INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and it's jobs Friday. Here we are Friday, May the 5th, and we got numbers for April, and we've got the regular group here to talk about that. We've got Cris, Cris deRitis. Hi Cris.

Cris deRitis:                      Hey, Mark.

Mark Zandi:                     Good to see you. And Ms. DiNatale. Good to see you.

Marisa DiNatale:            Hello, Mr. Zandi.

Mark Zandi:                     Yeah, thank you. Doctor.

Marisa DiNatale:            Oh yeah, I'm sorry. Oh, woo. God. Yeah, we should edit that out.

Mark Zandi:                     Ah, no, no, no.

Cris deRitis:                      Grand [inaudible 00:00:44].

Mark Zandi:                     Fair enough. Yeah. And Dr. DeAntonio too, right? Dr. DeAntonio. Yeah. We got a lot of doctors here. Well, it's good to have you all. I did testify in the Senate budget Committee this week on the debt limit.

Cris deRitis:                      How'd that go?

Mark Zandi:                     Yeah, how'd that go? I'd say, this might be the glass half full in me, less partisan than I expected. Pretty partisan. A few folks, a few senators really kind of threw a few bricks, but generally I thought it was less partisan. The thing that really I find interesting is just how frustrated they are with the budget process. They hate this, they really hate this.

Marisa DiNatale:            Well, it's stupid.

Mark Zandi:                     Well, yeah.

Cris deRitis:                      That's bipartisan. Everyone hates it.

Mark Zandi:                     Senator Merkley from Oregon spent his time talking about the history of the budget process and that they all kind of reminisced about how things used to be, how they could get things done. Paygo, remember Paygo? Just really bemoaning the current situation with the debt limit. So I found that particularly interesting.

Cris deRitis:                      So you think they'll get it together?

Mark Zandi:                     I think so. Right?

Marisa DiNatale:            You left hopeful. Did you leave more hopeful than you would-

Mark Zandi:                     I think I was a bit more hopeful. Yeah.

Marisa DiNatale:            That's good.

Mark Zandi:                     I think a bit more hopeful.

Cris deRitis:                      But we're still going down to the wire right? Just now.

Mark Zandi:                     Yeah, and I think it's going to take a fair amount of turmoil and financial markets to get there. I mean, I think we're going to have some pretty ugly days in the stock market here. We already had the banking crisis situation, which we probably should come back and talk about. But I just don't see them signing on the dotted line to increase the debt limit unless they're under some pretty significant pressure from markets. So I think we're in store for some pretty dark days here before that happens. Hopefully it doesn't do too much economic damage before they actually figure it out, but we'll come back to that. We should talk about that because that's probably, we've got two real threats now to the economy. One is the #unfolding banking crisis and which we have been talking about, and now the debt limit is front and center, and we should talk about that as well. So we'll do that. But before we do, let's talk about the job numbers for the month of April. Dante, do you want to give us the rundown?

Dante DeAntonio:          Sure, I can do that. I think more than anything else, if you just looked at the top line number in April, you get a little bit of a misleading picture of what's going on in the labor market. Added 253,000 jobs, and the unemployment rate ticked lower to 3.4%. But I think in both of those cases, there's some sort of obvious signs of softening underneath the data that's there at the top line. In the case of payroll employments, there were big downward revisions to the prior two months of data totaling almost 150K. The three months after-

Mark Zandi:                     That's pretty big, right? Those are pretty significant downward revisions.

Dante DeAntonio:          Biggest revision if you combine both months since December of 2020, and that was kind of an odd month where employment declined. So certainly among the largest downward revision since the pandemic started. The three-month average is at 222,000 now, it was 345,000 just last month prior to revision. Huge swing in terms of what we think trend job growth looks like. In terms of industry detail, there wasn't a whole lot that was noteworthy. I think construction and manufacturing both turned back positive in April after declining in March. That's probably a positive sign there that things aren't completely falling off in goods producing industries. Temp help is another one where weakness continues and is likely a sign that certainly softening is likely to keep moving as we go throughout the year. Temp help is down something like 50,000 jobs now in the last three months, and typically a bellwether of broader weakness in the labor markets to come.

Mark Zandi:                     Can I ask that quickly on that one? Is that demand or supply, is it that they can't, temp companies can't find people to place? Or is it because there's just less demand for temp help? Or both?

Dante DeAntonio:          I think it's a fair question. I think up until this month, I would've said it was likely demand because we were adding lots of folks to the labor force every month, and supply didn't seem to be as big of an issue. Obviously this month that pattern changed a little bit, so I guess it's probably a mix of both.

Mark Zandi:                     Okay. Sorry, I didn't mean to interrupt.

Dante DeAntonio:          No, it's okay. On the wage growth front, things were a little bit less optimistic if you're sitting at the Federal Reserve. Wage growth had been trending more favorably in recent months, and then we got a 0.5% gain in April. Year over year wage growth, according to average hourly earnings, is now 4.4%. We got a reading from the employment cost index last week that also was not overly optimistic, still has wage growth around 5% year over year. So certainly I think a little bit more negative news on the wage growth front than we were expecting. And then from-

Mark Zandi:                     Negative in a weird way?

Dante DeAntonio:          Negative in a weird way, negative for them, not necessarily negative for consumers, I suppose.

Mark Zandi:                     Right. Strong for consumers, but if it's too strong that means hard to get inflation back down to target and therefore higher rates. Got it.

Dante DeAntonio:          Yeah.

Mark Zandi:                     Yep.

Cris deRitis:                      On that note-

Dante DeAntonio:          Everybody's side. Yeah, go ahead, Cris.

Cris deRitis:                      I was wondering, do you ascribe any mix issues to the strong growth there?

Dante DeAntonio:          Yeah. I mean we had strong growth where-

Mark Zandi:                     Can you explain that? I mean, what's motivating that? So this is average hourly earnings in the employment report, and it can be influenced by the mix of jobs that are being created. So if there's a a lot of low paying jobs that'll bias the all else being equal, the wage growth down. And if you get a lot of high paying jobs, the Congress... And this month, you've got lot less leisure and hospitality jobs, which are low wage. So maybe that, I think that's your motivation, right?

Cris deRitis:                      I was asking. Exactly. Exactly.

Dante DeAntonio:          Yeah. And certainly the biggest gains were in healthcare and in professional services where wages tend to be higher, you got fewer jobs added in leisure and hospitality so I think it certainly could be a little bit of mix there. But after we got sort of 0.3% the last few months, seeing that half a percent increase is not ideal yet, even if there was a little bit of mix involved in that. On the household survey side, obviously the unemployment rate ticked down but for the wrong reasons. We had seen strong labor force growth over the last several months, and now the labor force actually pulled back just slightly.

                                           In April, average labor force growth is still quite strong. I'm not sure that it's anything to really sort of read into in terms of a change in trend about labor supply, but employment measured in the household survey was pretty weak this month as well. It was only about 140,000 jobs added according to the household survey. I would say there just wasn't a whole lot noteworthy on the household survey side. Things sort of improved on unemployment rates falling, but it was mostly for the wrong reason in the sense that the labor force was a bit weak.

Mark Zandi:                     I know this is unfair, but I will be highly impressed if you look at the unemployment rate to the second significant digit. Do you do that?

Dante DeAntonio:          I do sometimes. I did not look today yet to see what it was.

Mark Zandi:                     Oh, I'm so curious whether it was 3.44 or 3.45. It wasn't 3.45, I guess, then it would've been revised up. I mean, it would've been rounded up to three five. Or was it 3.38? Does anyone know?

Dante DeAntonio:          We can do that calculation here while we're talking.

Mark Zandi:                     Okay. While we're chatting.

Marisa DiNatale:            It was 339.

Dante DeAntonio:          339.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Oh, okay. Okay. So it wasn't, okay. All right.

Dante DeAntonio:          And the same with wage growth, yeah wage growth-

Mark Zandi:                     Did you just do that right now or did you ChatGPT? Because as you're [inaudible 00:09:05].

Marisa DiNatale:            No, I just did it.

