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Moody's Talks - Inside Economics
Bonus Episode: In Person Recording, Increased Probability of Recession
Mark, Cris, and Ryan sit down for their first in-person podcast to discuss their recession odds over the next 6,12, or 18 months. They list out both contributing and mitigating risk factors and the market signals to watch to understand where the economy is headed.
Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.
Watch the video of the in-person episode.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and welcome. This is a live podcast. Hey, guys.
Ryan Sweet: Or in-person, right? Not live. Are we live?
Cris deRitis: Well, we are live here, right now.
Ryan Sweet: Got you.
Cris deRitis: But not to the people watching.
Mark Zandi: Live and in-person, aren't they the same thing?
Cris deRitis: No.
Ryan Sweet: No.
Mark Zandi: Oh, because when we have a podcast normally, we're live, but we're not in-person. Now, we're live and in-person.
Cris deRitis: No, when we have a podcast, normally, we are neither live nor in-person. We're recording it.
Mark Zandi: Oh. No, wait.
Cris deRitis: We're recording it now too.
Mark Zandi: Okay. This is not live.
Cris deRitis: Correct.
Mark Zandi: This is in-person.
Ryan Sweet: Right.
Mark Zandi: Oh, my God.
Ryan Sweet: An in-person podcast.
Mark Zandi: Yeah, that's true. Okay, but it feels like I'm live and in-person.
Cris deRitis: You look live to me.
Ryan Sweet: We're off the rails already.
Cris deRitis: Yes.
Mark Zandi: Oh, all right. Well, okay, we're in-person. We're not live. We're recording. And this is great.
Cris deRitis: It's a lot of fun.
Mark Zandi: Although I am hot. Are you not hot?
Cris deRitis: No, I feel good.
Mark Zandi: You feel good? Okay. Maybe because I got embarrassed there with the whole live, in-person thing. Sweating a little bit.
Ryan Sweet: Yeah.
Cris deRitis: Really? Okay.
Ryan Sweet: Well, this is the first time we've all been in the same room since the pandemic.
Mark Zandi: Yeah.
Cris deRitis: And this is the first time I've seen Ryan in-person in...
Mark Zandi: Two and a half years?
Cris deRitis: Since the pandemic.
Mark Zandi: Yeah, and he got taller.
Cris deRitis: For sure.
Mark Zandi: We were discussing this before-
Cris deRitis: Certainly.
Mark Zandi: ... We went live.
Ryan Sweet: You guys are shrinking.
Mark Zandi: Listen. Look. Put the camera on Ryan. Who does he remind you of? It never dawned on me until I saw him walk in the room today. Who do you think?
Ryan Sweet: 17 years.
Mark Zandi: John McEnroe. Obviously, a young version of John McEnroe. Right?
Ryan Sweet: I don't know.
Cris deRitis: Maybe?
Mark Zandi: Maybe. Yeah, you look just like him.
Ryan Sweet: I'll have to look it up.
Cris deRitis: Maybe it's the do. Yeah.
Ryan Sweet: Oh, there it is now.
Cris deRitis: You have to look it up?
Ryan Sweet: Yeah. I don't know it off the top of my head.
Mark Zandi: You're kind of irreverent, sort of irreverent, in a quiet way. McEnroe is irreverent in a loud way. He expresses irreverence. Ryan has got all kinds of looks and eye rolling.
Ryan Sweet: Well, we're going to be talking about recession today, so maybe I'll channel my inner McEnroe.
Mark Zandi: Yeah, there you go. And that is the topic of the podcast, is recession odds. And, of course, we've been debating this one a lot and discussing this a lot in the past few months, really. Really since the beginning of the year.
So, this is how I thought we'd frame it. We each talk about our odds of recession over different horizons. So, next six months, we'll take the next six months. So, between now and, let's say, March, April of next year. So, kind of near-term, and we'll talk about that.
And I will say, I think when we had Alan Blinder on, the Princeton University professor who was vice chair, we were talking that it's hard to imagine that we wouldn't have a near-term recession. If we were going to have a recession, it was going to be near-term, and now it feels very different than that. But we'll talk about that.
And then we'll go to the 12-month horizon. So, one year. So, between now and September of next year. And then, we'll go to 18 months, let's say, through early 2024. Spring of 2024.
Ryan Sweet: Gotcha.
Mark Zandi: Yeah, 18 months. Should we go longer than that? Maybe, if we have time.
Ryan Sweet: Well, anything longer than that, it's 100% probability.
Mark Zandi: You think so?
Cris deRitis: Anything longer than?
Mark Zandi: Yeah.
Ryan Sweet: Well, we haven't repealed a business cycle.
Mark Zandi: Not necessarily, probabilities can actually go down.
Ryan Sweet: I think they will go down. They could, but longer term, we haven't repealed a business cycle.
Mark Zandi: Yeah. At some point.
Ryan Sweet: At some point, yeah.
Mark Zandi: There's going to be recession. That's what you meant. Yeah, for sure. Okay. Does that sound like a good...
Ryan Sweet: Sounds good to me.
Cris deRitis: Yeah.
Mark Zandi: Okay, and yeah, before I do that though, let me ask you this. I don't look carefully at the consensus forecast, at least I don't do it on a regular basis. Do you look at those?
Ryan Sweet: Once in a while, because I don't like being influenced.
Mark Zandi: Influenced.
Ryan Sweet: Yeah.
Mark Zandi: Yeah, you seem like you might be easily impressionable, Ryan. I'm remembering why I'm here.
Ryan Sweet: This is the only reason he has me here. I'm just a punching bag.
Mark Zandi: No, but if you look at consensus, what do you think consensus is for recession at some point in the next 18 months? There's different flavors of recession, and different people have different views on what that recession might look like and when. But what do you think? Consensus view at this point?
Cris deRitis: My guess would be 50/50.
Mark Zandi: 50/50? Yeah.
Cris deRitis: Kind of wishy washy assumption.
Mark Zandi: Well, 50% of economists say, "No, we'll make our way through." 50% say, "We're going in at some point." Right?
Cris deRitis: Yeah. Yeah.
Mark Zandi: It feels roughly right.
Ryan Sweet: Yeah.
Cris deRitis: Perhaps. Yeah.
Mark Zandi: Why? Why do you mean?
Cris deRitis: Well, it's still a percentage, right? It's not just 50% say yes, 50% say no.
Mark Zandi: Yeah.
Cris deRitis: Everyone's coming up with a number still, right?
Mark Zandi: Yeah, but if I'm looking at the distribution of economists and their projections, and are we going into recession, Mr. or Miss Economist? Half are saying yes. Half are roughly saying no, it feels like. Sort of.
Cris deRitis: Yeah.
Ryan Sweet: But I don't know of many places that have a forecast... In their forecast, their basic forecast, is for a recession.
Mark Zandi: Yeah.
Ryan Sweet: I mean, there's maybe one or two that I've heard of.
Mark Zandi: No, no, no.
Cris deRitis: No. I think it's growing.
Mark Zandi: Yeah. Yeah.
Ryan Sweet: It's growing?
Cris deRitis: The investment banks, I think.
Ryan Sweet: Oh.
Cris deRitis: In particular.
Mark Zandi: If I look at consensus economics, for example, or focus economics, we use them for consensus, and you can see in the 2023 GDP growth forecast, a negative number or zero, I'd consider that to be a recession.
Ryan Sweet: Recession, yeah.
Mark Zandi: And I'd say, I don't know if it's quite half are there, but at least a third are there. You got Bank of America, Fannie Mae, a bunch of institutions saying that.
Cris deRitis: I don't know of anyone who's calling for a deep recession or severe recession.
Ryan Sweet: No.
Cris deRitis: Right? Even those that are predicting it.
Mark Zandi: Yeah, it's true. They're all small negatives.
Cris deRitis: They're all saying, yeah.
Mark Zandi: Zero, small negative. I didn't see minus one.
Ryan Sweet: That would be big.
Mark Zandi: That would be pretty big for a calendar year decline in GDP.
Cris deRitis: Oh, I was thinking peak-to-trough.
Mark Zandi: Oh, peak-to-trough. Yeah. Well, okay. Statistics game.
Ryan Sweet: Oh.
Cris deRitis: Oh.
Ryan Sweet: Here we go.
Mark Zandi: Oh, yeah. Okay. I didn't even think I was going to do the statistics game today.
Cris deRitis: I'm prepared. I'm prepared.
Ryan Sweet: All right.
Mark Zandi: I got a statistic though.
Ryan Sweet: Okay.
Cris deRitis: Lay it on us.
Mark Zandi: I'm doing it backwards. I'm not going to give you the statistic. I'm going to ask you...
Ryan Sweet: What it is? Okay.
Mark Zandi: Yeah. What it is. It's like Jeopardy or something.
Ryan Sweet: Okay.
Mark Zandi: Okay.
Ryan Sweet: Alex. Alex Trebek over here.
Mark Zandi: All right. What is the average peak-to-trough decline in GDP, real GDP, in the 12... There's been 12 recessions since World War II, I believe.
Ryan Sweet: Mm-hmm.
Mark Zandi: Right?
Ryan Sweet: Yep.
Mark Zandi: Since World War II?
Ryan Sweet: Two percent.
Mark Zandi: That's pretty good. Wrong.
Cris deRitis: Two and a half.
Mark Zandi: Two and a half. Way to go. See this cow bell? Where did we get this? This is from Tim, right? This is from Tim. Tim.
Cris deRitis: Tim Daley.
Mark Zandi: Tim Daley, our buddy. Tim Daley in the sales team, and these are custom made.
Ryan Sweet: Yeah, that's good.
Mark Zandi: Custom made cow bells.
Ryan Sweet: They're fantastic.
Mark Zandi: Do you want to ring it?
Ryan Sweet: No, Cris got it. You ring it.
Mark Zandi: Oh, here you go. You ring it. Here you go.
Cris deRitis: What is this?
Mark Zandi: Oh, no, no, I got to ring it for him. There.
Ryan Sweet: There you go.
Mark Zandi: That actually has a good sound to it.
Ryan Sweet: That does.
Mark Zandi: Yeah.
Cris deRitis: The timbre.
Mark Zandi: Well, we all look a little scary, I'd definitely say. You definitely look like John McEnroe in this picture. Yeah, and I look even scarier than that. Yeah, but anyway, oh, two and a half. Two and a half percentage points, peak-to-trough decline in GDP. Okay. Here's the bonus question.
Cris deRitis: Oh, boy.
Mark Zandi: Yeah. Okay, what is the peak-to-trough decline? And this is all quarterly, by the way. Quarterly.
Cris deRitis: Okay.
Mark Zandi: On a quarterly basis. Quarterly periodicity. I've got another one on a monthly basis, but okay. On a quarterly basis, what's the peak-to-trough decline in the financial crisis? The Great Recession began in first quarter of '08, extended through the second quarter of... Excuse me, '09. A long recession.
Cris deRitis: Oh, gee.
Ryan Sweet: Four?
Mark Zandi: Four percent.
Ryan Sweet: Four.
Mark Zandi: Way to go.
