INSIDE ECONOMICS

Mark Zandi:                     Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I am joined by my two co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.

Cris deRitis:                      Hey Mark.

Marisa DiNatale:            Hi Mark.

Mark Zandi:                     So we're all going to be getting on a plane shortly headed to Phoenix, right? You guys are there in Phoenix at our MA Summit, the Moody's Analytics Summit.

Cris deRitis:                      Yep.

Marisa DiNatale:            I hope so because we're doing the podcast there.

Mark Zandi:                     Oh yeah. That's right.

Marisa DiNatale:            I hope we're all going to be there.

Mark Zandi:                     That's right. We are going to do in person. I typically say live, but we're always live. It's like, in person we're going to be doing a podcast at the summit. This is a conference, a confab for our clients and I guess good friends. They're coming into Phoenix. And is it a couple days? I think it's for two days, maybe three days even.

Marisa DiNatale:            Three.

Mark Zandi:                     Three days? Okay.

Marisa DiNatale:            Yeah.

Mark Zandi:                     And as part of that conference, we're going to put on the podcast live in person with the audience.

Cris deRitis:                      In front of a live studio audience.

Mark Zandi:                     Live studio audience. Yeah.

Cris deRitis:                      There you go.

Mark Zandi:                     It'll be interesting to see how that goes. What do you think?

Cris deRitis:                      Yeah.

Marisa DiNatale:            Yeah, I'm excited about it.

Mark Zandi:                     Yeah, it should be interesting.

Cris deRitis:                      Next frontier in Inside Economics.

Mark Zandi:                     Right. We need a laugh track and all that stuff at some point. Although I do a fair amount of laughing anyway, I don't think we need any more laughter. We need to be a little more serious. But I was going to say one other thing, what was it? Oh. Because we're going to be doing the statistics game live and in person in Phoenix, we're not going to do that today in this podcast. We're going to skip that just because there's a limited number of statistics and we might reuse them, make it more difficult to do the statistics show at the summit.

                                           But we will do listener questions because Marisa, you were saying we got a number of good questions that came in from listeners and we'll go through that. And I'll let you moderate that.

Marisa DiNatale:            Okay.

Mark Zandi:                     But do you guys look forward to a five and a half hour flight out to Phoenix, or not? Do you look at that with dread? Oh, for you, Marisa, just a hop, skip, and a jump for you, isn't it?

Marisa DiNatale:            It's a 45 minute flight for me.

Mark Zandi:                     Oh yeah. What about you, Cris? Do you look at it with trepidation, or like I can sit back-

Cris deRitis:                      It's a great time to focus and I've written a lot of articles on these flights, I have to say, because there's no interruptions. There are no telephone calls. If you don't go on the wifi, you don't have the emails bombarding you and I can get a lot done during these flights.

Mark Zandi:                     Yeah, I'm with you. It's weird. I mean I typically would dread because it's a Sunday afternoon flight to Phoenix, but I'm looking forward to this because I'm going to get five hours I can actually write, assuming my computer works.

Marisa DiNatale:            Assuming the wifi on the plane works.

Mark Zandi:                     Oh no, I don't need the wifi.

Cris deRitis:                      You don't want the WI-FI. No, no. Yeah, don't get the-

Mark Zandi:                     Exactly. In fact, I hope now that they don't have WI-FI because-

Cris deRitis:                      I would pay a premium not to have the wifi.

Mark Zandi:                     I'd paid the airline. That's funny. Yeah, you're absolutely right. Okay, we got a couple guests, colleagues. We got Mr. Scott Hoyt. Scott, how are you?

Scott Hoyt:                       Good. How are you doing, Mark?

Mark Zandi:                     I'm okay. And you've been on the podcast at least a couple times.

Scott Hoyt:                       Yeah, twice before.

Mark Zandi:                     Twice before, okay. Memorable events or no?

Scott Hoyt:                       Oh yeah. Lots of fun.

Mark Zandi:                     Lots of fun. And of course, Scott, you're like everything the consumer. And we're going to be talking about the American consumer again in this podcast, particularly with regard to their household balance sheet and particularly on the liability side of the balance sheet on consumer debt and credit. Because there's been a very dramatic increase in the growth in debt, household debt recently, at least for certain categories of debt and some significant increase in delinquency rates as well. So we're going to dive in here deeply to try to figure out what's going on. So I'm glad to have you on board. And we also have David Fieldhouse. David, good to see you.

David Fieldhouse:           Thanks for having me, Mark.

Mark Zandi:                     And this is a first time for you on Inside Economics. Welcome.

David Fieldhouse:           Yeah, longtime listener, first time caller.

Mark Zandi:                     Oh really? You're a listener?

David Fieldhouse:           Oh, yes. Yeah, definitely. I get a lot of work done outside listening to the podcast if it's a really good one. Lawn's in perfect shape.

