INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues. Of course, we've got Cris, Cris deRitis, the deputy chief economist. Hey, Cris.

Cris deRitis:                       Hey, Mark. How are you doing?

Mark Zandi:                      I am doing well. And you?

Cris deRitis:                       Yeah, same here. Same here.

Mark Zandi:                      You're in the office in Westchester, PA. Anything going on in Westchester?

Cris deRitis:                       I got a little bit of a cold November rain here, so that's about it.

Mark Zandi:                      Oh.

Dan White:                        He didn't get it, Cris. He didn't get it.

Cris deRitis:                       You didn't get it?

Dan White:                        No.

Cris deRitis:                       Oh.

Dan White:                        It's a Guns N' Roses song.

Cris deRitis:                       It's his favorite band?

Mark Zandi:                      Oh, Guns N' Roses?

Cris deRitis:                       Yes, yeah.

Mark Zandi:                      Oh, I missed that.

Cris deRitis:                       Oh. Oh, you have to go back, give it a listen. Give it a listen.

Mark Zandi:                      Okay. Okay, very good. Yeah, that was right over my head.

Cris deRitis:                       Oh, sorry about that.

Mark Zandi:                      Yeah. And of course Dan White. Dan.

Dan White:                        Hey.

Mark Zandi:                      That was Dan's voice. Hey, Dan.

Dan White:                        Hey, Mark. You look warm. You look much warmer than here.

Mark Zandi:                      I am, but I'm not going to tell you where. I am a little warmer than you are, but looking forward to being back in good, old Pennsylvania relatively soon, making my way back. And Emily, Emily Mandel. Emily, it's good to have you.

Emily Mandel:                  Yeah, good to be here.

Mark Zandi:                      Yeah, and Emily, this is your second time on-

Emily Mandel:                  Second one. The first one was the one where we introduced the world to your newfound love of Guns N' Roses. So apparently that has not persisted since then.

Mark Zandi:                      Oh, now it's apropos. Okay. Actually, I'll have to tell you, the deeper I dig into Guns N' Roses, the less I was impressed. I know that sounds bad, and I'm sure I'm going to get mail, but the top three, four, five songs are fantastic, and then after that, I don't know, it didn't resonate with me.

Dan White:                        You don't need to go too much deeper than that.

Mark Zandi:                      Okay. Okay, fine. You can listen to the four, five songs forever. Yeah, but yeah, very good. You know what group I've run into recently that I really like? And maybe this reveals too much about me, I'm not sure. 1975. Have you heard of 1975? No?

Dan White:                        The [inaudible 00:02:21]-

Mark Zandi:                      I think it's a Generation Z thing. I think it is. We're going to come back and talk about the election, but did you hear about this young fella, I believe in the Orlando area, who was elected to Congress, he's like 25 or something?

Emily Mandel:                  Yeah, the first Gen Z one. Yeah.

Mark Zandi:                      He's Gen Z, right? Gen Z. So I was listening to a NPR interview of him, and he was saying, "Oh, I'm going to go to a 1975 concert." And I go, "That's my band. That's my band." So believe it or not, I'm right in there with the Gen Z.

Dan White:                        That's why you don't get Guns N' Roses because you're younger and hipper than all of us.

Cris deRitis:                       Yeah, there you go. There you go.

Mark Zandi:                      That's true. Now I'm definitely going to get mail, it's like the Maroon 5 of the Gen Z generation. And they're going to say, "Maroon 5? Who the hell's Maroon 5?" Do you guys know who Maroon 5 is?

Dan White:                        Yeah, we know Maroon 5.

Emily Mandel:                  Yeah.

Mark Zandi:                      Okay, everyone knows Maroon 5. But it's good, I was running on the treadmill the other day with 1975. They got really catchy, upbeat, melodic... It's really, really nice music. So anyway, I'm always looking for music for my treadmill. I need that music. And of course, Dan, Dan runs anything government related for us, and Emily is our maven on state and local government issues. They're here because we had the midterm elections this week, and clearly we want to talk about that, and what it means for economic policy. But before we do that, go down that path, of course, the other big news this week, economic news, was the Consumer Price Index report. CPI report, inflation, inflation's top of mind. And a lot to talk about there, but let me turn this back to Cris and I... Well, I was going to say something else, but I won't say it. You can tell I'm in a good mood. I'm in a good mood for lots of different reasons.

Cris deRitis:                       Let's keep it that way.

Mark Zandi:                      Lots of different reasons, one of which is that CPI report. It really put me into a good frame of mind. Thank goodness for that report. But anyway, Cris, give us the rundown.

Cris deRitis:                       I think last week we were talking labor report, and we had that little debate about bad news being good news, good news being bad news. I think this week we can definitively say CPI inflation was good news being good news.

Mark Zandi:                      Hey Cris, can I say one thing on that before we move on, and then I won't to interrupt you?

Cris deRitis:                       Okay.

Mark Zandi:                      I'm notoriously bad at this, but we were nervous about what people would think of that... someone called it bickering, and actually that's the right word for it. We were bickering. We were bickering. And we were nervous, what will people think of that bickering? I think people liked that bickering. That seems... yeah.

Cris deRitis:                       I was surprised. I didn't think they would at all. To me, it was like watching five year olds play soccer, but that's entertaining as well, right?

Mark Zandi:                      Yeah, I think you're right.

Cris deRitis:                       But I've got a lot of positive feedback that's... I think there's this myth that we are some monolith here at Moody's Analytics, right?

Mark Zandi:                      Oh, yeah.

Cris deRitis:                       That there's only one opinion and that's it, nobody else has any other difference. So I think they appreciated that we listen, we debate, we are in search of a truth here, and it gave them a little insight into some of that backstory, if you will.

Dan White:                        Yeah [inaudible 00:05:43]-

Mark Zandi:                      Yeah, so if you are a listener to this podcast, you should go back and listen to that one. And by the way, that did generate some really interesting email conversation internally about forecasting from Kamil Kovar, who's been on the podcast before, in particular. And I started writing a response, but the email he wrote to me was so full of interesting things, it's going to take me a while to respond to it all. I thought it was really cool. Dan, you were going to say something?

Cris deRitis:                       Yeah, same here.

Dan White:                        I was just going to say disagreeing with Mark is one of the funnest parts about working here.

Cris deRitis:                       Absolutely. Absolutely.

Dan White:                        You can disagree with your boss and not get fired because that's the whole point is we're supposed to be debating and talking about this.

Mark Zandi:                      Oh, I thought you were going to say because you can always win those debates. I thought that's what you were going to say.

Dan White:                        Well, it's the best part about economics. It depends, right? So I think I won the debate, and you think you won the debate, we're all happy at the end of the day.

Mark Zandi:                      Everyone's happy. Great profession, great profession. Yeah, anyway...

Cris deRitis:                       Well, back to the CPI...

Mark Zandi:                      Back to the CPI from far away.

Cris deRitis:                       Good news was good news. Headline CPI was 7.7% year over year. That's down from 8.2% in September. And I believe the high was 9.1% in June, so we are moving in the right direction. And actually moved a bit more swiftly than I think either we or consensus anticipated in terms of the decline. Even more encouraging was the core. So stripping out food and energy prices, that's down to 6.3% on a year-over-year basis, 0.3% month over month. It had grown 0.6% month over month back in September, so that's a nice improvement, again, in the right direction.

                                             In terms of what are the factors that led to the improvement, we finally saw some significant improvement in used car prices, down 2.4% on the month. We had been anticipating that for a while. Other data was indicating that, and now it's finally materialized to a larger degree in the CPI. Apparel prices are down, so I think we're also starting to see the supply chain effects kind of work themselves out. So we maybe even have too much inventory when it comes to apparel because of the over-ordering that went on during the pandemic. So prices are coming in there. And then medical care, medical care came in. There's a little bit of a quirk there though related to health insurance. I'll briefly say, I don't know if you know how much you want to get into this, Mark, but-

Mark Zandi:                      Yeah, I think you need to just a little bit because it was a... Health insurance premiums actually fell and contributed meaningfully to the weaker core CPI number. So maybe you can just dive into... maybe not go all the way to the bottom of the ocean here, but maybe halfway down.

Cris deRitis:                       Yeah, and I think we talked about this maybe last time, actually, because in our discussion, but health insurance premiums are difficult to measure, and they were down a lot this month. So it's down 4% month over month, so a huge decline relatively speaking. But health insurance is... well, it's notoriously difficult to actually measure properly. The premiums that the employees are paying can change, but the plan can change as well, so quality adjustments become really complicated. We know that there are already issues when we think about how to quality adjust smartphones or computers, and health insurance is, in some sense, I would argue even more difficult.

                                             So there is this complex formula that, certainly, if you're interested, go check out on the BLS's website. But essentially what they do is say, "You know what? We're just going to look at the profits of health insurance companies." And those changes in profits on a year-over-year basis should be a good proxy for changes in prices. So if there are more profits that the health insurance companies are accumulating, then that should-

Dan White:                        Makes sense.