Cris deRitis: Nice. Very nice. Nicely done.
Mark Zandi: Excellent. Good job. Okay. Here's another one.
Cris deRitis: No collusion here, right?
Mark Zandi: No. Now, here's the bonus question. On a monthly basis, and this goes to Ryan's monthly GDP estimates.
Ryan Sweet: Oh, so now I should get this.
Mark Zandi: You should know this. What is the peak-to-trough decline in GDP in the pandemic recession? In the pandemic recession.
Cris deRitis: Oh.
Mark Zandi: And it blows my mind. I'm not sure it's right, but you did this. You constructed the statistics. So, it's got to be right.
Ryan Sweet: Oh, it's right.
Mark Zandi: Yeah. It's got to be right. Yeah, peak-to-trough. So, the peak was February of 2020.
Ryan Sweet: They all add up. They all add up to GDP. Quarterly GDP.
Mark Zandi: Okay. There you go. Yeah.
Ryan Sweet: So it's got to be right.
Mark Zandi: So, it's February 2020. We cratered in March, April. I think April was the bottom. So, really two months, a two-month decline. So, in that two months, what was the peak-to-trough decline in GDP?
Cris deRitis: It was something crazy.
Mark Zandi: It was something crazy.
Ryan Sweet: Did we go double digits?
Mark Zandi: Double digit? Yeah.
Ryan Sweet: That's what I thought. I don't know. Well, I'm trying to think.
Cris deRitis: 12%.
Mark Zandi: Pretty good. 15%.
Cris deRitis: 15%.
Mark Zandi: 15%. Yeah.
Ryan Sweet: Wow.
Mark Zandi: Unemployment also, 15%.
Cris deRitis: Yeah.
Mark Zandi: We lost $22 million.
Cris deRitis: And we're not even sure if that was properly measured.
Mark Zandi: Exactly. Right.
Ryan Sweet: Could be worse.
Cris deRitis: Could have been a lot worse.
Mark Zandi: Yeah. Okay. All right, but with that as a preface, let's talk about the probability of recession going forward. Next six months. So, near-term, and let me define terms. A recession is a broad-based, persistent decline in economic activity. Now, ultimately, it's determined by the Business Cycle Dating Committee of the National Bureau of Economic Research, a group of academic economists, but they use judgment, a plethora of data. But in my mind, you can't have a recession, and it's not broad-based, unless the job market is struggling, unless we're losing jobs. You got to be losing jobs on consistent basis. Unemployment has to be moving north on a consistent basis. Well, do you agree with that?
Cris deRitis: Yeah. Yeah, the first two quarters of negative growth that everyone talks about is very concentrated in trade and in inventories.
Mark Zandi: Right.
Cris deRitis: That's not recession.
Mark Zandi: Doesn't feel like a recession. We create a lot of jobs, and employment actually declined. It was six percent at the start of the year. We're 3.7. I think it was six percent. Was it? And 3.7 now. That's not consistent with... I don't know. I think we were six at the beginning of the year.
Cris deRitis: Really? Six at the beginning of the year?
Mark Zandi: I think so.
Ryan Sweet: That seems high.
Mark Zandi: Seems high. It does seem high, now that you say it, but I think, usually, I get these things...
Ryan Sweet: Yeah, usually, you're spot on.
Mark Zandi: I'm usually spot on, yeah.
Ryan Sweet: I can fact check you. Yeah.
Mark Zandi: Fact check at some point, when he's blathering over here a little bit. Give us some time to check up on these statistics.
Ryan Sweet: Yes.
Mark Zandi: Yeah. Okay, where was I? Oh, the six. Oh, the defining terms. I was defining terms.
Cris deRitis: Yeah. Yeah.
Mark Zandi: So, you got to have steadily declining employment. And let's say it's got to be six months or more. Not three months. Not two months. It's got to be three months.
Cris deRitis: So, the pandemic was not a recession?
Mark Zandi: No. No. Well, okay, good point. Yeah.
Ryan Sweet: It really didn't meet their definition.
Mark Zandi: It didn't.
Ryan Sweet: Right.
Mark Zandi: Well, no.
Ryan Sweet: Lasting more than a few months.
Mark Zandi: It was so severe, so broad-based.
Cris deRitis: It was so profound.
Ryan Sweet: That offset that.
Cris deRitis: Exactly.
Mark Zandi: That dimension of it blew out. Oh, who cares if it's two months?
Ryan Sweet: Just nitpicking that.
Mark Zandi: The whole world fell apart, but that's a great point. No, that's a great point, and we're saying it starts in the next six months.
Cris deRitis: Okay.
Mark Zandi: So, it doesn't have to start next month. It likely won't, but at some point in the next six months, between now and let's say March of next year, April, the recession begins. Something like that. Okay. So, what do you say? What is the probability in your mind, Cris, of that?
Cris deRitis: I would say between 10, 15%.
Mark Zandi: Ooh.
Cris deRitis: Which is the historical average, right?
Mark Zandi: Right.
Cris deRitis: That the economy has been in recession going back to 1900. So, was that an "ooh" because it's too high or too low?
Mark Zandi: It felt low.
Ryan Sweet: It felt a little low. Yeah.
Mark Zandi: It felt a little low to me. A little low.
Ryan Sweet: For six months. Six months.
Mark Zandi: Yeah. Yeah, I'll tell you why, but after you tell me why you think it's 10 to 15%.
Cris deRitis: Okay.
Mark Zandi: Because I'm going to use exactly what you use on me all the time to explain why you're too low. Yeah.
Cris deRitis: I can't wait until we go to 18 months and see what the...
Mark Zandi: Oh, that. Well, that's the crux of the matter.
Cris deRitis: Yeah.
Mark Zandi: I assume, yeah.
Cris deRitis: So, for me, to get into recession within the next six months, given where we are today with such a strong labor market, still a lot of fire power in terms of excess savings, means that there's some other shock that hits us within six months. So, that's why I go back to the historical average.
Mark Zandi: Oh, interesting.
Cris deRitis: Something else must be happening within that period for us to get there.
Mark Zandi: Yeah. This goes to why I think it's a little bit higher, but I want to know what yours, probably... I'm not going to tell you mine until he tells you his, but mine's higher than yours. Only because, for the same logic, it's low, but it's higher because we're so vulnerable to that shot.
Cris deRitis: Right.
Mark Zandi: Right? It doesn't take a typical shock to push us in, like that rail strike that was about to happen last week.
Ryan Sweet: That could have done it.
Mark Zandi: That felt like, in a more typical time, that would be okay. It's not great, but it's no big deal. But in this time, when supply chains are a mess, inflation's already high. People are already on edge. That would drive us in.
Cris deRitis: Okay. So, you're assigning higher than 15% chance of some...
Mark Zandi: Yeah.
Cris deRitis: Major event.
Mark Zandi: Yeah, and I liked the way you reframed it. You're saying, if it was a typical year, on average, it's probably closer to 15 than 10, but let's say 15.
Cris deRitis: I think it's somewhere in there.
Mark Zandi: Yeah, it's somewhere in there. I think that feels right, but I would put it at 20 because... Oh, and I'm sorry. I went ahead of you.
Ryan Sweet: No, we're close. I was 25, 30.
Mark Zandi: I know you're a little impressionable. Did I mess with your mind?
Ryan Sweet: No, I would never change my number based on... I do the opposite. When we remember when we forecast unemployment?
Mark Zandi: Yeah.
Ryan Sweet: If your number's the same as mine, I change my forecast.
Mark Zandi: That is true. He does do that.
Ryan Sweet: It makes me worried.
Mark Zandi: Yeah because he knows I'm wrong, dead wrong.
Cris deRitis: So, if you go to a restaurant, and someone else orders what you want?
Ryan Sweet: Oh, yeah. I can't order the same thing.
Mark Zandi: Really?
Ryan Sweet: No.
Cris deRitis: Oh.
Mark Zandi: Yeah.
Ryan Sweet: If Katie orders, my wife orders...
Mark Zandi: Oh, that's reasonable.
Ryan Sweet: No, I can't do that.
Mark Zandi: No, I agree with that.
Ryan Sweet: That feels weird.
Mark Zandi: Yeah, but my wife does that too.
Cris deRitis: Oh, why is that reasonable?
Mark Zandi: No, it's reasonable.
Cris deRitis: You can't have the same forecast?
Mark Zandi: It's very reasonable. That's a reasonable thing. Because he gets the fish, and then she got the fish. She gets the fish. The fish is no good. Then what do you do?
Ryan Sweet: Oh, for oh for two.
Mark Zandi: Yeah.
Ryan Sweet: You got to switch it up.
Mark Zandi: Yeah. I get the pork chops. She gets the fish. The pork chops are good.
Ryan Sweet: You share.
Mark Zandi: Maybe.
Ryan Sweet: No, that's my logic.
Mark Zandi: It's negotiation at that point.
Cris deRitis: I see. Okay. So, it's risk management.
Mark Zandi: What about those Brussels sprouts? Are they part of the deal?
Ryan Sweet: Yeah.
Mark Zandi: Yeah. You know what I'm saying?
Cris deRitis: No.
Ryan Sweet: So, you guys get the same thing sometimes?
Cris deRitis: If we both want it and we both like it.
Mark Zandi: I'm telling you. I'm burning up in here. I'm burning up here. Maybe it's the reason I'm laughing so loud.
Ryan Sweet: And we haven't even gotten started. We haven't even gotten started.
Mark Zandi: I know. I'm just saying.
Ryan Sweet: Just wait until we get into a heated debate about recycling.
Mark Zandi: Yeah. I'm going to be a bloody mess before this is all...
Cris deRitis: I hope not.
Mark Zandi: Before this is all over. Okay, wait a second. Okay. Hold on.
Cris deRitis: Train of thought.
Mark Zandi: 20%. 20%. So, typically, 10 to 15. I get it.
Cris deRitis: Okay.
Mark Zandi: 20% just because, I think fundamentally, the economy, when you're creating so many jobs. Hard to see businesses turning tail, running for the bunker, and start laying off workers.
Cris deRitis: Yeah, exactly.
Mark Zandi: And going into recession. Exactly, how is that going to happen? Unless you get whammed by a shock, and I'd say the probability is, it doesn't take a big shock to do that because everybody from the CEO down to the average individual is on edge. Right? Right? Shem, are you on edge? Are you worried about recessions? Shem is our producer. Yeah. So, the quality of this broadcast depends on Shem and his buddy, Eduardo. Eduardo, are you kind of like the sous chef? Would you consider you're the sous chef?
Eduardo: Yeah, I guess.
Mark Zandi: He's the chef, and you're the sous chef? Yeah, okay. All right.
Eduardo: Yes, I am worried about recession.
Mark Zandi: See, what did I tell you?
Ryan Sweet: Yeah.
Mark Zandi: Yeah.
Ryan Sweet: It's everywhere.
Mark Zandi: It's everywhere. Yeah. Have you ever seen anything like this?
Ryan Sweet: No.
Mark Zandi: No.
Ryan Sweet: Where we could talk ourselves into a recession?
Mark Zandi: Well, when everyone's predicting recession.