Mark Zandi:                     [inaudible 00:09:05] you do. Did you ChatGPT? Hey, ChatGPT, take... I wonder if you could do that.

Marisa DiNatale:            I'm not ChatGPT'ing over here.

Mark Zandi:                     You're not ChatGPT'ing?

Marisa DiNatale:            No.

Mark Zandi:                     Oh. So you just calculated that fast? That actually by itself was pretty impressive.

Marisa DiNatale:            Thank you.

Mark Zandi:                     Yeah. Okay.

Dante DeAntonio:          Well, that's lowest since summer of '69. Is that the...

Mark Zandi:                     Isn't there like a song, The Summer of '69?

Dante DeAntonio:          Oh, that was the reference. Yeah, you got it.

Mark Zandi:                     Oh, I did? Who sang that song?

Dante DeAntonio:          Bryan Adams.

Mark Zandi:                     Oh, Bryan Adams. Yeah, Bryan Adams. Yeah, for sure.

Dante DeAntonio:          You have to add that to your-

Mark Zandi:                     Yeah, yeah, yeah, yeah, yeah.

Marisa DiNatale:            Your playlist.

Mark Zandi:                     I'm definitely going to listen to that this afternoon. That's a great song. Yeah.

Marisa DiNatale:            And think about the unemployment rate.

Mark Zandi:                     And think about the-

Dante DeAntonio:          I think it was '69 was right around the 3.4.

Mark Zandi:                     Yeah. Right, right. Okay. Dante, anything else you want to call out? I noticed average weekly hours are stable, no change there, nothing to write home about. Any other? I don't want to take anybody's statistic for the game and which we will definitely play, and I'm sure some of these data in the employment report will be part of the game, but anything else you want to call out?

Dante DeAntonio:          Yeah, the only thing I would say, and I don't think I'm stealing anyone's stat here, the diffusion index which I think I had called out a month or two ago, it's still weak. And actually it looked like it had rebounded last month, and now with revisions it's been under 60 now for three months in a row, which is the first time that's happened since the pandemic really.

Mark Zandi:                     Can you explain that for the listener?

Dante DeAntonio:          Yeah, yeah, sure. The diffusion index measures essentially the breadth of job creation. So it looks at the share of industries that are adding jobs versus the share of industries that are losing jobs. And so a diffusion index of 57 means that's essentially 57% of industries at the detailed level are adding to jobs and 43% are losing jobs. It's not quite that simple because there's industries that aren't changing, obviously, that get split in there too. Typically, at a fusion index once it gets south of 60 and starts heading towards 50, that is usually consistent with job losses as opposed to job gains. So we had been well above 60, historically high in 2022, and it's come down quite a bit over the last year. And certainly you can have a diffusion index between 55 and 60 and still have steady job gains and that's sort of where we are right now. But I think it's something to keep an eye on. If we see that continue to creep lower, that would be a signal that job losses could be on the horizon.

Mark Zandi:                     On the breadth, I was actually impressed that some sectors, like how construction added jobs, manufacturing added jobs, financial services added jobs. Now banking lost jobs, but insurance increased. So at a higher so-called [inaudible 00:11:51] level, higher industry level, it was actually impressive all the positive signs that I saw. Yeah.

Dante DeAntonio:          Agreed.

Mark Zandi:                     Almost perplexing, I'm almost thinking, "Well, we're going to get more revisions when this is all said and done." So it's that 253,000 probably isn't 253,000 when it's all said and done. Be my guess.

Dante DeAntonio:          Could be close.

Mark Zandi:                     Would that be your intuition?

Dante DeAntonio:          Yeah. I mean based on what we saw in terms of revisions, I wouldn't be surprised to see [inaudible 00:12:20]

Mark Zandi:                     You wouldn't be surprised. Yeah. Okay. Okay, Marisa, let me turn to you next. So you heard the rundown. Anything, any color you want to add to any of that? Generally speaking, how do you view the employment report in the context of an economy avoiding recession, but also in the context of inflation and what the Fed might do next?

Marisa DiNatale:            I agree with Dante's take. The headline looks stronger than I think some of the underlying detail is. The household survey is certainly not as strong as the payroll survey. The labor force declined, the participation rate didn't move. The employment gain on the household side was much smaller, and those big revisions in the past two months have me wondering if we're going to see more of these big downward revisions and perhaps this is overstated. Kind of what we've been expecting to see is just keep expecting sort of the bottom to start falling out month after month, and it just doesn't really happen. So it's still certainly a tight labor market, but take that in account with the JOLTS data that we got this week with some of the other data we have on layoffs, and it's very clear that the job market's cooling.

Mark Zandi:                     JOLTS being Job Opening Labor Turnover Survey.

Marisa DiNatale:            Right. So we saw a big decline in the number of job openings, we saw a decline in hires. So it's consistent with a cooling job market but nothing catastrophic, so it's good that it's cooling seems to be doing so slowly. The wage growth numbers from the payroll survey, I was just taking a look by industry, and I do think it is more of an industry mix, that half a percentage point increase that looks very strong over the month. If you look at some of the industries like leisure hospitality and retail where wage growth has been very, very strong over the past couple years, it was pretty weak. So I think it is more of a mix of the kinds of jobs that were added over the month.

Mark Zandi:                     Okay. So generally speaking, job growth still solid, strong, but slowing and probably slowing a bit more than the headline number [inaudible 00:14:41] suggest?

Marisa DiNatale:            I think so. I think so. Yeah.

Mark Zandi:                     Cris, do you agree with that characterization?

Cris deRitis:                      I do. I do. The revisions, I certainly agree with Marisa and Dante that the revisions give me pause. When looking at that top line, 253,000 sounds great, but good chance that it comes down.

Mark Zandi:                     Right. Anything else in the report that you think is important to call out?

Cris deRitis:                      We see good results across the demographics, assuming those hold as well. So again, that's favorable. It's indicating it's not just in a few key sectors where you're seeing some of this growth, so that certainly would be a positive.

Mark Zandi:                     Yeah. It looks like the market, I mean the stock market and the bond market are viewing it relatively positively. There's a lot other things going on, obviously like-

Cris deRitis:                      Yeah.

Mark Zandi:                     ... regional bank stocks and that's bouncing up and down and all around. But it feels like market had no problem with the report. Is it? So what do you think? What does this mean for monetary policy, do you think? I think markets are anticipating that the Fed rate hikes are over that. If you look at the futures market for Fed funds, the rate the Fed controls, the increase the Fed put in place on Wednesday, the quarter point, putting the funds rate over 5%. That's the end of the story. That's the so-called terminal rate, the highest rate's going to get in the cycle. And then markets seem to be anticipating, looks like rate cuts in the second half of the year. They kind of digested today's numbers well, I've seen nothing but green on the screen up to this point in time. That could change, obviously, but that's the case. So it feels like markets feel pretty good about this and what it means about... It's consistent with the idea that the fed's going to end its rate hikes here. Is that a fair interpretation?

Cris deRitis:                      I would say so. I think market is discounting some of these top. If you just took the report on the surface, then you might think, "Oh, still lots of strength", that 0.5% average hourly earnings, that would cause an alarm bell. It would've caused an alarm bell a few months ago. But I think given all the other issues and the fact that there are these revisions and potential mix issues, I think markets sussing that out.

Mark Zandi:                     Yeah, okay. It just feels like, to me, the labor market is moderating very gracefully here so far. Unemployment did notch down 3.4% in the month, but it was 3.4% in January and basically it's gone nowhere for about a year. It's been hovering around 34, 35, 36 for a year, and we're seeing kind of a normalization in all the underlying aspects to that. Hiring is normalized. It feels like layoffs are normalizing. They've been incredibly low. And now you saw the unemployment insurance claims are weekly average is, what? 240, 250, something like that, which is pretty consistent with where you would see it in a well-functioning economy. Quit, go back a year ago, it felt like everyone was quitting their job. Quit rates are still I think maybe a little bit elevated, but not that much more elevated. It just feels like everything is kind of normalizing in a reasonably graceful way.