Cris deRitis:                       ... that implies that the prices of health insurance have gone up as well. What happened was, with the pandemic, we had insurance premiums being paid in, but not a lot of claims being paid out at the height of the pandemic. There was a lot of elective surgery that was postponed. So health insurance companies actually on paper looked as though they actually did make large profits back in 2021. Now, a year later, we're starting to see that unwind. So now we are going back to the doctor, we are going back to the hospitals. Those profits are coming in. And again, based on this quirk and the timing, it looks as though the prices of health insurance premiums are coming down based on this methodology.

                                             In reality, we know that employees are paying the same or perhaps more in terms of their actual premium. So this is, again, one of those quirks or anomalies in the CPI calculation. In this case, it's working in favor of putting downward pressure on inflation. It's going to continue to do so probably for the better part of 2023 as well. Now it's not a huge part of the consumer basket, it's less than a percent. So it's a big number in terms of the decline in the insurance premiums paid, but in terms of the overall impact on core inflation, it's relatively small.

Mark Zandi:                      So taking a step back, it feels like the report for October suggests that inflation definitively rolled over. It's peaked, it's coming in.

Cris deRitis:                       Oh, I don't like to use definitively anymore with the inflation.

Mark Zandi:                      That's a good point. Good point.

Cris deRitis:                       But it appears that way. Certainly, it's coming in.

Mark Zandi:                      Unless something else changes.

Cris deRitis:                       Correct.

Mark Zandi:                      Unless oil prices spike or-

Cris deRitis:                       Yeah, yeah.

Mark Zandi:                      ... COVID lockdown in China, or whatever. Assuming nothing goes off the rails, it feels like it's peaked.

Cris deRitis:                       Yeah, the trend seems to be downward. The speed might be different, but...

Mark Zandi:                      Right. And that very small, smallish, let's call it, decline in core CPI in the month, 0.3%... because they had been coming in 0.5, 0.6-

Cris deRitis:                       Six, yeah.

Mark Zandi:                      Yeah, that 0.3 probably is overstated. The case here is overstated a bit because of this quirk with regard to health insurance. But it's still a case. There's still a case that inflation's [inaudible 00:12:13].

Cris deRitis:                       Yep. Yeah.

Mark Zandi:                      Okay.

Cris deRitis:                       Yeah, let's say it's 0.4, right? Worst case. That's still improvement, right?

Mark Zandi:                      Right. And of course, just for context, I mean, for inflation to be back to the Federal Reserve's target on CPI inflation, which is a little bit different than the consumer expenditure deflator measure of inflation, which is what the Fed typically is targeting. But looking at the CPI inflation, it feels like we need to start getting 0.2s, 0.1 maybe thrown in there every once in a while, to get it down to about somewhere in the mid twos, two and a half percent-ish, something like that. So the 0.3 is good, we'll take it. Clearly the stock market took it, they loved it. Bond market took it, they loved it. But to actually get back to the Fed's target, we still have ways to go here.

Cris deRitis:                       Yeah. And I think they might have loved it a little too much. Might have extrapolated a little bit there.

Mark Zandi:                      Yeah, yeah.

Cris deRitis:                       But maybe not, and we can talk about that.

Mark Zandi:                      Yeah, I mean, they jumped all over it, right?

Cris deRitis:                       Yeah. Yeah.

Mark Zandi:                      Right. But before we go there, any other things in the report you wanted to call out? Any other aspects of the report you want to call out? I noticed that food price inflation's still strong, but that moderated, which is... we've been waiting for that as well because diesel prices have come in, and a big part of the cost of food is transporting the food from the farm to the store shelf, and lower diesel prices help. So I noticed that. Anything else you notice in the report?

Cris deRitis:                       Housing. So shelter is the other big one, right? We've been talking saying that that's going to continue to be a drag on inflation, or continue propping up inflation to be specific, for a while. It actually did moderate a bit. Rents grew 0.7% versus 0.8. So that's encouraging. But lots of script yet to be written there, so it's still too high.

Mark Zandi:                      Right.

Cris deRitis:                       At least for another couple of quarters I would think, we're going to continue to see some drag.

Mark Zandi:                      Yeah. The other thing I noticed is there's some things that made me feel better about the future. So for example, new vehicle prices, that continued to increase.

Cris deRitis:                       Yeah.

Mark Zandi:                      There's gravity that's going to set in there at some point, once vehicle production around the world normalizes. I think vehicle production here in the US has normalized back to pre-pandemic levels, but not in Germany, not Japan, where a lot of cars are produced. And we here in the US consume a lot of those cars and vehicles. But as that production normalizes, what you would expect with the easing of supply chain issues all around the world, we're going to see more production, rebuilding of inventory, and we should start to see new vehicle prices at least level out, but I would even expect some declines. And that also sounds like a small component of the CPI, but these have been big, big changes, and if they go away or go down, that could have some me meaningful impact on core as well.

Cris deRitis:                       Yeah, the prices moderated, I mean they're not growing as fast as I recall. New vehicles are... I think they were 0.7 and now they're 0.4.

Mark Zandi:                      Yeah.

Cris deRitis:                       Month over month.

Mark Zandi:                      I think our colleague Mike Brisson, who is a great economist for the vehicle industry, points out that this is reflecting the 2023 model year, these prices. And because pricing has been so strong, they've raised those '23 MSR... so-called MSRPs, those listed prices. And that's what was flowing through right now. But on the other side of this, as you make your way into early next year, we should start to see some meaningful moderation, at least a flattening out of new vehicle pricing, and at some point I would expect a decline. But that made me a little bit more... gave me some encouragement about inflation in the future.

Dan White:                        To back that up, Mark, we were just at a conference... actually, Emily and I were at a conference the other day, and for the first time I think in any conference I've ever been at with state officials, the people from Michigan were maybe the most optimistic in the room. They're never the most optimistic people in the room, but they were so excited that the microchips were finally showing up for some of those cars, and some of those cars were starting to roll off the lots, that I've never seen them excited as they were.

Mark Zandi:                      Oh, is that right? Okay, that's interesting. So they're confident in revenues because we're going to get more cars, more vehicle sales, more production.

Dan White:                        Right. And they're ramping up production again for the first time, because they didn't have any chips to put in the car so they ramped it down for a little while.

Mark Zandi:                      Yeah, makes a lot of sense. Hey, Cris?

Cris deRitis:                       Yeah?

Mark Zandi:                      You mentioned the market reaction. What was the reaction with regard to what it means for monetary policy? If you look at the futures market for the federal funds rate, which is the key interest rate that Fed controls, do you have a sense of what they're saying now?

Cris deRitis:                       Yeah, it came in-

Mark Zandi:                      [inaudible 00:17:06].

Cris deRitis:                       Well, at least immediately, I didn't check it today, I probably should. But yeah, now the assumption is the Fed may not have to be quite as aggressive in terms of hiking rates, and the terminal rate may not have to go to, whatever, 6% as some were thinking. So a more modest reaction if in fact inflation is coming in and can stay on this downward path.

Mark Zandi:                      I think it solidifies the idea that the Fed's going to raise the funds rate at the December FOMC meeting-

Cris deRitis:                       Yes, just-

Mark Zandi:                      ... by a half a point.

Cris deRitis:                       Right. Right. There had been higher probability on a 75 going in, and now that reversed. At least last time I looked, 50 was the majority opinion.

Mark Zandi:                      And that's what we've been expecting, a 50-base point, half point increase. And the terminal rate, the so-called terminal rate, the highest the rate's going to get in this cycle, I think you mentioned was well over 5%.

Cris deRitis:                       Yeah.

Mark Zandi:                      Is it still over five?

Cris deRitis:                       It's like a quarter point higher than ours, right? There was one extra hike-

Mark Zandi:                      So our peak is four and three-quarters. So it's about a-

Cris deRitis:                       It's like in that range.

Mark Zandi:                      ... as high as-

Dan White:                        [inaudible 00:18:17].

Mark Zandi:                      Yeah.

Cris deRitis:                       4.75 to five, right.

Mark Zandi:                      Okay. Yeah. And of course, the stock market had a really good day, right? The DOW was up 1,200 points I believe. And I think the market now, stock market, is not even down 20% from its all-time high-

Cris deRitis:                       Peak.

Mark Zandi:                      ... set at the beginning of the year. So I guess investors are trying to time the end of this rate hiking cycle because they know, as soon as it's clear that the Fed is going to stop raising the rates, then that's a signal to buy stocks, and thus the reaction. But you feel like that's premature?

Cris deRitis:                       I think so. I mean, it's one report, it's a good report, no doubt. You want to hear negative, well, gas prices, right? Energy prices went back up. Not a lot, but they had been coming in, and they could bounce back up again.

Mark Zandi:                      Yeah, I think that's the key. I mean, if oil prices stay where they are, I think West Texas Intermediate's just south of $90 a barrel, Brent is just north of $90 a barrel. And that's kind of where we've been now for the past, at least a couple, three months. Gasoline prices have settled in just south of $4 a gallon nationwide. They had peaked at $5, all-time high back in June, we're down below four. If they stay there, and that's our baseline forecast, obviously a lot of risk around that given EU sanctions on oil, given potential OPEC production... more production cuts, given the brinkmanship with Russia over a cap on oil prices.

