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Moody's Talks - Inside Economics

Episode 66
July 8, 2022

Sahm on the Soft Landing

Claudia Sahm, founder of Stay-at-Home Macro Consulting, joins Mark and Ryan to discuss the June employment report. They also talk about inflation, monetary policy, and the odds of a recession.

Full episode transcript.

Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis on LinkedIn for additional insight.

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics. And I'm joined by my trustee cohost, Ryan Sweet. Ryan, you've been trolling me again, I noticed on Twitter.

Ryan Sweet:                      The highlight of my week, Mark. Highlight.

Mark Zandi:                      I just can't keep up with you. This was particularly biting troll... Is it trolling or trash talking? Did we figure that out?

Ryan Sweet:                      I think we settled on trolling.

Mark Zandi:                      We settled on trolling because trolling is social media. It's related to social media. Okay, that's we... So this was the infamous... Well, you want to describe your troll?

Ryan Sweet:                      I'm just trying to keep you in check.

Mark Zandi:                      Keep me in check?

Ryan Sweet:                      We don't want your head getting too big on the stats scheme-

Mark Zandi:                      Get my head too big?

Ryan Sweet:                      So yeah, this one was the famous Bill Buckner play. And so in 1986 World Series, the Red Sox are on the verge of winning their first World Series. And then the ball goes through the first baseman's legs.

Mark Zandi:                      Yeah. Were you born in 1986?

Ryan Sweet:                      1980. So I was six years old.

Mark Zandi:                      You see, you don't remember that game? You didn't see it real time.

Ryan Sweet:                      I didn't see it live.

Mark Zandi:                      Yeah. I remember that game very well, actually. It was like, "What just happened?

Ryan Sweet:                      It was unbelievable.

Mark Zandi:                      It was unbelievable. Unbelievable.

Ryan Sweet:                      The first base coach for the Mets would eventually teach me how to hit baseball. So he gave me a signed Bill Buckner play. That was the ultimate troll. So before he went back to the majors, he signed it, gave it to me and was like, "Put this on your wall." So I had that memory of Bill Buckner.

Mark Zandi:                      Did you have plans to go on to play major league baseball, professional baseball? Was that what you were thinking?

Ryan Sweet:                      No, I was not that good.

Mark Zandi:                      You were not that good, but you played for Washington and Lee, right?

Ryan Sweet:                      Washington College.

Mark Zandi:                      Well, I'm sorry. Washington College. Yeah. Washington College. Very cool. And we have another guest, Claudia. Claudia Sahm. How are you, Claudia? Good to have you on board. Thank you for joining us on Inside Economics.

Claudia Sahm:                  Yep. Good to be here.

Mark Zandi:                      Good. Great to have you. And you are now at, well, this is your firm, Stay at Home Macro. That's the name, and that's a play on your last name, which I admit I did not get until you told me. I'm sorry about that. And do you do a lot of consulting work, Claudia, or what consulting work do you do?

Claudia Sahm:                  Yeah, I do a lot of policy work that is more of the pro bono type of work. And then I do a lot of talks on Federal Reserve, macro conditions for more of a Wall Street crowd. And I write a Sub-stack now by the same name, Stay at Home Macro. And there I do a lot of both more technical Fed writing, but a lot of writing about inflation, the economy, fiscal policy to a more general audience to pull back the curtain, make sure, we're all ... It affects everybody, so that's a big part of my work and I do research too.

Mark Zandi:                      Perfect. Exactly who we need for this podcast, because this is Jobs Friday. We've got the employment report for June. And you also got your chops at the Federal Reserve. You were at the Federal Reserve for quite some time.

Claudia Sahm:                  Right. So I was at the Federal Reserve for over a decade. I worked on the staff's macro forecast. At the end, I worked in a group that oversees one of the household surveys that the Fed does, the low- and moderate-income families and communities. And during my time at the Fed, I also spent a year at the Council of Economic Advisors, so I've had a lot of opportunities to do policy work. And since I left the Fed in 2019, I've had a chance to work with a lot of members of Congress on fiscal policy.

Mark Zandi:                      And who was CEA, Council of Economic Advisors, chief at that time when you were there?

Claudia Sahm:                  Jason Furman.

Mark Zandi:                      Oh Jason. Oh, okay.

Claudia Sahm:                  He was the chair. So I was right towards, actually right at the end of the Obama Administration that last year.

Mark Zandi:                      Oh yeah, yeah. Jason and I had been going at it a little bit in an economist way around inflation and the causes of inflation. Can we come back to that?

Claudia Sahm:                  Oh yeah, because I'm with you on that one.

Mark Zandi:                      Oh, you're on my side. Oh then we're definitely coming back to this. Okay. All right. Demand versus supply, the Bane of Economists. It always boils down, is it demand or supply? And you're obviously famous for the Sahm rule, but we're going to come back to that in the context of recessions and what we should be looking at to gauge whether we are in recession because that's a very prescient indicator that you came up with. But before we do all of that, let's come right back to the employment report for the month of June, which came out this morning, July 8th. And as we typically do let's... Ryan, can I turn to you and can you give us a sense of that report?

Ryan Sweet:                      Yeah, no problem. So overall I think it was a solid report. It just wasn't good across the board like we've seen in past months. There's many more blemishes in this report than what we saw last month and the month before that. But overall, the economy added a net 372,000 jobs, better than what we anticipated or the consensus. Job growth is fairly broad based. There's big increases in leisure and hospitality, healthcare. So overall we're still below where we were pre-pandemic, but that gap is closing pretty, pretty quickly, so we should close that completely in the next couple of months. So job growth remains solid, doesn't show any signs of recession concerns, but then the household survey, there was a lot of blemishes in that thing. So household employment fell, when you adjust it to make it an apples to apples comparison.

Mark Zandi:                      Just to step back a little bit. So you've been focused on the establishment survey, survey of businesses and that came in at 300-

Ryan Sweet:                      372.

Mark Zandi:                      Job creation in the month of June of 370,000. And now you're saying, "Okay, let's look at the survey of the households".

Ryan Sweet:                      Correct.

Mark Zandi:                      Okay.

Ryan Sweet:                      I think it's roughly 60,000 households. So it's a much smaller sample, but household employment fell. But when you adjust household employment to be comparable to that 372,000 that survey businesses, it rose around a little more than a hundred thousand on net. So household employment-

Mark Zandi:                      You mean there's conceptual differences between-

Ryan Sweet:                      Correct.

Mark Zandi:                      These two surveys. And if you correct for that, you go from a decline to a small increase.

Ryan Sweet:                      A small increase-

Mark Zandi:                      Of a 100K or so.

Ryan Sweet:                      Yep. And then the unemployment rate was unchanged. Unrounded it slipped a little bit, but I think I was more concerned about the labor force participation. That fell. And also when you look across men versus women, men's dropped noticeably over the last several months, prime age employment to population ratio, my favorite metric, dropped back below 80%. That's concerning, so I'm wondering if that's starting to show some signs of weakness in the labor market. So overall nothing to be overly concerned about, but there are more blemishes in this report.

Mark Zandi:                      Okay. Is that your take on it, Claudia? Would you characterize it the same way?

Claudia Sahm:                  I think at this point we've gotten so used to big numbers and low unemployment rates that we are numb to the goodness. There were times in the recovery from the great recession. We would've been doing cartwheels down the street with this report, regardless of the blemishes. So big picture. I think this recovery has been so fast and so full of jobs. The recovery from the 2001 recession and the great recession, these were the jobless recoveries. It took years and years to get things back on track. That is a huge difference with long term consequences, so it's good. The other thing I'd say with participation, as soon as I started hearing the commentary and truly Ryan, you're not the only one that was talking about the blemishes. I think back to Steve Braun, who's the Macro Forecast Director at the Council of Economic Advisors.