Ryan Sweet: No. Everyone's always...
Mark Zandi: Yeah.
Ryan Sweet: This is a first.
Mark Zandi: This is bizarre. So, it feels like everyone is on edge, and if anything slightly goes off the rails, and we're going to go into a downturn. What do you think?
Cris deRitis: So, everyone's on edge.
Mark Zandi: Yeah.
Cris deRitis: So, I'm using personal experience.
Mark Zandi: Yeah.
Cris deRitis: It's coloring me. Over the last couple weeks, we've done a lot of business travel. We've gone to a number of clients and dinners and whatnot, and despite everyone talking about recession risk, the behavior doesn't seem to match up. At least, in these major cities that we've gone to.
Mark Zandi: Right.
Cris deRitis: So, I don't know. I think, yeah, it'd have to be a really major shock to get us over the edge in the next six months.
Mark Zandi: Just the opposite of what I said. You don't need a minor shock.
Cris deRitis: I just feel like this momentum is still there, despite the psychological aspect.
Mark Zandi: Yeah. Right. Yeah, maybe you're right.
Cris deRitis: Businesses are still with plenty of job openings. I don't know if they're really going to pull back so quickly, even in the face of a minor shock.
Mark Zandi: Well, I'm just having a hard time getting my mind around what this dark sentiment actually means for the probability of recession, right? The obvious way of thinking about it is, okay, everyone's bleak. Therefore, what I just said, it doesn't take much to push us in if something else goes wrong. The metaphor I have in my mind is we've got our hands on the bunker door, and if we heard one loud sound, we're going to run into the bunker. Meaning, we stop spending, and we go into recession.
Cris deRitis: But the restaurants are packed. The airport was packed.
Mark Zandi: Yeah.
Cris deRitis: Hotels, waiting in line. Just, there seems like there's a cognitive dissonance.
Mark Zandi: Well, let me ask you this. The other way, potentially thinking about it, seems a little less satisfying, but I'm going to throw it out there. Maybe there's even another way of thinking about this because it is so bizarre that so many people are just discounting recession. The fact that half of all economists are predicting a recession, that's unprecedented. That is unprecedented.
Ryan Sweet: Could be some groupthink.
Mark Zandi: Yeah.
Ryan Sweet: You don't want to be the last one to adopt everything.
Mark Zandi: But it's the entire... Everyone, the group.
Ryan Sweet: Right? CEO confidence is really low.
Mark Zandi: Jamie Dimon. The hurricane is coming.
Ryan Sweet: Oh, yeah.
Mark Zandi: So, could it be that we're all thinking recession, recession doesn't happen. It's certainly not going to happen in the next six months. We're saying, low probability event. Then people say, "Well, what recession? I don't think there's a recession."
Cris deRitis: No, no. I don't think that's what they're...
Mark Zandi: No, I don't think that's what happens.
Cris deRitis: I think it's the timing.
Mark Zandi: Yeah.
Cris deRitis: What they have in mind.
Mark Zandi: What do you mean?
Cris deRitis: It's not going to happen right now, but...
Ryan Sweet: It's going to have to.
Mark Zandi: No, but most people, when they think recession, they think right now. Shem.
Cris deRitis: Do they?
Mark Zandi: When you think of recession, do you think recession in the next few months? Or do you think recession in the next year or two years.
Shem: By the end of the year.
Mark Zandi: See, that's what I'm saying. That's what I'm saying.
Cris deRitis: Wow.
Ryan Sweet: That's consistent with Google trends. If you look at Google trends data and search for "what is a recession" or "recession," it's spiked. It's come down, but it was really elevated. So, it was on people's minds, and that's what they're Googling.
Cris deRitis: But it's been on their minds all year, right? I bet if you went back to March, people were already worried about recession. The confidence was going, and we haven't had recession yet.
Mark Zandi: Yeah.
Ryan Sweet: Right.
Mark Zandi: So, what are you saying?
Cris deRitis: So, I think there's that level of anxiety. It's there.
Mark Zandi: Yeah.
Cris deRitis: That doesn't necessarily trigger a recession right away. It could be that they're anticipating recession later.
Mark Zandi: Yeah.
Cris deRitis: Next year. Right?
Ryan Sweet: I think next year.
Mark Zandi: Here's another reason why I think, and this goes if you're looking for things to look at, to gauge whether it's a near-term recession, in my mind, and I'm curious if you've got other indicators. But the best indicator that I've found for predicting a near-term recession over the next three to six months is a big decline in consumer confidence, as measured by the Conference Board survey.
Cris deRitis: We've got that.
Mark Zandi: No, no, we do not.
Ryan Sweet: No.
Mark Zandi: Actually, we do not.
Cris deRitis: Oh, yeah.
Mark Zandi: Three month change.
Cris deRitis: Not the U Mich.
Mark Zandi: Yeah.
Ryan Sweet: Michigan is sensitive to gasoline and stock prices. No.
Mark Zandi: I don't find that useful as a predictor.
Ryan Sweet: Conference Board.
Cris deRitis: It doesn't match my narrative forward.
Mark Zandi: Well, well, true. That's true. That's true.
Ryan Sweet: Cherrypicking.
Mark Zandi: Yeah, yeah. No, no, no. There's no cherry picking. This is statistical cherry picking.
Cris deRitis: Fair enough. Fair enough.
Mark Zandi: I mean, I go back, and I look. I go back, and I look, right?
Cris deRitis: Yeah.
Mark Zandi: I have 12 recessions. I got 12 data points. Of course, the Conference Board doesn't go back that far.
Cris deRitis: Right.
Mark Zandi: I got maybe eight data points going back to the 60s or something.
Ryan Sweet: Mm-hmm.
Mark Zandi: And the Conference Board survey does a really good job. It's an index. If it declines more than 20 percentage points in a three-month period, we're going into a recession three to six months down the road. I don't think it ever falsely predicts, has falsely predicted that. I think it goes to the fact that the Conference Board survey's more labor market oriented.
Right now, as of August, the last data point we got, it actually improved from July because of the decline in energy prices. It's exactly where it was three months ago. So, it's zero. It's not even negative. It was falling through July. Now, it's not even...
Cris deRitis: But it's at a low level.
Mark Zandi: That's my point, though. That's my point. That's my point in terms of predicting the recession in the next three to six months. It's not about the level, it's about the change. Think about that metaphor about hand on the bunker door. When confidence falls 20 points, the bunker door just opened, and the consumer just walked in and shut the door behind them and stopped spending, and we're going in. We're going in. Right? I said three to six months. I picked that because there's a fair amount of standard deviation around that, but the actual average is five months. It's actually five months. So, this would say, pretty low. This indicator would have to get blown out the water, based on its historical record. It's saying, no recession, to your point.
Cris deRitis: Yeah.
Mark Zandi: So, yeah.
Cris deRitis: Okay, but you're discounting that.
Mark Zandi: Well, yeah. The level of confidence. Yeah. Yes.
Cris deRitis: Don't go and change it, right?
Mark Zandi: Yeah.
Cris deRitis: But we still have a higher probability.
Mark Zandi: Well, we're nitpicking here, aren't we? God, he does this all the time.
Cris deRitis: Yeah.
Mark Zandi: He kills me. Yeah.
Ryan Sweet: I don't know how you travel with him.
Cris deRitis: 15 versus 20?
Mark Zandi: You know that boxing metaphor? He's like the rope-a-dope guy.
Ryan Sweet: Oh, yeah. Yeah.
Mark Zandi: I go after him, and he's like this. Like this, and then I stop, and he goes, boom. Right in the head.
Ryan Sweet: He waits for the knockout.
Mark Zandi: He goes right in the nose. Shem, am I right about that? Can you feel that? Can you feel that strategy he's employing here?
Shem: I like Cris.
Mark Zandi: Yeah. Yeah, we all like Cris. What are you talking about? We all like Cris. Where was I? Oh, what other indicators do you...?
Ryan Sweet: Jobless claims.
Mark Zandi: Okay. Jobless claims.
Cris deRitis: Oh.
Mark Zandi: Yeah, very good.
Ryan Sweet: It comes, it's more high frequent. It's every Thursday.
Mark Zandi: Yeah.
Ryan Sweet: Counts the number of people that are filing for unemployment or insurance benefits, and it gets back to the labor market argument. That has to increase for the labor market to deteriorate, which would then cause confidence to fall.
Mark Zandi: Yeah, that's a good point.
Ryan Sweet: This is a kind of an early read of what Conference Board will do.
Mark Zandi: And the UI claims are low.
Cris deRitis: Yeah.
Mark Zandi: Really low.
Ryan Sweet: Very low.
Cris deRitis: Very low. Right.
Mark Zandi: I think last week they were 213?
Cris deRitis: Yeah.
Ryan Sweet: Yeah. Something like...
Mark Zandi: 213,000.
Ryan Sweet: Right.
Mark Zandi: And that's about as low as it ever gets.
Ryan Sweet: And normally when we're heading into a recession, not in one, it's 300 to 350,000. So, we got breathing room.
Mark Zandi: Yeah. So, what do you think, though? We don't need to get to 350 before you start sounding the alarm bells, right?
Cris deRitis: No, no, no.
Mark Zandi: Yeah.
Ryan Sweet: No. Once we start heading in that direction, that's when the bells go off.
Mark Zandi: So, do you have a rule of thumb? What's the threshold above which recession is? Now, it seems like increasing.
Ryan Sweet: 300.
Mark Zandi: Oh, it's 300. We have to get as high as 300?
Ryan Sweet: Mm-hmm.
Mark Zandi: I thought it was 250. No?
Cris deRitis: No, I'd say 275 is when I get nervous.
Mark Zandi: Yeah, okay.
Cris deRitis: Especially when we're trending up, and then 300 is...
Mark Zandi: Okay.
Ryan Sweet: That's when it's up there.
Mark Zandi: 250 is when...?
Cris deRitis: I think 250's normal.
Mark Zandi: Kind of typical. Okay.
Ryan Sweet: I think 275, 275 thousand, if sustained, is consistent with no job growth.
Mark Zandi: No job growth. Right. Yeah. We actually want to get to 275, right?
Ryan Sweet: Well, a little bit below.
Cris deRitis: And it stays there.
Ryan Sweet: We want, maybe 50 to 100 thousand jobs.
Mark Zandi: It wouldn't be bad if we got zero for a little bit, right?
Ryan Sweet: For a little bit, yeah.
Mark Zandi: Yeah.
Cris deRitis: Yeah.
Ryan Sweet: But then you're dangerously... yeah.
Mark Zandi: Yeah, to slip back in. And you're saying if I go over 300,000 initial claims for unemployment and insurance, people saying, "I'm unemployed. Government, cut me a check. Help me out."
Ryan Sweet: Right.
Mark Zandi: We're in it. We're in a recession.
Ryan Sweet: Yeah.
Mark Zandi: Or we're pretty close.
Ryan Sweet: Yeah. We're tipping in.
Mark Zandi: We're tipping in. Yeah. Okay. Okay, and do you have any good indicators in your term, kind of intermediate-term indicators you look at, to gauge this question?