                                             But if that stays the case, then because we got the big increases in oil and gasoline prices beginning very late last year, going into early 2022, on a year-over-year basis, we're going to start to see some real moderation in energy/gasoline prices. And that's going to take a big bite out of top line inflation. In fact, I think if you do the arithmetic, as you said right now we're 7.7, 7.7% on CPI inflation, year over year. I think by March, April, in that period, May, we should be down near 4% on top line inflation I think, just on a year-over-year basis. But that does depend on oil prices remaining stable. Does that sound right to you?

Cris deRitis:                       So that's taking out the energy/food, right? So I guess you're translating it into energy/food and the supply chain constrained, right? Those either go flat or roll over as you put it in [inaudible 00:21:01].

Mark Zandi:                      Just simply go flat. Simply go flat. Then on a year-over-year basis, because you had that big surge late last year, early this, then on a year-over-year basis it really starts to come out. It's really going to be the hard part-

Cris deRitis:                       That next...

Mark Zandi:                      Yeah.

Cris deRitis:                       Yeah, the next two and a half or so. Or two.

Mark Zandi:                      And that goes back to the labor market, wage growth, and of course that drives the healthcare inflation, other service price inflation. We need to get that. That's going to be a little bit more... well, that's going to be a lot more difficult to get back to-

Cris deRitis:                       Yeah, and the shelter, right?

Mark Zandi:                      Oh, and of course the shelter.

Cris deRitis:                       That's going to continue to-

Mark Zandi:                      But there, too, I'm feeling really pretty good about that as well, because market rents, the current lease up rents, there's a lot of weakness in rents. And that will translate over this time next year starting to get into much more moderate housing cost inflation, right?

Cris deRitis:                       Yeah, by this time next year. So that's still a ways... It's not going to be immediate, so don't expect... I think there's a misconception that, oh, because the asking rents are coming down pretty rapidly, then CPI is going to pick it up rapidly, too, or within a few months. But it does take some time for those asking rents to work themselves through the CPI calculations, at least on the year-over-year portion of it, right?

Mark Zandi:                      I've articulated this a number of times now in the podcast, but just to restate it, to make it clear, the key... and obviously we're spending a lot of time on inflation because that's key to interest rates and key to what it means for the economy in terms of recession risks and that kind of thing. But over the next three, six months, I expect improvement in inflation, just the base effects. Meaning those year-over-year base effects we just talked about because of stable oil prices and easing of supply chain issues. We also get a bit of benefit from new vehicle prices if they start to come in as we get more vehicle production.

                                             Then by the second half of the next year we get benefit from slower growth in the cost of housing because of what we're observing now with regard to market rents. That takes six, 12 months to translate over into CPI housing cost inflation. And then it's the first half of 2024 when I would expect to see a moderation in service price inflation. Because at that point the labor market should be weak enough, long enough, wage growth slow enough, that takes the pressure off the service side, and we start to see service inflation moderate. And that's when we come back into the Fed's target of about mid twos. That's kind of the path as I see forward.

Dan White:                        Mark, can I ask a question about that? We were just talking to some clients about this the other day, and the question was that we agree that last two, two and a half percentage points is going to be the toughest to squeeze out. If we run into more trouble than we expected to at that time, squeezing that last two and a half percentage points out, is that higher rates or is that high rates for longer at the Fed or both?

Mark Zandi:                      Yeah, and I think that's the crux of the matter. I mean, there's two key risks to the outlook I gave. There's many risks, but two key ones. The first is, and we talked about it, oil prices and how that goes. Second one is what you just mentioned, and that is maybe the wage growth remains more persistent and entrenched, and you get more of that kind of self-reinforcing wage price dynamic that is very difficult to wring out, and you can't wring it out unless you have a recession to do so, much higher unemployment.

                                             But I think that at this point, my sense is based on last week's FOMC meeting, that it may be the case that the Fed doesn't raise rates. It goes up to where we say it's going to go, four and three-quarters, 5% by early next year and stays there for a while, and maintains that higher... kind of high terminal rate for an extended period well into 2024. So by not raising rates more aggressively, they reduced the risk of generating some kind of financial event and also causing recession, but they keep pressure on the economy with that high rate. And that rate obviously is above the so-called equilibrium rate, which is consistent with monetary policy that's not supportive or restrictive to economic growth, and it just keeps it there. The Fed keeps it there at that four and three quarters percent, 5%, well into 2024 to make sure that the economy slows sufficiently that we get that wage growth down and inflation back into the box. I think that's their thinking now, the strategy that they're going to pursue, my guess. And that's in our forecast, that's what we have in our forecast.

Dan White:                        It'd be interesting to see how it plays out, especially because there's a day in November at the end of that, that you're talking about, that all this is going to play into.

Mark Zandi:                      Yeah, yeah, great point. I mean, how this all plays out obviously will be critical to the presidential election in 2024. Because if inflation doesn't go back into the box gracefully without a recession, then obviously that has all kinds of implications for how that election's going to play out.

                                             Okay, Cris, anything else on the inflation front? I mean, let me ask you this, based on our bickering from last week, does this change your view at all with regard to the risks? I mean, you were at 70% probability of recession starting some time between now and the end of 2023. Is that still the same? Any change there?

Cris deRitis:                       Data dependent. So of course, this plus the Phillies losing the World Series-

Mark Zandi:                      Oh, good point. Good point.

Cris deRitis:                       ... has brought my odds down to 67%. So yeah.

Mark Zandi:                      Ooh.

Cris deRitis:                       Yeah, I know. Big, big move. Big move.

Mark Zandi:                      Actually, that's a bigger move than people think it is, right?

Cris deRitis:                       It's borderline-

Mark Zandi:                      Want to explain why? Want to explain why?

Cris deRitis:                       Well, that's our threshold for making a change in the forecast is two-thirds, two-thirds probability. So I would still make the change. I still think we need a little bit more slowing in our baseline, but getting closer to that knife's edge. If we get a few more reports like this, that narrow path the Fed is on could be realized.

Mark Zandi:                      Ooh, did you hear that, Dan, Emily? Did you get that?

Dan White:                        I don't believe my ears.

Cris deRitis:                       I've said that from the beginning, 30% chance of that occurring, right? From the beginning.

Mark Zandi:                      [inaudible 00:27:44].

Emily Mandel:                  Okay, still pretty low.

Mark Zandi:                      Yeah. Hey, Emily, did you get Cris's reference to the Phillies?

Emily Mandel:                  No, I didn't. I mean, I know they lost, but-

Mark Zandi:                      Are you a Phillies fan?

Dan White:                        In her defense, she lives in Massachusetts, so they don't care.

Emily Mandel:                  I mean, I knew the Astros, I saw that happen, but I don't know the significances regarding the recession probabilities and data.

Mark Zandi:                      Oh, [inaudible 00:28:09]-

Cris deRitis:                       It's in Mark's Twitter feed, right?

Emily Mandel:                  Oh, no.

Cris deRitis:                       You missed that one?

Mark Zandi:                      Are you a follower, Emily?

Emily Mandel:                  I am, but I'm going to just blame a Twitter meltdown for not seeing it.

Mark Zandi:                      You're right. You're right. There's been a bit of a meltdown in Twitterland.

Emily Mandel:                  Yeah.

Mark Zandi:                      Yeah, a lot of [inaudible 00:28:25]. Dan, you know what he's talking about, right?

Dan White:                        Yeah, actually one of my students at Villanova brought it up to me, as a reason why they should get off class the day after game seven. I said, "If they make it to game seven, I will give you Monday morning off class," and they lost in game six. Everybody was very upset.

Mark Zandi:                      I bet they were. Yeah, Cris, you want to explain to the listener why the-

Cris deRitis:                       I think you should. You're the progenitor of this, right? Or at least the-

Mark Zandi:                      Well, okay. Very, very simply, and I think we've talked about it before. So the Phillies won a World Series in 1929, or what was-

Cris deRitis:                       Or the precursor to the Phillies.

Dan White:                        1929 and 1930.

Mark Zandi:                      And 1930. And they were the Athletics at the time, but the precursor to the Phillies. Yeah, they won in 2008.

Emily Mandel:                  Oh.

Mark Zandi:                      Oh, no, they won in 1930-

Dan White:                        80.

Mark Zandi:                      No, wait. 1929, 1930-

Dan White:                        19-

Mark Zandi:                      ... 1980.

Dan White:                        Yeah.

Mark Zandi:                      1980, sorry. And 2008. So Emily, what happened in those years?

Emily Mandel:                  Well, recessions.

Mark Zandi:                      Big time, right?

Emily Mandel:                  Yeah.

Mark Zandi:                      Big time recession. So-

Emily Mandel:                  See, originally I was unhappy about the Phillies losing, but now I'm kind of reassessing that.

Dan White:                        [inaudible 00:29:40].