Mark Zandi:                     Yeah, this is what we were saying. It's an hour and 10 minutes it seems like every single time. Is how long it takes you to cut your grass, about an hour and 10 minutes?

David Fieldhouse:           I don't have a yard that big, but there's leaves and other things. Right?

Mark Zandi:                     Good, good. And tell us about yourself. Your background is a certainly apropos to the conversation we're going to be having here, but give us a sense of your background.

David Fieldhouse:           Yeah, I've been at Moody's for 10 years. I'm from Canada. I got a PhD at the University of Western Ontario. They have a great economics program up there.

Mark Zandi:                     Indeed.

David Fieldhouse:           I was lucky to connect with some experts who wrote papers about consumer credit and bankruptcy and business cycles. And Moody's was looking for people to do this kind of work right after the financial crisis. And so my dissertation matched up pretty much with the job description at Moody's and I think Cris was on my hiring committee. So I convinced him to-

Mark Zandi:                     Is that right?

David Fieldhouse:           ... bring me along. Yeah.

Mark Zandi:                     Excellent.

David Fieldhouse:           So yeah, I've been here for 10 years and it's been a great experience so far. Great colleagues and amazing data. I remember we wished we had the data during when we were doing research that I have access to now. So we get all this wonderful data from Equifax.

Mark Zandi:                     Yeah, explain that for a second because that's really key. I think we have a lot of insight into what's going on in terms of household balance sheets because of this relationship we've had with Equifax for I think 20 year. I think I established it could be 20 years now. 25 years ago we first started that relationship with the credit bureau. But maybe you want to describe that data because that's really key data.

David Fieldhouse:           Yeah, we get two feeds from Equifax. I think the one that we look at the most is the aggregated feed of the consumer credit file that Equifax has. So this is balances, delinquencies, all that type of information, originations by different product categories, origination cuts, term length, credit score, bands. And then we get some demographic information, age, income, that type of information.

                                           And then the really neat thing that we're exploring over the last year or two has been a loan level version of that. So we can really track borrowers and figure out exactly what they're doing and not individuals. I can't see your credit profile but anonymized, we can look at that and figure out what somebody like you might be doing. And it is amazing. We are starting to do all kinds of other things like migration analysis and other type of work with that data.

Mark Zandi:                     Yeah, I mean that's really cool. I mean I love all that data, but the migration data is pretty cool because you can see addresses and therefore you can track address changes month to month. And I think we've got data, we're probably getting the February data here pretty soon. So we can see for example, the number of people that are moving from the urban core of Philadelphia to the suburbs, exurbs, and rural areas, the net outflows of people. Gross inflows, outflows, and net outflows. Really, really cool data.

David Fieldhouse:           Yeah. And it's very timely.

Mark Zandi:                     Very timely, yeah.

David Fieldhouse:           That's a great thing about it. So we see these zip code movements or balances. So yeah, it's awesome data to have. Definitely, the day it's printed, Tim and I, we race through it very quickly and we love looking at this data.

Mark Zandi:                     Yeah, so we'll definitely come back to that because I think the data will provide a real sense of what's going on in terms of the household balance sheets. But just to frame this a little bit, so up until recently, I'd say up until, I don't know, 3, 6, 9, 12 months ago, I was of the mind that household balance sheets were in excellent shape, both on the asset side. We had high stock prices, high housing values. People were enjoying some pretty substantive capital gains. And then also on the liability side, on the debt side, leverage seemed to be... Well, was low. I mean if you look at overall household debt compared to income or looked at debt service, which is the share of income that's going to servicing that debt, all that seemed relatively benign. No real problem.

                                           And then I'd say in the last, maybe beginning a year ago, but certainly in the last few months, you can really see a very substantive pickup in credit growth, borrowing by households. Not so much on the mortgage side and we'll come back to that, but on the consumers lending side in terms of bank card and consumer finance and auto lending. That kind of thing's been very strong. And if you look at the overall credit growth, the debt growth, it's been very robust, much stronger than inflation, much stronger than income.

                                           The debt to income is now rising and even more significant, there's been a pretty significant increase in delinquency rate. Still, that's not out of balance historically, but we're now for a lot of lending categories above pre-pandemic levels. So it feels like stresses are starting to develop here and thus why I think it's important to take another look at the balance sheet and ask the question whether it's an issue or not for the broader economy.

                                           So with that as a backdrop, and I said a lot and there's a lot to unpack there. Let me turn to Cris, you first because you've been looking at these things for a long time. What do you think? What's your sense of things with regard to household balance sheets and the debt in general?

