INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two co-hosts, Cris deRitis. Chris, how are you?

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

Mark Zandi:                      Good, good. And we got Marisa, Marisa DiNatale. Marisa's back, she was away for a-

Marisa DiNatale:              I'm back.

Mark Zandi:                      Couple weeks. Good to have you back.

Marisa DiNatale:              Thank you. Nice to be back.

Mark Zandi:                      Yeah. And how was your week? Okay?

Marisa DiNatale:              It was good. Yeah.

Mark Zandi:                      Good. I was in Dallas this week. We had a client ... we've been having these client dinners across the country and I think that was our seventh dinner since we started traveling this summer. This was in Dallas and in these dinners, one thing we've been doing is having a poll at the end of the dinner where we asked the clients ... and these are kind of small groups, 10, 12 people, that kind of thing. What they think the probability of recession is in 2023? Of course, we have a long lengthy discussion about what all that means, but we won't go into it. Anyway, you know what I've figured out? I have figured out that people's probabilities of recession are very dependent on the economic conditions in the place they live.

Marisa DiNatale:              That makes sense.

Mark Zandi:                      Yeah. Okay, here's the cities, New York, DC, Toronto, I'm going east to west, Chicago, Dallas, San Francisco and Honolulu. We had one in Honolulu, don't ask. It was a good one though. So of all those cities, which city do you think had the lowest probability of recession in 2023?

Marisa DiNatale:              Lowest?

Mark Zandi:                      Lowest. They were most optimistic.

Cris deRitis:                       Dallas.

Mark Zandi:                      Dallas?

Marisa DiNatale:              Yeah.

Mark Zandi:                      Dallas. And it was 50% probability on the nose.

Marisa DiNatale:              Wow.

Mark Zandi:                      Although I tipped them over the edge to 49 after they got my vote.

Cris deRitis:                       Yeah. Yeah. They lacked my insight.

Mark Zandi:                      Yeah, you were supposed to be there-

Marisa DiNatale:              There wasn't a counter balance.

Mark Zandi:                      And you weren't.

Cris deRitis:                       I was supposed to be there. Right.

Mark Zandi:                      You were supposed to be there and I had to do it all myself. And that's what happened.

Cris deRitis:                       Yeah, you biased the pool there.

Mark Zandi:                      I biased it a little bit. Guess which city ... and this is a real test. And you get a cowbell if you get this right. Which city had the highest probability of recession?

Cris deRitis:                       Chicago.

Mark Zandi:                      No.

Marisa DiNatale:              San Francisco.

Mark Zandi:                      San Francisco.

Marisa DiNatale:              I was there, so I have an unfair advantage.

Mark Zandi:                      Oh, you were there. Yes. Right.

Marisa DiNatale:              They were like 70, 80%.

Mark Zandi:                      We're going right in, man. We're doomed. And of course, San Francisco is getting crushed by all the tech layoffs and Dallas is booming. Dallas is just off the charts booming. Everyone's moving into Texas, they're all coming from California and San Francisco. All the tech layoffs and house prices are falling more ... I think Cris aren't house prices are falling more in San Francisco than anywhere else?

Cris deRitis:                       Yeah.

Mark Zandi:                      I believe according to our-

Cris deRitis:                       That's right.

Mark Zandi:                      Yeah. But I found that fascinating. But the optimist, Dallas, 50%. So that kind of gives you a sense of the state of the collective psyche here. People are pretty nervous. And with that, I'd like to introduce our guest, Justin Wolfers. Justin, how are you? Good to have you on the podcast.

Justin Wolfers:                 Mate, it sounds like you eat dinner for a living. That seems like not a bad thing to do. Talk us through Honolulu, would you?

Mark Zandi:                      Oh-

Justin Wolfers:                 Studying the economy there?

Mark Zandi:                      No, the problem is I don't get to eat dinner. I go to the dinner and actually all I do is drink.

Justin Wolfers:                 This is the problem of being the most entertaining, most interesting person at dinner.

Mark Zandi:                      There you go.

Justin Wolfers:                 All you got time for is a couple of swigs.

Mark Zandi:                      Yeah, I get to drink the wine because I can't eat while I'm seeing the group. But Justin, I don't know if you recall this ... oh, of course, I should formally introduce you, of course. Everyone knows you, you're a professor now at Michigan at the Gerald Ford School of Public Policy and you're also at the Peterson Institute, right? Do I have that right? You're a senior fellow there. Or you're a senior fellow at lots of different places, I think. But Peterson-

Justin Wolfers:                 Lots of things can be true at the same time.

Mark Zandi:                      Okay.

Justin Wolfers:                 No one pays me to eat dinner, but my main day job at the moment is at the University of Michigan in both the econ department and the public policy school.

Mark Zandi:                      Yeah. Fantastic. Then one thing I did notice, because I looked up your Wikipedia page, as you would expect I would. You were born in Papua New Guinea, that's interesting.

Justin Wolfers:                 There is actually a chance that you are currently speaking to Papua New Guinea's greatest economist.

Mark Zandi:                      Is that ... of all time?

Justin Wolfers:                 And I say that because-

Mark Zandi:                      Of all time.

Justin Wolfers:                 I'm not quite sure I know the second best.

Mark Zandi:                      Yeah. Now how old were you when you left Papua?

Justin Wolfers:                 Well, I can tell you how old I was when I was born.

Mark Zandi:                      Yeah, that's right.

Justin Wolfers:                 I left Papua New Guinea at the age of six months. But Papua New Guinea at the time was actually called Papua and New Guinea.

Mark Zandi:                      Oh, I see.

Justin Wolfers:                 That country was actually a territory of Australia.

Mark Zandi:                      Oh, I see.

Justin Wolfers:                 And it was granted independence in 1975, I was born there just prior to that.

Mark Zandi:                      I see. Now, I didn't look up the capitol of Papua New Guinea-

Justin Wolfers:                 Port Moresby.

Mark Zandi:                      But I think it begins with the letter B, am I right?

Justin Wolfers:                 Nope, nope, nope, nope, nope. Port Moresby, I just gave it to you.

Mark Zandi:                      Oh, Port ... oh yeah. Oh yeah, you did.

Justin Wolfers:                 I was born at Port Moresby General Hospital.

Mark Zandi:                      Port Moresby. Oh really? That's so cool. Have you been back since?

Justin Wolfers:                 I never have.

Mark Zandi:                      Never have.

Justin Wolfers:                 No.

Mark Zandi:                      Yeah.

Justin Wolfers:                 No.

Mark Zandi:                      Interesting. That is fantastic. And I was going to say, do you recall you spoke at the conference-

Justin Wolfers:                 Of yours.

Mark Zandi:                      Yeah. And I think it was-

Justin Wolfers:                 Yeah.

Mark Zandi:                      When it was still Economy.com. It was before we ... I think it ... we-

Justin Wolfers:                 I remember that.

Mark Zandi:                      Weren't Moody's, were we at that point?

Justin Wolfers:                 I remember it was in Pennsylvania.

Mark Zandi:                      Yes. Right. And I remember dinner. Do you remember what you talked about?

Justin Wolfers:                 If I now understand what economists do at dinner, they just drink wine. In which case I likely have no memory. Probably about the economy would be my guess.

Mark Zandi:                      Yeah. Actually, that was a great dinner, actually, now that I recall.