Emily Mandel:                  I can say that because I don't live in Philly anymore.

Dan White:                        When you were going to get your morning coffees at Wawa, were you asking people about that? Because when I ask people around here, I explain to them that correlation does not mean causation, but every one of them said totally worth it. Totally worth it, we'll take it.

Mark Zandi:                      We'll take it. No problem. Massive recession, financial crisis, Phillies were in the World Series? Eh, we're going with the Phillies, we're going with the-

Dan White:                        They were okay with it.

Mark Zandi:                      Very good. Okay, well, I'm-

Cris deRitis:                       Got to have priorities.

Mark Zandi:                      Yeah. Yeah, I think it's a good segue into obviously the other massive event last week, or this week, and that's the midterm elections. And I don't how to begin the discussion, but maybe I'll just turn it to you, Dan, do you want to give us a sense of the state of play, and anything else you want to say about it before we turn to what it might mean for the economy?

Dan White:                        Sure. Yeah, I think the big takeaway is that nobody got everything that they wanted, and everybody got at least a little bit of what they wanted. So it just means that we're just about as divided as we were before the election, but there are some interesting trends that came through. So the Republicans, as of this recording, haven't officially won control of the House, but they're probably likely to win control of the House. We probably won't know who has control of the Senate until Georgia has their runoff. But either way, it's going to be a very, very divided Congress with probably one party in charge of one House and one party in charge of the other, but neither of them having a really significant hold on power in either one of those. So it's going to be some very interesting nuances in some of those votes. If the Republicans really do win the House, there are some folks who maybe not as core to the Republican constituency who have some power, who may not have had power before.

                                             I was just reading an article about how interesting it'll be when they try and bring up a vote on the $10,000 cap for state and local government. When a bunch of their new congressmen are from New York and New Jersey, are they really going to vote against the $10,000 cap?

Mark Zandi:                      Oh, interesting.

Cris deRitis:                       Hmm.

Dan White:                        And on the Democratic side, you've got some of folks who are from maybe more working class backgrounds who maybe vote differently than the normal Democrats do. And so the normal consensus within each party is really not going to be as firm as maybe it has been in previous elections. And so what that means is... and you and I have talked about this in the past, probably nothing gets done other than keeping the lights on for the next two years or so. Which has some upsides for the economic outlook, but certainly some downsides as well.

Mark Zandi:                      Well, before we go there, Emily, let me turn to you, anything you want to point out with regard to the election? And again, the ballots are still being counted in some key states, and we're going to have a runoff election for Senate in Georgia, which is going to determine whether... it feels like it is going to determine whether the Republicans or the Democrats control the Senate. Anything else you want to point out? I mean, there's a lot of stuff going on at the state level as well, correct?

Emily Mandel:                  Yeah, and I mean, at the state level, in some ways it's kind of the reverse of what Dan is saying. We came into this selection with very few state governance having divided control by historical standards, and that actually intensified a little bit with this election. We had two states, I think it was Michigan and Minnesota, flip so that they're now the same party as the governor. And then-

Mark Zandi:                      Democrat.

Emily Mandel:                  Democrat. Yeah, of course. And then with the caveat that a couple races haven't yet been called for the governorship, it looks like there'll be maybe eight or nine houses that are... or eight or nine governments that are divided, which is just really low if you think about it. So I think implications for that is these places will have quite a bit of ability to make changes, to make tax changes, to make different changes to law. So we could see some more... less gridlock at the state level than we're potentially going to see at the federal level for the next couple years.

Mark Zandi:                      To try to synthesize what both of you just said, feels like to me, the bottom line is it just means we are very divided and very closely divided. I mean, it looks like the Republicans are going to win the House, but they're going to win the House by, what, Dan? Five seats or six seats or-

Dan White:                        We can't tell yet. They need 218 to have control, and it's looking like they're... last count I saw was like 222, 223 probably. But there are seven races that are totally toss-ups, that no news agency is coming out and calling either way. So it could be 230, it could be 222. So we don't know. But neither side can really call. They got a little bit of what they wanted, but neither side can say, "We definitively won this election." The Democrats, they lost the House probably, but they didn't lose it by nearly as much as they thought they would, so they're kind of energized. The Republicans didn't win... probably didn't win control of the Senate or we don't know yet, but they certainly didn't win the House by as much as they thought they did. But you probably have a Republican speaker at the end of all this. So it's really nobody got everything that they wanted, and so both sides are going to probably steer that towards energizing their base as opposed to working towards the middle unfortunately.

Mark Zandi:                      And of course, just to make sure everyone understands, you need 218, correct? 218-

Dan White:                        218 to control the House representatives.

Mark Zandi:                      And if the Republicans sweeped all of the outstanding elections, what would they have, do you know? How many House-

Dan White:                        It would be almost 240.

Mark Zandi:                      240?

Dan White:                        Yeah. But there are probably, and I'm probably butchering this, but there's at least 10 of those that probably have no way of going Republican, that are very lean Dem, they're just waiting for the count. So my best case for the Republicans is probably somewhere around 230. The probable case is somewhere 223, 230, 225, somewhere around there.

Mark Zandi:                      So the most likely scenario is the Republicans win the House, but they win the House with about a five, six seat majority, which is... I think that's exactly what the Democrats just had in last Congress.

Dan White:                        Yeah, they probably win maybe a one or two seat larger majority than the Democrats have now.

Mark Zandi:                      Yeah. Now we're kind of moving into what it means for policy, but one other political question is, okay, say the Republicans win the House, McCarthy becomes the Speaker of the House, Kevin McCarthy becomes the Speaker of the House, and he has five seat, six seat majority, which is very thin. What does that mean in terms of his ability to manage any kind of consensus in the Republican caucus?

Dan White:                        It's going to be really hard. I mean, it's going to be really hard. I mean, it's going to be hard. I would imagine when we have the election of the speaker next spring, it's probably... or sorry, in the wintertime, it's probably going to be way messier than usual. Usually all that stuff is figured out in the back room somewhere, and we all come out and we vote, and that's the way it is. But with some of the more diverse caucuses within the Republican party, it might be more difficult to pull everybody together. And if it's that hard to pull them together on the speaker vote, I can't imagine how easy it's going to be to pull them together on things like the debt ceiling or some of the fiscal policy decisions that are going to have to be made.

Mark Zandi:                      Oh, okay. So Emily, you said something that... and I don't think I got it until just now, what you were saying is at the federal level, because it's so close and because of what Dan was speaking about, it's going to be very difficult to get anything through into law. But at the state level, because it's become so polarized, you're either a Democratic state or Republican state, you're either red or you're blue, all in, it's much more likely you're going to get stuff done because it's one party. That's what you were saying. I just-

Emily Mandel:                  Yeah, exactly. And I mean, there's some-

Dan White:                        Laboratories of democracy.

Mark Zandi:                      What's that?

Emily Mandel:                  Yeah, I mean, there's-

Dan White:                        So you're going to see all the laboratories of democracy.

Mark Zandi:                      Yeah, exactly. Exactly.

Emily Mandel:                  Yeah, going to get a lot of interesting policies out there. Yeah, because federal government's now going to be divided. And I mean, it was really close before even, and we could see how much that impeded the Democrat's ability to get some things they wanted passed. But I think the real thing is that a lot of places you've got the same control in the legislature as you have in the government, and so that's... with variations across how big those margins might be across states, it's going to mean that they're going to have a lot of ability to pass laws and try out that new laboratory of democracy Dan mentioned.

Mark Zandi:                      You know, it's so funny, for most of my life I've always wondered why do we need to have states with such autonomy? I mean, just seemed to be kind of a mess, didn't make a lot of sense to me. I could never understand the Tom Jefferson view of the world where give states real power. I was kind of always an Alexander Hamilton kind of guy, centralized power. And now I go, "Oh, now I understand. Now I get it." It's not a bad thing actually, really. There's definitely disadvantages to it, but there are advantages. And that, to your point Dan, it's a way to see what works, what doesn't work. You got 50 different data points out there to use.

Dan White:                        Yeah, we were very blessed to have both Alexander Hamilton and Thomas Jefferson. Because just one or the other would've made a really poor system of government, but having them both is what I think makes us great.

Mark Zandi:                      Yeah, and I think the American political experience since its founding has been Tom Jefferson versus Alexander Hamilton. I mean the whole way along, that battle continues to rage. I mean-

Dan White:                        Right, with both parties kind of switching sides over the course of history, which is kind of interesting, too.

Mark Zandi:                      Oh, that's a great point. That's a great point. Yeah. Hey, Cris, before we move on to the economic implications in more depth, anything from your vantage point on the election? Anything you want to call out?

Cris deRitis:                       I'm just happy that the republic held, right? There was all these-

Mark Zandi:                      Good point, good point.

Dan White:                        You know what? That's a really low bar.

Cris deRitis:                       I know, I know.

Dan White:                        It's a bar.