Cris deRitis:                      Yeah, I think you characterized it appropriately. If you look at the aggregate statistics right now, actually things don't look so bad. 9.75% is the debt service ratio, so the amount of money that households have to dedicate to paying their monthly debt payments divided by their disposable income, 9.75%. Well, I should say that's as of the third quarter of 2022. And that's exactly where it was the first quarter of 2020, so we're right back where the pandemic was, at least we were a couple quarters ago, right?

                                           Probably it has risen since then. So I would argue things are certainly deteriorating relative to we were, but still well below the whatever, 13, 13 and a half percent that we had during the great recession. Something along those lines. So based on that measure, which is fairly core to understanding if consumers are able to make their debt payments right now, no worries.

                                           But as you mentioned, if you dig below the surface a little bit, then you do see signs of stress forming here. So in particular, if you look at delinquency rates, you see that auto delinquencies and consumer finance or personal loan delinquency rates are now above where they were prior to the pandemic. So that's despite a very low unemployment rate. So that's a bit of the conundrum here or a reason why a lot of analysts are particularly concerned that there may be underlying risks here that the consumers may not actually be as strong as what those aggregate statistics suggest, or certainly parts of the consumer population may not be fairing as well as what that aggregate number would say.

                                           Outside of that though, you're right, if you look at mortgage mortgages is in kind of its own different world. Mortgage delinquency rates are ticking up now, but they're still relatively low compared to history. So they're off the bottom that we hit during the pandemic, but they're not back up to where they were prior. I would consider that market to be more normalizing. Those delinquency rates were depressed and awful a lot by all the government stimulus and the moratoriums that were put in place. borrowers have a lot of equity in their homes, so the chances are that they won't default anytime soon. So something to keep an eye on, but definitely in a very different dynamic than what we see in auto or personal loan.

                                           Credit card is somewhere in the middle. It's certainly been growing in terms of volume. And you do see those delinquency rates creeping up. So they're by my read, maybe Dave or Scott could correct me, they're pretty close to where they were prior to the pandemic, but the trajectory is upwards, so I don't see that stopping anytime soon. So it's very likely that credit card will be next in terms of surpassing its previous peak.

                                           So maybe I'll stop there. So the picture is that right now things are still humming along. I don't see the consumer credit market as cracking or causing a recession in the immediate term, but certainly you are seeing more and more signs of stress. And if there was an uptick in unemployment or a worsening in the income growth that we see, you could definitely make the case for more defaults, more delinquencies. And ultimately, that would cut down on spending and the broader economy as well.

Mark Zandi:                     I want to focus on one thing you said. There's a lot to cover there and we'll do that, but the one thing you brought up at the beginning of your comments was the debt service burden.

Cris deRitis:                      Yes.

Mark Zandi:                     So that's the share of after tax income that households must devote to servicing their debt interest and principle payments to remain current on that debt.

Cris deRitis:                      Correct.

Mark Zandi:                     You're saying okay, it's just under 10%. So 10% of after tax income is going to debt service. Which by the way, people hearing that may say, "That sounds pretty low," but you can talk about that for a second, but it's now back to its... It fell sharply during the pandemic because of all the government support that was received and from on the income side support, but also debt moratoriums and of course student loan payments and foreclosure forbearance and all those kinds of things brought down those debt payments.

                                           You're saying that now we're back to where we were pre pandemic. And in the grand scheme of things, historically, that's pretty low. Right?

Cris deRitis:                      Still low.

Mark Zandi:                     Yeah, because pre pandemic, it was low.

Cris deRitis:                      That's low rate environment.

Mark Zandi:                     Because of the low rate environment. So that's still pretty low. So you're saying okay, if I look at that, it's moving up. So that would be consistent with stress is starting to develop, but it's still pretty low in the grand scheme of things. Is that fair?

Cris deRitis:                      That's right. I guess I would just throw out the context of the labor market though, because we have this extraordinary good labor market still, very low unemployment rate. To see the debt service ratio rising as quickly as it is given where we are in terms of the labor market, that should give us some pause. If that labor market were to get any worse, that service ratio is only going up. It's not going to get better.

Mark Zandi:                     Right. Right.

Cris deRitis:                      That's the cause for concern.

Mark Zandi:                     Marisa, let me quickly turn to you because I think at the conference, the Phoenix conference that I mentioned, you're giving a session on this very issue. Is that right or am I-

Marisa DiNatale:            Yes. Yeah, that's right.

Mark Zandi:                     Oh, I am. Okay. You are.

Marisa DiNatale:            Yeah.

Mark Zandi:                     So what do you think of how Cris laid things out there?

Marisa DiNatale:            Yeah, I think you both hit the nail on the head.

Mark Zandi:                     Okay.