Cris deRitis: Well, of course.
Ryan Sweet: No, don't do it. Not like that.
Mark Zandi: Something housing related?
Ryan Sweet: No, not yet.
Cris deRitis: Yeah. Not yet. It's a little longer term. Maybe 12 months.
Ryan Sweet: Here it comes.
Mark Zandi: Oh, he's got another. Oh, really? I should know this?
Ryan Sweet: It's your favorite. Your favorite.
Mark Zandi: My favorite?
Cris deRitis: Oh, you want to stick with six months?
Mark Zandi: Not the [inaudible 00:25:25]?
Ryan Sweet: Yeah. Yeah. Oh, he wants to bring that up already.
Cris deRitis: Of course the [inaudible 00:25:27].
Mark Zandi: No, no. Wait, wait, wait. That's not a near-term marker.
Cris deRitis: No.
Ryan Sweet: That's what, 12 to 15 months, right?
Mark Zandi: Yeah.
Cris deRitis: It's indicative. It's pointing.
Mark Zandi: No, I'd say 12 to 18.
Ryan Sweet: Okay.
Mark Zandi: 15 on average.
Ryan Sweet: On average is 15, right?
Mark Zandi: Yeah. 15.
Cris deRitis: I think we've had some episodes where it's been shorter.
Mark Zandi: That's true. Yeah. Okay, we're coming back to that, though.
Ryan Sweet: We'll save this one for later.
Cris deRitis: We will.
Ryan Sweet: I have, Cris knockout punched you. It's already in the forecast.
Mark Zandi: You mean you're going to punch me, you mean?
Ryan Sweet: I'm not going to punch you. I got to stay employed.
Mark Zandi: Metaphorically? Metaphorically punch me?
Ryan Sweet: You were just talking about the rope-a-dope.
Mark Zandi: Yeah.
Ryan Sweet: Here's Cris' knockout punch.
Mark Zandi: Okay. What is it?
Ryan Sweet: He put it in the forecast. No, I'm going to save it.
Mark Zandi: What's he talking about?
Cris deRitis: I'm not sure.
Ryan Sweet: We'll see. You'll see.
Mark Zandi: He's cryptic.
Cris deRitis: It's the Macon Road, am I right?
Mark Zandi: Oh, it's a Macon Road. Okay.
Cris deRitis: Messing with our minds.
Mark Zandi: Yeah.
Ryan Sweet: It's mind games. It's all mind games.
Mark Zandi: Do you play tennis?
Ryan Sweet: No, no.
Mark Zandi: Did you see the way he said that? He looks down on anyone who plays tennis.
Ryan Sweet: Oh, no.
Mark Zandi: Shem, do you play tennis?
Shem: A little.
Mark Zandi: Oh, see?
Ryan Sweet: No, you're a big tennis player, aren't you?
Mark Zandi: I used to be, in my prime.
Ryan Sweet: Yeah, well, my elbows are all shot out from baseball.
Mark Zandi: Oh.
Ryan Sweet: So, I can't swing a tennis racket.
Mark Zandi: Yeah.
Cris deRitis: Pickleball?
Mark Zandi: Oh, that's fun. Have you ever played?
Ryan Sweet: It's a lot of fun.
Mark Zandi: It's a lot of fun? I got to try.
Ryan Sweet: Yeah, we're getting into it.
Mark Zandi: Really? Oh, you play it?
Ryan Sweet: A little bit. The kids are a certain... My oldest is kind of being able to hit it back.
Mark Zandi: Where do you go to play pickleball? The Y or something?
Ryan Sweet: Yeah, the Y.
Mark Zandi: How can you say it that way? See the way he does that?
Ryan Sweet: No.
Mark Zandi: Yeah. You see?
Ryan Sweet: Where do you go to play pickleball? Oh, you haven't played it.
Mark Zandi: I haven't played pickleball.
Ryan Sweet: Cris, where do you go?
Cris deRitis: If I play pickleball, I would go to the Y across the street.
Ryan Sweet: And there's a park in Westchester that has pickleball courts.
Mark Zandi: They have pickleball? Oh, cool. Yeah, I got to give that a shot. Well, I noticed at the beach, the New Jersey shore... Oh, you probably saw this. They're turning tennis courts into pickleball courts.
Ryan Sweet: Right.
Mark Zandi: Because people don't play as much tennis anymore.
Cris deRitis: Yeah.
Ryan Sweet: Yeah, but pickleball's a lot of fun.
Mark Zandi: Yeah. I got to give it a shot. Okay, let's move on.
Cris deRitis: Recession indicators.
Mark Zandi: Oh wait, I need, what's your probability?
Ryan Sweet: Oh, 30%.
Mark Zandi: 30? 30%.
Ryan Sweet: Yeah.
Mark Zandi: Okay. So, why are you on the high side? This is probability of recession beginning in the next six months.
Ryan Sweet: Right. Early next year, first quarter, is when we get the biggest drag from the tightening in the financial market conditions. So, that's going to be a drag on the economy early next year. I think we'll get through it, but that's my concern.
Mark Zandi: So, you want to explain that? What did you mean when you said that? Just explain that to the listeners.
Ryan Sweet: Yeah. So, when financial market conditions tighten, so stock prices fall, corporate sponsors widen out, long-term interest rates rise. It hits some parts of the economy right away.
Mark Zandi: Value of the dollar.
Ryan Sweet: Yeah. Housing, the value of the dollar, a great one, but then, there's a lag, and the wealth effect, for example, plays out over time. So, when people see the stock market decline, they don't pull back on spending right away. It happens over a period of time. The biggest drag on the economy will be early next year, and also some of the tightening from the Fed hasn't hit the economy yet. That's going to be early next year.
Mark Zandi: Yeah.
Ryan Sweet: So, that's kind of two things that are going to hit us all at once.
Mark Zandi: Right, and I guess fiscal policy also had been a massive tailwind, that's now turned into a bit of a headwind.
Ryan Sweet: Should be neutral.
Mark Zandi: Kind of neutral, I guess, by early next year.
Ryan Sweet: Well, the infrastructure should start...
Mark Zandi: Yeah, that's true.
Ryan Sweet: Some of it should start kicking in, yeah.
Mark Zandi: It's true.
Ryan Sweet: But if that's delayed, then that's just another support pulled away. Early next year.
Mark Zandi: Right. So, you think, what'd you say? 30%?
Ryan Sweet: 30%.
Mark Zandi: In the next six months.
Ryan Sweet: Mm-hmm.
Mark Zandi: Okay. All right. Shem, are you writing all this down? We have a track record here. Yeah.
Shem: Wow.
Mark Zandi: Yeah, we got a track record. Okay, let's go to the six-month... Excuse me, 12-month horizon. So, between now and, let's say, next September, October. What do you say? I'm going to turn to you first.
Ryan Sweet: Oh, you have to come to me.
Mark Zandi: Yeah.
Ryan Sweet: Oh, 75%.
Mark Zandi: Between now and next year, 75?
Ryan Sweet: 70 to 75.
Cris deRitis: I don't even want to know your 18 month.
Ryan Sweet: Yeah.
Mark Zandi: Exactly.
Ryan Sweet: But actually, it's lower.
Mark Zandi: Yeah.
Ryan Sweet: Because if we get through the next 12 months, then I think we dodge it.
Mark Zandi: Oh, interesting.
Cris deRitis: Interesting.
Mark Zandi: Oh, interesting.
Ryan Sweet: Same thing with the next six months. You got tightening in financial market conditions. You have the Fed, and they're not stopping. Well, we can talk about the fed forecast later.
Mark Zandi: We should, right now.
Ryan Sweet: It's three and a half percent. We have it in our September baseline. It's more likely going to be four.
Mark Zandi: Yeah.
Ryan Sweet: Later this week, the Fed's going to release their new dot plot, and I think it's going to be four and a quarter, four and a half, where they think they're going to stop.
Mark Zandi: So, by the time this is aired, we probably will have this from the Fed. So, you're saying, very high probability we're going into recession.
Ryan Sweet: Very.
Mark Zandi: Very high probability.
Ryan Sweet: Very high.
Mark Zandi: If you were doing the forecast today, and you were responsible for deciding, you'd put a recession.
Ryan Sweet: I'd put a recession sometime in 2023. Second half.
Mark Zandi: Second half of 2023, but starting in between now and a year from now.
Ryan Sweet: Yeah, because the Fed is not going to stop. Total inflation.
Mark Zandi: Okay. So, lay out the path for me because it boils down to interest rates in the Federal Reserve policy, right?
Ryan Sweet: Correct.
Mark Zandi: So, lay out the path for me as how you think the funds rate, and that's our benchmark for what the Fed's going to do, plays out over the next year.
Ryan Sweet: So, 75 basis points this month.
Mark Zandi: Okay. The federal funds rate target, two and a quarter to two and a half. So, let's just say two and a half, the top end of the target. The Fed meets in this week, Wednesday.
Ryan Sweet: Wednesday.
Mark Zandi: They're going to raise it...
Ryan Sweet: 3.25%. So, 75 basis points.
Mark Zandi: 3.25. Then, November.
Ryan Sweet: Another 50.
Mark Zandi: That's 3.75. Then, December.
Ryan Sweet: Another 50.
Mark Zandi: 4.25.
Ryan Sweet: Right.
Mark Zandi: And by the way, I'm with you so far.
Ryan Sweet: Okay.
Mark Zandi: Okay. Then, we go into next year.
Ryan Sweet: Correct.
Mark Zandi: Where do they go?
Ryan Sweet: So, as of now, I would expect them to pause, if our inflation forecast is correct.
Mark Zandi: Well, no, no, no. This is your forecast.
Ryan Sweet: Oh, you want my... Oh, the recession forecast?
Mark Zandi: Yeah.
Ryan Sweet: Then, they go 25 in January when they meet.
Mark Zandi: Okay. So, the inflation isn't coming down fast.
Ryan Sweet: It's not coming down fast enough.
Mark Zandi: Job growth isn't slowing fast enough.
Ryan Sweet: It's not.
Mark Zandi: So, they will keep going.
Ryan Sweet: Correct.
Mark Zandi: We're going from 4.25 to 4.50 in January, and then what?
Ryan Sweet: Then one more 25.
Mark Zandi: 4.75?
Ryan Sweet: Yep.
Mark Zandi: And that is sufficient to generate a recession?
Ryan Sweet: Yeah. So, if you shock our MacroModel, If you have that, that's a mild recession.
Mark Zandi: Oh, when you say mild, you mean two quarters of... We lose jobs for six months.
Ryan Sweet: Yeah, you lose jobs if the funds rate goes up. Yep.
Mark Zandi: Broad-based, persistent decline, at least six months. We lose jobs, unemployment rises meaningfully.
Ryan Sweet: Exactly because you get further tightening in financial market conditions, and then that bleeds through into the broader economy.
Mark Zandi: So, what happens to the stock market in that scenario? We're down 20, peak-to-trough, now. So, what are we down? Like, 25, 30?
Ryan Sweet: Yeah. 25, 30.
Mark Zandi: Okay. We're at 3.5% on the 10-year yield.
