say something you wanted to say here about the American consumer. So fire away. This is your open-ended question. Anything else you want to say about what's going on here? And it doesn't have to be. Maybe we got it all, and we covered all the bases.
Scott Hoyt: I guess mainly, I got in the main point that I was hoping to get through through the game, because that was the fact that consumers have been using their excess saving to smooth their consumption through the inflation. That was kind of one of the main points I wanted to make. I guess the one thing that we haven't really talked about much, and I'm not sure we should because I'm not a big believer in it, but is consumer sentiment, consumer confidence, and the huge gap between the two main measures that we see right now, which I think is fairly easy to explain.
But just to sort of set the ground here, there are two widely followed measures of consumer confidence, one from the Conference Board, one from the University of Michigan. And they're telling vastly different stories right now. The Conference Board's measure is weak but non-recessionary, kind of muddle through, consistent with a slow-cession, to borrow from Chris, whereas the University of Michigan recently hit a record low, lower than the financial crisis, lower than the pandemic, lower than any prior recession since they started collecting their data. And it has only very modestly recovered. The seemingly obvious reason for this is that historically the Conference Board's measure has tracked the labor market, and if you look at their questions, you can kind of infer a labor-market feel to the questions. Whereas the University of Michigan's questions are much more household-finance oriented, and its index has at varying points in time correlated closely with gasoline prices and the stock market. And obviously, of late, gasoline prices and the stock market have been terrible from a consumer perspective.
Mark Zandi: Do you put any weight on one or the other in the context of is the American consumer going to pack it in?
Scott Hoyt: I think statistically, the Conference Board measure correlates a little better with spending than Michigan. But no, I'm not a firm believer in either. I tend to think that spending and confidence are driven by the same things, but they don't... There's only very rarely a causal relationship between the two. So I think they're more indicators of consumers' perceptions of fundamentals than they are anything else. And I think-
Mark Zandi: Got it. Got it. That's a great way to end, kind of geeky. It kind of fits the group. I have found, and Chris has also done some work here too, so I'll turn to you Chris after I give my piece on this, that what matters... A really good, leading indicator of recession is a six-month sharp decline in the Conference Board survey of consumer confidence. If that measure falls by more than 20 points in the average since it was started back, I don't know, in the '60s... It's 100, almost exactly 100. So if it falls 20 points... And right now, it's close to... It actually improved last month, like 108. But if it falls 20 points in a three-month period, consumers have lost faith. They're worried about losing their job, and they're pulling back on their spending, and we're going into recession. And that feels invariable.
But right now, as I said, last month it was up. Over the last six months, it's flat as a pancake, no change. It's very close to the average. So my read of what that's saying is, and this is consistent with what you're saying, Scott, no recession in the next six months, at least based by this indicator. Now I can't use it for after that, but over the next six months. But Chris, you also did some work here and found another kind of interesting relationship. Did you want to describe that? Because I think it comes to a different conclusion.
Cris deRitis: Sure. So just looking at the divergence or the difference between the Conference Board and the University of Michigan, every time... So again, not saying anything about causality, but just correlation. Anytime you've had a very large divergence between the two, we have had a recession, at least going back to the '80s. So right now, we're close to a record in terms of the divergence between the two measures, even with today's numbers. So take that for what it's worth. It certainly stands out to me.
Mark Zandi: It kind of makes sense, right? Because the University of Michigan survey is more based on equity market and financial conditions, and they tend to fall off first, right?
Cris deRitis: First, right.
Mark Zandi: So the equity market goes down. The last thing to go is the labor market, right?
Cris deRitis: Yeah.
Mark Zandi: Yeah, so it's not that... But interesting point. Interesting.
Cris deRitis: Yeah. The only caveat I would throw out, and this is another part of the survey I follow, is just the difference by political party. It's incredibly wide right now. We got the University of Michigan today. Democrats have a sentiment of 80 on the index. Republicans are at 40, right?
Mark Zandi: Wow.
Cris deRitis: So there's definitely a very different view depending on the political affiliation.
Mark Zandi: To your point, Scott, maybe we shouldn't put too much weight on these sentiment measures because lots of things going on there.
Scott Hoyt: Yeah.
Mark Zandi: Okay.
Cris deRitis: Right.
Mark Zandi: Okay. We covered a lot of ground, and I want to thank you, Scott, for defending my side, my perspective and kind of...
Scott Hoyt: I don't know. 60%, that's-
Mark Zandi: Yeah.
Scott Hoyt: I'm going to say I'm not sure I completely did.
Mark Zandi: I know, but I like to end it that way in my own mind. But I hope you guys have a wonderful holiday. And you too, listener, I hope you have a wonderful holiday within the next week or so. And we have a podcast next Friday that we've already taped. That'll be out there for you. We are going to do listener questions. We did that for that podcast and going forward in calendar year '23. So if you've got questions, fire away. Send them our way helpeconomy@moodys.com or just go to economy.com on the web, and there's a place there to put in your question. Or you know how to get ahold of us, through LinkedIn or Twitter. And we're going to take those questions. That'll be a regular feature. When we don't have external guests on, we'll have that as a regular feature of the podcast. But wishing everyone a wonderful holidays. Take care now, everyone. Talk to you soon.