                                             And whenever monthly data would come in and we get all excited about labor force, he's like, "Stop". He's like, "That number, it bounces around". So I think that's where we've had a trend of improvement. It's been very slow. That was a surprise how slow it's been. So it hasn't picked up. I don't think I'm particularly concerned about one month, but it would be real nice if it started to speed up and we definitely didn't get that. But I agree. There are things you can point to in this report and be like, "Ah, that could have been better". But I was holding my breath for the payrolls and the unemployment rate. Oh, and I'd also say with the household survey, there are people who've really looked at it and basically you should put almost no weight on household employment versus payroll. If you put them together as a signal of where things are going, but it's important to take in all the data, pay attention to it.

Mark Zandi:                      So you're saying when trying to weight the importance or the informational value of the payroll survey, the 370,000 gain versus the household survey, the decline or on a payroll basis small gain, you'd say don't put weight on the household survey. Just focus on the payroll survey?

Claudia Sahm:                  Yeah. Really low weight. I mean in terms-

Ryan Sweet:                      You should put little weight on the employment, the first prints of the establishment survey as well. They're subject to bigger revisions. On net, we saw a downward revision of 74,000. And I think when we get the annual benchmark revisions, we-

Mark Zandi:                      Can you just explain that, Ryan. So you're saying in the previous, going back and looking at the payroll survey results from May and April, those gains, which were quite sizable, they're still sizable, but they were revised down.

Ryan Sweet:                      They're still normal, right. Yep.

Claudia Sahm:                  Yeah.

Ryan Sweet:                      So employment gets revised three times and then once a year they do an annual benchmark revision. And if you look at the response rate, so what's the percent of people that are responding to the households or the establishment survey, they've been pretty low. June was actually above average. But the last, since the beginning of the year, they've been really, really low. So I agree with Claudia's point, we don't want to make too much out of one month, but the trend in the labor force is just moving sideways. And I think that's something that you can't argue against the trend.

Mark Zandi:                      On that, I'll push back a little bit. I haven't had a chance to look at the June data, but through May, even though participation has slowly risen, only slowly, labor force growth has really picked up. Right. I mean-

Ryan Sweet:                      The level isn't just sideways.

Mark Zandi:                      No, no. The year over year growth, as I recall from May was over 2%.

Ryan Sweet:                      Yeah. But the year over year comparisons, you get these odd quirks because this recovery has been really, really fast, but it's had some ups and downs. If you look at the levels and levels don't lie, it's moving sideways.

Mark Zandi:                      I like that levels don't lie. Okay. Right. Very good. Okay. Oh, but it feels like we're nitpicking here a little bit. Right? Doesn't it? I mean, broadly speaking, the labor market's pretty good. Right? We're pretty close to full employment. We can debate it. Unemployment's at 3.6, the employment to population ratio for prime age workers at around 80, that's our benchmark for employment. We're creating a lot of jobs, but that's slowing and that's a feature, not a bug because we are at full employment. We can't continue to create jobs at 300, 400K per month without going past full employment and exasperating wage and price pressure. So we need it to slow. Labor force growth isn't quite where we want it, but it feels like it's more or less steadily, slowly coming back. Pandemic is still playing a role. Right? Is that fair to characterize it that way?

Claudia Sahm:                  Yeah. I'd agree. And I think the other thing is we know there's a lot of demand for workers still. The job openings relative to unemployed workers is hanging out right around two, and at very high levels. So there are jobs to bring people back into. They get to decide if they want to come back or not. But this is a really strong labor market and that's important as we try to cool off the economy. If you start from a position of strength, you're going to have to create a lot less hardship to get things cooled off some because they're really hot right now.

Mark Zandi:                      Yeah. No, that makes a lot of sense to me. Two statistics that I often look at in the report you didn't mention, or we haven't talked about is hours worked and that was stable. So that's a good sign. If that hour started to tick down, that might suggest some further significant weaking in labor market in job growth, but didn't see that in the report. And wage growth, that seemed to be pretty good as well. I mean still a little on a hot side, compared to where you might want to see it long run because it's not consistent with current rates of productivity growth, but it was up three tenths of a percent in the month. It's up 5%-ish over the past year or so it feels like wage growth is sort of going where you'd want it to see. Right Ryan? Would you agree with that?

Ryan Sweet:                      Yeah. I just don't put a lot of emphasis in average out there earnings.

Mark Zandi:                      Yeah.

Ryan Sweet:                      But yeah, you're right. If you look at the employment cost index, Atlanta Fed's Wage Tracker, wage growth is going where we would want it to.

Mark Zandi:                      Right. I don't either on average out earnings, because it's affected by the mix of jobs, occupations, industries, but it's 5% and that's very consistent with everything else. Right. That feels like all the wage measures seem to be coalescing. It's 5% growth, feels like to me. No? Okay. Claudia, would you agree with that characterization around wage growth as well? Or do you have a different take on that?

Claudia Sahm:                  Yeah, I think wage growth is really hard to piece out of the data. So I'm a little weary of a pinpoint that it moderates some, and this to me, across all of these data series where you're starting to see wage growth flatten out at a pace that is above where they were before, regardless of exactly what number it was, it's clear they're still elevated relative to before COVID but they have moderated. And I think the wage growth is probably the only thing the Fed really looked at. They looked at everything, but the wage growth was probably the only piece of these payroll or the jobs report that the Fed could possibly react to because it fits into the inflation space. And they've told us, it's unconditional. We're not stopping until the inflation rates come down. So I think we're seeing it moderating and that should ease the fears of a wage price spiral. That was the big concern as if they started stepping up or stayed at these really high levels. And that's not what we're seeing.

Mark Zandi:                      Right. And it feels like, and I know Ryan's done some work in this area, that the causality is inflation, high inflation, the jump in inflation we've seen over the last year, is driving the increase in wage growth. It's not that the wage growth is driving the inflation. It doesn't feel like we've got into that dreaded wage price spiral that certainly the Fed would fear.

Claudia Sahm:                  Yeah. I think there's a pretty strong disconnect between what's happening with wage growth and what's happening with inflation. There is some pass through between the two, but I the wage growth workers were in high demand. Low wage workers were able to get higher pay to come back. They were moving around in different jobs. So that's, in my opinion what's really drove the wage gains, but you'd have to have an inflationary mindset set in, where people are like, "Oh, inflation is going up". And so they get the wage increases and there's really no evidence of that inflationary mindset. And that's what you'd need to tie the two together, the price inflation and the wage growth.

Mark Zandi:                      Of course, the Fed, when they raised rates 75 basis points, three quarters of point, the last meeting they called out the University of Michigan sentiment or inflation expectations. What did you think of that move?

Claudia Sahm:                  I was not happy about this.

Mark Zandi:                      A little odd. Yeah.

Claudia Sahm:                  Okay, so on the one hand, and you know all these models well, in the type of macroeconomic models that are central to monetary policy, inflation expectations are absolutely crucial. You can have them shift three tenths of a percentage point and people totally change their behavior. And then it starts to spiral off this it's anchoring. And we really don't have a good sense of how these expectations are formed. And frankly, the measurement, that particular data series, I've done a lot of research on the Michigan survey, largely with fiscal policy. One time I had the opportunity to sit and listen to the tapes because we were trying to figure out some problems in our section on the stimulus checks. I listened to the tapes and the section that just blew me away is when people were trying to answer these questions.