Cris deRitis:                       Actually I had clients really concerned about civil war, or how do I calculate my losses if there's this type of disruption in the country once again. So I think it is a testament to some of the self-correcting power within our system, that we can have an election and it seems like everyone is going to accept the results to a large degree. And I also think it was a vote for the middle way. I think Republicans, Democrats... we're like... tend to be more centrist. Although there will be gridlock, I don't think there's going to be a lot of tolerance for policies or discussions, debates that are not central to the problems that are really facing us. So I think we'll have good debate. We might not get a whole lot done, but I don't think we're going to be going off in a lot of direction... I hope we won't be going off a lot of directions or paths that don't lead anywhere.

Mark Zandi:                      Yeah, and I hope this isn't come across as being too political a statement, but it does feel like the election deniers, the candidates that were denying the 2020 election, that President Biden won election as president, those folks still... there's still elections to be decided here, but generally they seem to lose out in this election. They didn't do well. Like here, in our home state of Pennsylvania, we had this fella running for governor who was a very strong election denier. He got creamed by the Democrat. It's very, very unusual in a state like Pennsylvania, which is very definitively a swing state. There's red, there's blue, there's purple, there's everything. So I think that was pretty definitive. Dan, would you agree with that statement? Is that a fair statement?

Dan White:                        Yeah, I can't remember who did it, somebody did the math, and the candidates who, across the House and Senate races, who generally were more in the January 6th camp, seemed to lose more often than they won. I think there's only a very few of them that won. But I think your point about Pennsylvania is a great point, because Dr. Oz and John Fetterman were razor thin, and the governor obviously was a much wider margin. I'd have to go back and look, but I can't remember a wider margin in the governor's race for Pennsylvania for a very long time.

Mark Zandi:                      I joke, my wife determines presidential elections because we live in Chester County, Pennsylvania. Chester County is a really purple county, populous county, just west of the city of Philadelphia, which is obviously bright, bright blue. But it's very purple. And my street is half Republican, half Democrat. And I know it because I can see it with the signs. And it's all about turnout on that street in Pennsylvania. Because Pennsylvania in Chester County determines Pennsylvania, Pennsylvania determines... So I often joke all these candidates should just be talking to my wife, convincing her one way or the other about the election.

                                             But anyway, okay, so the most likely scenario is divided government. The Senate is a... we don't know, that's a toss up. But what really matters here is the House flipping to Republicans, and that feels highly likely at this point. So let's use that as our basis for discussion. And Dan, if that's the scenario, what does it mean for policy? What does it mean for what gets done over the next couple of years, particularly economic policy, obviously?

Dan White:                        It means not a lot gets done. Which may be more of a feature than a flaw. And especially with inflation as high as it is right now, we've been talking a lot about... there's a lot of good people coming out and saying fiscal policy should be helping the Fed, helping to make the Fed's job easier. Fiscal policy hasn't helped the Fed at all. I mean, we had the student loan stuff, we had a couple other things that are just kind of piling on and not making things easier. For better or worse, not being able to do anything other than keep the lights on is probably a blessing over the next year, year to two years, as we go into the 2024 election.

                                             That said, there's still a lot of risk out there that we can't physically do anything, which would be too bad because we need to... there's some things we need to do to keep the lights on. We can't just send everybody home for two years. The debt ceiling's got to be increased, which is going to be hairy, especially in the House. We've got the continuing resolution which has to be extended, hopefully it'll be extended during the lame duck, but we'll see. There are some things that just have to get done, and God forbid we're talking about the odds of a real recession as opposed to the slow down or growth recession that we've got in baseline. If things get really off the rails, you're going to have to really convince a lot of very reticent folks to authorize additional funding if we go into a deeper business cycle than we're expecting.

Mark Zandi:                      Okay, so the Congress that's just ending, the first two years of the Biden Administration, that was action packed. A lot of drama, but a lot of stuff got done. You know, got the American Rescue Plan, you got the Infrastructure Bill, you got the CHIPS Act, which provides support to the semiconductor industry to come here and produce here at home. And of course, the Inflation Reduction Act around climate risk and prescription drugs, that kind of thing. So lots of things, actually, at the end of the day got through the legislative process because that was a unified government, that was Democratic control. And even though the Democrats only had a five seat majority in the House, they were able to pull it together and get that through. I mean, again, a lot of drama, reconciliation, so forth and so on, but they got it done. And what you're saying is now, with a divided government, even if the Senate remains Democratic, because the house is Republican, it's hard to see anything getting done at all.

Dan White:                        It's hard to see anything getting done unless it really has to get done. And again, I think that's a good thing because, you said that it's been action packed, there's been a lot of drama, but it's probably too much has gotten done in the last two years. I know not everybody would agree with that, but some of us would've said there's too much in one [inaudible 00:46:18]-

Mark Zandi:                      That's a political statement. That definitely-

Dan White:                        Yeah, [inaudible 00:46:19] too much has been done in some cases, and especially with this fight against inflation, that may not be a bad thing to have our hands tied a little bit in terms of going into 2024.

Mark Zandi:                      Now here's, though, the thing that worries me a little bit, and this goes back to the last time we had divided government, under President Obama, and we got into a real brinkmanship over two things. One is the funding the government. So the government has to pass these funding bills to keep the lights on, to pay workers and pay out program... do the things that the government does. And if that legislation doesn't passed and there's no funding, the government shuts down. And I think we had one big one under Obama and we had two under Trump, actually, a small one and a big one. I can't even remember why. I think it was over immigration policy and the building of the wall, that kind of thing.

                                             And then the other thing to worry about here is probably even much more important is the debt limit. That anachronistic law. So maybe I'll stop there, turn it back to you, and maybe you can explain those things and handicap them. Should we be worried about that in the context of history, that last time we were looking at this kind of government we had these kinds of problems?

Dan White:                        Sure. Yeah, I think what it means is we have to go back to our slide decks from 2018 and 2013 and dust off our shutdown charts again. But the first one that you mentioned, if you can use our... I don't even know what it's called, our risk matrix, our "what could possibly go wrong" matrix?

Mark Zandi:                      Yeah.

Cris deRitis:                       Yep.

Dan White:                        We've got the y-axis, which is the likelihood of something happening in the x-axis, which is the severity. If I was to put the government shutdown, it'd probably be middle of the y-axis in terms of likelihood, and it would be very low in terms of severity. Very different than... I think 2013 was the last one, the first time we really had that government shut down since Gingrich did it in the mid-'90s. We found ways around making it as harmful as it was. There's some really bad regional economic things, and we worked very closely with the states of Maryland and Virginia, and they're always very concerned about that because it had the big impact on their regional economy. But if the government shutdown doesn't last more than a couple weeks, it's not a huge macroeconomic event anymore. Unfortunately, we've become immune to that kind of government.

Mark Zandi:                      I think just to put a finer point on that, I think based on those previous shutdowns, we estimate that if the shutdown is less than a couple weeks, it doesn't register. But if it goes into week three and four, each additional week shaves about a 10th of a percent off of GDP in that quarter.

Dan White:                        Right.

Mark Zandi:                      So that's small, but-

Dan White:                        That third week is-

Mark Zandi:                      ... you can measure it.

Dan White:                        Yeah, the third week is really key, because that's when people start to miss paychecks. And if you missed one or two paychecks, even if you're getting your back pay, it's going to really create some issues. And if we're in a weak economy already, or a weakening economy already, then that's something that could really make the difference.

Mark Zandi:                      Right. Okay. But you're saying, okay, the shutdown, that's possible, and you're saying kind of a reasonable probability, kind of halfway up that risk... So like a 50% probability, something like that.

Dan White:                        Yeah, I'd say even like-

Mark Zandi:                      Yeah, it might not be that big a deal if it's short. The longer it goes, obviously the bigger the deal, and the bigger the deal, the weaker the economy is. Depends on the state of the economy at the time.

Dan White:                        Exactly. And what really matters is... and this is probably what's going to happen, it's probably going to end up with some type of continuing resolution, and that's just the way that we budget nowadays, which is terrible. But what that does is it doesn't give the folks in the agencies a whole lot of certainty going through the next couple years. And it really can decrease productivity, can decrease hiring in some of those government agencies, which doesn't give us a whole lot of juice from an economic standpoint. So it's not ideal, but it's probably what's going to happen, and it's not going to cause a recession or be a huge macroeconomic event.

                                             The second one that you talked about though, that's the one that is hopefully very low in terms of the likelihood. I'd put it at maybe a third on the y-axis. But in terms-

Mark Zandi:                      A third? Wait, wait, wait.

Dan White:                        But in terms of-

Cris deRitis:                       That's too high for me.

Mark Zandi:                      A third?

Dan White:                        It's too much for me.

Mark Zandi:                      One-third?

Dan White:                        [inaudible 00:50:40]. Yeah.

Mark Zandi:                      30% probability?

Emily Mandel:                  A third probability? Or a third of the way up that axis?

Dan White:                        A third of the way up that axis. And remember this is a totally-

Emily Mandel:                  I don't know what the scale of that-

Dan White:                        ... subjective axis, right? There's no objectivity in this at all. But you put the impact on the extreme, right? On the x-axis, it's all the way to a hundred, right?