Marisa DiNatale:            In the aggregate, things look good, still very, very healthy. It looks like we're just getting back to where we were prior to the pandemic in terms of both debt service ratios and in terms of delinquency rates. For most product lines, they're either just below pre-pandemic rates or in a couple cases now, they're at or a little bit higher. And those I think are the interesting cases. And that's what I'm going to focus on in my session next week.

                                           What we're seeing is the usage of credit cards and personal loans by consumers. Delinquency rates for those two product lines are now a bit above where they were prior to the pandemic. And that's where much of the growth was through the back half of 2021 and early 2022 was this incredible growth. I mean almost 25% growth in credit card balances outstanding and in consumer loans as well.

                                           Mortgages, yeah, nothing really to worry about there, I don't think. I mean the mortgage service debt service burden is actually below where it was prior to the pandemic and that had been falling for some time. So it's really these lines of revolving credit that are flashing some warning signs. And then we could talk about the auto market too. There looks to be some stress in the auto loan market, particularly among subprime borrowers.

                                           The other thing I'd point out, which is a little unusual, this is a very small part of credit, but home equity has staged a comeback. So the usage of people tapping home equity lines of credit and one time loans has risen again for the first time since the financial crisis. And that's just due to the fact that homeowners saw on average 40% house price appreciation in a two-year period. And home equity lines of credit and home equity loans, the interest rates on them had been quite low. And so people were able to use those to pay off other higher debt payments that they may have had. So that's staged a comeback in recent years. So while other things have started to cool off a bit in the back half of '22 as rates have risen, home equity is kept rising, which is a little bit interesting.

Mark Zandi:                     Yeah, a lot going on there. Hey Scott-

Marisa DiNatale:            Yeah.

Mark Zandi:                     I'm sorry, did you want to say something else, Marisa?

Marisa DiNatale:            Nope, nope.

Mark Zandi:                     No, okay. So Scott, big picture, what do you think? We're seem to be all coalescing around this idea that yeah, things are weakening. Borrowing has been strong, but in general, at least so far, the balance sheet is still strong generally. And we're going to come back and talk about under the hood, there's a lot going on there. But what do you think? Is that a fair characterization?

Scott Hoyt:                       Yeah, I agree with that characterization. My biggest concern as we talked about the last time I was on the podcast is what this means for the spending outlook six, 12 months from now. Because I think consumers are starting to run out of either room to borrow or access to credit. I mean The one thing that nobody's mentioned is a senior loan officers survey from the Federal Reserve, which shows a significant tightening in underwriting standards by a large segment of banks. So consumers, their ability to grow their credit to finance spending may shrink down the road. I don't think it is today, but I think it's a significant risk as we get late in the year.

Mark Zandi:                     Yeah. So consumers households are turning to debt to cards and consumer finance and home equity to help supplement their purchasing power, their income, their real income after inflation income because of the high surge in inflation has been under pressure. And so they're using the debt to supplement, to maintain their spending. And you're saying, "Hey, how long can that continue?" Particularly in the context of weakening delinquency rates and tightening underwriting standards by lenders, that's what you're focused on.

Scott Hoyt:                       Correct.

Mark Zandi:                     Yep. Got it. Okay, David, let me turn to you and maybe we can get a little bit more granular because you go into the bowels of this data as you described and get a sense of what's going on with regard to the trends when you look across income, when you look across age, when you look across other score bands. Can you give us any sense of where the credit growth has been strongest and where the stresses are starting to develop in a more significant way, looking around those different demographic cuts of the data?

David Fieldhouse:           Yeah, absolutely. If we look at some of the growth, we had a lot of debt growth was powered by well-to-do borrowers. So these were people getting mortgages, expensive car loans. So even when you look at credit cards, you can see prime borrowers growing balances pretty quickly. So that's what what's driving a fair bit of growth. But with it, you're still seeing the rest of the population trying to keep up.

                                           And I liked Marisa's phrasing there, the flashing warning signs because we are seeing quite a few warning signs. So when you look into the credit distribution, you can see that when you look at auto credit cards. It's all the subprime borrowers that are really starting to show the higher delinquency rates. So the prime borrowers, they might be having delinquency rates below pre-pandemic levels, but when you get into the subprime, they're getting really high delinquency rates and-

Mark Zandi:                     Really high? What do you mean really high? What does that mean?

David Fieldhouse:           Well, we're seeing in some product categories, we're seeing 12 year high delinquency rates.

Mark Zandi:                     12 year high. Back to financial crisis kind of high.

David Fieldhouse:           Just post. Just post. Just coming out of the financial crisis. It's a different world than it was during the financial crisis. It would be hard to imagine we get to that level of delinquency default, but we're seeing some issues. And prior to the pandemic, we got to remember in some of those product categories, it wasn't particularly great. Like credit cards were showing lots of stress. So it had just pretty much from 2010 we just saw every year worse and worse delinquency rates for credit cards. Pandemic hit, delinquency rates drop. But now we're back on trend.