Ryan Sweet: Oh, you're north of four and a half? Or, no, close to four and a half.
Mark Zandi: You're going to go up a full point.
Ryan Sweet: Mm-hmm.
Mark Zandi: Oh, the 10-year's going to go from three and a half to four and a half?
Ryan Sweet: If the Fed funds rate... Oh, no, no. No, I'm sorry.
Mark Zandi: The funds rate is 4.75.
Ryan Sweet: Yeah.
Mark Zandi: You think it's going to go to four and a half?
Ryan Sweet: To four and a quarter, I think. I got to double check.
Mark Zandi: Okay. That's okay. It's okay.
Ryan Sweet: It's right around there.
Mark Zandi: Just, yeah, we're over four.
Cris deRitis: There's inversion.
Mark Zandi: There's inversion.
Ryan Sweet: There's an inversion between the 10-year and the Fed funds rate.
Mark Zandi: Okay. we'll come back to that in a second, and mortgage rates were 6%, plus, mortgage rates. Trying
Ryan Sweet: I'm trying to remember. You know, I didn't look at mortgage rates.
Mark Zandi: You don't?
Ryan Sweet: No.
Mark Zandi: Oh, but you do.
Cris deRitis: Yeah.
Mark Zandi: Yeah.
Ryan Sweet: Because I know the model's going to spill over into where, you look at housing-
Mark Zandi: What about the value of the dollar? Does it go any higher?
Ryan Sweet: What is this?
Mark Zandi: I'm just [inaudible 00:33:20].
Cris deRitis: You have to find the value of the dollar in this scenario.
Ryan Sweet: Think about this scenario. The Fed's continuing to tighten.
Mark Zandi: Yeah.
Ryan Sweet: Euro zone's about to fall in a recession.
Mark Zandi: Yeah.
Ryan Sweet: So, the ECB's going to start cutting. So, the dollar is going to keep going up against the Euro.
Mark Zandi: Yeah. Okay.
Ryan Sweet: And elsewhere in the world.
Mark Zandi: Okay, interesting. Okay.
Ryan Sweet: Because interest rate differentials are going to remain.
Mark Zandi: Well, a big part of your story is the Fed over-tightens. Tightens because they need to get inflation in, and it's not happening by itself without a recession.
Ryan Sweet: Mm-hmm.
Mark Zandi: Part of your story is, overseas, particularly Europe, weak recession. So, that kind reverberates back on us. Any other elements to that?
Ryan Sweet: No, the key one's the Fed. Yeah, I mean, if you listen to Fed Chair Powell's Jackson Hole speech, it's hellbent on getting inflation back and reading between the lines that they'll stomach a mild recession to address that. If you look, and we talk about this all the time, our inflation problems are on the supply side. It's not the demand side where the Fed can affect inflation. So, they're going to keep hiking rates, and inflation might start coming down if oil prices fall, supply chain stress eases, but if they don't see that, off they go.
Mark Zandi: Yeah.
Ryan Sweet: They're going to keep going.
Mark Zandi: Okay. Can I ask one more thing, then, before we move on in terms of underlying assumptions?
Ryan Sweet: Okay.
Mark Zandi: What do you assume about oil prices in this world we're in?
Ryan Sweet: They come down a little bit, but then they remain higher than what's on our baseline forecast.
Mark Zandi: Well, we have oil going back up to... It's $90 a barrel. We have it going up to a hundred.
Ryan Sweet: It comes back down to 90. It just stays right around where they are today.
Mark Zandi: Yeah, right around. So, you're assuming nothing goes off the rails with Russia?
Ryan Sweet: No.
Mark Zandi: Or oil prices? That's not part of this story.
Ryan Sweet: This is a whole policy mistake scenario.
Mark Zandi: Okay. Well, it doesn't sound like a mistake. It sounds like this by design. We're going in because they want to wring out the inflation.
Ryan Sweet: Well, I think the Fed, in a perfect world, would want to engineer a soft landing.
Mark Zandi: Yeah, but at the end of the day, they've decided they can't do that.
Ryan Sweet: Right.
Mark Zandi: Yeah. Okay.
Ryan Sweet: Yeah. So, it's like them facing Hobson's choice. A mild recession now, or potential stagflation down the road.
Mark Zandi: What about the pandemic and supply chains? Are you assuming that continues to wind down and fade away?
Ryan Sweet: Yeah. Yep. So, we get a deceleration of inflation. It's just not fast enough for them to...
Mark Zandi: Yeah. Underlying core. We can get oil prices down, gasoline, jet fuel. We get some benefit from vehicle prices coming in because of supply chains, but the core underlying rates of inflation remains stubbornly high.
Ryan Sweet: Right.
Mark Zandi: Wage growth is strong, which goes to the [inaudible 00:33:21].
Ryan Sweet: Rents keep rising.
Mark Zandi: Rents keep rising. Medical care cost inflation, and therefore, let me ask you this. One more question. What do you assume about inflation expectations?
Ryan Sweet: They remain anchored.
Mark Zandi: Oh, they remain anchored.
Ryan Sweet: Yeah.
Mark Zandi: Okay.
Ryan Sweet: Yeah.
Cris deRitis: Throughout, or are there bouts?
Ryan Sweet: That's the Fed's credibility. I think the Fed's credibility is still intact.
Cris deRitis: Yeah.
Ryan Sweet: I mean, most measures, not all of them, of long term inflation expectations, are still anchored. That doesn't mean that's going to help us on the inflation front today or next year, and the Fed, to keep their credibility, they would rather ring out the inflation now by overdoing it.
Mark Zandi: Okay. All right. Okay. He's 70, 75%, which means if he were king economist, we'd have a recession in our forecast, built into our forecast.
Cris deRitis: Yeah, over the 12 months.
Mark Zandi: Remember, because our philosophy. I think we all are on the same page here, that we will only make a big change in our forecast, and going from no recession to recession is a big change-
Cris deRitis: An enormous change.
Mark Zandi: We are confident, and confidence defined by a two thirds probability, which is obviously subjective, but we have to feel deep down, because we don't want to get whipsawed.
Ryan Sweet: Exactly.
Mark Zandi: Recession, no recession, recession. That makes for bad planning.
Ryan Sweet: It's not just with recession. It's fiscal policy, monetary policy.
Mark Zandi: Any major assumption.
Ryan Sweet: Exactly.
Mark Zandi: Yeah. Okay. You'd be one of those half of economists out there who have a recession built in?
Ryan Sweet: Mm-hmm.
Mark Zandi: Okay, fine. Okay. Where are you on this?
Cris deRitis: I agree with all that Ryan has laid out here except the timing. I think that the recession is a bit later than that. So, as we get to the 18 month, that's where you're going to see my probabilities rise, but for the 12 month, I would estimate something, 50, 55%.
Mark Zandi: Okay.
Cris deRitis: Right?
Mark Zandi: Yeah.
Cris deRitis: But for many of the same reasons Ryan outlined, it's just, I do think that consumers do still have...
Mark Zandi: Fire power.
Cris deRitis: Quite a bit of fire power. So, there might be some delay really eroding the psychology.
Mark Zandi: Real incomes are going to improve, right?
Cris deRitis: They are.
Mark Zandi: Or are actually improving, because oil prices are in. Unfortunately, it is coming down. So, we're going to get a real income boost here. We have got nailed by real incomes... See how he does that?
Ryan Sweet: No, I'm thinking.
Mark Zandi: See, when he's on Zoom, I can't see him do these things, but his facial expressions.
Ryan Sweet: No, no. But if that happens, the Fed's going to go even more aggressive. So, instead of 50, it's 75.
Mark Zandi: Shem, put a camera close-up on this guy.
Ryan Sweet: No.
Mark Zandi: Watch his facial expressions. Yeah, yeah. No.
Ryan Sweet: Here we go.
Mark Zandi: Okay.
Ryan Sweet: You can't hold these against me down the road.
Cris deRitis: Well, he twitched.
Mark Zandi: I know. He twitched. He twitched, yeah. He twitched. There's got to be meaning in that twitch. I'm a very sensitive guy.
Ryan Sweet: You are very sensitive. I think the pandemic has made you more sensitive.
Mark Zandi: I'm very sensitive. I follow everything.
Ryan Sweet: Because before, we could have arguments, and you would not get this uptight.
Mark Zandi: I'm not uptight. I'm defensive. Am I uptight? Shem, am I uptight?
Shem: Not the in the slightest.
Mark Zandi: God, I like this guy. Yeah, he's a good producer.
Ryan Sweet: He is. He's actually good.
Cris deRitis: Only Shem?
Mark Zandi: Eduardo, I'm sure about you yet. You're still on probation. We got to figure you out.
Cris deRitis: Oh, wow.
Mark Zandi: Well, maybe that's too strong a word. What's the right word?
Ryan Sweet: Probation. We'll go with probation.
Mark Zandi: See, look. See his face? I told you.
Ryan Sweet: What you're saying is exactly what my wife says to me the whole time. She's like, you wear your emotions. People can tell exactly what you're thinking.
Mark Zandi: Yeah, it's so funny. Like Cris, I can't tell. He's like Aristotle. Yeah, I think that's how Aristotle looked.
Cris deRitis: Okay. Podcast poker.
Ryan Sweet: Next time, all right? No, I would be awful.
Mark Zandi: Okay, well lay out your path for the Fed then. So, we're at two and a half.
Cris deRitis: Yep.
Mark Zandi: What happens this week?
Cris deRitis: Very similar. 75.
Mark Zandi: 75, 50, 50. We're at four and a quarter by the end of the year.
Cris deRitis: Yep.
Mark Zandi: Then, what happens?
Cris deRitis: We get another 25 in there. I don't know specifically. Sometime in the first quarter. I don't know when.
Mark Zandi: Yeah. Okay. And then, then what?
Cris deRitis: Then they pause.
Mark Zandi: They pause. Okay.
Cris deRitis: And the effects of that, all of that tightening, actually make their way into the economy.
Mark Zandi: Yeah.
Cris deRitis: Right? It takes time.
Mark Zandi: They see inflation starting to come in a little bit. They see job growth slowing a little bit. They've done all this tightening, and monetary policy works with a long lag.
Cris deRitis: Right.
Mark Zandi: Let me just hang out here at four and a half for a little bit. See what the world looks like.
Cris deRitis: Right.
Mark Zandi: And then...?
Cris deRitis: Yeah, I think they're getting pressure as well because job losses are starting to come in. Those doves are turning, so they're weighing that inflation versus job growth, a trade off. And then, I think we do have higher probabilities of some other shock hitting us as well. The one I am particularly worried about is Europe next year. I think Europe gets through this winter reasonably well. I still think they go into recession, but the real pain doesn't occur until next year, when they're trying to refuel all their gas tanks. They're still in the middle of this protracted conflict with Ukraine. So, they're in, and they potentially could go into a very deep recession at that point.
Mark Zandi: Because of the energy issues?
Cris deRitis: Because of the energy issues.
Mark Zandi: Okay. They go through their storage of natural gas.
Cris deRitis: Correct, and they have to refill at that point.