Mark Zandi:                      Oh, oh, oh.

Cris deRitis:                       What's your probability, straight up? Absolute top line?

Mark Zandi:                      Straight up, what's your probability?

Dan White:                        If I was to put a probability straight up, I'd say 10%.

Mark Zandi:                      Okay.

Cris deRitis:                       Okay. Okay.

Mark Zandi:                      That's still too high.

Cris deRitis:                       That's still high, yeah.

Dan White:                        0.1 is too high. It's the dumbest thing that we have in all of government, is the debt ceiling.

Mark Zandi:                      Okay, explain what the debt ceiling is.

Dan White:                        So the debt ceiling, the US government works differently than all of the states work and that most other governments work around the world, which is where we basically have to have a vote of Congress every time we want to increase our credit card limit. So if you had a credit card at home, imagine that on all the money you've already spent, you eventually get to say, you know what, I'm not going to pay back my credit card, I'm not going to pay back my debt. So they have to increase the credit limit, otherwise the Treasury can't borrow any more money in order to pay off the debt that we already have. And basically, what you have under the worst case scenario though, is you have a sovereign default by the United States, which creates unspeakable amount of bad things in the financial markets. Financial market would melt down. I mean, there's no discussing it. It would be just about the worst thing that the federal government could do. Hopefully, that never happens. And I think most people in government would say that hopefully that never happens. But with such a razor thin majority in the House, and some people in the House who I think would genuinely want to take us over that waterfall, I think it's higher than it's been for quite some time. In terms of probability.

Mark Zandi:                      Yeah, I would agree.

Emily Mandel:                  Do you see their-

Cris deRitis:                       [inaudible 00:52:29] question for... Sorry.

Emily Mandel:                  Sorry.

Cris deRitis:                       If I can, quick question related to that. Is anything preventing the Dems from passing it now in the lame-duck session? Why wait?

Dan White:                        They would Republican help in the Senate to do it.

Mark Zandi:                      Why? Reconciliation. They could do a reconciliation bill.

Dan White:                        They could do it under reconciliation, but I don't think they would for a couple reasons. One, because that means that the Republicans can use that tool in the future, and Dems wouldn't be able to use the debt ceiling as a lever the same way the Republicans would. But two, so far as I understand it, there is some dubiousness about whether or not it is possible to do in reconciliation.

Mark Zandi:                      Oh, you mean the rules under reconciliation may preclude a piece of legislation that would obviate the debt limit?

Dan White:                        Yes. And again, I'm not a constitutional scholar or a parliamentarian, so I don't know that I can definitively comment on that, but I've heard people make very strong arguments both ways. So I don't know that the Democrats are all that confident that they can do it under reconciliation.

Mark Zandi:                      Just to make this clear to the listener, so under reconciliation, this is just another arcane budget rule that allows the party to pass a piece... This would be in lame duck, when the House is still Democratic, get it through the Senate under 50 votes because the vice president would vote in favor, and you don't have to worry about the filibuster. And you could do one reconciliation bill-

Dan White:                        Per fiscal year.

Mark Zandi:                      ... each fiscal year. And of course this fiscal year just started in October 1, so you could argue, okay, we could use a reconciliation bill, but there are some rules around what you can use reconciliation for. And so that's what you're saying, they might not be able to do it, even if they wanted to do it. And they may not be able to do it because all you need is one Democratic senator saying, "I don't want to do that," for whatever the reason is. Like, Joe Manchin, senator from West Virginia, did that for a long time with regard to the two reconciliation bills that got through, or at least the second one. The first one, the American Rescue Plan, that got through under reconciliation pretty easily. I think it was the second one, which ultimately became the Inflation Reduction Act that took two years to get done, basically because of one senator, right.

Dan White:                        Yeah, the margin is right now where one senator can hold the whole bill up and hold the whole thing hostage.

Mark Zandi:                      Yeah. Okay. Here's the thing that worries me, and I think do worry about the probabilities as well. I'm not sure I put it 10%, but maybe. I do remember testifying in the Senate, and Rand Paul, the Republican senator from Kentucky, was openly contemplating a debt limit breach. And his thinking was, "Oh, we can decide who we want... We can prioritize who gets paid and when they get paid, and we don't necessarily have to pay Chinese debt." He didn't say Chinese debt holders, I'm extrapolating. He was just saying we can navigate around the debt limit, no big deal. And I found that terrifying, because just think about it for a second, you're a Japanese bond holder... And the Japanese own 1.2 trillion of Treasury debt. I don't know how many Chinese... Chinese is probably close to a trillion. I'm not sure, I haven't looked recently.

Dan White:                        They've been spending theirs down. They're a much smaller share of overall Treasury debt than [inaudible 00:56:07]-

Mark Zandi:                      Okay, so say it's 800 billion. I don't know, it's a lot of money.

Cris deRitis:                       Yeah, still a lot.

Mark Zandi:                      It's a lot of money.

Dan White:                        I think they're less in Japan now.

Mark Zandi:                      Oh yeah, I think Japan's the largest holder. Yeah. And even the Japanese are kind of getting a little wary of charging bonds in the context of a 1.45 yen to the dollar. But anyway, put yourself in the shoes of a bond holder from China or Japan, Middle East, wherever, and a congressman says to you, "Oh, don't worry, you're going to get your payment. We're not going to pay grandma her full social security payment on time." Not going to happen. So the bond holders going to run immediately, interest rates are going to jump, and we're going to be in a mess.

Dan White:                        Even if bond holders get paid, if somebody doesn't get paid along that waterfall, it's a default. And if you made a promise and you didn't pay on it, from a government, that's in default. And so the fact that you did that at any level of that waterfall, whether it's bond holders, whether it's people on Medicaid, people on Medicare, you only have to do that one time and you're done. The rest of the people in that waterfall are not going to trust you again. And that's the real cost of this because so much of the global financial system is based on that US treasury rate being the risk-free rate, and as soon as that goes out the window, all hell's going to break loose in the financial market.

Mark Zandi:                      And by the way, this is why I love Alexander Hamilton. One of the reasons, right? Because he understood this principle and he... Back in the Revolution, all the states issued debt to finance the Revolutionary War. At the end of the war, investors in those debt, they thought it was basically a gift. I don't think many thought they'd ever get their money back. That debt was trading pennies on the dollar. And hedge funds at the time... the analog to hedge funds today, they weren't hedge funds then, but they were the analogs to hedge funds, were going in and buying these notes for Treasury debt. And Hamilton said, "Okay, I'm going to buy all those notes back, 100 cents on the dollar," to the hedge funds. And by so doing, established the credit of the United States of America. We're the Lannisters of the world. We pay our debts. Emily, do you understand that reference?

Emily Mandel:                  I got that one, yeah.

Mark Zandi:                      Okay, you got that one. It's above Cris's head, he doesn't-

Cris deRitis:                       Yeah.

Mark Zandi:                      He didn't get that. Everyone else did, but Cris. That's okay. That's okay, Cris.

Cris deRitis:                       Once in a while, yeah.

Mark Zandi:                      Once in a while. That's true. I'm usually the one where it goes over my head like this. But anyway, we pay our debts on time. We pay our debts, and we pay our debts on time, and by so doing, we pay the lowest interest rates in the world. We're the reserve currency on the planet with enormous benefit because we pay our debts. And as soon as you have any shred of doubt that you're not going to get paid your money on time to the second that it's due, you got a problem. You got a problem. But anyway, I agree, I worry about that. I think that's something that will come to the fore here at some point in the next year. So I'm not so sure, Dan, I'd be as sanguine as you, saying it's okay we don't do anything, if it's [inaudible 00:59:14]-

Dan White:                        Well, so I think that one's going to get done. So we can argue about where it is on the... We all agree that it's like a thousand on the x-axis, right? It's infinity in terms of severity. But the fact that it's even a little bit up at all, regardless of where you would have it, is going to make some people nervous. It's going to make financial markets nervous. Because what'll happen is, in March or whenever we get around to the next debt ceiling, is there's going to be brinkmanship and everybody's going to hand-wring, and you're going to be on CNBC talking all this stuff you just said, about how bad it's going to be if this actually happens. And then at the last minute they'll make a deal, right? That's what has happened traditionally over the last 10, 15 years.

Mark Zandi:                      Well, here's the thing though, here's the thing that even worries me about that scenario. Because you just articulated that everyone's thinking like you are, so markets aren't going to react at all. They're not going to react, they'll go, "Oh, no worries, no problem."

Cris deRitis:                       "It's a bluff."

Mark Zandi:                      "They'll take it right down to the midnight hour and we'll pass a piece of legislation." So there will be no signal from financial markets that anyone's at all concerned, and then the Rand Pauls of the world are going to say... I'm sorry to pick on Rand Paul, he's just... because of what he said. "Oh, look, financial markets aren't worried at all," and we go over the waterfall. By the way, I wouldn't use waterfall as a metaphor, I'd use cliff. Waterfall has this kind of nice, fuzzy connotation. It's cliff, it's cliff. We're going down. It's like coyote... Wiley-

Cris deRitis:                       Wiley.