Mark Zandi:                     Because of the forbearance they dropped. Right?

David Fieldhouse:           Forbearance, extra income, stimulus.

Mark Zandi:                     Support, right.

David Fieldhouse:           Lots of reasons there.

Mark Zandi:                     Yeah.

David Fieldhouse:           You weren't spending. You just couldn't figure out what you wanted to buy.

Mark Zandi:                     Right, couldn't spend. Oh yeah, Good point. Yeah.

David Fieldhouse:           Lot lots of reasons there.

Mark Zandi:                     Yeah.

David Fieldhouse:           But now we are definitely seeing some problems. And then when you try to tell the story and really understand what's causing that, it's really you can think about, it's people with less means overall are driving some of these higher delinquency rates.

                                           So we were circulating an email around earlier this week about looking at the age distribution and delinquency rates. So if you look at that, it's the borrowers that are under 35 that are showing higher delinquency rates prior to the pandemic when we look at credit cards. And then it's also some of the older individuals too. So it's not as much that's concentrated out there, but the 75 plus category, some of those older individuals out there, they're showing some stress as well.

                                           So I think this is some of the inflation is really eating into people's pocket books and they are showing signs that they can't really make those payments. If you have a nice home and a nice job, a nice income, you can weather inflation. But when you get around to the edges of the distribution, you're starting to definitely see stress there. And I am quite concerned about it. It's not maybe a macro issue yet. There's not enough debt sitting with those individuals, but it's a worrisome sign for the average person in the country when you're starting to see the tails really struggle.

Mark Zandi:                     So when you look at the delinquency rates, because that's the window into whether folks can manage their debt or not, you're saying, "Look, delinquency rates are up the most for subprime borrowers." So these are folks with low credit scores or lower credit scores. And just for a little context there, David, in my mind's eye, I think the average score is like 720 maybe, 710. Subprime, is that roughly right?

David Fieldhouse:           Yeah, yeah. I think we're sitting around seven-

Marisa DiNatale:            700.

David Fieldhouse:           700, 705, in around that.

Mark Zandi:                     Oh, is it still 700? Because I thought it'd been migrating up. No, it's still 705?

David Fieldhouse:           Depends on the score and the measure you use.

Mark Zandi:                     Yeah.

Scott Hoyt:                       Which score you use, yeah.

Marisa DiNatale:            It's also come back down a bit. It kind of peaked and now it's coming back down a bit.

Mark Zandi:                     Coming back down.

Marisa DiNatale:            Yeah.

Mark Zandi:                     Okay. But anyway, so when you say subprime it, let's just take 700 cause that's easy. Say 700 is the middle of the distribution. What do you consider subprime?

David Fieldhouse:           Below 660. There's some different definitions by a product category, but I would think 660 and below.

Mark Zandi:                     And what do you call people like Cris when they have a credit score of like 858? What do you call that?

David Fieldhouse:           Impossible.

Mark Zandi:                     Impossible, okay.

Scott Hoyt:                       Fraudulent. Yeah.

Mark Zandi:                     Fraudulent.

David Fieldhouse:           No, I mean there are lots of people out there like that. I mean credit scores have migrated up recently. Over time, it's been interesting to track who's going up the most. The people that went up the most though, Cris probably figured out a way to get a couple extra points go from 840 to 845.

Mark Zandi:                     He games everything.

David Fieldhouse:           But the people that really benefited were the subprime borrowers. So you could see them, the typical subprime borrowers, if you tracked what happened to them over a three year period, the average score might have gone up 20 points or so. They were the ones that really saw a lot of the credit score inflation overall. But they're the ones that are coming back down. To Marisa's point, we've peaked in terms of credit scores at least right now. And it's going to be the subprime population that is really, it's another sign of stress that we're seeing in that population. Their credit scores are just going down.

Mark Zandi:                     So subprime, you also mentioned it's younger people. I badgered you for that as you mentioned that data earlier this week, and we saw delinquency by age bucket. And it's really the folks in their twenties and maybe early thirties where they're always higher than older age groups, but they're rise, they're much higher and they've risen a lot more appears than it has been for the other older age groups in this period. So it's younger people. You mentioned income, but we don't really have a good window into income. Right? I mean income is correlated with score, correlated with age, but we don't really have as good data on the income side. Is that fair to say?

David Fieldhouse:           No, it's definitely improving what we have access to.

Mark Zandi:                     Oh, is that right?

David Fieldhouse:           With some of the loan level data, Equifax has a scoring model that they use for income. We're still unpacking that a bit, but the income measures are improving over time and so we're getting a better view of that. But the message that we're generally seeing is that the people with lower incomes, whether we've got the best score or some older methodologies that are being used is that individuals with the incomes below let's say $50,000 per year, they're seeing signs of stress as well. So it's very consistent overall. You can imagine that if you're not in the prime earning years of your life and with a prime income and the distribution, the rest of the population is struggling.