                                             "By what percent do you think prices will increase in the next year"? And it was so clear that a lot of people really struggle with percents. They're like, "What do you mean, price? Do you mean gas? Do you mean"? So this is a question that I do think has information, but the 10th. I mean, they were reacting to a three 10th increase in a preliminary reading, which isn't even representative of the US population... You got to have the full survey. And so there were basically 300 people selected, but not representative because it's not the full... And probably the hardest question in this whole survey was one of the reasons that we kicked from 50 to 75 basis points.

                                             I was just... But CPI was really bad. So if they just said the CPI, I would've-

Mark Zandi:                      Consumer Price Index [inaudible 00:19:16].

Claudia Sahm:                  Yeah. I would've been calm, but as soon as they brought that in and then it revised.

Mark Zandi:                      Is this your non-calm state? Or am I looking at your...

Claudia Sahm:                  I don't know. It's hard to tell anymore. I will-

Mark Zandi:                      When you're mad, do you get really mad? Doesn't seem to me as likely.

Claudia Sahm:                  Oh-

Mark Zandi:                      Oh really? Okay. So I haven't seen it then. Okay.

Claudia Sahm:                  No, I internalize the macro data. This is just the way I am. It is a professional hazard as a forecaster, but it's been really rough.

Mark Zandi:                      Ryan does that too. The listener doesn't know this, but if the number comes in off compared to his expectation, he cries like a baby. Just cries like a baby.

Ryan Sweet:                      I don't know about that. But yeah.

Mark Zandi:                      I have to calm him down.

Ryan Sweet:                      It affects me.

Claudia Sahm:                  Yeah. Well, I mean they're-

Mark Zandi:                      That's called the trash talk because it's not on social media. That's trash talk.

Claudia Sahm:                  Yeah. There are people under the numbers. And a lot of times the macroeconomic discourse, we make them sound widget. I mean the idea that wage growth moderating is a good thing-

Mark Zandi:                      I know is weird. It's weird to say. I choke every time I say it, it's like, "That is weird". So weird. Hey, I've got a couple of other questions around the jobs numbers. I'm just curious your perspective. One is, we're creating a lot of jobs. We're at 500,000 per month for a while, now we're down to, let's say we're at 350 to 400. That's still a lot of jobs. Is that consistent with a full employment economy? How can we be a full employment if we're creating that many jobs? How do you reconcile those things?

Claudia Sahm:                  Yeah. As with every aspect of the economy, the labor market is very tough. We had such a massive drop in the labor force participation. People just walked away from jobs, and they haven't come back, as we were talking about this very slow progress. That means that the unemployment rate, what does that mean? Now we're at an unemployment rate very close to where we were before the pandemic, but we've lost all of these people who, and it's clear, it's not just aging. I mean, it was so abrupt. And so what is that unemployment rate telling us? Because it could be telling us the labor markets even tighter if these people would come back or it could be, if they come back and it's unemployment... So it's how do we really interpret that?

                                             And the question, and this has come up in multiple recoveries. It's more extreme right now, is whether you write those people off, or not. After the great recession there was a belief around 2015 that we were at full employment because the labor force had been dropping and they're not coming back. And it turned out that strong enough economy that we had years down the road, they did come back. So that's part of why it's really hard to judge and we are still, in terms of jobs, we still haven't made up the pre-pandemic levels.

                                             Now one something that I look in the report, and this isn't just showed up today, is if you look at the full-time jobs, they are back to pre-pandemic. What's missing are these part-time jobs. And frankly, we talk about numbers, but there's an aspect of job quality that is really important. And there are groups of workers, particularly at the bottom, who have had to some extent more of an upper hand. And so they've been able to be choosier and frankly, a lot of those part-time jobs, they're just bad jobs. Right. So I don't know. There's a lot going on in the labor market and more than we would have in a regular recovery. It's just-

Mark Zandi:                      Hey, I've got one more question for Ryan around the report. And before I ask it, just want to say that we're going to play the statistics game and it sounds like you're on board with the statistics game, right? Where we each come forward with a number and the rest of us try to figure that out.

Claudia Sahm:                  Yip.

Mark Zandi:                      Okay. And I say this before I ask the question, Ryan, because I don't want to take anyone's statistic and if I am, then stop me. But the question is, what about the pandemic? Do you see any effects of the pandemic still in the data, in the report? Did you notice any of that in the numbers?

Ryan Sweet:                      Yeah. That's one of the first things I looked at this morning, because if you look at the number of COVID cases, they increased between the May and June payroll reference week, which concludes the week of the 12th. But the number of people that were out of work because of own illness, it didn't jump.

Mark Zandi:                      It did not?

Ryan Sweet:                      No.

Mark Zandi:                      Okay.

Ryan Sweet:                      So because I think quarantine rules have changed. It's down to, I forget what it is, now five days versus 10 before. So the odds of people not working at least one hour during the reference period is much lower now. So I don't think the pandemic's really causing any big effects on the employment data. One thing I also looked at was the number of getting back to the idea of, or should we forget about these people? There's 700,000 more people today that are not in the labor force, but want a job versus pre-pandemic. So those people are going to come back. They're out because of childcare issues or family responsibilities or own illness. So I think as the pandemic continues to wind down, I think one encouraging thing was daycare worker. Employment at daycare's increase more than 10,000. We need further improvement. We need more workers to go back and work at the daycare centers, that should be able to pull more women back into the labor force.

Mark Zandi:                      Did I, and maybe I didn't read this right. But did I read in the report that there are roughly 600,000 people that said that they weren't looking for work because of the COVID, because of pandemic? Did I read that right? Did you-

Ryan Sweet:                      I didn't see that.

Mark Zandi:                      You didn't see that? Okay.

Ryan Sweet:                      No, but it doesn't mean it wasn't there.

Mark Zandi:                      Yeah. I don't know where I got that.

Ryan Sweet:                      But I don't know how that number compares to what it was in January of this year.

Mark Zandi:                      Yeah, no, it's just very consistent with the number you said were for folks that are out of the workforce that say they want a job, it's about 700K higher than it was pre-pandemic. That could be pandemic related.

Ryan Sweet:                      Yes. I think a lot of it's pandemic related.

Mark Zandi:                      Pandemic-

Ryan Sweet:                      Because it's in childcare, family responsibilities. Own illness.

Mark Zandi:                      Right. Okay. Okay. Let's play the statistics game. And I know people who are regular listeners get annoyed at me repeating this, but there are people out there who have never listened to this before. The game is, we each come up with a statistic, the rest of us try to figure that out through guesswork, questioning, deductive reasoning. We want a statistic that's not so easy. It's a slam dunk. We all get it. But not too hard that we'll never get it. And you get a bonus if it's something related to the topic at hand, labor market or a statistic that came out recently. So with that, Claudia, I'm going to let you off the hook first so you can see how this is done. And Ryan is quite good at this. Oh, and by the way, we're missing our other co-host. I didn't bring up Chris. See how fast we forgot about him, Ryan.

Ryan Sweet:                      I know. I wasn't going to say anything, but I assume he's on, you know-

Mark Zandi:                      Well, he's still in that wine cellar or somewhere-

Ryan Sweet:                      That's what I was going to say.

Mark Zandi:                      Now he's in south Italy. He was in north Italy, then central Italy. I'm sure he is in Sicily somewhere, beating a grape or something. I don't know.

Ryan Sweet:                      You see his dedication. We take the back seat to Italy.