                                           Even wage growth. With that rate of that low unemployment, you might have thought, well we're beyond full employment, therefore wage growth would accelerate. It wouldn't decelerate. But it's still too high, no doubt about it. And it may be not coming in as fast as the Fed would like to see it, if they could write it on a piece of paper, but it feels like it is coming in reasonably gracefully. And I think actually Chair Powell, Fed Chair Powell, said something to that effect in the press conference after the monetary, the FOMC met, and they raised interest rates. And he says he doesn't think recession is going to occur, and one reason for that is this kind of normalization that seems to be happening in the labor market. It feels like it's all coming together. Am I being, I know I am but I'll ask, am I being too sanguine? Or not? Cris? Or Dante?

Dante DeAntonio:          I mean, I feel like [inaudible 00:19:18] crashing too fast. I think if anything, there's signs that the slowdown is getting slower. You mentioned claims, they rose a lot in February, January and February, but now they've basically sort of stabilized around 240,000. So it certainly doesn't look like layoffs are accelerating at this point. We got the downward revisions to job gains, but even if job growth was at 150,000 instead of 225,000, I think we'd still be totally fine with that. So the fact that job gains are slowing is exactly what we want and expect to happen. So I think there's a lot of room on the downside yet for things to go further south before it's a big concern. I think the real question is are things slowing fast enough and are they slowing fast enough that the Fed won't keep raising rates? And that in my mind is the biggest question moving forward.

Mark Zandi:                     Yeah, right. Cris, any pushback there on my sanguine picture I just painted for the labor market?

Cris deRitis:                      No. If this is the optimistic part of the podcast, I'd agree with all. I'll even throw in another factor that gives me some optimism or makes me [inaudible 00:20:22]

Mark Zandi:                     Oh, okay. I'm all for that. Go ahead. Fire away.

Cris deRitis:                      Small businesses, small business formation. Applications for small businesses continues very, very strong.

Mark Zandi:                     How timely is that data? I know that's from IRS, that's based on the EIN, the employee-

Cris deRitis:                      It's weekly.

Mark Zandi:                     Oh, it's weekly. Oh, yeah.

Cris deRitis:                      Haven't checked it in a couple of weeks now so maybe if I go back, but in my last read, we were still above 2019 levels in terms of weekly applications. So somebody's out there still seeing opportunity.

Marisa DiNatale:            And that's promising just in light of tightening credit conditions. If people still feel confident enough to go out and try to create a small business, and they must be, presumably, many of them are getting credit from somewhere. So that's also a good sign.

Cris deRitis:                      At least so far. I guess that's the risk. If the tightening standards is coming and the regional banks, especially the small banks, are primary providers of a lot of that small business credit. That could be the...

Marisa DiNatale:            But so far you're saying there's no sign that that's crimping growth in businesses.

Cris deRitis:                      Entrepreneurs are still out there. They're still sensing opportunity. They're still willing to fill out an application.

Mark Zandi:                     Yeah.

Cris deRitis:                      That makes-

Marisa DiNatale:            Probably a lot of laid off tech workers.

Mark Zandi:                     I like this. I like this game. Everyone's got to say something nice.

Cris deRitis:                      A positive.

Mark Zandi:                     Yeah. This is the Thumper principle. Don't say anything if you can't say something nice or don't say anything at all. What's the Thumper principle? Don't say anything. Well, I don't know. You know what I'm talking about, right?

Cris deRitis:                      Yeah, yeah, yeah.

Mark Zandi:                     From Bambi.

Marisa DiNatale:            If you can't say something nice, don't say anything at all.

Mark Zandi:                     Oh, that's it. Yeah, say that. What is it, Marissa?

Marisa DiNatale:            If you don't have anything nice to say, don't say anything at all.

Mark Zandi:                     That's it. That's it. It's something to live by. Yeah. All right. I got one. I got to another one.

Marisa DiNatale:            But that's not why people listen to our podcast.

Cris deRitis:                      No. But I think they need some cheering up maybe.

Mark Zandi:                     Yeah.

Cris deRitis:                      The last couple weeks have been kind of brutal.

Mark Zandi:                     Yeah, that's true. We'll get to the brutal stuff in just a second. But one other positive thing in the employment report for me was you mentioned labor force down in the month. No doubt about it, it fell, but it's been up strongly in recent months. And year over year labor force is up 2.7 something million people. And you divide by 12, that's 225, 230,000 being added to the labor force every month in the past year. I keep coming back to this, but that's a lot, that's consistent with the job growth which is good. The labor market by that measure isn't getting any tighter. But how can we be at full employment and labor force grow to that degree? Wage growth decelerate, it doesn't add up to me. Feels like 3.5% unemployment is pretty close, is consistent with full employment. And you're listening to other economists in the Fed, they say, "No, no, no, it's 4%" but why? Why do you think that? Dante, do you have any view on it? Do you agree with me? It feels more like three and a half, doesn't it?

Dante DeAntonio:          I mean, I agree with you. It certainly doesn't feel like we're well beyond full employment given everything we know about what's happening in the labor market. So yeah, I think it's getting harder to argue that full employment is 4% when we've been at three and a half for a long time now. It's not like it's been a month or two, it's been most of a year at this point. And wage growth is certainly not accelerating, and we continue to see labor supply picking up. So I think it's hard to buy the argument that we're well beyond full employment at this point.

Mark Zandi:                     Yeah. Marissa, Cris, any pushback there? Are we all in the same?

Marisa DiNatale:            I think it's been well below 4% for a long time prior to the pandemic. I mean, even prior to the pandemic we had a very low unemployment rate and wage growth wasn't that high.

Mark Zandi:                     It was low. It was consistent with low inflation too.

Marisa DiNatale:            Yeah.

Mark Zandi:                     You don't see it either?

Marisa DiNatale:            No, I don't see it.

Mark Zandi:                     Interesting. Yeah, Cris? No?

Cris deRitis:                      Yeah, yeah, I agree with that.

Mark Zandi:                     You would? Okay.

Cris deRitis:                      The wage growth is above equilibrium so maybe we are a bit, you could argue that we're a bit beyond, but it's not screamy, it's not accelerating to Dante's point.

Mark Zandi:                     Yeah. Okay. All right. Well, let's turn to the couple of those issues that are more dark threats to what's going on here. The banking crisis, we've been talking about that quite a bit. Cris, any update there? I mean, I know you watched the data very carefully. One thing that I find a bit spooky is the regional bank stocks are still under a lot of pressure. I won't name names, but they're out there. They're up today I guess and I don't know if that's a trend, but just after all of the government support here, the stepping in and guaranteeing the deposits of folks with deposits below the insurance limit and above the Fed's bank term funding program to provide liquidity to the banking system.

                                           The very aggressive resolution of troubled institutions by the FDIC, the pretty muscular government response. I'd been hopeful that that was it, that the crisis was, or at least the acute phase of the crisis was over. But I'm a little nervous about that in the context of these bank stocks under a lot of pressure. What do you think? How worried are you about this? Or do you think this is just short sellers looking for an opportunity and they'll get rung out?

Cris deRitis:                      Yeah, that's where I was going to go. It's all psychological at this point. The balance sheets of these banks actually are still pretty good for the most part. Obviously, there are issues there in terms of marking down the value of bonds or potential CRE issued credit, credit issues in the CRE market. But taking all together, still lots of capital. These banks are really well run and I see more of the psychological and the speculative nature of this feeding on itself. You have the short sellers in there, they bring down those stock prices, then the depositors start to get nervous. There are real implications if your equity value goes down so it can feed on itself and depositors could flee. But I don't know. So I think we're still in a gray zone here in terms of that self-fulfilling prophecy continuing to occur. And although the government has been robust in its response, it's still been pretty much on a one-off basis. So there's plenty of anxiety still out there among investors and depositors that...

Mark Zandi:                     You know what I'm perplexed by? And maybe you've got some insight here, is the bank term funding program.

Cris deRitis:                      Yeah.