Mark Zandi: Right, right.
Ryan Sweet: Yeah, they're refilling it, and there's no one to refill it.
Cris deRitis: Or it's very difficult.
Ryan Sweet: Yeah, very difficult.
Mark Zandi: Okay.
Cris deRitis: So, they go down, and although the linkages between Europe and the US aren't so tight, I think there are some repercussions from that slowing there, and our exporters, and make it just very difficult. And also, the psychology. I think consumers look over there, see what's going on with utility bills, and start to pull back at that point.
Mark Zandi: Right. Got it. Okay, I'm at 40% over the next 12 months, and my path is very similar to yours. I mean, this is very interesting because the Fed keeps on going.
Ryan Sweet: Mm-hmm.
Cris deRitis: Yep.
Mark Zandi: You are, they pause, but then they have to start raising again at some point, right? I mean, or no?
Cris deRitis: Not necessarily.
Mark Zandi: Oh, they're still going at it?
Cris deRitis: They're there for an extended period of time.
Mark Zandi: Oh, and you're saying there are four and a half, and then something bad, something happens.
Cris deRitis: Yes.
Mark Zandi: And we're vulnerable.
Cris deRitis: Exactly.
Mark Zandi: Fragile, and that's when we go in.
Cris deRitis: Yes, that's right.
Mark Zandi: Oh, okay.
Cris deRitis: And the consumer firewall is deteriorating. Those excess savings are getting depleted increasingly.
Mark Zandi: Because, why? The job market, it slows?
Cris deRitis: The inflation is still not very low.
Mark Zandi: Oh, okay.
Cris deRitis: And the job market is slowing. So, those wage gains are slowing as well.
Mark Zandi: Okay. So, I guess, I'm at 40% the next 12 months. I'm not dissimilar to your perspective. Four and a half, I'm not going to argue for that percent.
Cris deRitis: Who knows?
Mark Zandi: Four to four and a half percent, something like that, and I agree with you. They pause for the reasons you gave because top line inflation should be coming in if oil prices are stable, if supply chains are ironing themselves out, and vehicle prices are starting to come in. That's part of core. We should see some moderation, and job growth, it's slowing already. We were at 500K a month on average. Back in the spring, we're down to 350. I think we discussed that in one of the podcasts.
Ryan Sweet: Yep.
Mark Zandi: We need to be no more than a hundred, and I don't know, I think it feels like we'll probably be there by that time early next year, around 100K.
And they say, "Okay, I'm, I'm going to pause," because you're right. There's a long lag, because it works through financial conditions. That takes a long time to kind of iron, figure all that out. So, they pause, and then, in my 40%, inflation works out in their favor, that inflation continues to moderate. Job growth slows. Labor market eases. That takes the steam out of wage growth, and we don't have a long way to go. We're at five percent-ish, kind of, on wage growth depending on the measure. We need to be three and a half percent-ish on wage growth to be consistent with 2% inflation. And that, we get that with that moderation, and that's kind of a soft landing.
Cris deRitis: You're seeing this very smooth type of path here?
Mark Zandi: Well, it's never a straight line, and there will be shocks. And you're right. I mean, if we get another supply-side shock of any consequence, you're right. We'll go into recession, but I'm not building that into my baseline. And maybe that's kind of where we...
Cris deRitis: Maybe that's where we differ.
Mark Zandi: Or agree, when it comes to the forecast because you would not change the forecast. You would still have a non-recessionary forecast.
Cris deRitis: In the next 12 months.
Mark Zandi: In the next 12 months.
Ryan Sweet: Here he comes.
Mark Zandi: Okay, here it comes.
Ryan Sweet: Yep.
Mark Zandi: Okay. Okay. So, what indicators should we be looking at to gauge recession over the next 12 months? Or should I wait until we do the 18-month and come back to that question?
Cris deRitis: No, I think it's appropriate.
Mark Zandi: Okay. Okay, it's appropriate.
Cris deRitis: It'll feed into the 18-month as well.
Mark Zandi: Okay. All right.
Cris deRitis: Has to be the yield curve.
Mark Zandi: It has to be the yield curve. Yeah. Okay, you want to explain?
Cris deRitis: Difference between the 10-year and the two-year treasury rate. Treasury yields.
Mark Zandi: Yield curve. That's one yield curve.
Cris deRitis: Yeah, that's one yield.
Mark Zandi: Yield curve.
Cris deRitis: That's a pretty good one.
Mark Zandi: Yeah, it's a good one. Yeah. Doesn't fit with my narrative, but, you know.
Cris deRitis: Exactly, right? Typically upwards sloping, typically longer duration, or longer time periods require higher yields when they invert, where the two-year is above the 10-year yield, it has signaled a recession almost every time since World War II. Right now, we're deeply inverted about 40 basis points, and we've been that way for several months now. I think we inverted briefly in April, kind of undid that, and then in June, July.
Ryan Sweet: Yeah. This is a hard inversion.
Cris deRitis: This is definitely a hard inversion.
Mark Zandi: Hard, long inversion.
Cris deRitis: This is harder than the pandemic, pre-pandemic inversion, for sure.
Mark Zandi: Right.
Cris deRitis: Yeah.
Mark Zandi: Well, I mean, that's not a great example.
Cris deRitis: No.
Mark Zandi: But actually that was signaling something.
Cris deRitis: Something.
Mark Zandi: Yeah. Yeah, it was going to weaken even before the pandemic.
Cris deRitis: True, but it wasn't signaling much.
Mark Zandi: This kind. Nothing like this.
Cris deRitis: It wasn't nearly as severe.
Mark Zandi: It was a close call. Right?
Cris deRitis: Yeah, that's right.
Ryan Sweet: I remember somebody using the yield curve to support their 2020 recession.
Mark Zandi: I still am. I still am. Wait.
Cris deRitis: He doesn't have the counter.
Mark Zandi: I've got a counter punch. I got a counter piece to this. I got a counter piece to this.
Ryan Sweet: All right. All right, we'll see.
Cris deRitis: There's no counter.
Mark Zandi: I'm playing rope-a-dope now, baby. Yeah. I learn. I can learn, still, at my age.
Ryan Sweet: There you go.
Mark Zandi: Yeah, okay. Especially with this guy.
Ryan Sweet: Ugh. I don't know how you do it.
Mark Zandi: You got to adapt.
Ryan Sweet: I can't imagine traveling with you two. The conversations and the debates.
Mark Zandi: Actually, it works out really well.
Cris deRitis: It's good. It's good. Yeah.
Mark Zandi: Yeah. I go like this, I go like this, I get tired, and say, "Cris, please."
Ryan Sweet: He puts his headphones on on the plane.
Mark Zandi: It actually works out well.
Cris deRitis: Yeah.
Mark Zandi: We got a good thing going, I think.
Cris deRitis: Yeah.
Mark Zandi: Yeah. We could charge for this.
Cris deRitis: A bit of Abbott and Costello.
Mark Zandi: I'm pointing to Sara. Sara leads the way on all this stuff.
Cris deRitis: So, inverted yield curve.
Mark Zandi: Oh, wait, wait, wait, wait. Explain. People are saying, well, what's the intuition behind that? Why does an inversion of the yield curve signal recession? What's the intuition behind that?
Cris deRitis: So, it's investors indicating that they are afraid of the future, that the economy is going to face some type of slow down, and they're willing to accept a lower yield for that very long-term debt that they are supporting in exchange for that security. On top of that, perhaps if you're thinking more economically, it is a strain on the financial system. Banks make money when the yield curve is positively sloped. When you have that inversion, it makes it very difficult for them to earn any type of net interest margin.
Mark Zandi: Yeah.
Cris deRitis: You could say that the yield curve, then, is causing the stress on the financial system. Credit dries up, and that leads to a pullback in spending.
Ryan Sweet: Right.
Mark Zandi: Too much credit's a problem. You over-levered, that kind of thing. Not enough credit's a problem.
Cris deRitis: Exactly.
Mark Zandi: Credit crunch.
Cris deRitis: Exactly.
Mark Zandi: It slows economic growth. There's a happy medium there.
Cris deRitis: Exactly.
Mark Zandi: And if the curve inverts, banks that fund themselves with short-term money at a higher rate, then they can lend out with long-term money. They can't make money. So, I don't lend.
Cris deRitis: That's right. That's right.
Mark Zandi: No credit, no growth.
Cris deRitis: Yeah.
Mark Zandi: That kind of thing. Okay, but you don't like the yield curve. Historically, you've not liked it?
Ryan Sweet: Not historically, No.
Mark Zandi: Why?
Ryan Sweet: Just cause I think with quantitative easing and tightening, which is the Fed buying and selling treasury securities, they're altering the term structure of the yield curve. So, I just think the message today is different than it was in the past.
Mark Zandi: Yeah.
Cris deRitis: So, you do believe it prior to this round?
Ryan Sweet: Yeah, pre...
Cris deRitis: Pre-financial crisis.
Ryan Sweet: Pre-financial crisis? Yeah. I thought the yield curve was a pretty good predictor.
Mark Zandi: But the consensus view, and it doesn't mean it's right, but the consensus view on the quantitative easing and tightening is, what matters for interest rates, long-term interest rates, is the stock of securities that the Fed owns, not the change in.
Ryan Sweet: Right.
Mark Zandi: So, in the QE, they expanded their balance sheet, took a lot of treasury mortgage securities, put it on their balance sheet. It's bloated. So, all else being able, that would suggest long-term interest rates are lower than they otherwise would be without the QE.
Ryan Sweet: Correct.
Mark Zandi: Okay. So, you're saying the 10-year yield should actually...
Ryan Sweet: Be higher.
Mark Zandi: Be higher. So, the curve is not inverted.
Ryan Sweet: Yeah. It's not as deeply inverted as it is now.
Mark Zandi: As it appears to be.
Ryan Sweet: Right.
Mark Zandi: Yeah. It may be the 40, 50 basis points that, relative to the two-year yield today, may actually not be inverted at all.
Ryan Sweet: Correct.
Mark Zandi: So, that would be a signal that there is no recession.
Ryan Sweet: Right.
Mark Zandi: Okay. So, that is counter to your 75%.
Ryan Sweet: Yeah, right.
Mark Zandi: Well, talk about a blow.
Ryan Sweet: No.
Mark Zandi: That's a blow.
Ryan Sweet: No, no.
Mark Zandi: That's a big blow.
Ryan Sweet: No.
Mark Zandi: Right to the nose. Shem, was that a blow?
Shem: You got it.
Mark Zandi: Yeah. I love this guy.
Ryan Sweet: How much did you pay him?
Mark Zandi: I didn't pay him anything. Yeah.
Ryan Sweet: He's taking him off to dinner.
Mark Zandi: Yeah.
Ryan Sweet: No, because the economy and financial markets can do two different things. So, if you look at the economic data, it's suggesting we could get in trouble soon, because if you look at the Senior Loan Officer Survey, the net percent of banks tightening lending standards on CNI, CNI loans, commercial and industrial, is rising. So, more banks are tightening screws. Back to the yield curve being inverted.