Justin Wolfers:                 Okay. Because you got to eat this time.

Mark Zandi:                      At a very nice restaurant. I remember the restaurant. Yeah, I remember the restaurant. It was very good.

Cris deRitis:                       At the General Warren Inn.

Mark Zandi:                      Yeah, General Warren Inn, that's a classic. I think we had the Beef Wellington.

Cris deRitis:                       As I recall, Justin, you spoke about the GDI, gross domestic income.

Justin Wolfers:                 That's all I ever liked to talk about. The good news is, Cris, like 10 years later and you're trying to interpret what's been happening in the post COVID economy and you must be thinking to yourself, "These GDP numbers just don't look right, they don't cohere with what I'm seeing around me. I should be looking at GDI." If you'd done that, you wouldn't have used the R word once in 2022 and you would've been more accurate than almost anyone. So I love those three letters.

                                             For your listeners, GDI is gross domestic income. Which sounds like it's different to GDP, but it's not. It's just another way of measuring GDP. We add up how much income people get rather than how much money people spend. But because every dollar I spend is a dollar of income to someone else, they're really the same thing.

Mark Zandi:                      Yeah, and so GDP declined in the first half of the year, small decline. GDI I think increased a little bit in the first half of the year, didn't it? Or maybe it was down a little bit in second quarter, I can't quite remember.

Justin Wolfers:                 It was generally more optimistic.

Mark Zandi:                      More optimistic, yeah. So you came to the conclusion, I guess I think most rational comments did that there was no recession in 2022. The GDP probably wasn't the thing you should be focused on.

Justin Wolfers:                 I am quite confident there was no recession in 2022.

Mark Zandi:                      Yeah, very good. Well it's great to have you. Oh, and I should mention, of course, you have your own podcast, Think Like an Economist. You do that with Betsey Stevenson, and Betsey was so kind to come on the podcast earlier this year.

Justin Wolfers:                 Are you trying to create a fight between us, Mark?

Mark Zandi:                      No, I wouldn't do that.

Justin Wolfers:                 Okay, good.

Mark Zandi:                      No, no.

Justin Wolfers:                 Good.

Mark Zandi:                      Not at all.

Cris deRitis:                       I'll just say that her episode was highly rated.

Mark Zandi:                      Yes it was. The bar is high.

Justin Wolfers:                 I'm well aware you went to her first, but I would too in your situation.

Mark Zandi:                      She's such a great economy ... you're both fantastic and-

Justin Wolfers:                 She's wonderful.

Mark Zandi:                      I'm so glad you're here. I do want to dive right in. There's three top of mind macro issues all related. First, inflation, where's it headed? Second, what does this mean for monetary policy? What's the Fed going to do in response to all this? And three, where does this land us in terms of the economy in the next 12, 18 months? There's a bit of a parlor game now about recession, and you can see we were playing that game at these dinners.

                                             So let's begin with inflation. Before we go to how you're thinking about the future in inflation, can you weigh in, if you feel comfortable, on this debate around the causes of the high inflation that we're suffering right now? It's been distilled down to demand versus supply, obviously both demand and supply. But how are you thinking about why we're in this kind of high inflation environment that we're in?

Justin Wolfers:                 This demand versus supply argument really matters a lot because it shapes how persistent you think the inflation will be. For the Fed, it shapes how critically important it is or is not for them to be responsive. So the standard view is if it's demand, which is to say if the economy's too tight, too many people chasing too many things. Then we've got to call the economy down and that's essential. The counter viewers, it's supply. By supply here, we'd mean some combination of Ukraine of supply chain disruptions and also the whole world just being a little bit upside down because of COVID and its recovery.

                                             The thing about supply shocks is one of the pages from the central banker's manual is that you should look through a supply shock. The simple version of this is Putin invades Ukraine, oil prices rise. Oil's an input into a lot of other stuff, a lot of other prices rise. Putin stays in Ukraine, maybe, but as long as he's not invading another country, what happens is oil prices stabilize. They're high, people are pissed off, they should be pissed off. But if a price is high, that doesn't cause inflation. Inflation is a rise in prices.

                                             So if you're just willing to be patient, the inflationary impulse from the supply shock disappears. In which case the Fed could cause a recession to get rid of inflation, it's going to just fall out of the system anyway. So that would be the dovish argument right now is it was all a supply shock. The hawkish argument is, are you kidding me? Three and a half percent unemployment, the US has never successfully sustained this and therefore we need to slow the economy. There are two really interesting talking points for each. I don't want to give you a super hot take. I prefer to educate. And so I think there are two things worth thinking about. One, the big talking point for the supply side folks-

Mark Zandi:                      Oh, does that mean you're not going to tell us where you land on that debate? Is that what that meant?

Justin Wolfers:                 You and I have different jobs. I'm a professor of economics, I teach, I write textbooks. I want to give your listeners the ability to evaluate the arguments for themselves. You want them to have to pay you for dinner in order to get the insights.

Mark Zandi:                      Okay, okay. All right.

Justin Wolfers:                 Maybe we're compete ... I don't know if you and I are substitutes or compliments, Mark.

Mark Zandi:                      Well, Cris and Marisa, listen very carefully what he is saying and we're going to interpret that and see where we think he's landing on this very important question.

Justin Wolfers:                 Look, the big talking point for the supply side people is we are seeing similar inflationary pressures in just about every industrialized country except Japan. Unless you thought that there was a Biden stimulus in every one of these countries, that's a very difficult pill to swallow.

                                             The other difficulty for the folks who want to argue that it's the main side is the usual story is unemployment's low, employers can't find workers. And they're all telling us that, therefore wages rise, therefore prices rise. Now actually that intermediate step, therefore wages rise quickly is not really a big part of the story and it certainly hasn't been through 2022. So through 2022, wage were arising, we can choose our favorite number somewhere between four and 5% while inflation has been up at seven or eight. That doesn't sound like a tight labor market is driving wages and therefore business costs up. So that says there's something else going on. So yeah, I think you actually probably don't need to listen too hard to hear me saying, I don't think it's all demand. And the real test of that theory is going to be the next six months.

Mark Zandi:                      Absolutely.

Justin Wolfers:                 Because the real one-offs are falling out of the system. So the energy price shock is a really big one that's disappearing. We're seeing rents coming right down right now. We're not seeing wages take off so far, we're a little bit more worried this week than we were last month. So if things keep moving along at sort of seven or 8% inflation over the next 12 months, then mark my words, I will definitely revise my view.

                                             But every time I talk to smart market economists, including folks on this podcast. They show me numbers that suggest that inflation's coming down to three point something by the end of 2024, 2 point something if you're an optimist and four point something if you're a crazy pessimist. So what that means is that within a year or two, inflation in the public imagination will be a much less pressing issue.

                                             That's actually a really important framing for all of us thinking forward, which is, right now you go to the grocery store and everything's expensive and you go to the gas station. It's not as bad as it was, but we've been complaining about that for a while. And inflation has been politically salient, it's salient in people's lives. It's been worse than it normally would be because the prices that are most salient have been the ones rising the quickest. Groceries and gas. When it's things like healthcare expenses, people never notice.

                                             Once it comes down to three point something, that's going to feel a lot like the kind of one point something that it used to be, maybe only two points different. Then we've moved from the whole world is on fire to the fed is uncomfortable. So I think the next year and a half, there's this very clear shift from seven to eight to two or three or four point something. Then what happens after that? It will really disappear from the public consciousness a lot.