Mark Zandi:                     Yeah. And maybe I'm pressing you too far here, but I'm going to keep pressing until you tell me no moss. So if I look at age by income, so if I look at those young households, those borrowers, if I go look at the income of those young borrowers, is the problems most pronounced for the people at the low part of the income distribution by those ages? Have you looked at that data?

David Fieldhouse:           I have not looked at it, but I would almost be certain that is correct.

Mark Zandi:                     Almost certain that'd be. So it feels like it's partly age, partly score, but it's really about income. If I'm lower income, I'm going to be under more pressure given the high inflation. I just don't have the financial cushion and therefore I'm turning to debt and I'm starting to run into trouble paying back on that debt. Is that fair?

David Fieldhouse:           That is a perfect description of what's happening credit market sale.

Mark Zandi:                     See how I do that? I get those perfect descriptions every once in a while.

Cris deRitis:                      So it's more income and experience really than age.

Mark Zandi:                     Experience?

Cris deRitis:                      Yeah. I would say what you're picking up with age is lower income and also someone who has not used credit for a long time.

Mark Zandi:                     Oh.

Cris deRitis:                      Right? If you know how the system works, how to use credit effectively, you're not new to it, you're going to have a better shot at being able to manage your finances.

Mark Zandi:                     Got it. I want to go onto why we're seeing this in a second, but the other thing I want to just ask about that makes me a little nervous, is the measure delinquency rate. All you do is you simply take the number or the dollar amount outstanding that's delinquent and divide by the total number or dollar amount that's out there. And right now, so you got an numerator delinquent, the bucket is delinquency and the denominator, you got outstandings or number of loans.

                                           And right now, we're seeing a very rapid growth in the denominator and the number of loans and the debt outstanding. But despite that, the measure delinquency rate is rising, which that gives me a pretty queasy feeling. Is that right? Fair to say, Cris?

Cris deRitis:                      Absolutely. Good reason to up your recession odds. Yeah.

Mark Zandi:                     Having gone there, we're going to come back to the macro consequences because that's really important. And here's the other thing. I know you, David, look at the data based on vintage. So you can say, "Okay, let's go look at all the say bank card loans or auto loans that were originated in 2021 first quarter. How are they doing relative to other vintages at the same point in their so-called lifecycle, so many months or quarters or years into since origination." And that gets around this or at least helps to address this issue that I just described with the measure delinquency rate. What are you observing? And again, I'm pressing you until you tell me, no moss, but what's going on there? Do you know?

David Fieldhouse:           It's a great question. Yeah, the answer is terrible. Those vintages, the 2021 vintages are some of the worst in recent years. So when we compare them to 2017, 2018, 2019, obviously we got to think about the pandemic coming in there. But when we look at the early performance, the first year, year and a half of that performance for 2021, it's been terrible.

                                           It's definitely the worst crop. And I think there were a lot of lenders out there who their job is to extend credit. You got to find and make loans to certain people. And everybody looked great at the time, but maybe they weren't as diligent overall about thinking about the prospects to paying those loans back. So when we look at auto loans, credit cards, consumer finance loans, 2021 has been turned out to be a crummy year for that crop of loans.

Mark Zandi:                     That's interesting. Cris, any insight there? Why? What's go 2021? We're just coming out of the lockdowns and people were just coming out and about. Why would that be such a bad vintage? Do you know?

Cris deRitis:                      Yeah, it's absolutely counter to previous experience. 2009 was one of the best vintages ever. Because typically, you go through the recession, you clean out a lot of the bad debt. People are in better shape and then the lending standards are tight and you're making very high quality vintages. I think what happened this time around is the score inflation that David referred to.

                                           The average went up overall and yeah, the super prime borrowers had proofs to their scores a bit, but it was really those big jumps at the subprime level. So someone who had a 600, 620 credit score suddenly looked like a 680 or a 690. They made huge jumps because their delinquency rates went way down. They weren't spending, so their utilization rates went way down and their scores looked great. They improved to a large degree.

                                           And I think there was this competition in the lending industry that David referred to, and I think there were also a lot of models that just relied on scores themselves and didn't really adjust for the dynamics of the economy. So these lenders saw a borrower at the 690 and oh, let's send them an offer. And you're sending offers to folks who maybe aren't used to getting offers in the past when they had their lower scores. And so there was a lot of uptick, uptake in the credit. And now as things are normalizing, they're realizing the underlying credit isn't as strong as what the score was representing.