Dan White:                        Wiley Coyote.

Mark Zandi:                      Wiley Coyote. Emily, do you understand that reference, Wiley Coyote?

Emily Mandel:                  Yeah, more vaguely. But, yeah.

Mark Zandi:                      I thought I'm old enough to understand, because I watched those. That's what I watched when I was a kid, Wiley Coyote. I don't know if [inaudible 01:00:55]-

Dan White:                        They still work. I still show them to my kids.

Mark Zandi:                      Okay, very good. All right. Anyway. Okay, so Emily, I got a question for you with regard to state and local governments, but before I ask my question is there... As you said, we've these now states that are dominated by one or the other party, and we could get to see a lot of things happening here. So what's at the top of the list of things that could happen from an economic perspective?

Emily Mandel:                  I mean, the potential good part would be states have money still set to allocate from some of that federal funding. They maybe could get their act together well to make sure that they allocate that, they get projects moving, they get infrastructure projects on the ground. That could be effective state government moving along. What is more concerning for me is that states have been enjoying these huge windfalls of just having a ton of revenue come in lately. And I worry that having this consolidated government could maybe lead them to over-allocate, overspend, over-rely on that money kind of continuing into the future. Whether that's new programs that they're funding or whether it's tax cuts. We've already seen a lot of states passing tax cuts. So I think continuation of that, amplification of that could be potentially concerning as we go into the next couple years where they're not going to see that massive growth in tax revenue they've been kind of starting to rely on.

Mark Zandi:                      Great, good, good. But there's no kind of one burning economic policy issue out there that [inaudible 01:02:39]-

Emily Mandel:                  The beauty of state government is there's a huge amount of variation there.

Mark Zandi:                      Yeah, okay. Dan, anything there you would add that we might see at the state and local level?

Dan White:                        I think a lot of the things that you'll see that both parties are advocating for at the federal level and national level are going to play out at the local level. They're going to try it there first. And that's where you'll see, one, who's got the political... is that really winning in the political arena when they do that? And two, is it working economically? So the Republicans are going to try and have more tax cuts, the Democrats are going to increase a lot of these spending programs, especially on social services and things. And how that gains momentum up to the federal level is usually how we get these federal programs eventually through one way or the other. So it'll be interesting to see who gains the momentum by doing that at the state level.

Mark Zandi:                      Here's my question, and I'm not sure I'm going to articulate this well, but hopefully I get the gist of it across. Do you think we could see self-selection going on across states, where Republicans tend to go to start living in some red states and Democrats start living in blue states, and we actually fracture... One of the beauties of the American experience is that we're kind of a hodgepodge. We all melted together and we got Republicans and Democrats, got all kinds of ethnic groups, minorities, kind of all... We've got communities. And there is some segregation going on across all these different groups, but generally, we've had a mixing. And actually, much more so in recent decades because we've seen this massive flow of people from the Northeast and Midwest into the South and the West. And the country looks a lot more similar today demographically and industrially than it has ever been.

                                             But now it feels like it might be moving in the other direction. That if you go take a look at the state of Florida, for example, it's turning increasingly red because you've got a lot more... it feels like Republicans moving into... This is just my sense of things, and the question is, is that happening, and is that something we should be worried about? And also in the context of the abortion laws, right? Because the biggest now distinction between states might be with regard to abortion laws and rights, and that could have very significant effects on who wants to live where. Is that something you're observing? Is that something we should be worried about? What do you think, Emily?

Emily Mandel:                  Yeah, I mean, I want to go to look to the data on this, and I don't know that we have a clear-cut idea of that at this point. I think this polarization, obviously it's concerning. Obviously, abortion rights are on a lot of people's minds right now as far as choosing, I think, where they want to live. Or I think Adam Kamins, who does our regional work, has done some good work on whether that would impact where people want to go to college, which maybe could impact things on a longer term basis about where people settle. So I don't know that we're seeing it yet.

                                             In the reverse, we've also seen some of these rapidly growing cities thinking like Boise, Idaho for example, where people are still moving to, despite maybe not always aligning with the politics of the area. So I think I don't have a good answer for this. It's something I definitely want to watch, but I don't know. It kind of depends also, I feel like in a bit, this past election was a little bit of a repudiation of some of that extreme... more extreme views. So maybe there's some natural checks there, where if states don't get especially extreme, maybe we won't see it manifest. But I think it's going to depend how that plays out.

Mark Zandi:                      Yeah. What do you think, Dan? Am I barking up the wrong tree?

Dan White:                        No, I think you're onto something. I think it's interesting. I think the advent of remote work has just accelerated that a little bit maybe, because people don't need to be by the industry. A lot of folks, especially in the service industry, can go work wherever they want, right? In office using service industries. And I think we're seeing that. So it's not just the retirees moving from the Northeast to Florida or Texas. It's people with in their 30s and 40s with jobs and kids moving to those places, which is interesting to see the demographics. And demographics [inaudible 01:07:14], so it's going to play out.

                                             But I think near term, there's other things that at work. Florida's a great example. So Marco Rubio absolutely annihilated his opponent in the race yet the other day, and so did DeSantis. DeSantis, his margin was enormous. But what shocked the heck out of me was when we were looking at the results, it was Miami-Dade County, they did better than any Republican's done in... I can't remember when. And it's not because the demographics are there, right? It's a bunch of Hispanic voters who have started to vote red instead of blue, which is more of a messaging thing around those platforms, I think, than it is a real demographic story. So there's cross currents going both ways, and I don't know that we can tell just by looking at the voting data that, but if we look at the demographic data and how it plays out in the next 10, 20 years, it's going to be really, really interesting to see who the swing state is in five years.

Mark Zandi:                      Yeah, I think it'll be a good research topic. Because there's a lot of moving parts here, so it's hard to disentangle things, but maybe we can do a little work, try to identify if there's a... If you look at net migration state to state, and have a political variable as one of the explanatory variables and see if it's significant or not in terms of... after controlling for everything else, all the other things that affect migration flows. It might be [inaudible 01:08:42]-

Dan White:                        Well, you could do that, you could tie it into the... We have voter registration data by state that you could actually look at. And you could take that down to the county level, actually. That'd be really cool to do.

Mark Zandi:                      All right. Well, so the listener, this is how we decide what research we're going to do, these kinds of topics is kind of how it happens. Cris, anything else you want to add here on these issues before we call it a podcast? Oh, we got the game. I forgot about the game.

Cris deRitis:                       Forgot the game.

Mark Zandi:                      Statistics game. We'll do that right after you opine here. Anything else you want to say?

Cris deRitis:                       No. Well, I'm really interested in the last study topic you brought up, because I do think there are a lot of other cross current... Like housing, or being locked into your homes. Can people even move to places that they might want to move to, given the housing situation? I think there are a lot of other considerations. So there'd be an interesting regression. Complex one, but interesting.

Mark Zandi:                      Oh, so there's confounding factors. And I don't think I'm mischaracterizing, but older populations tend to be a little bit more Republican, younger populations, a little bit more Democratic. And you got a lot of retirees now moving to places like Florida and maybe it's age and it's not-

Emily Mandel:                  But we have age. We have the net migration data by age, so we could actually look at that, yeah.

Mark Zandi:                      I know, but I'm saying you got to control for that. We got to control for that.

Emily Mandel:                  Yeah.

Cris deRitis:                       Yeah. Yeah, for sure.

Mark Zandi:                      It gets difficult to disentangle. But anyway, okay, let's play the game. See, how can I forget that? Man. Who wants to go first?

Cris deRitis:                       We've had listeners waiting for the last hour just to get to this game.

Mark Zandi:                      I know. I know. I know. And I know we have a few good ones. Cris, do you want to go first, just to show us how it's done?

Cris deRitis:                       Sure. 39.1.

Mark Zandi:                      39.1? Is it related to the election?

Cris deRitis:                       No, but it is 39... I'll give you units, 39.1%. Just in all fairness.

Mark Zandi:                      Is it a statistic that came out this week?

Cris deRitis:                       Yes. Yes, that is one of our rules.

Dan White:                        It has to be this week, right? That was the rule?

Mark Zandi:                      Well, sort of. I can break the rule every once in a while. Yeah, I'm allowed. Is it from a survey?

Cris deRitis:                       Yes.

Mark Zandi:                      Is it from the NFIB survey?

Cris deRitis:                       No.

Mark Zandi:                      Is it from the University of Michigan survey?

Cris deRitis:                       Nope.

Dan White:                        Oh, is it the loan officer survey?

Cris deRitis:                       Yes.

Mark Zandi:                      Ah, that's what it is.

Cris deRitis:                       Senior loan officer opinion-

Emily Mandel:                  Oh, I was looking at this yesterday. Oh my gosh.

Cris deRitis:                       ... survey for? What was 39.1%?

Mark Zandi:                      Commercial industrial loans.

Cris deRitis:                       Tightening standards, yep.

Mark Zandi:                      Lending standards for C&I loans. You want to-

Cris deRitis:                       For large and medium customers.