Mark Zandi:                      Yeah. That's all kind of very consistent kind of the way I think about it, as well. One thing I wanted to test out on you is that ... that's kind of an added dimension to this supply side generated inflation, that makes it different and a little bit Socratic was that it was two supply shocks. The first one was the pandemic that messed up supply chains to this day. I mean new vehicle prices are still going north because Japan and Germany can't get their production up to typical speeds because of supply chain issues coming out of Ukraine for Germany and China for Japan. And labor supply disruptions, which still continue to this day. I mean people are long COVID and childcare issues, they're still playing ... the immigration, still playing a role.

                                             Then you had that underlying inflationary force in place and then you get nailed by the Russian invasion, oil prices spike. Which is kind of the single most important price in people's minds when they're thinking about where their financial health and also where inflation is headed. These two things kind of conflated earlier this year and that's when inflation expectations really took off. If you look at the surveys, bomb market expectations around inflation, but probably more importantly in terms of wage demands, consumer expectations. You look at the University of Michigan survey on consumer inflation expectations or the New York Fed Survey, same thing.

                                             So, it's supply, it's still supply. Admittedly, if the economy was flat on its back and unemployment was at 6%, that this wouldn't have happened. But economies in full employment are pretty darn close. Then these two supply shocks came together and conflated with each other in the minds of people and that's really when this thing metastasized. That's when, of course, the Federal Reserve and other central banks went on Defcon One. Does that resonate? That kind of argument.

Justin Wolfers:                 I think that's right. And what's important coming out of that is, the language of this argument a year and a half ago was team transitory. In some sense, the Putin shock will be about as transitory as our models suggest it'll be. The COVID shock's not that transitory just because this was the largest economic disruption of our lifetimes. And the idea that you can just shut down the economy and reopen it the next day and there's not going to be some kinks to work out of the system, as we have the largest sectoral shift between first to services and then back to goods. The fact that the claim that things could just turn around in a dime is obviously silly.

                                             So the basic premise of team transitory was its supply shocks and supply shocks dissipated. The political mistake they made is transitory in Washington means two weeks. Transitory in economics probably meant one year. And in reality this time transitory was twice as long as that. So we'll see over the next year, if inflation's not down to three point something in a year, a year and a half, I think then it's time to say this whole thing ... team transitory is wrong and team supply shock was wrong. And it was all about demand and it's all about the Phillips curve.

                                             But the other thing that goes against it's all the Phillips curve is all the evidence for the past 30 years is that the Phillips curve is flat. Now to say that in English for your listeners, what we had was 30 years of sometimes having high unemployment, sometimes having low unemployment no matter what was happening and inflation just didn't change. So it seemed like there was an incredibly weak link between unemployment and inflation, and now all of a sudden we find unemployment a percentage point lower than makes some people comfortable or maybe even two percentage points lower. All of a sudden the claim is that can explain inflation rising from two to eight. That would be wholly inconsistent with the last 30, 40 years of American economic history.

Mark Zandi:                      Yeah. Let me bring Cris and Marisa into the conversation, and you heard what Justin's perspective on this. Guys, would you push back on any of that? Cris particularly you, would you push back on anything you just said?

Cris deRitis:                       I mean-

Mark Zandi:                      Because if you listen to it ... now, let me ... I'll interpret it first and then let you interpret it. It's a pretty [inaudible 00:19:55] view if you believe that these supply shocks are going to abate and they are. I mean, it feels like it. I mean, the pandemic just you saw what China did with its no COVID policy, that feels like that is going to allow supply chain [inaudible 00:20:07]-

Justin Wolfers:                 It's going to be the beginning of the end.

Mark Zandi:                      It's not going to be a straight line, but it's going to normalize. And then Putin, to Justin's point, unless he invades another country, feels like oil prices are going to stay roughly where they are. So the inflation generated by the surge and energy prices during the year will come out of the system. So that feels pretty sanguine to me. And if that's the case, then well we'll get to monetary policy and what it means for the economic outlook. But you could connect the dots. So would you push back on anything you said?

Cris deRitis:                       I think it's all quite reasonable in terms of the interpretation of the demand and supply and how we are working through the various issues. One complicating issue I'll submit, see how you've react is just on top of all this, we are undergoing significant structural changes. I would argue when it comes to globalization and trade, the remote work, changes spurred on by the pandemic. So those could be more structural, they could be longer lasting. And given certain assumptions, you could assert that there would be a higher level of underlying inflation in the future. Or I guess you could make a counterargument, well the demographic trends haven't really shifted all that [inaudible 00:21:21]. Scrambled them a bit during the pandemic, but we are an aging population perhaps that would argue for a still low level of underlying inflation in the long run. So does that enter your calculus at all? Are these [inaudible 00:21:36]-

Justin Wolfers:                 Yeah [inaudible 00:21:37]. No, no, this is a really, really smart point. But I want to rephrase it in statistical rather than economic terms because I think it'll lead to a slightly different argument.

                                             We had a pretty standard US economy from about 1982 to 2019, and it seemed like one simple model could fit it. I used to teach my students an ISMP Phillips curve, sort of a model or a 3-equation New Keynesian model. Which for your listeners is just jargon for the underlying equations that Cris, Marisa and Mark have in their computers. And everything was pretty simple.

                                             Now pandemic economics is different, fundamentally different. So we all suspended those models through 2020 and 2021 because the laws of supply and demand in very important senses have been suspended or at least worked differently. In 2022, inside these models there are lots of deep constants, things that we think of as not changing. And Cris, your observation of this, well shit, everything changed. If that's the case, yes we're going to revert back to using S models because we think it's a normal-ish economy. But we're uncertain about everything.

                                             I'll give you one example, but it's really just one of ... I think you and I could think of a dozen examples like this. When I say everything's changed, it's how the economy works, but also how our data collection works and what the data means. So here's a simple one. Wage growth has been surprisingly weak given the very low unemployment rate and the rate of inflation and the claims that workers have bargaining power. Here's a possibility, workers have a lot of bargaining power and what they're doing is instead of asking the boss for an 8% pay rise, they're saying, "How about Mondays and Fridays at home?" That would be one where they're taking their pay rise, they're just taking it in another form. It would show up in our data as weak wage growth.

                                             If you look at how much people value work from home, the answer is a lot. If you look at how many people are negotiating over it, the answer is a lot. So could this drive a large wedge economy wide between what's really happening and what we're measuring in our wage statistics? I think the answer turns out to be yes. So when you said if you were to say to me, "Justin, what's the underlying rate of wage growth?" I could look up the data and it sort of says five, five and a half. But I could say, well there's a story actually it's kind of like eight and a half or nine. Because the rules of the game changed.

                                             Now we can tell stories like that actually about almost any economic statistic. I wrote a New York Times column during the pandemic which said, the thing about work from home ... not work from home, about the lockdowns. The lockdowns were counted as a loss of economic activity. Now the lockdowns were a way of preventing people from getting COVID. We have a different technology for preventing people from getting COVID now, it's called a vaccine. If we were able to buy a vaccine in the year 2020, how much would you have been willing to pay for it? The answer for many of us is literally thousands of dollars.