Mark Zandi:                     That's fascinating. So in the pandemic, because of all the extraordinary support and the fact that people weren't out buying stuff and were saving cash, scores started to rise. And the person that would've been a 660 back in December of 2019 is now all of a sudden a 690 and can qualify to get a loan or a card, auto loan, whatever it is. And they got extended the credit, they took it, and here we are in early '23 and that's when the credit problems are starting to show up. And it's not only the score inflation, it's the financial pressure that these same households are under given the high inflation presumably.

Cris deRitis:                      Yeah, that's my take. And then on the supply side, on the lenders, we were in that low interest rate environment, remember. Everyone was looking for yield anywhere. So they saw consumer credit and the performance was great back in 2020, '21. And I think that's what led to a lot of origination.

Scott Hoyt:                       Yeah, I wanted to add to that because that is what we were seeing. If you think about the second half of 2020, the first half of 2021, delinquency rates were extraordinarily low. The senior loan officers survey said that lenders were easing standards and so they were looking for consumers to borrow, especially because their balances were down. And so they were trying to build back up their portfolios, particularly in the consumer space. So I think they were lending relatively freely and potentially too freely to borrowers who, as Cris said, were marginal borrowers who only looked good because they had all the excess cash that they'd received during the pandemic.

Mark Zandi:                     Makes sense. Hey Marisa, so anything else to add in terms of what could be behind this erosion and delinquency that we're observing now? The score inflation, the high inflation, the easing of underwriting by banks during that period, anything else that comes to mind?

Marisa DiNatale:            Yeah. I would just add the pool of borrowers during this time period was more likely to be skewed toward less credit worthy people because we had all of this excess saving and most of that excess saving good was concentrated at the high income and middle-high income levels. Those people who may ordinarily have been in there seeking credit didn't have to do that. So the pool of potential borrowers, not only was their score inflated, making them look better than they actually were, but the pool that these lenders were fishing from was made up more of people at the less credit worthy end of the credit spectrum. Because the people that were higher, more credit worthy weren't even in that pool seeking credit because they didn't need it.

Mark Zandi:                     Yeah. And I guess the other point to make on the score inflation is that was in part by a government fiat. I believe, correct me if I'm wrong, but as part of the forbearance in terms of say on mortgages, foreclosure moratorium and forbearance, and that's also on student loans, the moratorium on payments in the laws that were passed during the pandemic to allow for this, the law stipulated that the lender should not report to the credit bureau a credit problem. That it shouldn't affect the score.

                                           And so that really helped to cause the scores to rise because the intent was you didn't want to ding somebody because they were going through this very difficult time and it was no fault of their own. But on the other hand, you also brought in people, you gave a break in terms of the scores to people who weren't going to be able to manage even in a normal time. And so their scores were inflated. Yeah, that's an important point.

                                           Okay. And I guess the thing that makes you really queasy is all of this is happening with a 3.4% unemployment rate, as low as it's been since 1969. And what happens? No layoffs. I mean we saw that again this week. 190,000 unemployment insurance claims, which is about as low as it ever gets. There's just no layoffs. What happens when layoffs just simply normalize, go back to something more typical? It sounds like we've got delinquency rates are going to rise here meaningfully over the next 12, 18, 24 months under almost any reasonable scenario, even no recession, it feels like they're going to start, they're going to keep rising.

Scott Hoyt:                       And adding into that, all of the loans that were originated over the last year or so that we know are poor quality, it's not the first 12 months when they're more likely to go delinquent. It's the second 12 months. And David probably knows those statistics better than I do, but-

Mark Zandi:                     Yeah, you're saying the life cycle.

Scott Hoyt:                       Right.

Mark Zandi:                     You're saying if you look through-

Scott Hoyt:                       The life cycle of all the loans that got originated over the last year says that things are going to get worse.

Mark Zandi:                     Hey David, say take a typical bank card. When does the delinquency rate on that bank card peak? How long after origination does it typically peak? Is it a year or is it 18, 24 months, do you know?

David Fieldhouse:           Yeah. You'd want to look around 12 to 18 months,

Mark Zandi:                     12 to 18 months.

David Fieldhouse:           That's usually where it peaks. Usually, you could pay it back when you get the card. It takes a little bit of time for things to go off the rails a bit, or you've realized that there's been some mistakes that have been made. But after a year or so, you usually get a sense for what the peak's going to be.

Mark Zandi:                     So those loans that were originated in 2021, those are now experiencing their peak delinquency based on where they are in the life cycle.

David Fieldhouse:           Yeah. Maybe in the next six months or so. But definitely the 2021, the end of 2021 is bad. Beginning of 2022 is bad. Actually, I want to make sure that's clear as well. And we're going to start to see where those peaks hit. That's for sure.

Mark Zandi:                     Got it.