Mark Zandi:                     That's what the Fed calls it. That's this facility they established back in mid-March when things were unraveling. And this allows banks to borrow cash from the Fed using their mortgage and treasury securities as collateral. But the twist here is valuing that collateral at par, meaning not at the current market value, which is a lot lower because of the run-up and interest rates. Because that those securities they purchased have coupons, interest rates that are well below market value and therefore their values a lot lower. And there has been some meaningful borrowing, last I looked it was 80, 85 billion outstanding in that program. And the Fed recently, I think recently, or maybe it regularly releases the names of the banks that are using that facility, how much they're borrowing, what percent of their liabilities, their total funding is coming from that program.

                                           And you look at that list, it feels like the tailor-made for those short sellers to go in and go after those banks. And moreover, the banks know that. And it seems like the stigma of going to that facility is so high I would think at this point that they are very reluctant to go to it, which exacerbates their funding problem. So do you have any insight here? Why would the Fed? Maybe they have to do this, I don't know. Do you know? Do they have some kind of regulatory or legal requirement, or is this voluntary? Do you have any sense of that?

Cris deRitis:                      To disclose?

Mark Zandi:                     To disclose.

Cris deRitis:                      There are other programs where they disclose, but it's with a lag. It's after the fact.

Mark Zandi:                     I think so. Like the discount window, right?

Cris deRitis:                      Yeah, that's right.

Mark Zandi:                     I just find this so bizarre that they would be...

Cris deRitis:                      I guess you have these competing theories or forces. On the one hand you want to be transparent, and by being transparent you assure the depositor or the investor that this bank is well run. All cards on the table. Look, everything is there. But then on the other hand, you're right, there's the stigma. If you are the only guy going-

Mark Zandi:                     Right.

Cris deRitis:                      If you're the only one going to this facility, it sends a signal as well.

Mark Zandi:                     Yeah.

Cris deRitis:                      I guess what they should do is have all the banks, JP Morgan, everyone should go.

Mark Zandi:                     You should borrow at least something.

Cris deRitis:                      Should borrow-

Marisa DiNatale:            Kind of like during the financial crisis.

Cris deRitis:                      Exactly.

Marisa DiNatale:            That's what they need. Everyone go.

Mark Zandi:                     Yeah.

Cris deRitis:                      Right.

Mark Zandi:                     So your sense is though that this is short sellers, other speculators kind of driving the stock prices down, that the fundamentals here are obviously the banks are under a lot of pressure, but they're fundamentally in good shape because they've got a lot of capital. And they've got the government support now. And that at some point here, that is what prevails, that investors say, "Hey, these banks are pretty solid. These bank stocks have gotten driven down to such low levels that this is an opportunity." So value investors, so to speak, come in and shore up the bank stocks. And we don't get into this kind of doom loop where bank stocks go down, that spooks depositors who flee the bank, who then cause the bank stock to go down further. And you get into this kind of self-reinforcing vicious cycle. That's your kind of sense of things here, that that's what's going to happen.

Cris deRitis:                      It is, but there's definitely risk there.

Mark Zandi:                     Yeah.

Cris deRitis:                      And I'm saying, it's effectively you're saying there's going to be some type of short squeeze here. That the shorts are going to go down driving things down, but then you do have another class of investor. And the buzzers say, enough, "I'm fine. FDIC is covering me" and they don't worry about it anymore and the prices start to shoot back up. But in the meantime, things can get out control, they can feed on themselves pretty quickly.

Mark Zandi:                     Right.

Marisa DiNatale:            Do you think that the government has some role to play here to stop this if this does become a downward spiral? I mean, because it sounds like what you're saying is this isn't warranted by fundamentals, and if banks just keep falling and the government has to come in and ensure all these uninsured deposits, I mean, where does it end?

Mark Zandi:                     I got a few ideas. Cris, what do you think?

Cris deRitis:                      Yeah. Well, I guess to the question, the basic, yeah I do think government has a role to play here. If they let this get out of hand, they're going to have to pay a bigger price later on. You could go all the way to a bank holiday if it really comes down to it. So I think speaking forcefully with confidence, that certainly is the first thing to do here. Then we can consider the broader more blanket guarantee of more accounts by the FDIC just to quash any concerns here. But I think if you let too many of the dominoes fall, then they will start to really fall in on themselves and need to avoid that.

Mark Zandi:                     Well, the first thing I'd do is I'd lose that list somewhere. Oh. Oh, yeah. Where's that list? I can't find that list. I'll get back to you on that and come back a month later with the list.

Marisa DiNatale:            Or release it with a lag or a long lag or something.

Mark Zandi:                     Exactamundo.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Yeah. I'd say at least a month lag. The second, I'm not sure to understand all the unintended consequences of this, but I would seriously consider not allowing short selling of banks. Kind of what happened during the financial crisis because the SEC, Securities and Exchange Commission, I think 800 banks... There were 800 banks that short sellers could not short for a period of time because they had a similar kind of problem back in the financial crisis, where you're getting into that kind of doom loop I just described. And then I think we really need to take a look at the positive insurance. I'm increasingly of the mind, and again, here I got to think about it more deeply, and there might be more unintended consequences than I fully appreciate. But I'd consider putting deposit insurance on all deposits, particularly business deposits.

                                           And that's where you have a lot of uninsured. Those are big deposit accounts, uninsured, but businesses are using them to make payroll and just operate their business. And I don't really see deposit, the logic for not having deposit insurance on all deposits is you want the big depositors to be careful where they put their money, which bank they put their money in, and that by so doing disciplines the bank to not take untoward risk. But I just don't think that happens. I don't think depositors are really paying it. They're operating their businesses, their households, they're not paying attention to the, is that a good bank, a bad bank? And they don't have the ability to judge that. That's really on the shareholders and the debt holders of that bank, the other creditors, not the depositors.

                                           So particularly in a world where people can move money instantaneously, and you've got social media egging people on just fanning the fear. And in that context, I'm not really sure we want the same kind of deposit insurance system we've had in the past. We have to pay for it, you got to pay for the deposit insurance. The banks have to pay for it. And if they have to pass that through in the form of lower deposit rates or higher loan rates, I get it. But I think that makes a lot more sense than this artificial 250K, that doesn't make sense to me. I don't know. I've got to think about that more carefully. Cris, on the fallout.

Cris deRitis:                      Transactional.

Mark Zandi:                     Oh, sorry, go ahead.

Cris deRitis:                      I was going to say clearly on those transactional accounts, like the payroll accounts from businesses that you're right. They're not looking to, they're not staying-

Marisa DiNatale:            They're not looking for yield in a [inaudible 00:35:47]

Cris deRitis:                      No. And they don't have the time to study the bank balance sheet. They're just operating their businesses.

Mark Zandi:                     I wonder, does this increase the logic of a Central Bank Digital Currency? I mean if you had a CBDG, you wouldn't have...

Cris deRitis:                      Banks.

Mark Zandi:                     ... presumably deposit runs, right? Well, you wouldn't have banks.

Cris deRitis:                      Right.

Mark Zandi:                     Fill in the blank. I'm just saying, all else being, I'm not a fan of the Central Bank Digital Currency, but feels like this might be an argument, one argument at least that might be... there's some value.

Marisa DiNatale:            Can you explain what that is?

Mark Zandi:                     Basically your deposit account is sitting at the Fed, not in the bank, not in the banking system, kind of what the Chinese I think now do. Lots of different concerns about it. One is just privacy. And if you're doing business directly with the Federal Reserve, the government has access to your financial information. Do we really want that? I'm not sure. But we should have a podcast on CBDG. We'll do that.

Cris deRitis:                      We're already pretty close with these money market funds.

Mark Zandi:                     Yeah, that's an excellent point.

Cris deRitis:                      The reverse repo structure.

Mark Zandi:                     Do you want to explain that? That's a little complicated, but you're-

Cris deRitis:                      That's a little bit in the weeds here. Yeah. You have these money market funds. Traditionally, they invest in all sorts of short term assets, commercial paper, treasury securities. There's also a reverse repo structure which I won't get into, but essentially it's a loan to the Fed, to the Federal Reserve. So you have these funds that go into the Fed that in return, they get a bit of yield. So if you have this money market fund that only had this type of structure with the Fed, essentially you don't have the FDIC insurance cap that you're talking about because the Fed is going to pay. There's no question of not getting your funds back. And you're getting some yield there from the reverse repo structure. So effectively if you are a depositor, you can circumvent the bank. You don't have to go through a commercial bank, you go into the money market fund and you're getting full coverage on your deposits through the Fed.