                                             So what that means is when each of us were staying at home, it's not that we weren't doing work in the office. It's that we were producing a flow of services to our fellow citizens, keeping them safe that is exactly equal and has the same consequence as giving them a $5,000 vaccine. So 2021 or 2020 looks in the books like a terrible year for GDP, but that's a statement more about how we measure GDP rather than what we were doing. We were doing incredible work looking after each other.

                                             Let me try and bring this back to what you're working on, then we can talk about inflation. What does inflation mean when half the goods aren't available at the local store? How do you measure inflation when it used to be $30 to go to a really nice restaurant and get table service and now they give you semi cold food in a foam container and tell you to drive it home yourself? So what does it mean to think about the flow of housing services when you're rarely home as we were before and now we're always home? So now I'm getting another eight hours a day of housing services and I paid not a penny for it. What if rent was on a per hour used basis?

                                             So all of this is just a way of saying, "I don't really trust either our models or our data." Now to bring it back to the actual work of the day, what should all economists be saying about the next two years? The answer is we should be unbelievably humble. Whatever you think your confidence [inaudible 00:26:15], first of all, the behavioral economist will tell you it's always 50% too narrow. And then now we say because of COVID, you probably want to double it again. So maybe the right way of thinking about things is much more balance of risks. As we transition to the Fed discussion, one way of saying this is the Fed doesn't get to choose where the economy's going. It gets to choose which mistake it's going to make. In a world in which we truly don't know what's going on, it really is about choosing which mistakes we're going to make rather than thinking we're going to thread any needles.

Mark Zandi:                      Well and the measurement discussion is fascinating and I hadn't even thought about much of what you just said. But really I think strikes a lot of points home. But getting down to brass tax, I'm at the Fed and I got to set interest rates. I got a target and it's called 2% on the ... I got the core consumer expenditure deflator, X food and energy, this is the thing I'm tagged on. And yeah, there's a boatload of uncertainty and who knows what exactly I'm measuring. But on the other hand, I still got to set the interest rate which affects everybody's lives through house prices and stock prices and crypto values, that kind of thing.

                                             So to back to Cris's question, do you think based on the way we actually measure inflation, it feels like before the pandemic, after the financial crisis up to the pandemic, we had all these kind of secular headwinds to inflation, de-leveraging and globalization. The labor market really up until the end of that cycle wasn't very tight. We had very pedestrian wage growth and those were kind of headwinds. The Fed and other central banks were fighting like the dickens to try to keep rates relatively low and get inflation back to target.

                                             Now the argument out there in the world, if you listen to investors and policymakers. The argument is that these headwinds to inflation now have become tailwinds, but they're new tailwinds. Globalization is over and if we're not de-globalization, we're slowbalizing, we're not going to get the benefit from that. We've got the transition cost from going from fossil fuel to renewable. So that's going to be a cost. In terms of labor market, we've got all these demographic trends, aging out of the boomer generation, less foreign immigration means perennial tight labor market. And workers have the power now to demand higher wages and therefore higher inflation. Therefore the fed's not going to be ... federal reserves on central banks are not going to be fighting to get inflation up, they're going to be fighting to get inflation back down. Does that kind of resonate with you, those arguments or not?

Justin Wolfers:                 I'm just going to commend you on the courage of your argument that a time of 7% inflation with a 2% target, your forecast is that the Fed is going to be fighting to get inflation down. I'm not sure there's a deep argument about that.

Mark Zandi:                      I think beyond the near term, when you look out five years from now, 10 years from now. That kind of thing.

Justin Wolfers:                 I'm a simple fellow, so I'm going to give you a simpler perspective.

Mark Zandi:                      Okay.

Justin Wolfers:                 If I had spent every year since 1985 simply predicting that inflation will be 2% next year, I would've been close nearly every time.

Mark Zandi:                      For sure.

Justin Wolfers:                 When you got a rule that works, probably keep using it.

Mark Zandi:                      Okay, got it, got it.

Justin Wolfers:                 It is really hard for complicated models to do better than dumb predictions like that. What's been happening in the past is what's likely to continue in the future. So my guess is we're looking at roughly two until some point at which the Fed changes its mind about what its target is.

Mark Zandi:                      Okay, let me ask you one other question about that and then let's move on. This is kind of the segue into what it means for monetary policy and the Fed. There's this chatter and just on the periphery, feels like it's coming more into the mainstream kind of debate and argument. Maybe the Fed shouldn't be targeting that 2%. Maybe they should be targeting something higher than that. The logic being at 2%, assuming the economy's real potential growth is one and a half to two. Your nominal potential growth, what the economy can grow without generating inflationary pressures is three and a half to four. You get into a recession every single time, the fed's going to be forced to push interest rates to the zero lower bound to zero. And then have to engage in something they don't feel particularly comfortable with, quantitative easing, buying mortgage securities and treasury securities.

                                             So why not set the target not at two, but something two and a half, I'm making it up, three. Don't talk about it now because if you talk about it now, that would be pretty counterproductive. Inflation expectations would rise and make it much more difficult to get inflation in. But as you're on the other side of this, this time next year going into 2024, that's a pretty opportune time to say, "Oh hey guys, we're not going to two, we're going to two and a half or three." Do does that resonate to you, that argument whatsoever? Does it matter from your perspective?

Justin Wolfers:                 So first a little history. So during the global financial crisis, 2008, 2009, it became very quickly, very clear the Fed couldn't do an enough to dig the economy out of a hole. That's when very serious, very prominent people like Olivia Blanchard, for instance, suggested we raised the inflation target to three or 4%. And turns out, by the way, if you look at the latest research from my side of the tracks, academic macro economists, there's probably some evidence that 2% is too low of an inflation target. Part of that is because we keep hitting the zero lower bound.

                                             We're hearing whispers of it right now. I will tell you in the circles in which I run, the whispers I hear are coming mostly from the left wing of the Democratic party, rather than ... Blanchard is a center left technocrat and that was where it was coming from. That sort of center of the economics profession was willing to come back and have a look at it. I'm not hearing mainstream economists say, "Now's the time to do it." That doesn't mean they're wrong. The argument that was made back in 2009, 2010 has a lot of validity and it's likely that we are going to spend a lot more time with the zero lower bound and we just went ahead and did it again. The question then is, how to do it? There was this notion back in the late eighties and nineties, you probably remember it, that was back when inflation was too high and we used to talk about opportunistic disinflation.

Mark Zandi:                      Yeah, that was Greenspan.

Justin Wolfers:                 Yeah, remember that? It'd be like something just knocks inflation down and then you just lock it in. That was the idea. And you sort of hope it comes for free. So I think if your argument is being a symmetric flip side of that opportunistic inflation. In all of this, I think maintaining the public confidence is going to be the real trick. The current environment, highly partisan environment in which we find ourselves is one where I would be not at all confident if I were Jay Powell, that I could lead the broader public in a sensible conversation about whether two ... there's no point moving from two to two and a half. That's spending a lot of political capital for half a point.

                                             So you either decide you want to hit four or you leave the argument alone and could I have a coherent, sensible discussion with the American people and bring them along? Or are the gold bugs and the crypto nuts and the political opportunists going to make it sound like you're hyper inflating your way out of say a big public debt? And that really does undermine what the fed's doing right now. I suspect that political constraint is a really important one.

Mark Zandi:                      Yeah. Okay. Hey Marisa, let me bring you into the conversation. Anything here so far that strikes you? Something you want to reinforce or something you want to push back on?