Mark Zandi:                      I know. But Claudia, anytime Ryan goes away on vacation... I never go on vacation, by the way. But if Ryan goes on vacation, I'm just saying, if Ryan goes on vacation, he takes his microphone with him. But Chris, we don't know what... We're not sure about Chris. It's all those crypto winnings he cashed out. He's getting lazy. But anyway, where was I? Oh, the game. Ryan, what's the statistic.

Ryan Sweet:                      I swear you repeat the rules of the game just remind yourself, because he's break them all the time.

Mark Zandi:                      It's taken me a year to get that down roughly, right?

Ryan Sweet:                      Yeah, exactly. I'll give you three numbers. 6.4%, 1.2% and 11.9%. They're all related. And they were all in the employment report.

Mark Zandi:                      Oh, they were all in the report. I was going to ask is it in the employment report. So repeat them one more time. 6.4-

Ryan Sweet:                      1.2 and 11.9.

Mark Zandi:                      And these are percentages?

Ryan Sweet:                      I'll even give you their year over year percent changes.

Mark Zandi:                      Oh. Are you looking at industries? The employment growth across industries?

Ryan Sweet:                      They are industries.

Mark Zandi:                      Okay. And this is year over year growth?

Ryan Sweet:                      It is.

Mark Zandi:                      So, which industry has seen employment grow by 6.4% over the past year, is the question.

Ryan Sweet:                      It's not employment.

Mark Zandi:                      Oh, it's not employment? Oh. Oh, what else? Geez. By industry.

Claudia Sahm:                  Is it hours?

Ryan Sweet:                      It is not hours. That've been a good one though.

Mark Zandi:                      Wages?

Ryan Sweet:                      It's wages. So I'm going against my trash average hourly-

Claudia Sahm:                  I was going to say I think you didn't liked average hourly-

Ryan Sweet:                      I know. This just stood out to me, so.

Mark Zandi:                      Okay. So 6.4, that's got to be, what industry's in the middle of the pack. I'd say, well, leisure, hospitality has got to be the high one. Right?

Ryan Sweet:                      Very good. Yeah. 11.9.

Mark Zandi:                      The low one. That's probably-

Ryan Sweet:                      If you get this one.

Mark Zandi:                      Is it retail?

Ryan Sweet:                      No.

Mark Zandi:                      Is it manufacturing?

Ryan Sweet:                      It is not. You're just going to go down all the [inaudible 00:29:20] until you hit it.

Claudia Sahm:                  Professional services?

Ryan Sweet:                      No, that's not.

Mark Zandi:                      Maybe financial services.

Ryan Sweet:                      Professional services, 6.8.

Mark Zandi:                      Oh, 6.8. Well, so 6.4 is healthcare.

Ryan Sweet:                      No you're-

Mark Zandi:                      Oh, I know. I know it's one point. It can't be government is 1.2.

Ryan Sweet:                      No, it's not 1.2. So the 6.4, I'll still let you struggle with 1.2-

Mark Zandi:                      Oh this is like... Yeah, go ahead.

Ryan Sweet:                      The 6.4 is total private non-supervisory average [inaudible 00:29:51], 6.4.

Mark Zandi:                      Okay. Oh, so the five... So overall the top line wage numbers, I believe 5.1 you're-

Ryan Sweet:                      Correct. Yep.

Mark Zandi:                      And that's across all workers?

Ryan Sweet:                      Right. This is looking at just non-supervisory.

Mark Zandi:                      Non-supervisory workers.

Ryan Sweet:                      Yeah. All right. So what's 1.2?

Mark Zandi:                      We tried everything, mining-

Ryan Sweet:                      Information.

Mark Zandi:                      Oh, information... Oh, I should have known. Information, which is a hodgepodge of things, right?

Ryan Sweet:                      It is. Yeah.

Mark Zandi:                      Yeah.

Ryan Sweet:                      But it just shows you, I mean, 1.2 to 11.9, just the distribution of wages curves.

Mark Zandi:                      Just for your information. That was a pretty poor statistic. I'm just saying.

Claudia Sahm:                  Well, the 6.4 wasn't an industry.

Mark Zandi:                      Oh, see, now she's-

Claudia Sahm:                  See, he's tricked us.

Ryan Sweet:                      See, there we go. Now you're going to-

Mark Zandi:                      She's into it now too.

Ryan Sweet:                      See, this is what happens. Did Zandi call you last night? You guys are [inaudible 00:30:54].

Claudia Sahm:                  No.

Mark Zandi:                      All right. Okay. Very good. Claudia, you want to go next?

Claudia Sahm:                  Okay. Mine is 2.8%.

Ryan Sweet:                      Is this an unemployment rate?

Claudia Sahm:                  Think it's not necessarily one from today.

Ryan Sweet:                      Ooh.

Mark Zandi:                      So what did you say, Ryan? I missed what you said.

Ryan Sweet:                      Oh, I asked if it was one of, because I was thinking demographic, unemployment rates or education.

Mark Zandi:                      Oh, I see. One of the unemployment rates.

Ryan Sweet:                      Are we going to the jolt report?

Mark Zandi:                      Oh, she's-

Ryan Sweet:                      Smirk. Look at that smirk.

Mark Zandi:                      Yeah. Yeah. 2.8%. It can't be quits, right? Maybe quits or I keep it level. I think of levels. So four-

Claudia Sahm:                  No it's quits.

Mark Zandi:                      Oh, it is quits. Okay, it is quits.

Claudia Sahm:                  So it's back to my theme of better job quality. It's down from November, December, but it was flat and it is notably higher than before COVID and COVID was a really good account, like labor market. All right. So I picked two easy of a one.

Mark Zandi:                      No, that's okay. No, no.

Ryan Sweet:                      It's a good one.

Mark Zandi:                      We'll have you back. There's well, that many bites at this apple, but quits, that's a great resignation. So I think of it in levels. So there's anything over four million people quitting a job in a month and that's what we've been getting pretty consistently here. That's a lot of people leaving their job and that remained the case in May, the last... Or no, was it May? Yeah. May, the last data point that we have.

Claudia Sahm:                  Yeah. And we can see they're going to other jobs. That was my problem with the framing of great resignation. It sounded like people were throwing in the towel-

Mark Zandi:                      Yeah. Good point.

Claudia Sahm:                  And going home to sit on the couch, but-

Mark Zandi:                      But yeah. Good point.

Ryan Sweet:                      I use quits. I use the quits rate when clients push back, saying that we're already in a recession. I was like, "You can't be in a recession when people are quitting their jobs at this rate. It's just unheard of".

Mark Zandi:                      Well, I mean, do you get a lot of pushback from clients or a lot of people saying we're in recession?

Ryan Sweet:                      They want to know why recession is in our baseline. Because a lot of them pointing to the survey of economists that 70% of economists said the economy will be in a recession by first half of next year.

Mark Zandi:                      First half of 23?

Ryan Sweet:                      Yeah. But when you look at the questions, it was, "If a recession was to occur, when would the timing be"? Wasn't 70% of the comment saying we're in a recession or going to be.

Mark Zandi:                      I see. So this is actually a good time to ask another, before I give you my statistic, is to you Claudia. To this debate, I guess it's a debate. I don't know why it's a debate, but I guess it is a debate. Are we already in recession? I guess it's a debate because GDP fell in the first quarter and it looks like it's tracking, given the monthly data, it's going to fall again in the second quarter. So the rule of thumb is, it's just a rule of thumb, but the rule of thumb is two consecutive quarters of negative GDP is a recession. So the question Claudia, are we in recession?

Claudia Sahm:                  No.

Mark Zandi:                      Okay. All right.