Mark Zandi:                     Yeah. Okay. Lot untangle there. Maybe next week in the podcast where you can talk about what this all means for lending and economic activity because by then, I think we get the senior loan officer survey data, right Marissa? From the Fed?

Cris deRitis:                      That's Monday.

Marisa DiNatale:            Next week.

Mark Zandi:                     It's on Monday? Okay. And that's a survey of loan officers at banks. And we get a better sense of how they're thinking about underwriting and how aggressively they've tightened their standards, which obviously is key to loan growth, which is key to economic activity. But we'll come back to that. I want to play the game, and then I want to come back and talk about the debt limit a bit because that's now top of mind. And then we'll call it a podcast. But let's play the game. Does that sound okay? Does that sound like a fair? Okay. Marisa, tradition has it that you go first. I don't know who set that tradition. I mean I might-

Marisa DiNatale:            I believe you did.

Mark Zandi:                     Did I do that? Okay.

Marisa DiNatale:            I think you did that.

Mark Zandi:                     I like the tradition. What do you think? I like it. It's good. You're actually-

Marisa DiNatale:            It's good for me because then it reduces the odds that someone steals my statistic during the game.

Mark Zandi:                     Oh, that is a reasonable point.

Marisa DiNatale:            So I like that.

Mark Zandi:                     Yeah. Yeah. And you're so good at this game. I want you to put your hands up though, during the game like this. You got to do this. No hands. I don't want any hands down here.

Marisa DiNatale:            I'm not. Hey.

Mark Zandi:                     I'm just saying.

Marisa DiNatale:            I do not do that.

Mark Zandi:                     You are really good. You are so good. You're so good. You're really good. Okay. But I'm going to play hardball today. Okay. I'm in the game this week.

Marisa DiNatale:            What does that mean? Oh, boy.

Mark Zandi:                     That means I'm going to win, is what it means on the game. Actually, what it means is I'm going to lose miserably, but we'll give it a shot. Okay.

Marisa DiNatale:            All right.

Mark Zandi:                     Marissa, you're up.

Marisa DiNatale:            Okay. My statistic is 4.7%.

Mark Zandi:                     Is it in a jobs report?

Marisa DiNatale:            Yes.

Mark Zandi:                     Is it payroll survey based?

Marisa DiNatale:            No.

Mark Zandi:                     Household. There must be household survey based. Okay. And is it a percent of labor force? The 4.7?

Cris deRitis:                      Is it a demographic?

Mark Zandi:                     Hold on one a second. She didn't answer that one question.

Marisa DiNatale:            Yeah, it is a percent of the labor force.

Mark Zandi:                     Why did you pause?

Dante DeAntonio:          Unemployment rates.

Marisa DiNatale:            It's an unemployment rate.

Mark Zandi:                     Oh.

Cris deRitis:                      African American.

Marisa DiNatale:            Yes. Oh, okay. He's looking it up. I can tell he is looking it up.

Mark Zandi:                     Oh, what? Oh my gosh. Oh my gosh. Well, 47, is that in new low? New all time low?

Marisa DiNatale:            So that's the unemployment rate for Blacks and it's the lowest it's ever been, and the data goes back to 1954.

Mark Zandi:                     Wow.

Marisa DiNatale:            It's been trending lower. And if we also look at the participation rate is 63%, which is high. It's the highest it's been in... You have to go back to the late 2000s I think to see, or I'm sorry, the late 1990, 2000 period to see a participation rate that high. So the gap between the white unemployment rate and the Black unemployment rate is the lowest now that it's ever been. It's under two percentage points. And then this is also, if you look at Hispanics too, it's not quite an all-time low but it's near there. And the data there also goes back to the fifties. So all demographic groups are looking pretty good.

Mark Zandi:                     This goes to the high intensity labor market, right? This high intensity meaning the labor market is tight. We're full employment, we've been there now for at least a year. And it's drawing everyone in, including groups that have historically been kind of on the periphery of the labor market. Now they're in, they're fully in. And this-

Marisa DiNatale:            And wages [inaudible 00:42:09] too.

Mark Zandi:                     Yeah.

Marisa DiNatale:            Drawing people in.

Mark Zandi:                     This is one of the key benefits of having a labor market like this because you are now bringing people in that typically have a hard time staying into the labor market.

Marisa DiNatale:            Yep.

Mark Zandi:                     That's a great statistic. A very good one. Do you want to go next? Yeah.

Dante DeAntonio:          Negative 2.7%.

Mark Zandi:                     Negative 2.7% in the job report?

Dante DeAntonio:          No.

Mark Zandi:                     Oh, okay.

Dante DeAntonio:          Got a lot of good data this week so I want to-

Mark Zandi:                     There was a lot of good data this week.

Marisa DiNatale:            Is it from the JOLTS?

Dante DeAntonio:          It is not JOLTS, no.

Mark Zandi:                     Is it labor market related?

Dante DeAntonio:          It is, yeah.

Mark Zandi:                     Oh, it is. And is this a government release?

Cris deRitis:                      Oh, productivity, right?

Mark Zandi:                     Ah.

Cris deRitis:                      There you go.

Dante DeAntonio:          I was waiting. I was taking a shot directly at Cris, so I was waiting for him.

Cris deRitis:                      Yes, I got it.

Mark Zandi:                     Cris is on fire. Way to go, Cris. Yeah. Okay, so explain Dante.

Dante DeAntonio:          So productivity growth was down 2.7% in the first quarter. The stat really I think is more important is if you look over a slightly longer time horizon, since it's pretty volatile quarter to quarter. If you look at the average since the end of 2019, it's 1.1% now over the last whatever that is, three and a half years. And if you compare that to the two years leading up to the pandemic, the average was 1.8%. So we've gotten a lot of volatility and productivity since the pandemic, but all in all, it's averaged out to basically 1%, which is pretty significantly lower than it had been in the two years leading up to the pandemic.

Mark Zandi:                     I think he's cherry-picking dates, Cris.

Cris deRitis:                      It sounds like it.

Mark Zandi:                     He's cherry-picking dates. Yeah. I mean-

Dante DeAntonio:          Even if you go back further-

Mark Zandi:                     Yeah, blah, blah, blah.

Dante DeAntonio:          Before the pandemic, a little bit lower percent if you make the average a little bit wider. But from since 2019 Q4, it's only 1.1% average productivity growth.

Mark Zandi:                     So I calculated it. I calculated it over the past three years, 2023 Q1 to 2020 Q1 being the start of the pandemic and it's 1.2% per annum. And I go back the previous three years, I thought it was like one and a half percent per annum.

Dante DeAntonio:          I think if you go a little wider on the back end, it gets a little bit [inaudible 00:44:24]

Mark Zandi:                     So three years since the pandemic hit, three years prior to the pandemic, it's a little bit on the soft side recently I think as the output is definitely weak. GDP growth is slowing, output growth is slowing. But as we can see in the labor market, the businesses do not want to lay off. They're not interested in reducing their payrolls despite that, so it's kind of cutting into productivity. But you're a productivity growth skeptic, that's the point here.

Dante DeAntonio:          Correct. Yeah. I've long been. Yeah. I've been on the low end of where I think productivity growth is headed here over the next few years. I think it's got a whole lot of room.

Mark Zandi:                     Since I got you, I'm going to ask you a question I'm getting with every day.

Dante DeAntonio:          Okay.

Mark Zandi:                     What about AI and machine learning? Isn't that going to upend things? I mean, the productivity gains here could be enormous to the degree that this is almost dystopic. We're going to have not a tight labor market, we're going to have way too much unemployment out there. How do you respond? What do think? How do you think about that and how would you respond to that kind of concern?