Marisa DiNatale:              Yeah, I think my interest is the labor market. So I think it'll be fascinating to see what the impact of the hybrid work, the remote work means for just frictional unemployment. In theory, this should make labor markets run much more smoothly and job matching to be much easier. If it doesn't matter where I'm located and I can find a job anywhere in the country or anywhere in the world, this should reduce some of that frictional unemployment.

                                             And people like to come down definitively on one side of remote work is great for productivity or this is really changing the game. But we don't have any data definitively yet to really say, A, how big of an impact this is having on the overall labor market, productivity, wage growth. We don't know how ubiquitous it is. And we also don't know how permanent it is. I mean, you hear stories all the time of people that left and they left San Francisco and they moved to Salt Lake City, but now they're coming back. Some employers are asking people to come back into offices.

                                             So I think it's going to be years before we truly understand what this all means for the labor market. I think Justin's comments about wages and that perhaps it's not showing up in monetary compensation, but employees have more bargaining power and non wage benefits. And one of them being remote work or hybrid work is a really interesting point. Because yes, theoretically we should be seeing much stronger wage growth than we see right now, given a 3.7% unemployment rate. We have falling real wages and we have for over a year since the pandemic started.

                                             That's varied a lot by industry and you do see cooling across some of these industries where they were really impacted by a lack of supply of labor like restaurants and bars and entertainment and that sort of thing. That's come down from double digits last summer to something that's kind of right above that 5% wage target. So I just think the jury is still really out on what all of this means for the labor market. So I think drawing conclusions about structural shifts due to the pandemic in the labor market is way too soon.

Justin Wolfers:                 And drawing conclusions about the failure of structural shifts to occur is also too soon.

Marisa DiNatale:              Right, yeah.

Justin Wolfers:                 There's a symmetry there.

Marisa DiNatale:              And this also has the other part of inflation, the way that government measures the consumer price index, 40% of it is housing. So all of this shifting labor market, people moving, it's all still shaking out how this is going to impact house prices across the country. Are we going to get to some sort of regional convergence? Which regional economists have been talking about for 40, 50 years and has never really truly happened. We keep saying it's going to happen and all the models have this happening, that eventually every region of the country will converge to some sort of similar wage rate, housing rate as people move around.

                                             So this should accelerate that, in theory, but we're not really seeing that now. We always have these very expensive coastal cities that have these extraordinarily high run-ups in house prices. Then they have ... we were just talking about San Francisco. That's an old story with San Francisco, this is nothing new. I'm not convinced that we've seen this major structural change in the labor market and migration and mobility that is here to stay, that we have to account for. But I don't know, maybe it is. But we're not going to know for probably several years to see how permanent or temporary it is.

Mark Zandi:                      Justin, you should know, Marisa came from the BLS, so she's, she's into the weeds on how to measure things. Down to the DNA-

Justin Wolfers:                 I'm with her.

Mark Zandi:                      Down to the DNA.

Justin Wolfers:                 I just one counter, Marisa, and maybe just context rather than counter. I'm 49 and three quarters years old, in fact, by the time this podcast airs, I may be 50.

Mark Zandi:                      Congratulations.

Justin Wolfers:                 Thank you sir.

Mark Zandi:                      Yeah.

Marisa DiNatale:              It depends how long the podcast goes.

Mark Zandi:                      You look fantastic. How do you do that? There's no gray hair, you got plenty of hair. You lead a good life. I'm sure you're drinking plenty over there in Ann Arbor.

Justin Wolfers:                 I'm drinking a hot cup of tea right now, Mark. The elixir of youth.

                                             But at age 49 and three quarters, I am totally confident that this is the largest disruption to economic life in our lifetimes by a substantial order of magnitude. It may be thinking about the Great Depression as the wrong analogy, it may be thinking about a war mobilization and demobilization is a better analogy. But this is a generational marked shift. While I think you're absolutely right, Marisa, to say I'm waiting for evidence before I call things permanent or call a structural shift. This is the one time in my entire life I'd be on the lookout for a bunch of structural shifts. Because if they're going to happen, they're happening now. If not, they're never happening.

Marisa DiNatale:              Sure. I agree with that. Yeah.

Cris deRitis:                       I think the debate is around the magnitude. I don't think we're disagreeing that there's a structural shift, but how large is it? Early returns may suggest it much larger than what we find later on as things do adjust.

Justin Wolfers:                 Right. And so a reasonable way of ... I think sometimes what economists need to do is just figure out how many zeros are on the end of something. That's why I actually think war demobilization might be a way of figuring that out. That's not going to give you a precise number, it's just like how many zeros are involved. What did that do? That gave us Rosie the Riveter, it gave us the entry of women into the workforce, it gave us new family forms, it gave us new urban geographies. So we have seen major population demographic shifts coming out of major moments.

Marisa DiNatale:              Yeah.

Mark Zandi:                      Yeah.

Marisa DiNatale:              I think-

Mark Zandi:                      Can I ... just-

Marisa DiNatale:              Oh sorry.

Mark Zandi:                      Sorry, Marisa, just I want to move the conversation on a little bit because we're going to run out of time and there's a couple things I want to do with Justin before we run out of time. First is, play the game, the statistics game, if you don't mind. And then we're going to come back and end the conversation. And I'm going to push you a little bit on the outlook, I know you don't do forecasting for a living. But just to get your sense of where-

Justin Wolfers:                 Oh I just don't do it for free.

Mark Zandi:                      Do it for-

Justin Wolfers:                 If you want to write me a big check, I'll do it. Everything's got a to prize.

Mark Zandi:                      I'm sensing the outlook here. Because we're really focused on the economy and how it's going to be performing in the next 12, 18 months. But the game, just to remind everybody, we each put forward a statistic and the rest of us try to figure that out, questioning and clues. The best statistic is one that's not so easy, we get it immediately, not so hard that we never get it and is apropos to the discussion or something recent. Justin, those are just rules of thumb. Feel free. If you don't mind, I'm going to begin with Cris. Cris, you want to go first?

Cris deRitis:                       Sure. 56.5.

Mark Zandi:                      I think I know the answer to that.

Justin Wolfers:                 It's going to be some kind of ISM number.

Cris deRitis:                       Very good.

Mark Zandi:                      Very good.

Justin Wolfers:                 And given the state of the economy, that'll be goods or is it services?

Cris deRitis:                       Services. Non-manufacturing.

Justin Wolfers:                 Yeah, yeah, yeah.

Mark Zandi:                      Non man.

Justin Wolfers:                 Okay.

Mark Zandi:                      Yeah, because the ISM manufacturing actually turned negative ... it went below 50.

Justin Wolfers:                 That's right. Yeah, yeah. I just got the two confused.

Mark Zandi:                      Yeah, no worries. So Cris, I'm disappointed my friend. That was too easy. 56.5. No?

Cris deRitis:                       Well-

Justin Wolfers:                 I got it wrong.

Cris deRitis:                       It's an important number.

Justin Wolfers:                 Yeah.

Mark Zandi:                      Okay, let me ask you, Marisa, did you know the answer to that question?

Marisa DiNatale:              Yeah.

Mark Zandi:                      See? Okay. Okay.

Cris deRitis:                       Well she didn't shout it out, though. Come on then.

Mark Zandi:                      Yeah, we were being polite. We were being polite. We were being polite. But anyway, why'd you pick that particular number?