Mark Zandi: Oh, so you're saying that's a good indicator to watch?
Ryan Sweet: It's in our probability recession models.
Mark Zandi: And it works pretty well?
Ryan Sweet: Yep.
Mark Zandi: Oh, okay.
Ryan Sweet: It's one of the most important, along with the yield curve.
Cris deRitis: But it's just reflecting the yield curve is what you're saying?
Ryan Sweet: Potentially, yeah. I did it with both. Take the yield curve out. Put Senior Loan Officer Survey in, vice versa, and that model would say 60% probability in the next 12 months.
Mark Zandi: Yeah. Okay. All right.
Cris deRitis: That's a tough argument to make here, right? High recession odds, I don't believe the yield curve, and yet the yield curve supports your high recession odds.
Ryan Sweet: No, I'm not saying it supports it a hundred percent. I don't even look at the yield curve. I don't care about the yield curve. I hate the yield curve.
Mark Zandi: Oh, I see. Yeah.
Ryan Sweet: It might not have to. It doesn't have to invert to have a recession.
Mark Zandi: You're saying you don't even pay attention to the yield curve.
Ryan Sweet: Yeah.
Mark Zandi: Yeah, but that's pretty hard to do.
Cris deRitis: Yeah.
Mark Zandi: Because it's so precious.
Ryan Sweet: Yeah, especially working with you two. Like, all I hear about is the yield curve.
Cris deRitis: Well, if you're right about the recession, right? And we're naturally going to look back and say, oh, well, yield curve inverted.
Mark Zandi: Okay.
Cris deRitis: Victory.
Ryan Sweet: No, I would not say the yield curve. I would not use that as a victory. I don't want a recession.
Cris deRitis: Nobody wants... No, victory for the yield curve, in terms of it's ability to predict. It'll say no, no. Asterisk.
Ryan Sweet: Well, the pandemic is a huge asterisk on the yield curve.
Mark Zandi: No, wait, what do you mean? I thought it inverted.
Ryan Sweet: It did not.
Mark Zandi: It didn't invert?
Ryan Sweet: All right. No, it did invert, but...
Mark Zandi: It wasn't a hard inversion.
Ryan Sweet: No.
Mark Zandi: It inverted.
Ryan Sweet: All right.
Mark Zandi: But it's not the pandemic. It was just saying that the economy was vulnerable. Okay, nevermind.
Ryan Sweet: No, no.
Mark Zandi: But I got something else I want to say. Something else on the yield curve.
Ryan Sweet: Okay.
Mark Zandi: We need to discuss the policy yield curve, which is the difference between a 10-year yield and the Fed funds rate. It also has been quite prescient. Very prescient historically.
Cris deRitis: Yeah, that's heavily manipulated, though.
Mark Zandi: What do you mean, heavily?
Cris deRitis: The Fed controls it.
Mark Zandi: Well, that's the point. This recession we're talking about now is largely the result of Fed policy and what the Fed's going to do or not do, right?
Cris deRitis: Yeah. Yeah, but if you believe the Fed...
Mark Zandi: The policy yield curve, well, I call it policy yield curve. I don't know if anyone else calls it that.
Ryan Sweet: No one else calls it that.
Mark Zandi: Oh, really?
Ryan Sweet: You can go with it. I like it.
Mark Zandi: I like it, right?
Ryan Sweet: You can coin it.
Cris deRitis: That's good.
Mark Zandi: Because it is a policy yield.
Ryan Sweet: It is, yes. That's very true.
Mark Zandi: So, you have the 10-year treasury yield, relative to the federal funds rate target, the actual rate they control. And every time that inverts, we get a recession. I think, the one wrap against it is you've had a couple freak false positives along the way. It inverted a little bit with a recession not following it. Not a deep inversion, but you had some inversion.
Ryan Sweet: False positive?
Mark Zandi: What was that?
Ryan Sweet: False Negative, right?
Mark Zandi: False negative? False negative? Oh, false negative, whatever. You know what I'm saying.
Ryan Sweet: Hey, that's my little jab back, all right?
Mark Zandi: Yeah. Right now, the 10-year yield is three and a half, and it's moving up pretty quickly. It's been moving up. It's up 50 basis points, a half a point, in a pretty short period of time, and the funds rate is now two and a half. Let's say that goes 75 basis points, like we all said this week. That means the top end of the range is three and a quarter. We're still at three and a half, and conceivably, even under our forecast for Fed funds, the 10-year can keep on moving northward and stay above the 10 year yield. The curve will get flat, flatter than it is now, but it actually won't invert.
Cris deRitis: It could. It could also not.
Mark Zandi: No, I know, but my point is, it's not signaling proof positive that there's a recession dead ahead. Right?
Cris deRitis: No, no.
Mark Zandi: Right?
Cris deRitis: Yeah.
Mark Zandi: Yeah.
Ryan Sweet: So, the best yield curve is the 10-year minus the three-month. And the three-month's sensitive to policy rate, and that will invert on Wednesday. Or Thursday, Thursday morning.
Mark Zandi: Why is that the best one?
Ryan Sweet: Fewest false.
Cris deRitis: It's controlled by the...
Mark Zandi: No, it's so close. Come on. It's so closely tied.
Ryan Sweet: It's not direct, but it has the best track record. Beats your ten-two.
Mark Zandi: Well, 10-year policy rate? Fed funds rate?
Cris deRitis: He's saying, mine, the ten-two.
Mark Zandi: Let's go look.
Ryan Sweet: I can at it.
Mark Zandi: That's a good question, though. That's a good question. Okay. All right, let's move forward. Now, we're down to brass tacks.
Ryan Sweet: Yeah.
Mark Zandi: Recession probabilities over the next 18 months?
Cris deRitis: 70%.
Mark Zandi: I didn't ask you.
Cris deRitis: Oh.
Mark Zandi: Shem, did you see how he did that?
Ryan Sweet: He just jumps in.
Mark Zandi: Yeah, he just jumps in.
Cris deRitis: I found my [inaudible 00:54:50].
Mark Zandi: 70%. Okay, 70%. So, what are you at? Oh, it's less than.
Cris deRitis: 70%.
Ryan Sweet: I'd be 65 to 70.
Mark Zandi: Ooh, that's interesting.
Cris deRitis: Oh.
Mark Zandi: Ooh.
Ryan Sweet: Because I think, the next 12 months, if we get through that, we have a fighting chance to avoid it.
Mark Zandi: Yeah.
Ryan Sweet: But it's still high. Uncomfortably high.
Mark Zandi: Yeah. So, what is it? What it you said?
Ryan Sweet: I said 65 to 70.
Mark Zandi: Okay. Still, you would have a recession in your forecast.
Ryan Sweet: Oh, yeah. Yeah.
Mark Zandi: Okay. Okay. So, 70% because odds are, in this 18 month-period, we are going to get hit by something that's big enough to push us in.
Cris deRitis: There's that, certainly.
Mark Zandi: Yeah.
Cris deRitis: But I also think the sociological pressures are also there over that longer time period.
Mark Zandi: What does that mean?
Cris deRitis: Right. Well, recession is a sociological phenomenon, right?
Mark Zandi: Yeah.
Cris deRitis: People lose faith, confidence. Businesses decide, not the time to invest. And all these things we've mentioned, or at least I've mentioned, in terms of a global recession, Europe, probably parts of Asia, going into recession in the not-too-distant future. The excess savings that consumers have built up whittling down over time here, right? High interest rates from the Fed actually having real economic impact over this time period. That's what pushes us into recession. Then,, I would agree with you. Any type of little shock at that point, pushes us in.
Mark Zandi: Do we need a shock, then?
Cris deRitis: We don't really need it, but any excuse at that point I think will be one...
Mark Zandi: That we go in.
Cris deRitis: Yeah, takes us in.
Mark Zandi: Yeah. Yeah. Okay. Shannon is signaling. We've got about 10 minutes left. Okay, I'm at 50%.
Ryan Sweet: Whew. That's low.
Cris deRitis: That's low.
Ryan Sweet: That's really low. I'm surprised the two of you are housing gurus, and you didn't mention housing. So, in our forecast, we have year-over-year declines in new home sales, 30% in the first quarter next year. One false positive.
Mark Zandi: Yeah, but what do you mean?
Ryan Sweet: When it falls 30% year-over-year, a recession is usually 12 months ahead.
Mark Zandi: Oh, that's interesting. Is that new home sales or existing home sales?
Ryan Sweet: New home sales.
Mark Zandi: New home sales?
Ryan Sweet: We get 30% decline around the pandemic, when you had sales go through the roof and then come back down, but if you go back to the early 1970s since, anytime new home sales fall that far, recession's, a little bit, maybe, right around there, 12 months later.
Mark Zandi: Yeah. That's an interesting point. I didn't know that. It makes sense because housing is the most rate-sensitive sector of the economy, but I almost look at that as, at this point, it's almost like bad news is good news.
Ryan Sweet: Oh, to cool the housing market?
Mark Zandi: Well, we need get job growth down fast, right? I mean, otherwise the economy will overheat. Wage growth inflation won't come in like we want, so we got to get job growth from 350K, where we are underlying job growth right now, monthly, down to 100K, south of 100K. So, if it isn't from housing, where is that coming from? Where's it going to be? Where's the job growth going to come from, the slowing in job growth going to come from?
Cris deRitis: Job losses.
Mark Zandi: Well, we need job losses somewhere to get the job growth, an aggregate to come in.
Cris deRitis: That's right.
Mark Zandi: So, if it's not in housing, I mean, I'm just a little confused by it. Because everything else, even in housing, the thing that makes it maybe different this time, I hesitate to say that, but...
Ryan Sweet: That's the thorn in the economy's side.
Mark Zandi: The vacancy rates are so low, and there's so much multifamily activity because people can't afford to buy single-family homes. Affordability's been crushed. So, first-time buyers, potential first-time buyers can't become... They rent. Rent. So, we see a lot of construction, and they are short-staffed. Unfilled positions, they've got a lot of them. So, what happens is, they stop building single-family homes, and people just walk across the road and go work on the multifamily development. And then we got the infrastructures thing kicking in.
Ryan Sweet: True.
Mark Zandi: In '23. I'm worried we don't even see any, I mean, it seems really weird to say, but we see no job loss in construction. So, where's the job loss going to come from? You know what I'm saying?
Cris deRitis: Yeah. These are your hospitality, other sectors, of the economy, where people are pulling back. Right?
Ryan Sweet: Yeah, but now you're feeding the personalized narrative that if the job growth doesn't slow, the Fed's...
Cris deRitis: The Fed's going to come in even harder.
Mark Zandi: Yeah.
Ryan Sweet: Guns a-blazing. Yeah.
Mark Zandi: Well, that is mine. That is the scenario, though, to get to recession, following that they go to four and a quarter, four and a half by the early next year, they pause.
Cris deRitis: Right.
Mark Zandi: Things don't slow sufficiently. We don't get the job growth slowing like we need to. We don't get overall inflation, and core inflation slowing. We need to, and they start tightening again. At that point, that feels like more like to me the most likely recession scenario.
Cris deRitis: But you see that as low probability.