Dante DeAntonio:          I think my response always, whenever I'm thinking about productivity growth and somebody mentions a specific technology, my answer is always that it's going to take a lot longer than you think for that actually to play out in terms of productivity growth. So if you're asking me about productivity growth in 2030, maybe AI plays a significant role in productivity growth then. I don't think over the next couple of years. And I think if anything, a big disruptive technology like that has the potential to reduce productivity growth in the near term because you have lots of companies expending energy and man-hours trying to figure out, "Does this work for me?" And for a lot of them, it probably doesn't and they just wasted how much time and effort trying to figure out if they could get some lift out of it. So I think of anything, it's probably a headwind right now.

Mark Zandi:                     I saw Marissa smile, Marissa, is that?

Marisa DiNatale:            It hits a little close to home.

Mark Zandi:                     We had some experience with this, don't we? [inaudible 00:46:22]

Dante DeAntonio:          Yeah, we have our own experience here that, and just other companies, that are trying to see if there's benefit and maybe not finding it right away. And that doesn't guarantee you won't find some eventually.

Mark Zandi:                     Yeah. I'm confident we will. But as to your point, it's not straightforward. You got to work at it and it's going to take some time. And in the meantime, it's a bit of a distraction actually, right? Because you're trying to figure it out.

Marisa DiNatale:            And usually even when there's a disruption with a major technology like the internet, right? Yes, it will destroy some jobs, but it will also create a host of jobs that we can't even envision yet that goes along with that to support that. But to Dante's point, that takes a long time to play out fully.

Mark Zandi:                     So Cris, you're the productivity proselytizer I believe.

Cris deRitis:                      Yes. Evangelist. Yes.

Mark Zandi:                     The evangelist. That's the word, the evangelist. So how do you react to Dante's punch to the gut here? Or maybe the poking. He's poking the bear here.

Cris deRitis:                      He definitely poked the bear.

Mark Zandi:                     Yeah, yeah.

Cris deRitis:                      But yeah, it's a short term phenomenon. If you look at the longer term, these technologies, we haven't even figured out how the smartphone really enters the economy, how we productively use it in all its different ways, new apps being generated every day. So I think there's long runway here. So you're right, if you're just going to look at the next six months, sure. But look a little further out, Dante, and things will pick up.

Mark Zandi:                     Do you guys have a dollar bet on this? Is that right? I can't remember because Dante-

Cris deRitis:                      We don't but we should.

Mark Zandi:                     Don't bet him. Just don't do it.

Marisa DiNatale:            What's the bet?

Mark Zandi:                     Whatever it is, don't do it because [inaudible 00:48:17]

Cris deRitis:                      Over a 10-year period, because we definitely [inaudible 00:48:19]

Marisa DiNatale:            So you're going to pay each other a dollar in 10 years?

Cris deRitis:                      Yes.

Mark Zandi:                     Well, no. And actually we never pay. I definitely-

Cris deRitis:                      I'm still waiting, Mark. I'm still waiting.

Mark Zandi:                     Yeah, he's having to but I definitely never pay. Yeah.

Dante DeAntonio:          Can we put an inflation clause on the dollar so at least it's worth something?

Marisa DiNatale:            Right.

Mark Zandi:                     No, no.

Dante DeAntonio:          Escalator?

Mark Zandi:                     Oh, that's so funny. Okay. Cris, you're up.

Cris deRitis:                      I'm up. Let me find it here. 6.4%.

Mark Zandi:                     6.4%. In the jobs numbers? No.

Marisa DiNatale:            It unemployment rate? Oh, oh.

Cris deRitis:                      No, it's is not.

Mark Zandi:                     Is it labor market related?

Cris deRitis:                      It is not labor market related. I'm going off the script here.

Mark Zandi:                     You're going off script.

Cris deRitis:                      It did come out this week.

Mark Zandi:                     It did come out this week. Is it housing related?

Cris deRitis:                      It is.

Mark Zandi:                     Oh. What came out? Oh, you're not going back to that Fannie-

Marisa DiNatale:            MBA mortgage apps?

Cris deRitis:                      No, no, no.

Mark Zandi:                     The Fannie Mae survey, that kind of thing.

Cris deRitis:                      That's a good one but no.

Dante DeAntonio:          Construction spending? Something with construction spending? That was early.

Cris deRitis:                      No.

Dante DeAntonio:          No?

Cris deRitis:                      No.

Marisa DiNatale:            It's not mortgage apps?

Cris deRitis:                      No.

Mark Zandi:                     No. House prices. It's not house price related, is it?

Cris deRitis:                      No.

Mark Zandi:                     No.

Cris deRitis:                      This is one of the-

Mark Zandi:                     Oh, it's housing vacancy survey. It's the rental vacancy rate.

Cris deRitis:                      Ding, ding, ding.

Marisa DiNatale:            Oh.

Mark Zandi:                     Oh. I beat, and I know I had to sneak that in before Marisa got it.

Marisa DiNatale:            No, you know what? I was going to say it's the mortgage rate, the prevailing mortgage rate.

Mark Zandi:                     Oh, that's a good one.

Cris deRitis:                      That's a good one.

Mark Zandi:                     That's a good one. Yeah, that's a really good one. But oh, the rental vacancy rate. Right.

Cris deRitis:                      Yeah.

Mark Zandi:                     That's right. Go ahead, that's a great statistic. Go ahead.

Cris deRitis:                      It's up. So obviously rental vacancy rate, percentage of rental units that are vacant, unoccupied, it climbed up to 6.4, it had been 5.8% in Q4. It is a quarterly number. So that's a pretty sizable jump for one quarter. And it does, to my mind, point to some of the softness, certainly in the housing market in terms of affordability. People pulling back in terms of forming new households and occupying new rental space, as well as new supply coming on. We've talked in the past about this very large number of multifamily units that's under construction. So this rise in the vacancy rate certainly puts some downward pressure on rent, that's a good thing for consumers as well as for our inflation outlook. That's a positive. I guess the negative might be on the CRE prices, commercial real estate prices and what that means for banks.

Mark Zandi:                     Yeah. Yeah.

Cris deRitis:                      [inaudible 00:50:56].

Mark Zandi:                     Depends on your perspective. Yeah. Yeah. A lot of data in that report that has a vacancy survey, the homeowner here. Okay, bonus. What is the home ownership vacancy rate?

Cris deRitis:                      Oh, the homeowner? Well, I got it right in front.

Mark Zandi:                     Oh, homeowner, I should say the home. Sorry. The homeowner vacancy rate.

Cris deRitis:                      Homeowner vacancy rate is 0.8%.

Mark Zandi:                     Oh, you got it right in front of you. Okay.

Marisa DiNatale:            It's in the same release, Mark.

Mark Zandi:                     Yeah. And of course, the home ownership rate, that's the percent of households that own their own home, is 66%. Right? We're on the nose. Interestingly though, that goes up, that goes down. But for the last 50, 60 years, basically unchanged.

Cris deRitis:                      Well, when it got up to 70, then it...

Mark Zandi:                     Was too high I guess, unsustainable. That was the crisis.

Cris deRitis:                      Right, that was the crisis.

Mark Zandi:                     The bubble.

Cris deRitis:                      So I'm saying it, two thirds-

Mark Zandi:                     Feels like it's kind of right. No matter how we try, whatever policy you put in, doesn't matter. It's still 66%. One way or the other. Interesting. Okay. All right. Should I go?

Cris deRitis:                      Yeah.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Okay.

Cris deRitis:                      Hear it.

Mark Zandi:                     And as I'm one to do, I don't stick with one number. I give multiple numbers that are related. That's a hint. So ready? 4%, 1.2%, and 2.5%. What do you think? Should I give you a hint?

Dante DeAntonio:          From the employment report or no?

Mark Zandi:                     Not from the employment report, but labor market related.

Marisa DiNatale:            From a release that came out in the past week?

Cris deRitis:                      4% was the first one?

Mark Zandi:                     Yes.

Cris deRitis:                      That's the quit rate, right?

Mark Zandi:                     Oh, you're barking up the right tree, but you-

Dante DeAntonio:          So it's JOLTS.