Cris deRitis:                       It's a strong number. 56.5, it's up from 54.4. So indicates that the non-manufacturing, the service sector, the economy continues to expand here. Even as manufacturing, as you mentioned, continues to retreat. This is the 30th consecutive month of expansion of the non-manufacturing sector. So back to Justin's earlier point in terms of going from services to goods, back to services, we're clearly moving in that direction. I also chose it because I think this does complicate the fed's outlook, as well.

Mark Zandi:                      I knew it was coming.

Cris deRitis:                       As we get into the [inaudible 00:43:28] policy discussion. So right, is this good news, bad news situation here? Or does this really show the strength and the resilience of the economy and therefore we just have to be patient, as Justin indicated in terms of inflation.

Mark Zandi:                      But you view this as this is good news as bad news. This meaning the economy's strong, resilient, therefore inflation's not going to come in easily. Therefore, Fed has to raise interest rates, therefore we're going into recession.

Cris deRitis:                       Yeah, that's my take.

Mark Zandi:                      Did I get all the therefores right?

Cris deRitis:                       I think you did.

Justin Wolfers:                 I am so confused by someone saying, "The economy is doing well, so therefore we're going into recession." That sort of says, forecast arise and you're suggesting faster growth today is slower growth in the future. I would like to see an econometric specification that shows that. Because generally when things are going well, they keep going well and when they're going bad, they keep going bad.

Mark Zandi:                      Sometimes they don't, Justin. We do have recessions.

Marisa DiNatale:              Until it doesn't.

Mark Zandi:                      Until it doesn't.

Justin Wolfers:                 But the recession continues, to Marisa's point. Things are bad and it keeps being bad till it flips. But we generally think there's positive persistence in the state of the economy.

Mark Zandi:                      Look, the economy is strong, job growth is strong, labor markets are tight. So the concern is that it's not going to cool off sufficiently, we're not going to get wage growth down something consistent with the Fed's inflation target. So when you get statistics like 56.5 strong growth, nothing slowing. The concern that we overheat increases, that's kind of the logic. You're saying that's not a reasonable logic?

Justin Wolfers:                 I'd say check out some of the intermediate steps in that long chain of logic you just used. So one of them was that wages start to kick out of control. Rather than just saying, "Well because we saw an ISM number like this, I know that that's what's going to happen. Why don't we just look at the wage number?"

Mark Zandi:                      Oh yeah, I mean this is kind of being sort of, again, a little forward looking-

Justin Wolfers:                 It's okay. I'm teasing you, man.

Mark Zandi:                      A little forward looking [inaudible 00:45:29].

Justin Wolfers:                 Good news is bad news has always confused me.

Mark Zandi:                      Yeah.

Cris deRitis:                       And this is just one sector, right? If manufacturing is going down, maybe that could be a precursor of services just hasn't caught up yet.

Mark Zandi:                      Well, let me put this way.

Justin Wolfers:                 So this is going to be 80% of the economy.

Mark Zandi:                      Let me put it this way, Justin. Okay, so the economy, if you believe the numbers, and we can debate the numbers here too. Underlying job growth month to month is 250 K. That feels like that's greater than underlying growth in labor supply. Therefore it feels like the tight labor market, 3.7% unemployment rate, 80% Epop for prime age workers is going to continue to tighten. And if it continues to tighten, that means wage growth won't moderate and therefore the Fed will continue ... this is the fed's model. The fed's going to continue to raise interest rates and at some point break, it's going to break, therefore recession. So we got to get those job growth down and you can get a 56.5 on the service side of the economy, then maybe you're not going to get that moderation. Does that not resonate? That argument.

Justin Wolfers:                 I just want to go back to the argument I made that we should be humble right now.

Mark Zandi:                      Okay.

Justin Wolfers:                 So unemployment three and a half seems low, but employment to population is still well below the pre-pandemic trends. Literally millions of workers below. So I think the argument is the economy's either really close to full employment or it's not. I just want to make sure we say the or it's not part. Well the one thing we're confident of is it's not miles over, miles past it. And so how many people two years ago would've said unemployment's going to be 3.5% by the middle of 2022? It felt unimaginable during the deepest moments of the deepest recession since the Great Depression. So the deep constants that we think we understand and we think we know, if you try and estimate how true are they, a lot less than we like to suggest.

Mark Zandi:                      Yeah, yeah. Okay. I'm in this weird position, Cris, you can tell.

Cris deRitis:                       Yeah.

Mark Zandi:                      I'm pushing back on Justin and he's like right in my camp. So I have a feeling he might be even beyond you. He might be a little bit beyond you.

Cris deRitis:                       We'll see, we'll see.

Mark Zandi:                      Yeah. Okay, Marisa, you're up. What's your statistic?

Marisa DiNatale:              Okay, my statistic is 4.6%.

Mark Zandi:                      4.6%. Statistics that came out this week?

Marisa DiNatale:              Yes.

Justin Wolfers:                 Now this week makes it hard because nothing interesting came out this week.

Mark Zandi:                      I know it was pretty boring.

Marisa DiNatale:              I disagree.

Cris deRitis:                       It came out today, University of Michigan one year had inflation expectations.

Mark Zandi:                      Oh, that's good.

Marisa DiNatale:              He's got it. That's my Justin Wolfers tribute statistic.

Mark Zandi:                      Way to go, Cris.

Justin Wolfers:                 Oh wow.

Mark Zandi:                      That's a good one.

Justin Wolfers:                 I just got burned badly.

Marisa DiNatale:              Yeah, I thought you'd get that.

Mark Zandi:                      You got burned, baby.

Justin Wolfers:                 I am going to take ... Marisa, the truth is I follow the University of Michigan football team more closely than I follow-

Marisa DiNatale:              I've seen that on Twitter, Justin.

Justin Wolfers:                 Their inflation expectations.

Marisa DiNatale:              Yes.

Justin Wolfers:                 Yeah.

Marisa DiNatale:              Yeah. So this is one year ahead inflation expectations from you U MICH consumer sentiment. That was down from last month where it was 4.9%. So these are consumer's expectations of what inflation will be in December of 2023. It's the lowest it's been in 15 months since September of 2021. So inflation expectations are coming in even by this survey, which is highly sensitive to gas prices at the pump. Those have come down recently. So perhaps some good news for the Fed that consumers are starting to buy into this notion that they're going to be able to bring inflation down. Now I will say that ... two things I want to point out about this. Consumers are really bad at predicting inflation. So if you look back at these surveys of households and-

Mark Zandi:                      I don't think any worse than economist, to be frank.

Marisa DiNatale:              They're worse than economists.

Mark Zandi:                      Are they worse? Okay.

Marisa DiNatale:              Yeah, I think so. I'll try to verify that empirically. But if you look-

Justin Wolfers:                 I have a paper on it if you want verify.

Marisa DiNatale:              Oh you do? Okay. Oh good.

Mark Zandi:                      Okay, there you go.

Marisa DiNatale:              So I'm right, right? If you look back at what they say inflation is going to be one year from now or five years from now, and what actually is panned out, they're pretty bad. I mean, the psychology of thinking what it is right now is what it's going to be a year from now. Then the other thing that we've talked about is this disconnect between the University of Michigan consumer sentiment and the conference board, which is more focused on the job market and wages, which has been way more optimistic than the assessments coming out of Michigan. The gap between the two has never been bigger. So there is never in the history of the two surveys been such a disconnect between people's assessment of current conditions.