Claudia Sahm:                  If a recession was strong job growth, I... And the GDP and we can talk a lot about recession, inventories and net exports. I mean how? The NBR doesn't even have GDP in its set of indicators. It looks at for recession for this very reason. The only one that's in there is consumer spending and that looked great in the first quarter. You can't have this job gains and unemployment and be in a recession. That's just not-

Mark Zandi:                      Not consistent. And of course, people should know that, at least in the US, we all [inaudible 00:34:45] around the business cycle data committee, a group of academics at the National Bureau of Economic Research. They sit down and they look at a range of data and they define a downturn and I'm paraphrasing as a "broad based persistent decline in economic activity". So if one indicator is down GDP, that doesn't necessarily mean you're in recession. In fact, this doesn't feel like we're even close to recession in the current-

Claudia Sahm:                  Yeah. Well, and inventories aren't economic activity.

Mark Zandi:                      Yeah.

Claudia Sahm:                  That was a big part of GDP declining. But yeah, it's been a weird conversation. People are cheering on a recession or something. I just-

Ryan Sweet:                      Talking yourselves into one.

Claudia Sahm:                  Yeah. But people are still spending and businesses are still hiring. So it's like, "Don't care what you call this. I just want people to keep their jobs".

Mark Zandi:                      Well, maybe this is a good place for you to tell us about the Sahm's rule, which is the regularity that you uncovered and there's a... I'm going to mispronounce this, eponymous. Is it eponymous that where you... You know what I'm saying?

Claudia Sahm:                  Yeah. I'll butcher it too. It ended up getting named after me.

Mark Zandi:                      Yeah. Well that's great. I always wanted to Zandi something, but I never had anything like this, so that's wonderful that.

Claudia Sahm:                  Yeah, I was-

Mark Zandi:                      Explain to folks what that is.

Claudia Sahm:                  Right. So I was working on a proposal to send out checks automatically, stimulus checks in a recession. That was the whole point. It was a volume that Hamilton project did about all the ways that we could put the types of things we do in recessions on autopilot. Timed economic conditions, get the politics out, figure them out ahead of time and just hit go when a recession happens. Okay. So as part of the proposal, I've got to have something to say, when do we hit go? And I figured if you're going to send out hundreds of billions of dollars, it would be a good idea for this thing to be accurate.

                                             The government would mind, maybe not people. Get some extra money. And so I knew, I mean, the unemployment is why we hate recessions. Why we fight them. People, millions and millions of people losing jobs, that's the problem with a recession. Every recession has an increase in the unemployment rate. That's just a feature of recessions, but unemployment very slowly increases. So I spent a lot of time, many weekends, looking at patterns of changes in the unemployment rate.

Mark Zandi:                      See then Ryan, she snuck in that on weekends. Did you notice that?

Ryan Sweet:                      I did notice that.

Mark Zandi:                      I'm a hard working economist.

Claudia Sahm:                  Yeah. While I was managing a team at the Fed, I had no time during the week. And mine is an indicator. It says we are in the first few months of a recession. It's not a forecast. People use changes in the unemployment rate as a forecasting tool, but this is about we're in one so it's really simple. You take the three month moving average of the unemployment rate as we talked today, don't get excited about monthly wiggles. So you take the three months moving average, you compare the current value to the lowest value over the prior 12 months. If that difference is a half a percentage point or more, which is small, a half a percentage point isn't that much, then we are in a recession. And it is like there are no false positives. It is triggered in every single recession since the 1970s. It's highly accurate going all the way back to world war II. There's a couple times where it turns on before a recession. And right now, the Sahm rule after we saw an employment today, is zero.

Mark Zandi:                      Yeah. Yeah. So no sign.

Claudia Sahm:                  No sign, but things can... There's a difference between saying we are not in a recession, and I feel confident about that, and we aren't going into one. Those are two very separate, but I've been really surprised at how firmly people have latched onto this idea. Everywhere, from people like Danny Blanchflower, who's an economist. We've had a lot of back and forth on this, all the way to Cardi B. It's really span the set here. And so-

Ryan Sweet:                      Who is Cardi B?

Claudia Sahm:                  She's a singer, like a pop star.

Mark Zandi:                      Oh no. He's-

Ryan Sweet:                      No, I have no idea who Cardi B is.

Mark Zandi:                      I know who that is and you don't. That does not make sense.

Ryan Sweet:                      You do not know who that is.

Mark Zandi:                      Are you kidding me?

Ryan Sweet:                      He just discovered Guns and Roses in the last year.

Mark Zandi:                      Well, that's true. That's true. They're pretty good actually. Yeah. They're very-

Ryan Sweet:                      I got three little kids. I'm not listening to popular... I'm listening to wiggles.

Mark Zandi:                      Frank Sinatra. Okay. Well, which is good. He's good too though, I have to say. Well, yeah. So right now, if I've been miss-pronouncing your last name, I could call you Sahm.

Claudia Sahm:                  It's Sahm.

Mark Zandi:                      Sahm. Okay. I've been saying Sam.

Claudia Sahm:                  That's okay.

Mark Zandi:                      I'm dyslexic. Not really. It's not really, okay. But thank you for letting me off the hook. Sahm. I apologize for that. Is saying, "No, this is not a recession. Not even close, at least at this point". Yeah. Right. Okay. Very good. Okay. Let me give you my statistic. Ready? Negative 1.6 and positive 1.8, two numbers, related.

Ryan Sweet:                      From the employment report?

Mark Zandi:                      Not from the employment report.

Ryan Sweet:                      Okay.

Claudia Sahm:                  Related to jobs?

Mark Zandi:                      It is not. No, it's not related to jobs. I was going to say directly related, but that would be-

Ryan Sweet:                      So there you go. He violates one of the rules.

Mark Zandi:                      No, no, no. Come on. You'll appreciate this when you hear it. My original [inaudible 00:40:46].

Ryan Sweet:                      Is it financial market related?

Mark Zandi:                      Not financial market related. Down 1.6, up 1.8.

Ryan Sweet:                      Well, wholesale inventories are up 1.8.

Mark Zandi:                      Oh, you're really digging it. I wouldn't go down that rabbit hole. Wholesale worries, these little-

Ryan Sweet:                      But now we're talking about inventory-

Mark Zandi:                      Yeah. That would be rude for me to do that. Wholesale. You know the inventories of canned beans or something. I wouldn't do that to you.

Ryan Sweet:                      Is it US related?

Mark Zandi:                      It is US related.

Ryan Sweet:                      Okay.

Mark Zandi:                      Do you want to hint? It might give it away.

Ryan Sweet:                      Is it trade related?

Mark Zandi:                      Not trade.

Ryan Sweet:                      Okay.

Mark Zandi:                      Although it includes trade. That's a big, big hint. Maybe not, maybe that-

Ryan Sweet:                      Not monthly GDP?

Mark Zandi:                      Not monthly GDP.

Ryan Sweet:                      Quarterly. Wait, wait.

Mark Zandi:                      Down 1.6. What was down 1.6?

Claudia Sahm:                  Oh, first quarter GDP.

Mark Zandi:                      The first quarter GDP.

Ryan Sweet:                      Ah, we're going to-

Mark Zandi:                      Oh my gosh, that... Like you guys, come on.

Ryan Sweet:                      Wait, when was that released? That was last Thursday.

Mark Zandi:                      Yeah. Last Thursday. Okay.

Ryan Sweet:                      Wait, today is Friday.

Mark Zandi:                      It is relevant. Yeah. But here's... Okay. Now with-

Ryan Sweet:                      This is what I have to deal with.

Mark Zandi:                      1.8. What's the 1.8? That is important. This is-

Ryan Sweet:                      Private. That's when you start up inventories and trade.