Mark Zandi:                     It's Job Opening Labor Turnover Survey. So the quit rate is 2.5%.

Cris deRitis:                      Oh, no. Oh, it's 4 million. That's okay.

Mark Zandi:                     So what's 4.0? 4%?

Dante DeAntonio:          Is that the openings rate?

Mark Zandi:                     That's the hiring rate.

Dante DeAntonio:          Hiring rate.

Mark Zandi:                     Rate. And what's the 1.2? This should be easy.

Cris deRitis:                      Layoffs.

Marisa DiNatale:            Layoffs.

Mark Zandi:                     Layoffs. Right. And this is a rate, so it's the number of, let's say, hires as a percent of the labor force is 4%. And the reason I picked this was those percents, those rates are consistent with pretty much with what they were pre-pandemic. So pre-pandemic the labor market was tight. We had a hiring rate of 4%, we had a layoff rate of 1.2%, and we had a quit rate of 2.5%. So we've come full circle, we're back kind of where we were pre-pandemic consistent with that tight labor market. The one thing that stands out, and you mentioned it, was the number of unfilled positions. They're still very elevated, but that's coming in really fast. So the peak in the number of unfilled positions was 12 million, I'm rounding obviously back a little over a year ago. We're now at 9.5 million, 9.6 million.

                                           In pre-pandemic it was 7.5 million. So almost, it feels like the labor market is, I think that's the theme that came out of today's jobs numbers is normalizing. It's getting back to something that's more typical, after obviously being completely upended by the pandemic and to some degree the Russian War in Ukraine. So what do you think? Reasonably good. I know this is hard, but not too bad. Okay. Let's end the conversation around the debt limit. And as I said, I was in Washington this week and at the Senate Budget Committee testifying, and we've done a lot of work in this area. And I just want to lay out, because the other question I'm getting every day now, other than AI machine learning, is how's this debt limit thing going to be resolved? Just exactly what is the kind of the path forward?

                                           And I want to lay out my thinking on that and get reactions and see what you guys think. And as you know, Bernard Yaros does a lot of good work here. We've identified that the so-called X date, the date when the treasury runs out of cash necessary to pay all of the government's bills on time, is June 8th. June 8th. It could be as early as June one, but by our calculation, the treasury will have just enough cash to squeeze by and pay all the bills in June 8th. And if June 8th is not the date, and there's some possibility that it's not, it could be as late as August 8th. So the X date-

Marisa DiNatale:            Which is my birthday.

Mark Zandi:                     Who? Whose birthday?

Marisa DiNatale:            My birthday.

Mark Zandi:                     Oh, it is? Okay. Well, we really don't want it to happen.

Marisa DiNatale:            Hopefully that's not when the treasury runs out of money.

Mark Zandi:                     We really don't want that to happen. Yeah. Although I will remember your birthday forever if the-

Cris deRitis:                      Eighth. That's auspicious.

Mark Zandi:                     Yeah. Oh, yeah. Why? Exactly. So why is that an auspicious?

Cris deRitis:                      I think eight is a [inaudible 00:56:15] number in China, in Chinese.

Mark Zandi:                     You're making that up.

Cris deRitis:                      I'm not. That's why the Olympics was to 888, right?

Mark Zandi:                     Oh, that's right. You're right. Yeah. Forgot about that. Okay.

Cris deRitis:                      Right, Marissa? You should know.

Marisa DiNatale:            It is a lucky number. Yeah. Yeah.

Cris deRitis:                      It is a lucky number.

Marisa DiNatale:            Yes, it is. Yeah. Yep.

Mark Zandi:                     Why are you being so coy?

Marisa DiNatale:            I'll take any gifts that anyone wants to send my way or good wishes.

Mark Zandi:                     Oh, on August 8th right?

Marisa DiNatale:            August 8th.

Mark Zandi:                     I'll tell you now, I'm going to remember that forever.

Marisa DiNatale:            Yeah.

Mark Zandi:                     The August 8th birthday. I can't even remember my own birthday, but I'll definitely remember your birthday. Where was I? Oh, August 8th will be the latest. Yeah. June 8th is the X date. So here we are, May the 5th. We got about a month. How's this going to play out without disaster, without lawmakers not increasing or suspending the debt limit? In time we get up to June 8th and we breach it, someone doesn't get paid. I will say, I don't think there's any probability that bond holders will not get paid, at least not initially. The treasury has the ability to cut checks to bond holders through the so-called fed wire. The rest of the checks are cut through a different accounting system. And I don't think the treasury has the ability to prioritize or change that around the... It's just too difficult from a programming perspective. But they can't pay the bond holder. So they will pay the bond holder.

                                           But it'd be complete chaos if we got to that point in time. So that's not our baseline. The baseline is slow economy, weak economy, but no recession. And that's not consistent with breaching the debt limit. If we breach the debt limit, we're going into recession, it's going to be that chaotic. So what's the path forward here? What is the political, the viable political path forward to increasing the debt limit, suspending it before we breach? And my thinking is that lawmakers will, and they meet next week, president Biden's meeting with House Speaker McCarthy and others, that out of that meeting subsequently, I don't think it happens immediately after the meeting but in the next week or two or three, lawmakers decide to suspend the debt limit and allow the treasury to continue to issue debt to pay the bills.

                                           Maybe they kick the can down a month, but then they'll kick it down another month and another month and they'll take it all the way to the end of the fiscal year, fiscal year 2023 which ends at the end of September. And the reason they'll do that is because they want to line up the decision around increasing the debt limit to the decision around the fiscal year 2024 budget and funding the government and avoiding the government shutdown, which would happen on October one. And by so doing, they can pass legislation together which would increase the debt limit. And my sense is that the agreement would increase it for enough to extend it to the other side of the presidential election. They don't want to the debt limit to get in the middle of the presidential election process because that would be a complete mess. And at the same time as increasing the debt limit they also increase... They pass a piece of the legislation that funds the government going into next year, fiscal year 2024.

                                           And both sides can declare a rhetorical political victory, the house Republican, because in that budget I'm assuming that there will... That's fair game. That's appropriate to discuss spending levels and taxes and the composition of spending. That's all fair game. And now that will come some additional spending restraint relative to the current budget. And so the house Republicans can declare victory. They can say, "Hey look, well we were able to reign in government spending at least to some degree." And the president can declare victory by saying, "Look, we passed an increase in the debt limit that was separate from this budget negotiating process. So I got a clean debt limit increase." Both those things can happen. We can keep both those things in our mind politically, rhetorically, and life goes on and we move forward. Well, one last thing I'll say and then I'll turn it back to the group and see what you think is that I don't think this happens without some real financial market turmoil.

                                           I think we're going to see some pretty dark days dead ahead where the stock market's going to be under extraordinary pressure. We'll see some gapping out of credit spreads in the corporate bond market. Treasury yields, I'm not exactly sure what happens there, but corporate spreads will widen, the dollar might come under some pressure in this period. But it's in that turmoil in all that red that people see on their screen that generates the political will necessary to go down the path I just described. So it's not going to be painless, it's going to be painful, but at the end of the day they're going to get this done before we breach. And the pain that we suffer isn't going to be enough to push the... It's going to hurt the economy, but isn't going to undermine it to the point that we get into recession. Okay. I laid out a pretty arduous path there because it is pretty arduous. What do people think? I'll turn to you Dante first. Do you have a view on this?

Dante DeAntonio:          Not a strong view. I mean, I agree that I don't see a situation where we actually breach the debt limit. How we get from point A to point B seems like it's going to be a bit murky and not clear cut and there's not going to be a swift resolution. So I mean the idea that this is going to get kicked down the road the fall is not surprising I guess to me, and it seems reasonable that it's going to take a while to come to some resolution. And hopefully they can come in an agreement where both sides can claim some sort of victory and save face, but ultimately we get done what needs to get done. So I think that makes sense to me. It'd be nice if it didn't have to go that way to get to a resolution, but it's not always the case.

Mark Zandi:                     So you kind of buy into the scenario.

Dante DeAntonio:          Yeah, I don't have any reason to-

Mark Zandi:                     Because again, there's not a better... We can't think of a more likely path.