Mark Zandi:                      Can I ask, before the pandemic, what was inflation expectations one year out? Because it's really ... everyone's making the same errors on-

Marisa DiNatale:              Yeah, I mean it was right around two and a half percent.

Mark Zandi:                      Was it two and a half?

Marisa DiNatale:              Yeah, it was like right in the-

Mark Zandi:                      Was it that low?

Marisa DiNatale:              Yeah. Yep.

Mark Zandi:                      Okay.

Marisa DiNatale:              So there's still very, very elevated to be sure. But they have been steadily coming down. With the Michigan, it really does follow whatever gas prices are doing.

Mark Zandi:                      Right, right. Interesting. Okay, very good. That was a good one. Justin, you want to go next?

Justin Wolfers:                 Sure. But I'm going to change the form of the question. This statistic-

Mark Zandi:                      Okay.

Justin Wolfers:                 Is at or near its highest level in the pre-pandemic 2000s. Now I'm sure there's a lot that fit that.

Mark Zandi:                      Oh hold, say that again.

Justin Wolfers:                 This statistic, it's the growth rate in something.

Mark Zandi:                      Okay.

Justin Wolfers:                 Is at or near its highest rate in the pre-pandemic 2000s. Nothing ever beats a during pandemic growth rate because they were crazy.

Mark Zandi:                      Oh, I see.

Justin Wolfers:                 Some real economy statistic-

Mark Zandi:                      I see, I see.

Justin Wolfers:                 Is growing as fast as it's ever grown in the 2000s excluding the pandemic.

Mark Zandi:                      Okay. So something in the GDP accounts.

Justin Wolfers:                 I didn't say that, I said real

Mark Zandi:                      That's part of the game. We get to ask questions.

Justin Wolfers:                 Okay. Oh right, I didn't know that. Okay.

Mark Zandi:                      You didn't have to tell us that. You don't have to tell us.

Justin Wolfers:                 Not a NIPA statistic.

Mark Zandi:                      It's not NIPA, it's in the labor market statistic.

Justin Wolfers:                 It is a labor market statistic. It's one that people focus on a lot.

Mark Zandi:                      Oh. And it's the strongest growth rate excluding the pandemic period, pre pandemic going into the 2000s. Okay. It's positive growth, so something that's growing very strongly.

Marisa DiNatale:              Is it an industry growth rate?

Justin Wolfers:                 It's an aggregate. It's something that gets a lot of attention. It's something we all care a lot about.

Mark Zandi:                      Oh really? Okay.

Justin Wolfers:                 It might be the most closely watched economic statistic.

Mark Zandi:                      It can't be payroll. It's not payroll employment growth.

Justin Wolfers:                 It is.

Mark Zandi:                      Oh, it is?

Justin Wolfers:                 It's payroll employment growth is running ... you know have to see that's a month to month. But you said payroll employment is growing at about 250. Numbers like 250, 270.

Mark Zandi:                      Okay. Oh, I see.

Justin Wolfers:                 We literally never achieved it through-

Mark Zandi:                      Have a good point.

Justin Wolfers:                 The 2000s. It's not a great one for a guessing game, but it's rhetorically important in the sense that if you talk about the state of the labor market, one, there's levels, the unemployment rates at a 50 year low. Two, there's changes. The current rate of ... I mean, this was the baffling thing through 2022. People are calling me up every day, are we in a recession? I'm like, I don't know. Why weren't you calling me in 2001, 2002, 2003, 2004, 2005, 2006? And every other year when we weren't getting payrolls growth this fast. It's a mind-blowingly fast rate of payrolls growth right now. And people have just totally lost connection with how incredibly fast payrolls are growing.

Mark Zandi:                      Yeah, that's a wonderful point. Yeah, yeah 250 K.

Marisa DiNatale:              Remember when we used to see ... you'd get 200,000 jobs a month and it was like, "Wow, that's amazing."

Justin Wolfers:                 Freak out.

Marisa DiNatale:              Yeah.

Mark Zandi:                      Well here's the other mind numbing thing that people just haven't globbed onto yet. But forecasters know for sure if you look out three, five, seven, ten years from now on the other side of this adjustment to the pandemic, job growth is going to really slow. I mean, we're going to see 50 K maybe, 25 K a month. And people don't understand that, it's not resonating with them yet. But it's going to be a very different world dead ahead on the other side of the pandemic adjustment. But that's a good one. That was a really good one.

                                             We're running out of time, so I'm not going to do mine because I want to move on before we lose you. And thank you again for participating today. Would you mind playing ... it's not a game, but this forecasting-

Justin Wolfers:                 Sure.

Mark Zandi:                      Parlor ... I guess it's a bit of a parlor game, right? Recession, no recession. Because it kind of encapsulates immediately where people's minds are with regard to how the economies will perform next year. So the question is, and I'm going to ask the other guys and then you, Justin. What do you think the probability of us entering into a NBER defined recession? So broad-based, lots of industries, persistent, not a few months, but the average length of recession since World War II, 10 months, something like that. Beginning sometime between now and let's say the end of 2023, just to make it rhetorically easy. Let me go to Marisa first then Cris, then I go to you. Then if you're interested, I'll give you mine, as well. Go ahead, Marisa-

Marisa DiNatale:              And it's really-

Mark Zandi:                      And tell us where you've been, where you are now. And if it's changed, why?

Marisa DiNatale:              Okay. And it's really not a parlor game, it's really become a drinking game for you, Mark.

Mark Zandi:                      Oh, is that ... okay. What kind of drink? Can I ask? I'm just really curious.

Marisa DiNatale:              I mean, you're a wine guy.

Mark Zandi:                      This is [inaudible 00:55:35] in your personality.

Marisa DiNatale:              We just talked about you asking this question over bottles of wine.

Justin Wolfers:                 I've heard he's even given up food in order to just get to the wine.

Mark Zandi:                      There you go.

Justin Wolfers:                 It's the first sign, isn't it?

Mark Zandi:                      Yeah, it's the first sign. It sure is. Yeah.

Marisa DiNatale:              I'm becoming increasingly more optimistic that we're going to avoid a recession-

Mark Zandi:                      Oh, there it is. There it is. Very good. Okay, so what's your probability?

Marisa DiNatale:              So I would say I'm at 58%.

Mark Zandi:                      Oh, okay. Justin, she went from 60 to 58. Talk about humble-

Justin Wolfers:                 It made the precision, too.

Mark Zandi:                      That's humble. That's humble. Oh, she's rounding.

Justin Wolfers:                 Any decimal points involved?

Marisa DiNatale:              Perhaps. I'm rounding.

Justin Wolfers:                 That's a form of BLS economist right there.

Mark Zandi:                      You're rounding, you're rounding.

Marisa DiNatale:              Well, I was at 66-

Mark Zandi:                      That's true.

Marisa DiNatale:              A few months ago.

Mark Zandi:                      That's true. That's true. Yeah. Tell me why you're growing more optimistic.

Marisa DiNatale:              The data-

Mark Zandi:                      And don't tell me it's because you're having more cocktails or you're drinking more glasses of wine.