Claudia Sahm:                  Is it the PDFP? The consumption and business investment?

Mark Zandi:                      No.

Claudia Sahm:                  No?

Mark Zandi:                      All right. You guys are hopeless.

Ryan Sweet:                      Private domestic sales?

Mark Zandi:                      GDI. Gross domestic income.

Ryan Sweet:                      I should have think that.

Claudia Sahm:                  Oh, oh yeah. GDI. Which really the average of the two after revisions, is a much better signal, but it'll take a while to get those revisions.

Ryan Sweet:                      Did you see the-

Mark Zandi:                      Yeah. That's my point. That's my point. That goes back to this old discussion we've been having about GDP signaling recession. GDP declined in the first quarter, but gross domestic income, which is another way of calculating the output of the economy from the income side of the economy, looking at personal income, what people are making and corporate profits and adding it all up, it should be conceptually exactly equal to GDP, but they're based on different source data, so they're not exactly the same. And GDI, gross domestic income, real grew 1.8% in the first quarter. And that difference between gross domestic income and gross domestic product, that measurement issue called a statistical discrepancy, is the largest it's ever been in the data as a percent of GDP largest. So that suggests something is off the mark here.

                                             And I would proffer my guess is it's GDP. Back to your point, Claudia, it's inventories and trade and government spending. Things that are very difficult to measure in real time or at least in a timely way. So my sense is that when we get all of the data in and all the GDP revisions, and there's a lot of GDP revisions, we're going to get another annual benchmark revision here in, I think at the end of this month or next month, I suspect that number is going to get significantly revised. I wouldn't be surprised if it gets completely revised away. The GDI feels a lot more consistent with the reality of what's going on than GDP. Now that's a good indicator, right? It has a message. No?

Ryan Sweet:                      Yeah. Did you also notice in the FOMC minutes from the June meeting, they called out GDI. It's the first time in a while I've seen them include GDI in the minutes.

Mark Zandi:                      No, I missed that. What'd they say?

Ryan Sweet:                      Oh, they were just exactly what you just said like, "Oh, GDP fell", but looking at alternative measures, because now they're gearing up for if another decline in GDP, they can point to GDI, saying-

Mark Zandi:                      Oh, so I was saying something really novel, but you're telling me no.

Claudia Sahm:                  No, no, that's a good one to bring up.

Mark Zandi:                      So bum, that was a good one.

Ryan Sweet:                      But I think the truth likely lies between the two.

Mark Zandi:                      Yeah, it probably does.

Ryan Sweet:                      Because I think GDI is getting overstated by corporate profits and just the way the [inaudible 00:44:43] BA calculates corporate profits could be problematic.

Claudia Sahm:                  Well, in the fourth quarter was a monster print. I mean, it was over 4%.

Mark Zandi:                      6% plus.

Claudia Sahm:                  The memory loss is just amazing during those crisis, like these... Anyways.

Mark Zandi:                      These numbers. Hey, let's talk about another debate and I know you have strong views on this too, and this is the inflation debate. Obviously inflation is very high and the question is why, and that's not simply an academic question, because that's critical to understanding where it might be headed and also what can be done about it. What's the appropriate policy response, monetary or fiscal. And the debate is, is the high inflation we're observing now, 8.6% see consumer price inflation through the month of May. We're going to get another read on that next week for the month of June. What's behind that. Do you have a view Claudia, with regard to that?

Claudia Sahm:                  Right. And I will underscore your point that it matters. Being right for the wrong reason and having then a voice about what now to do or assess, can have very bad consequences. To answer your question first and then I'll back up with the fill it up. So I-

Mark Zandi:                      By the way, I'm just saying, Amen. Amen. Yeah, go ahead.

Claudia Sahm:                  To me with inflation, a lot of the other problems, I mean, COVID is the root of all evil. We shut a $25 trillion economy down in March of 2020, much of the global economy was shut down. It turned out and I mean, I was surprised by this, but in hindsight shouldn't have. It actually is really hard to turn it back on. And so we have had disruptions that have taken a long time to work themselves through. COVID is a supply disruption, and it's not just the supply chains. The workers had to stay home. The daycares closed. People were afraid of dying and didn't want to go back out. There was this shift in the US economy that I, as someone who was point on consumer spending, like I still can't wrap my head around it.

                                             People shifted so fast from buying a lot of services because that's most of what the US economy is, to buying a lot of goods. We just don't have systems that are resilient enough to deal with these really massive shifts. And so it's clear that COVID caused the problems and it's still causing problems. And as one example where it really led some people, like myself, astray in terms of thinking it was going to be more transitory or temporary, is last summer around this time we'd seen a spike in inflation, or in the spring of 2021 things were opening up. It made sense getting back to it, it was going to be inflation. And then in the summer into the early fall, we had inflation month over month, stepping down.

                                             Right. You look at that number. Again, if we could remember back to last year, it looked like that was happening and then Delta came and then Omicron came and then Putin came. You had continual shocks and Delta and Omicron are yet another supply shock. Like these waves and we didn't anticipate them. We weren't prepared for them. So it's clear that that was a big problem. There's really good research. Adam Shapiro at the San Francisco Fed has been doing all kinds of really interesting work. Actually San Francisco in general has done just a-

Mark Zandi:                      They were great.

Claudia Sahm:                  Ton of COVID work. And one of his latest studies is, a big chunk of the inflation is supply driven. A much smaller portion is demand. And then there's this in between that's hard to tell. And so I do think that some of the demand that was put out there, whether it's cares and rescue plan, all these things demand also people getting back out, pent up spending, whether you got stimulus checks or not. That contributed to inflation. I don't think it was the big contributor. I think it was supply. And then the other thing that I don't think we talk enough about is the two collided with each other. We gave people a lot of checks and I know from my own research and then I was like, "Oh my God". Well, there was a fair number that uses down payments to buy a car. Well, it just so happened. One of the places that COVID really disrupted was in used cars. So we had demand going straight at some of the hardest hit sectors.

                                             And so that creates problems, but why it's important to have a sense of supply versus demand. And I mean, really some of the people that push the demand angle, it's all the rescue plan. They don't even talk about COVID, they don't talk about Putin. If we could just get it's both, it would be a real step forward because the problem is, if it's all demand, then it's like the Feds got this.

Mark Zandi:                      Yeah, exactly.

Claudia Sahm:                  And the government should just stop because they're just going to mess it up. But if it's supply, there's a lot the government could do. It might not fix things right away, but it'll make us more resilient in the future. But if the Fed goes at supply driven inflation, it's not going to end well. So that's why it matters. And that's why I think there should be a two-pronged approach right now.

Mark Zandi:                      Yeah. Totally agree. I think that's dead on. The way I would summarize what you just said and just to make it clear in my own mind, is that there's a long list of reasons for high inflation, but at the top, tippy top of the list are the pandemic and the Russian aggression. And those are two massive supply side shocks. And by the way, evidence of that it's supply not demand, is that the inflation that we're observing here is everywhere. The European, the EU inflation rate is now equal to the US inflation rate. So that would argue that it's the global supply shock. It's not some idiosyncratic piece of fiscal policy or something else here that's driving demand higher in creating the higher rates of inflation. Is that a fair way to characterize it, a thumbnail way?

Claudia Sahm:                  Yeah. Except if you take out a lot of Europe's, the measured inflation, is food or is energy. Their "core" has stepped up less than in the United States. But to me, the United States and Europe are not apples to apples. Comparisons, but yeah, people are living with high inflation now and we would've had the energy, the gas prices regardless. And honestly, any interview you listen to people talking about inflation, it's gas, it's food, it's housing. That's what people get really angry about because the other stuff, a lot of people can switch around their spending and cut back or buy the cheaper stuff. But those, they just got to have. So yeah, we were going to have high inflation. From the fiscal relief, there are a lot of people that have some extra padding, a little bit of a buffer they wouldn't have had otherwise.