Mark Zandi: No, 50%. I don't see that low. That's pretty damn high.
Ryan Sweet: If you read the Fed's Beige Book, employers plan on keep hiring, just because they know how difficult it is. So, they don't want to pull back ,and they don't want to lay off workers. That's why I think one of the best things on tracking is the Beveridge curve. The relationship between the unemployment rate and job opening rate. The Fed's got to pull it straight down. Pull labor demand down. They've never done that without the unemployment rate rising, and that's kind of my narrative for a recession.
Mark Zandi: By the way, did you see my Twitter feed this weekend? You're not looking at my Twitter feed? Shem, are you looking at my Twitter feed?
Shem: Always.
Mark Zandi: See?
Ryan Sweet: We got lots of sports on the weekend. It's the lowest thing on my list.
Mark Zandi: I like this guy. I love this guy. You can come back anytime you want, Shem. Eduardo, I'm not so sure about. Yeah, he's very quiet over there. Yeah.
Ryan Sweet: Yeah. Oh, what'd you Tweet about? The Beveridge curve?
Mark Zandi: Variation of the Phillips Curve.
Ryan Sweet: Okay. Oh, the prime age.
Mark Zandi: Yeah, EPOP Versus wage growth. It's actually @Markzandi. @Markzandi. You know, a really cool chart.
Cris deRitis: This was in this week in the Economy, on Economy.com. Yeah, I saw that there. I saw that there.
Mark Zandi: Wasn't it a cool chart?
Cris deRitis: It was a cool chart.
Mark Zandi: Yeah.
Cris deRitis: Yeah.
Mark Zandi: It's too hard to explain that to everybody.
Cris deRitis: Yeah, you need it visually.
Ryan Sweet: It's free though, right?
Mark Zandi: Yeah, it's free.
Cris deRitis: Yeah. It's free. Economy.com.
Mark Zandi: Is it free? Yeah, it's good.
Cris deRitis: Let's make it free.
Mark Zandi: Let's make it free.
Ryan Sweet: It's going to be free now.
Cris deRitis: Yeah.
Mark Zandi: Yeah. So, it boils down in my mind, that you get into the second half of '23, maybe mid-'23. And the question at that point is whether the labor market's normalizing because, the current employment-to-population ratio for primary workers, it's about 80%, a little over. That would be consistent with 3.5% wage loss historically, which is exactly where you would want it. That's where we were pre-pandemic, consistent with the full-employment economy, but because of the pandemic shifting, creating problems in the labor market, disruptions, it just pushed that Phillips curve up and out. And so, that 80% EPOP for primary workers is not consistent with 5%, and what is key to whether we go in recession or not, is whether that normalizes that curve, that Phillips curve comes back to where it was in time, so that we'd get three and a half percent, consistent with an EPOP.
Also, the other interesting thing is the slip of the curve is now more positively sloped. So, it suggests you don't need as much of a decline in EPOP to get wage growth coming in, right?
Cris deRitis: Right.
Mark Zandi: Than you did before. But that's the crux of the matter in my mind, and I say 50/50 because I can see it going either way here, that it normalizes efficiently, that wage growth moderates, and inflation comes in back to the Fed's target, quickly enough that they don't have to start tightening again. But that's very much a forecast.
Cris deRitis: So, it moderates without additional Fed interaction, Fed action?
Mark Zandi: Well, four and a half. Financial conditions are tight. According to the model, we're pretty close to death at that point anyway.
Cris deRitis: But you're saying consumers, businesses, are self-regulating then, right? They're moderating their spending.
Mark Zandi: Interestingly, they have been, haven't they? Right?
Cris deRitis: They have, some.
Mark Zandi: Consumers certainly have been, right?
Cris deRitis: But we'd expect much more compared to... That's what's interesting in my book.
Mark Zandi: Well, they provide the resilience, so we don't go in, but they're not spending with abandon, right? They moderate to enough degree that grows, slows sufficiently. Then we get wage growth in and inflation in.
Cris deRitis: That is quite a needle thread.
Mark Zandi: No doubt. No doubt. No, I totally agree with that.
Ryan Sweet: That's a narrow path.
Mark Zandi: Yeah, that's a narrow path.
Ryan Sweet: So, if you average the three of our probabilities of recessions, it's still below.
Mark Zandi: No, no, wait, you're what?
Ryan Sweet: 70?
Mark Zandi: 70? No, that 18-month horizon.
Ryan Sweet: 18 months.
Mark Zandi: 70?
Ryan Sweet: 70.
Mark Zandi: I'm at 40.
Cris deRitis: No, 50.
Mark Zandi: Sorry. 50, sorry.
Ryan Sweet: 120.
Mark Zandi: 120.
Cris deRitis: And 70.
Mark Zandi: Okay. 190.
Cris deRitis: 190.
Mark Zandi: Divided by three. It's pretty close.
Ryan Sweet: It's close.
Cris deRitis: It's like a whisker.
Mark Zandi: First of all, that's not the way any of this works.
Cris deRitis: The votes are weighted a bit here.
Mark Zandi: Oh, man.
Ryan Sweet: Mark's gets 99% weight.
Mark Zandi: Well, no, this is a great way to end. Right? Because this is exactly where we are. I mean, in my mind, we're right on the precipice of changing our forecast fundamentally, from one that under any scenario's going to be painful, no doubt at that. Yeah. Nobody's debating that, but whether we go for, and this is maybe more symbolic than real, I'm not sure. Because what's the difference between an economy that's kind of struggling along bottom or one that goes into a mild recession? There's a difference, but...
Cris deRitis: And then demographically, some people, already today are feeling...
Ryan Sweet: Feels like it's a recession.
Mark Zandi: Oh yeah. Yeah. For sure.
Cris deRitis: The heat. So, even if we just are growing below potential.
Mark Zandi: Yeah, people are going to feel pain.
Cris deRitis: Definitely. People who are saying, "This is a recession for me."
Ryan Sweet: And remember, that's what the Fed said. They're going to keep going even though it's going to cause pain to households and businesses.
Mark Zandi: Yeah. All right. Well, let's end with this. What would have to happen for you to change your forecast in a significant way? And for you to lower the odds, and for me to raise the odds. What would have to happen?
Cris deRitis: So, some type of resolution to the Russia-Ukraine crisis, certainly.
Mark Zandi: That would do it.
Cris deRitis: Yeah, it changes my outlook. Yeah. It's more positive.
Mark Zandi: It feels like a cop out though. Something more fundamental than that, no? You know what I'm saying? In terms of the workings of the economy, something else has to work out. Maybe it goes back to my Phillips curve chart. It just has to work out properly.
Cris deRitis: Yeah. Okay. Well, let's take that off the table then. Right? Energy kind of normalizes, not the factor. Still, it's very difficult in this situation for the Fed not to make an error. Right? So, what else has to happen? I think it's this concept of consumers and businesses self-regulating, right? If they pull back gradually, right? Without actually going off the cliff or being forced a bunker, right?
Mark Zandi: Yeah. They just keep their hand on the bunker. Cautious, circumspect in their spending and investment, but they don't actually go in.
Cris deRitis: That's right. You're seeing the job growth actually moderate you. The Fed doesn't have to act quite as aggressively. They're getting what they are looking for.
Mark Zandi: Yeah. Good point. Okay. What would it take?
Ryan Sweet: I agree with Cris, and the fact that the Fed's able to maybe put enough fear in businesses to pull back on hiring, cool the labor market, but those people that are getting lost, or are unemployed, find new work quickly, so the unemployment rate doesn't increase. So, it's kind of pulling this rabbit out of their hat, where they can cool the labor market, which at least historically had a hard time doing it.
Cris deRitis: So, the agencies, the job postings, are coming off.
Ryan Sweet: Down quickly, but the unemployment rate, just because the job market's still strong, demand is strong for labor, that those people find work quickly, and we don't see an increasing the home part rate.
Mark Zandi: It comes out of wage, wage growth.
Ryan Sweet: Comes out of wage growth.
Mark Zandi: By the way, one quick point. You mentioned something to me on the last podcast, that the quit rate, the percentage of the labor force that is quitting their jobs. A very good indicator of wage growth, future wage growth.
Ryan Sweet: For the Employment Cost Index.
Mark Zandi: And it is elevated, but it is coming in pretty fast.
Ryan Sweet: It's coming in quickly. Yep. Yeah.
Mark Zandi: Which is a positive thing, in terms of what we're talking about here.
Ryan Sweet: It's good for a quarter ahead.
Mark Zandi: Yeah.
Ryan Sweet: Yeah, but I mean, the near term, what's going to matter is the next six months.
Mark Zandi: But the trend lines here look...
Ryan Sweet: They look good.
Mark Zandi: They look good.
Ryan Sweet: They look better.
Mark Zandi: But we'll see.
Ryan Sweet: If it's sustained.
Mark Zandi: Yeah.
Ryan Sweet: If it's sustained.
Mark Zandi: Yeah. Okay. Well, for me, obviously, the flip of what you said, if anything goes wrong, oil prices go up, we're toast. I had this nightmare of a hurricane blowing through the Gulf, hitting the Texas coast, swiping out a refinery. No capacity. Even if oil prices stay where they are, gasoline prices go to back to $5 a gallon, we're done. That undermines confidence. We're going in. If anything goes wrong on the pandemic, if China has a bad wave and they shut the whole thing down, supply chains are disrupted again, I think we're toast. And I'd have to say, if my scenario's going to come to pass, we need the monthly inflation numbers to go from, right now it's .4, .5 per month on core and CPI inflation.
Ryan Sweet: On average.
Mark Zandi: On average, yeah. Yeah. It's a little lower. Last time, it was obviously a little higher, but we got to get down to, in the next few months, we got to be printing .2, .3. And then a year from now, we got to be printing .1, .2.
Ryan Sweet: Right.
Mark Zandi: On core.
Ryan Sweet: I'm just worried about the next few months because of the rents and services inflation.
Mark Zandi: But the next three, six months, we're still at .4, .5. I think there's no way inflation's going to come in fast enough. And then we go down that path where the Fed has to...
Cris deRitis: Slam on the brakes.
Mark Zandi: Yeah, slam on the brakes. Okay, I think we covered a lot of ground.
Ryan Sweet: Yeah, this was fun.
Mark Zandi: It was very therapeutic. Yeah, I really enjoyed it. It's all an in-person thing.
Ryan Sweet: Yeah.
Mark Zandi: Yeah.
Ryan Sweet: Don't get any ideas. Not every week.
Mark Zandi: No, no, no. Are you kidding me? This is Sara. This is Sara's brainchild.
Ryan Sweet: This is good.
Cris deRitis: So, still work from home for you? Remote work?
Mark Zandi: There's no going back for me. No going back. I'm remote entirely, forever. Well, it's not very long. All right. With that, we're going to call it a podcast. I hope you enjoyed it as much as we did. Obviously, we really enjoyed this. Any topics top of mind, let us know. We'd be very happy to tackle them. If you've got guests you'd like us to invite, let us know. We'll be happy to invite them, but we'll catch you next time. Take care, now. Bye.