Marisa DiNatale:              Yeah, that does tend to make me more optimistic, but it's not that. Yeah, I think it's the ... I'm just increasingly convinced that we might pull off getting inflation under control without causing a recession. My odds are high because I just feel like if there's any other shock, supply shock, energy price shock, something geopolitically that rattles things that we may not be able to withstand that. But there's no reason-

Justin Wolfers:                 Marisa, have you thought about the distribution of shocks being symmetric? And so maybe we'd get good news about something.

Marisa DiNatale:              That is true and I never think about the good news, I have to say. Because it's ... yeah.

Mark Zandi:                      Okay, that's good. I'm more optimistic because you're more optimistic. You see how that works? Yeah, it kind of feeds on itself-

Marisa DiNatale:              It does.

Mark Zandi:                      Which is really important. Okay, here we go, Justin. We're going to the dark side, here we go. Go ahead, Cris, lay it on us.

Cris deRitis:                       Geez. Wow. Just taking an interesting here, I'm sticking with 70%.

Mark Zandi:                      Okay.

Cris deRitis:                       I was contemplating an increase but Justin kind of talk me down, I've been at 70 for months here. I remain convinced that there will be a policy misstep, largely because of those data issues that we have been discussing throughout, that there will be some misreading here and we'll end up hiking much more aggressively in a short period of time. And as a consequence, although payrolls have been great, they will start to falter here and we'll go into recession probably later in 2023.

Mark Zandi:                      Can I ask, you said you were thinking about raising the odds. You were just jesting? Or are you really more pessimistic than you were four, six, eight weeks ago about the economy's prospects in '23?

Cris deRitis:                       Mostly in jest, but there are certainly a few things here, a few data points and version of the yield curve continues to bother me.

Mark Zandi:                      And in fact, I want to get Justin on the next podcast or one soon just to talk about the yield curve, Justin, because this thing is driving me crazy.

Justin Wolfers:                 It's incredible how the yield curve was able to predict the pandemic. That's what makes it such a reliable indicator.

Mark Zandi:                      That's a good line.

Cris deRitis:                       Indeed. Indeed.

Mark Zandi:                      That is a good line.

Justin Wolfers:                 I mean people who told me that it predicts all recessions are telling me that fact.

Mark Zandi:                      Well you don't know the counterfactual you could [inaudible 00:59:13]-

Marisa DiNatale:              There would've been a recession anyway.

Mark Zandi:                      If Trump was driving us into recession with the trade war, we were going in anyway, one way or the other. But anyway, so Justin, what's your probability, if you don't mind me asking?

Justin Wolfers:                 Yeah, I'm going to frame it first. So I saw a Wall Street Journal article which surveyed a bunch of economists about a month ago and they said the average probability was 65% and some were as high as 90. That struck me as insane. So what's funny, of course, is then I come on a podcast and the two numbers that come out are 66 and 70.

                                             So a different way of doing this is to say, "Well we really know nothing about the world in the last a hundred years there's been 14 NBER recessions. So if I knew nothing, it's a 14% chance." So then I'm going to bound it and I'm going to say it's between 14 and 65. How do I feel about 65? I went back and I looked at the survey of professional forecasters and I looked at ... you can see what percent chance people think there is that there'll be a recession ... that there'll be negative growth next quarter. It turns out that does peak from time to time, which is to say that forecasters really do predict negative growth sometimes, usually in the second or third quarter of a recession. Which is to say in the entire history of forecasting, we've never actually forecast a recession with any success whatsoever.

                                             In which case, anyone who thinks it's above 65% I think must think that either this is the easiest moment to forecast in the history of the US economy or they're overstating their confidence. I don't think it's the easy moment, I think they're overstating it. So therefore I think it's between 14 and 65 and I'm closer to the 14 end than the 65 end. I'm not saying 14.

                                             Because also then I ask people, why are you worried about a recession? And Cris, they always give your answer, which is the Fed could screw it up. It is true, the Fed can make mistakes. This is where I want to play the same trick on you I played on Marisa. It could make two mistakes.

Mark Zandi:                      Certainly.

Justin Wolfers:                 It could tighten too much and it could tighten too little. I know folks in the Fed, they seem pretty smart to me. I don't think I know which side they're going to screw it up on. So just as Marisa was right to say, I'm worried about external shocks. Look, I'll tell you, I'm not that worried about the Fed shock, I am worried about the rest of the world. Because the rest of the world looks pretty rotten.

                                             But all the unknowns have a symmetric distribution which includes good news. So I think the 65% is like wildly over-determined. Then the other thing is, what's the best preventative for a recession? It's approaching with momentum and we're approaching the end of 2022 with a ton of momentum, so it'll require a really negative shock to knock that momentum down to zero. Let me end with ... I know I've been run long here, Mark, I just want to make-

Mark Zandi:                      No, no, I mean if you have time, that's fine. Please.

Justin Wolfers:                 I want to run a sociological insight by you. It is simply that economists are trained to look for the worst in everything. And journalists only want to tell stories about things that can go wrong. That means all the happy stories don't go told, and all the happy thoughts go unthought. So if I were to give advice to your listeners, it would be I'm talking to professional grumps and ask themselves what isn't being said because of the pervasive grumpiness bias. Then use that to inform their assessment of recessions.

                                             Look, I could well be wrong. I was once told the single best thing to do is predict a 40% chance or something. Because then when the recession doesn't happen, I can say I was right. And if it does happen, I'm like, "I said it was a 40% chance."

Mark Zandi:                      Yeah, right.

Marisa DiNatale:              Pretty high.

Cris deRitis:                       That's the weather forecaster.

Justin Wolfers:                 Yeah. So let me predict 40%, but the truth is that's my public number. In my heart, I actually think it's a little lower.

Mark Zandi:                      Little lower. Okay.

Justin Wolfers:                 Yeah.

Mark Zandi:                      Okay. Very interesting. Yeah. Well I'm going to go out on a limb, I'd say 50, 50, to be humble.

Justin Wolfers:                 It is humble.

Mark Zandi:                      To be humble. But if I had to pick a side, because I do. I think we make our way through without ... it's going to be under any scenario, a tough year. I think it's going to be a difficult year. But I think we make our way through without recession. I actually feel increasingly more optimistic because it goes back to inflation and everything is pointing to inflation moderating here. I like what you said, Justin, I can state with a pretty high level of confidence, assuming oil prices don't go skyward again, that inflation is going to be three, three and a half percent by the end of 2023. At that point, you're at spitting distance, whatever target is. I think the Fed reduces the odds, the Fed makes the mistake of pushing us into recession at that point.

                                             Then even that, I think we have a fighting chance to get back close to the Fed's target, which on CPI, somewhere in the mid twos, probably by spring, summer of 2024, something like that. I mean, yeah, things can go wrong, but to your point, there's two sided risk. It doesn't feel like it's one sided to me. The final thing I'll say, just echo what you said, I think the moment of truth is here, we're going to figure this out here pretty soon, one way or the other.

                                             But I want to thank you, this was a fantastic conversation. I know you're feeling a little bit under the weather. So thanks for hanging out with us for an hour, much appreciated. I need you on this podcast often to counter the dark side, the dark pessimism you see what I'm dealing with over here.

Cris deRitis:                       Just keeping it real.

Mark Zandi:                      Yeah, yeah.

Justin Wolfers:                 Real dark, Cris.

Mark Zandi:                      With that, we'll call it a podcast everyone. Take care now.