Mark Zandi:                      Since you've focused on fiscal policy and from the behavioral side of the fiscal policy, one thing I find really fascinating is that households did build up a lot of savings during the pandemic. High income households, because they sheltered in place, lower middle income households because they got a lot of government support. And there was a great fear that that excess saving would find its way into spending and demand would really be strong. And ultimately the inflationary problems we would have, would be demand generated. That has not happened. What has happened, seemingly, is that people are taking that saving, that so-called excess saving and supplementing their purchasing power. So if you have this higher inflation, it's cutting into people's purchasing power, their real wages are down. It's a real income shock, but they're not cutting their spending. They're using the savings to supplement and continue to spend at the same rate.

                                             But they're not spending with abandoned. It's not like they're going out and spending like crazy. They're just spending, they're just using that savings just enough to keep their spending at where it would've been otherwise, which I find incredibly interesting and fascinating. Do you think about it the same way? And do you have a sense of as to why that's happening?

Claudia Sahm:                  Yeah. I think for a long time we've misjudged people with lower income. There's a lot of, "Oh, people don't save, because they're irresponsible", or they're just not even irresponsible, but just like, "I need it now". And that they can't wait and rich people, they're patient, they wait. And I've always thought the problem is these people don't get paid a living wage. The cost of just getting by is pretty high. And if your income isn't that much, well guess what, you don't end up with saving. So this is a time where people were able to put some money in the bank and it's like, "Gee, look at that. They want to financial buffer just like the rest of us".

                                             And frankly, given how bleak some of the consumer sentiment surveys are, it makes sense to me that people are using it to supplement the spending that they would normally do, as opposed to going out on a shopping spree. There is some caution, but a recession has demand declining. To me, the consumers, that money they have set aside could really be what gives us a soft landing or a hard landing.

Mark Zandi:                      Exactly. Exactly. Hey, so you've laid out a case for if we want to address this inflation supply side, inflation problem. Fed can only take us so far here. And if they try to take us too far, that's recession. They can't solve the supply side problem without pushing us into recession. That's not good. We don't want that. So would be nice if we could get Congress and the Administration fiscal policy makers to kick in here. Do you have any perspectives or views on what they should be doing? What they should be focused on in this regard?

Claudia Sahm:                  Yeah. So I've had the opportunity, actually it was right after Putin invaded Ukraine, to talk to a large group of Members of Congress. And they're asking about how should we tell the narrative? I'm like, "Don't worry about the narrative right now. You need to do something". But my point is you-

Mark Zandi:                      Oh, the congressmen were saying, "Well, how do I frame this".

Claudia Sahm:                  Yeah. I was supposed to help with the narrative of the rescue plan. And I think the rescue plan was great. I was just talking about how I think it's just padding but I said, "Not now". People are about what have you done for me lately. And we have a problem right now. You got to get it to the finish line. And one of the things I said, in large part because the Fed can't do this, I was like, "You need to move heaven and earth to get gas prices down. Relative to before COVID gas prices have doubled". When they're at the $5, they've doubled. Since March, they had increased a buck 50. Nobody can adjust to that change. And the Fed can't get those prices down. There's so much thinking in DC, outside of the Fed, the Fed's got this, they got it with inflation.

                                             Every time I hear that, I just seize up. That's just, it's not true. And the things that people are really getting hurt with, like gas, Fed cannot fix that. So there are limited things that the Administration can do. There are a lot more things that Congress can do. But at the end of the day, it's not about yelling at oil and gas companies like on Twitter. You have to either increase supply or decrease demand. There's no getting around this. And there are ways to increase supply. Skanda Amarnath who's at Employ Americas had this proposal and talked to policy makers about basically writing contracts for refilling the strategic petroleum reserve, like guaranteeing a price to refill because one year of high profits is not enough to get shareholders to give a green light on making capital investments that are going to be years into the future.

                                             They've got burned on this before. Nobody cared about them in 2020 when the bottom fell out. Nobody cared about them when OPEC came after the fracking industry, five years ago. Anyway. So that's just one idea that within the Administration, they could pursue. The thing that Congress should be doing right now and doing very publicly, because it would help I think, even knowing it's in train, is writing energy legislation. With other things they should be putting in the legislation that are long term investments, but something that really spells out the path forward with the fossil fuel industry. This is not going away. You should train it down. And the buildup of the renewables.

                                             Even just giving clarity could have some short term effect. But the thing is we cycle with these energy prices every six years or so, this will come again. We can't be this dependent on global oil markets and on dictators around the world. So I think that's one where we ought to be using a crisis to fix a very structural problem. And they ought to be doing whatever they can. Get supplies up, tell people, have the Federal Government work from home. There are things they can do, but they're not.

Mark Zandi:                      They're hard-

Ryan Sweet:                      Yeah, to get done.

Claudia Sahm:                  And they're just,

Mark Zandi:                      Politically-

Claudia Sahm:                  Waiting. They're waiting for the supply to fix itself and we've seen some progress. And honestly, that's given the inaction with Congress and the Administration, we're banking on the supply problems from COVID to unwind and unwind fast enough before the Fed gets to trigger happy with their rate increases.

Mark Zandi:                      I apologize for my... Everyone who listens to this podcast, knows my dog. He's 17 years old and is just losing his mind. So we make do. So we all make do, but I hear you on the energy. Nothing drives people crazier, makes them more down, than having to pay $5 for a gallon of regular unleaded. That's just too much to bear. And I think that's in my view, the key threat to the economy and continuing expansion. It is not going to take a lot. A cat 5 hurricane blown through the Gulf, takes out a refinery on the coast, because refiners are operating at a hundred percent. Gasoline prices go north of five, it just feels like we're going in. It's going to be pretty tough to avoid.

                                             So I think you're absolutely right. That's got to be number one priority. We are running out of time and the way we've been ending this podcast recently, just given that recession is top of mind, is we each give our odds of a recession beginning in the next 12 months, next 24 months. Now we're forecasters, so we do this for a living. So we're going to do this and talk about it a little bit, but more than welcome to join in this bit of a parlor game if you're so inclined, I'm very curious what your views are. And I'll start with Ryan. So Ryan, what are your odds of recession over the next 12 and 24 months?

Ryan Sweet:                      So over the next 12 months, it's 65% because of the Fed.

Mark Zandi:                      12 months, 65%.

Ryan Sweet:                      If they go 75 basis points again, then they're going to break something. And I think if we go in a recession, it's going to be in the next 12 months.

Mark Zandi:                      Oh, so 24 months is-

Ryan Sweet:                      It's coming down. Because I think if we get through the next 12 months, if we get through and hopefully the Fed pauses once they hit two and a half percent. If they pause, we got a better chance of engineering a softish landing, but if they keep going, something's going to break.

Mark Zandi:                      Okay. So, Claudia, the reason he goes up to 65% because we have this forecast rule of thumb that if we are going to make a major change to our outlook or major change to any assumption, fiscal policy, monetary policy, whatever it is, we have to have a very strong level of confidence in that change. And it has to be two thirds probability or more. So he's gone right up.

Ryan Sweet:                      I'm right up the line.

Mark Zandi:                      He's right up to the line. So because he knows if he said 66, I'm saying, "Ryan, are you saying we should put a recession into our basement", most likely scenario. You know what I'm saying? I wonder, let me ask you this before I ask you your odds. When you were doing the macro forecast or contributing to that at the Fed, was there a similar philosophy? What was the thinking around that if you wanted to make a major change?