Dante DeAntonio:          Not given the current environment, no. I think there's a much easier path that is not a realistic one. But yeah, I think that makes sense.

Mark Zandi:                     Cris, I'm holding you at bay here because I sense a different perspective so I'm going to go to Marissa next. Marisa, what do you think about that path?

Marisa DiNatale:            I think that seems the most likely path. Is the administration still pursuing this constitutionality of the debt limit?

Mark Zandi:                     Well, you mean like the 14th amendment you mean?

Marisa DiNatale:            Yeah.

Mark Zandi:                     Oh, invoking the 14th amendment saying that... That's 14th amendment, the constitutions, there's a clause in there that kind of sort of suggests that they might be able to continue to pay... Issue debt on the other side of the debt limit because if they don't, then they're not meeting the requirements of the 14th amendment. I don't know that. They're certainly not officially looking into that. I would assume the lawyers in the White House are looking at it as a possibility. But that's a possibility if things got crazy and there and we actually did breach, but that's a pretty uncertain path because that would go to the Supreme Court, who knows how the Supreme Court's going to rule.

Marisa DiNatale:            Yeah. So it seems that would take a long time, right?

Mark Zandi:                     Could take a while. And during that period it would be pretty messy I would think, enough to push us into recession. Okay. Cris, what do you think?

Cris deRitis:                      I think what you've laid out is a very rational and logical approach, but there's the political element here. And I think you do have to withstand the torpedo's contingent of the Republican Party that is going to make this much messier. So I would say we're likely not to breach, that's still my baseline as well, but I think we're going down to the wire.

Mark Zandi:                     So you and I and Bernard Yaros wrote a paper about going down the debt limit, what was it called? Debt-

Cris deRitis:                      Rabbit hole.

Mark Zandi:                     Going down the debt limit rabbit hole. And we laid out these different scenarios. And if you add up all the scenarios where we breach the debt limit, it adds up to... We assigned a probability of 5% to all those possible scenarios. And that's everything from they breach for a day or two, financial markets loses their mind, they reverse course like they did with tarp, the bailout plan back in the financial crisis, sign on the dotted line and we move forward. To we breach and it takes them weeks to resolve and increase the debt limit, and obviously that's a much darker scenario. And if you add up all of those scenarios, we attach the 5% probability to that 95% probability to something consistent with what I just articulated, that it's going to be messy. But at the end of the day, it gets done before there's a breach. Does that 5% sound right to you at this point?

Cris deRitis:                      I'm a little bit more pessimistic.

Mark Zandi:                     More pessimistic. Okay.

Cris deRitis:                      That we go down to the, right? Mistakes are made.

Mark Zandi:                     Yep.

Cris deRitis:                      There's this big game theory going on, game of chicken that's going on here, and a false move there could certainly push us over the edge. The prolonged breach scenarios certainly possibly, but a more likely scenario if we did breach is that it would be relatively short-lived. Financial markets really do crater, angry constituents are calling their Congress people and finally they put together some deal. So I think that's more likely than the extreme, this drags on for months or weeks at a time. I guess what I worry about, and part of your argument here is that we do need a financial market meltdown of some sort, or at least some-

Mark Zandi:                     Yeah.

Cris deRitis:                      I worry that there may be some complacency built into the system here. Investors expecting things to work out so you don't actually get that decline that you would need to trigger the reaction. There's, again, another game theoretic argument here and that's what may cause this to go right down to the wire.

Mark Zandi:                     One thing that gives me a little bit of solace is there are cracks developing in the financial system. You can see it in short-term treasury yields on short-term treasury securities, they... Very near, very short, short one month. The yields have fallen as secure, relative to where they were a month ago, as investors are thinking, "Oh I will get paid in the next month that the X date is a..." Although that's coming to an end here pretty quickly because we're running out of days. And you can see it in CDS, Credit Default Swap, that's kind of the insurance premium. You can go out and get insurance against a default on the treasury bond, you have to pay a premium. That's called the Credit Default Swap spread.

                                           And that's now very wide relative to a historical scenario. It's not a very liquid market so hard to read a lot into it but nonetheless. And you can look at treasury yields around these different X dates that we described earlier. They kind of jump at those points. So investors are starting to take it in, at least in the money markets. So some souls there that, and we're not completely complacent, but I hear ya. Maybe you need a lot of red on the screen, I think to get lawmakers to move.

Cris deRitis:                      Yeah. What are you thinking in terms of the amount of red? Because there's a lot of red already because of the banking crisis. So in an investors' mind, they might not be separating out these two effects, right?

Mark Zandi:                     Yeah. I think the model's 2011, the last time we had a pretty ugly debt limit battle, and I think there was a day or two the market was down on the Dow a thousand points, something like that.

Cris deRitis:                      Yeah. Okay.

Mark Zandi:                     And the Dow was a lot lower back in 2011, so we could be down 2000 points to provide context. So something like that. Yeah, something pretty serious. Yeah.

Cris deRitis:                      Okay.

Mark Zandi:                     Which then leads to, well, isn't that going to undermine confidence and wouldn't that push us into recession? And so I think it's going to feel very uncomfortable here for the next few months. Yeah. I don't think I want to go down the path of, end the conversation like we have in the past asking recession probabilities. Should I or Lou, you want to just hold that off? This is already getting to be a long podcast. What do you think, Marissa? Should we? We'll wait.

Marisa DiNatale:            I was just looking at our poll results thus far.

Mark Zandi:                     Oh, let's do that. Let's end with what the rest of the gang thinks. We had a macro meeting this morning, macro meaning U.S macro. We all get together and talk about the outlook and the underlying assumptions in that outlook, including what we thought about the debt limit. And we have been asking participants in that macro meeting what they think the probability of recession. What's the question exactly? Probability of recession over the next year? I think that's what it is. Can you tell?

Marisa DiNatale:            The next 12 months.

Mark Zandi:                     Next 12 months. Yeah.

Marisa DiNatale:            What's your subjective probability of recession in the U.S over the next 12 months?

Mark Zandi:                     Okay. I was going to say maybe we can all guess what that is, but that's like taking it too far. So what is it? Does the group think?

Marisa DiNatale:            Well, there's no majority but the plurality, so 47% of respondents so far have put it at 50 to 60%, which I think is where most of us are. Mark, maybe, are you under 50%?

Mark Zandi:                     I'm under 50, yeah.

Marisa DiNatale:            You are? Okay.

Mark Zandi:                     Yeah.

Dante DeAntonio:          Next 12 months? What was the question?

Marisa DiNatale:            Next 12 months.

Mark Zandi:                     Oh, next 12 months. Oh, right.

Marisa DiNatale:            Yeah.

Dante DeAntonio:          Over [inaudible 01:10:43].

Mark Zandi:                     It could be 50. Could be 50. Yeah. 50%. Yeah, pretty. Yeah, you're right. I'd probably be in that group. Yeah. What about the one below that? The 40 to 50?

Marisa DiNatale:            So then the next highest response was 60 to 70%. 21% of people said that.

Mark Zandi:                     That's Cris.

Marisa DiNatale:            Then it was 40 to 50% at 15%.

Mark Zandi:                     Okay. What was the 60, 70?

Marisa DiNatale:            And one person said 10 to 20%.

Mark Zandi:                     Oh, God I'd like to know who that is. That's probably Dante.

Marisa DiNatale:            I don't think so.

Dante DeAntonio:          I'm not that optimistic.

Mark Zandi:                     Oh, that's interesting. I wonder who that is. That should be a game for next time, who that is. We'll invite them on. Oh, that's a good idea.

Marisa DiNatale:            They'd have to fess up. This is an anonymous call.

Mark Zandi:                     I know they'd have to fess up, but that would be kind of interesting wouldn't it?

Marisa DiNatale:            It would be interesting. Yeah.

Mark Zandi:                     It would be interesting. Anyway. All right. Anything else guys, before we call it a podcast? Going, going. Okay. Gone. All right. We're going to call this a podcast. I hope you thought it was useful, enjoyable, and we will talk to you next week. Take care now.