Mark Zandi:                      Yeah. You want to explain it?

Cris deRitis:                       Sure. This is an indication that the lenders, the banks, are getting much... are tightening up on their credit, presumably out of fear of profitability and the ability of these businesses to pay back. 39.1% is a high level of tightening, and is one of our key recession indicators. So at this level, we've always had a recession. The survey only goes back to 1990, I believe, so we don't have many recessions to compare against, but this level of tightening is consistent with recession within several months.

Mark Zandi:                      And this is... doesn't tell you the intensity of the tightening down and underwriting, it's just directionally the underwriting is tightened.

Cris deRitis:                       Correct.

Mark Zandi:                      Yeah.

Cris deRitis:                       That's right. That's right.

Mark Zandi:                      Yeah. Yeah, that's a good one. That's a really good one. Okay, Emily, you want to go next? Oh, by the way, that was an example of teamwork, I thought, in terms of getting that one, right?

Dan White:                        Teamwork makes a dream work.

Mark Zandi:                      But that no one wins a cowbell based on teamwork in this game. Very individualistic thing. But anyway, good one. That was a good one. Emily, you're up.

Emily Mandel:                  Okay, I think this should be an easier one because I didn't want to start this off-

Cris deRitis:                       Oh, anytime you preface it with "this should be an easy one"-

Mark Zandi:                      We're doomed.

Emily Mandel:                  No, but actually-

Cris deRitis:                       ... we look ridiculous. Okay, go ahead.

Emily Mandel:                  0.75.

Mark Zandi:                      Is that from the CPI report?

Emily Mandel:                  Mm-hmm.

Mark Zandi:                      Is that a yes?

Emily Mandel:                  Yes.

Mark Zandi:                      Oh, okay. You got to say yes. You got to say yes.

Emily Mandel:                  Yeah, I forget that this is going to be audio for most people. Yeah.

Mark Zandi:                      And your nod was kind of a very, very [inaudible 01:13:09].

Emily Mandel:                  It is definitively, positively from the CPI report.

Cris deRitis:                       Nice. Okay. Is there a difference-

Mark Zandi:                      Top-line inflation is up 0.4. Is it a month-to-month increase?

Emily Mandel:                  Yes.

Mark Zandi:                      Okay.

Cris deRitis:                       Wow.

Mark Zandi:                      Is it one of the components of the CPI?

Emily Mandel:                  Yes.

Mark Zandi:                      Is it housing related?

Emily Mandel:                  Yes.

Cris deRitis:                       Rents.

Mark Zandi:                      Oh, housing related. Okay, so is it the cost of housing services?

Emily Mandel:                  Yeah, it's just the top line there. CPI shelter.

Mark Zandi:                      Top line. Yeah, top line.

Cris deRitis:                       Oh, shelter. Okay.

Mark Zandi:                      Shelter. Yeah. Okay. Okay. What do you think, Cris? What do you think of that statistic?

Cris deRitis:                       How did you get the second digit in?

Mark Zandi:                      How'd you get the second-

Emily Mandel:                  I went into Fame and I looked at the non-seasonally adjusted, because I figured if I just gave the rounded one-

Cris deRitis:                       Oh, okay. All right, all right, fair enough.

Emily Mandel:                  ... it would be a little easier. Yeah.

Cris deRitis:                       That was a little tricky.

Dan White:                        Way to throw Cris off, just add a decimal point and-

Cris deRitis:                       Yes. Well, I looked at the report.

Emily Mandel:                  Extra precision is extra good.

Cris deRitis:                       I looked at the report, that's right.

Emily Mandel:                  Yeah, figured.

Dan White:                        I got to remember that for next time.

Mark Zandi:                      Hold on. I think they don't give you the second significant digit, do they?

Emily Mandel:                  But it's an index, right? So if you look at the percent change in the index, then that'll give you another digit. If you go in Fame there, if you go into... and do the percent change-

Dan White:                        Yeah, Carl's team did it to more than one-

Emily Mandel:                  We've got it banked. Yeah.

Mark Zandi:                      Okay. Huh. Okay, very good. Because I think in the CPI report itself, they round down to 0.7, don't they?

Emily Mandel:                  Correct.

Mark Zandi:                      They don't round up to 0.8.

Emily Mandel:                  I think... Yeah.

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay. Okay. All right, very good. Very good.

Cris deRitis:                       Tricky, but good.

Mark Zandi:                      Okay, Dan, you're up.

Dan White:                        You guys are rough. All right, my number is 43.4 billion, with a B.

Mark Zandi:                      40... What is it, 44?

Dan White:                        43.4 billion.

Mark Zandi:                      43.4 billion. Is it related to the election?

Dan White:                        No. It's-

Mark Zandi:                      Is it related to the budget?

Dan White:                        It is a release that we cover on [inaudible 01:15:11] that came out this... or on Economic View that came out this week.

Mark Zandi:                      Is it related to the Treasury budget?

Dan White:                        It is.

Cris deRitis:                       Oh.

Dan White:                        Bernard's not here, so I had to stump you guys that way.

Mark Zandi:                      Yeah, yeah, yeah.

Emily Mandel:                  Is it something about the space left under the debt limit, or... Don't even know what the magnitude would be on that.

Dan White:                        No.

Mark Zandi:                      We got the October Treasury report this week, and it was the first month of the fiscal year, and 43.4, I think the deficit was... Was it a positive 43.4 or negative?

Dan White:                        It was a positive 43.4.

Mark Zandi:                      Is it how much we spent on interest in a month?

Dan White:                        It is. It's the net interest paid out by Treasury-

Cris deRitis:                       Oh, that...

Emily Mandel:                  Oh, that's a good one.

Mark Zandi:                      Okay.

Dan White:                        [inaudible 01:16:02] cowbell.

Mark Zandi:                      That is a cowbell, baby. Oh, that's impressive. I have to say.

Cris deRitis:                       That was impressive. That was impressive.

Mark Zandi:                      Who got that right? I'm just asking.

Dan White:                        Well, you didn't specify if it was gross or net. [inaudible 01:16:15] by that.

Mark Zandi:                      Not a trick question.

Dan White:                        That is one and a half times more than we spent last October.

Mark Zandi:                      Is that right? Wow.

Dan White:                        Yes.

Mark Zandi:                      I mean, in my mind's eye, I have interest expense is... for the federal government is 2% of GDP, and that's low.

Dan White:                        [inaudible 01:16:40].

Mark Zandi:                      That's low by historical standards. I mean, when it gets above four or five, that's when our alarm bells go off because then you can say we're spending more on interest than on defending our country, which doesn't make sense to anybody. And we do something on the deficit. That 43.4, that would be?

Dan White:                        So CBO and OMB over the summer both projected that it would be about just over 2%, like 2.3% this year. But that's way stronger than CBO and OMB assumed when they did their interest rate forecast over the summer. So it's possible. Just for context, in 2022, we ended up spending like 440, $450 billion on interest that year, or the previous fiscal year. If we keep going to that rate, we're going to be over 600 billion this year.

Mark Zandi:                      Wow.

Dan White:                        Which would be the highest we've paid, I think, ever on the debt.

Mark Zandi:                      Yeah, but... Yeah, okay.

Dan White:                        But as a share of GDP, it's closer to 3%, I think.

Mark Zandi:                      Okay. But still, I mean, it's creeping up. Two is low, five is a problem, three is okay, but moving in the wrong direction, obviously.

Dan White:                        Well, the reason people are freaking out about it is, if you look at the total number of that 600 billion, which that means by 2025, 2026, you'd be over... you could be over 700 billion, which is actually more than we spend on national defense, which is a nice kind of [inaudible 01:17:59] point that everybody's going, "Oh my gosh, we're spending as much on this as we are in defense." And so people pay attention. But it's one of the reasons why I think it'd be very hard to convince some folks to come along with anything that has to do with fiscal policy over the next two years, other than keeping the lights on.

Mark Zandi:                      Yeah. Yeah, no, I think on both sides of the aisle, there's a lot of increasing angst about the deficit and debt. Yeah, for sure. In a high rate environment, for sure. I mean, historically, you didn't worry too much of interest rates. Long-term rates were below nominal GDP growth, because if you had that situation then the debt to GDP would decline. But now, nominal potential GDP growth... interest rates are about equal to nominal potential GDP growth. You can't rely on that anymore. It's going to become much more difficult. We're running out of time, and I've got a hard stop, so you'll have to wait till next week to get my statistic. But that was very good, I really appreciate it.

Cris deRitis:                       You can tweet it out.

Mark Zandi:                      I'll tweet it out. That was a great conversation, very informative. And the other thing I didn't ask, the biggest news of course, was Cris going from 70 to 67%. I have to say that's a huge deal. That was the biggest news of the week from my perspective, so [inaudible 01:19:13]. Any last words of wisdom before we call it a podcast? Hearing none. Thanks, Emily-

Dan White:                        Thanks for having us.

Mark Zandi:                      ... thanks, Dan, thanks, Cris. Thanks guys. Thanks everyone, talk to you next week. Take care now.