Claudia Sahm:                  The forecast is the modal outcome. It's the most likely-

Mark Zandi:                      Most likely.

Claudia Sahm:                  Like an average. Whatever we write down-

Mark Zandi:                      In the middle of the distribution.

Claudia Sahm:                  Yeah. It's what we think is the most likely thing to happen. See, the thing is, they revise every time there's an... Actually we revise every data release as things come in. The whole forecast doesn't until you get closer to that FMC meetings. So the revisions tend to be smallish. But there's no particular rule.

Mark Zandi:                      Okay.

Claudia Sahm:                  But yeah, big ones. We talk more about.

Mark Zandi:                      Talk more about it.

Claudia Sahm:                  Right. Because you got to change the story then.

Mark Zandi:                      Yeah. That's the point. I mean, like the American rescue plan, at one point look like it was going to happen and it didn't, look like it was going to happen. And what you assumed about that was massive to forecasters.

Claudia Sahm:                  Yeah. Yeah. No, obviously go in as soon as they're likely. Yeah.

Mark Zandi:                      Well, no. For us it's got to be more than 50%, because if it's 50% or 51% or 52%, you could whipsaw it. You're going back and forth. So that's our level of conviction. But anyway, that's forecast flaw.

Claudia Sahm:                  That makes sense makes.

Mark Zandi:                      So do you want me to give you my probabilities before you give your probabilities?

Claudia Sahm:                  Sure. Go ahead.

Mark Zandi:                      What do you think Ryan? Should I make her go first?

Ryan Sweet:                      No, I have a feeling I could probably guess her probabilities.

Mark Zandi:                      It's going to be like mine, you think?

Ryan Sweet:                      Yeah.

Mark Zandi:                      Okay. I'm very curious. You can't change, Claudia. You can't change your mind.

Claudia Sahm:                  Yeah, no, no. Don't worry. Don't worry.

Mark Zandi:                      Write down on a piece of paper.

Ryan Sweet:                      I don't think she would now.

Claudia Sahm:                  Yeah. I don't bend to peer pressure.

Mark Zandi:                      Okay.

Ryan Sweet:                      And you also don't want to be wrong.

Mark Zandi:                      I shouldn't know. I clearly could see that. All right. I'd say 40% probability of recession in the next 12 months. And even though it's more or less over the next 24, so very high risk. And that has not changed, at least not in the recent past. That is obviously uncomfortably high and goes to my point, if anything else goes wrong, even a small thing, given how dark pessimism and the mood is, it feels like we're going to go in. So a lot of risk around that. What about you Claudia?

Claudia Sahm:                  Yeah, so I had been zipping along with my modal forecast of no recession.

Mark Zandi:                      Okay.

Claudia Sahm:                  But it was pretty close. I think I had it like 50% or something and then had 30% a mild recession. Like a 2001 recession. And I put very small odds, actually it must have been 40%. I put really small odds on the severe recession. I don't think we need a 10% unemployment rate in one year to get inflation down. That's not... Last week. Last week was rough. Every week feels rough because Jay Powell, in the event where there were a bunch like La guard and there was some little event with these central bankers, so inflation expectations came up again. And by this point, that increase had revised away. So now it was just a 10th. It was totally in the range. Historically the things looked really stable. And then-

Mark Zandi:                      Just to let people know, the University of Michigan survey, which has inflation expectations, was high when the Fed raised the rate and then it got revised away.

Claudia Sahm:                  Yeah. So it in-

Ryan Sweet:                      Short term, one year.

Mark Zandi:                      Short term.

Ryan Sweet:                      Short term.

Claudia Sahm:                  Yeah.

Ryan Sweet:                      Short term.

Claudia Sahm:                  No, that was long term.

Mark Zandi:                      Oh, was it the long term?

Claudia Sahm:                  It was long term.

Mark Zandi:                      Didn't both get revised? I thought both got revised.

Claudia Sahm:                  Well, maybe the short, but they don't care about that, because that's only cash prices, but no, it had been early in the month, the inflation expectations, the preliminary went from three to 3.3, which again, in Fed land, is a big increase. And then when they got the final numbers, it went to 3.1. So it'd only been a 10th, totally nothing burger. But then in this speech, which now we'd had the final, right, J Powell was like, "Well, inflation expectations are stable, but we need to keep moving because they might become unanchored". And I was like, "Oh my gosh". So as soon as I saw that, I was like... Anyways. And so that was the point where my odds went up above maybe to 60%, something like that. I still think because it just-

Ryan Sweet:                      You're in good company.

Mark Zandi:                      Boo.

Claudia Sahm:                  Yeah. I mean, to your point, they're going really hard. And they're going to get another bad CPI reading this month. They're going to do 75-

Ryan Sweet:                      For sure.

Claudia Sahm:                  And what is so strange to me, actually it's a little 10th, in their summary of economic projections, so what the FOMC writes down, each of the participants, they released it before the last meeting, they get to write out their forecast. If they were chair for the day and they have the appropriate policy under it and what the typical participant was looking for, was a little over 4% core inflation in the fourth quarter. Since February month over month, inflation has been running at 4%. So it's this weird, now the [inaudible 01:08:45] to the upside, but I'm like, "What are you looking for? You keep going at it. And you basically got what you want at the end of the year". So I'm just a little concerned they're pushing too hard and it's all going to start coming-

Mark Zandi:                      How about this for theory? How about this for theory though? That is a little more Sahm way perspective and that is, if I were in his position, I'd do the exact same thing. I'd be talking really tough, really tough, because I want to keep absolutely sure that inflation expectations stay anchored. I'm not going to let that go. And maybe I don't need to raise rates as much as I'm saying and if I don't, that's great. But if I say that I'm going to do this and that gets inflation expectations where they are and it's embedded in financial conditions, the stock markets priced to it, credit spreads are priced to this, tough talk, the value of the dollars price to this tough talk. And all I have to do is execute and give you what I'm saying I'm going to give you, financial conditions shouldn't tighten anymore, I should be okay. But I, deep down, think I don't need to get to 4% fund rate target to get what I want.

Claudia Sahm:                  But they could pair the tough talk and do 50 basis points. They don't have to do 75. I think it's just... But I hear you and I absolutely agree with them raising right now. I would just be raising 50. Not 75.

Mark Zandi:                      I don't mind 75 if it's like... Yes, it's 75. I didn't really appreciate or thought it was a tactical error, not strategic, but tactical to do it on the fly, ad lib, three days before put a leak in the Wall Street Journal that we're going to... That just didn't blend confidence. And again, we didn't use the economic plane metaphor I always use that, but they're the pilot of the plane and they're saying, "Oh, we better turn the knob this way or we're going to crash". That doesn't make me feel good that they're doing that. But anyway. Anyway, this is a great conversation and I really appreciate it. And there are some economists that, no matter what they say, I just disagree with. Some economists, no matter what they say, I agree with. I think you're in the latter.

Claudia Sahm:                  Wow. Thank you.

Mark Zandi:                      And I'm not sure that's good. What's going to be wrong for going to be wrong. But anyway, I really enjoyed it and I hope you do come back, even though I butchered your name. Next time I won't do so.

Claudia Sahm:                  It's really, you're good.

Mark Zandi:                      Alrighty.

Ryan Sweet:                      [inaudible 01:11:16] everybody's name?

Mark Zandi:                      I do indeed. Yeah. Thank you so much. Take care everybody. Have a nice week. We'll talk to you next week. Take care now.