Marisa DiNatale:            I'll just say I'm looking at these credit card delinquency rates by vintage, the later originated loans, so the ones originated in the beginning of 2022 and the ones originated in 2021, it's almost a vertical line in terms of their delinquencies. So they're actually going delinquent faster than you normally see. So yeah, if you look at older loans, they go delinquent 18, 24 months is usually the peak. These have gone delinquent like six, 12 months and have peaked. So they're really going sour right away.

Mark Zandi:                     What's the worst vintage, Marisa? What's the worst?

Marisa DiNatale:            Well, 2021, I'm looking at Q1s, back to 2017. And so right now, 2021 Q1 looks the worst.

Mark Zandi:                     Okay.

Marisa DiNatale:            But 2022 Q1 is almost matching it within six months of that origination. So it's really the past, everything originated in the last couple of years looks very bad very quickly.

Mark Zandi:                     Okay. Okay, so we've been talking about debt in aggregate. There's a lot of nuance and granularity and stories when you look at the different lending categories. We kind of alluded to the bank card, consumer finance, what the fin techs are doing, buy now, pay later, auto loans, student loans and residential mortgages. Cris, let me turn to you. Of all of those different lending categories, which one makes you most nervous in terms of what it means for the underlying stress the households are facing and what it might mean for the broader economy.

Cris deRitis:                      In terms of-

Mark Zandi:                     I know that's a tough one, but-

Cris deRitis:                      Yeah. In terms of their current performance, I probably would focus on the auto loans.

Mark Zandi:                     The auto.

Cris deRitis:                      Because that's a large, fairly large portfolio. And those, the quality of the underwriting there has actually been quite poor as well. So there too, maybe we're not seeing quite the vertical increase in delinquencies that Marisa is indicating, but those portfolios are deteriorating really fast.

Mark Zandi:                     Is that now-

Cris deRitis:                      The asset values are also projected to come down, so people are going to be upside down pretty... If they're not already, they're going to be upside down pretty quickly.

Mark Zandi:                     Driving the increase in auto delinquency is the score inflation, the actual inflation and the cutting into purchasing power. People have to make a choice. Do I buy the groceries, pay the rent, fill my gas tank, or do I pay the credit card bill on time... Or not. The auto loan, car bill on time. And you're saying on top of that is also now we're seeing or have seen vehicle prices, which had gone skyward early on in the pandemic used vehicle prices where a lot of these loans are going to buy a used vehicle. Those vehicle prices are now are starting to fall.

                                           So if you bought your used vehicle six months ago, it's now worth a lot less, therefore you have little equity, probably no equity in that auto right now. And so that gives you less incentive to continue to pay in a timely way. That's what you're saying.

Cris deRitis:                      Exactly. And those are substantial payments as well, would be the other thing. Compared to a credit card bill, which might be... Well it obviously depends on the balance, but that monthly payment may be a couple hundred dollars. The auto payment can be very significant because of the prices that we saw over the last couple of years. So people had to finance because they didn't have any option and those payments don't change. They're fixed and they're substantial.

Mark Zandi:                     Yeah. And I guess we know it feels like vehicle prices are going to... They've stabilized a little bit recently, but I think that's temporary and we're going to start seeing continue to decline. So that's another reason to be nervous about what all that means for credit conditions going forward in the auto market. Scott, let me turn to you. Of all those lending categories, any one of them stand out in terms of your level of concern?

Scott Hoyt:                       I guess I lean in two different directions, obviously besides auto because I agree with everything Cris said, but one is credit card. Just in the sense that if delinquency rates get too high and lenders potentially under pressure from regulators tighten standards too much, then it could be a real problem for consumer, particularly for the marginal borrower's ability to borrow to get a loan and to then keep up their spending. So I worry about that.

                                           And then the other question I have, and this maybe goes to Cris, is the story that you told for autos, how much does that apply as well to people who bought homes in the last year or two when prices were inflated and now are potentially going to be going down and eating substantially into their equity? Especially if they were marginal borrowers to begin with.

Mark Zandi:                     Yeah, that was directed you Cris.

Scott Hoyt:                       The issue there of course is that those are huge dollar sums.

Cris deRitis:                      No, you're right. There's certainly room to be concerned there. I take some solace in the fact that mortgage lending standards, although they may have loosened a bit, didn't loosen all that much during this period. It was still fairly rigorous in terms of the credit score and the income you had to prove to qualify for a mortgage loan. Versus auto, where I saw, I also saw a lot of industry, new lenders coming into that industry, again attracted by the yield. So I worry that there was a significant underpricing of risk in auto. It's possible that occurs in mortgage as well, but I just see that as a stronger category of borrower in terms of their credit scores, their incomes. We're not doing all the crazy type of lending we did in the past.

Scott Hoyt:                       Right. Although you do have to discount credit score somewhat particular for the marginal borrower for all the reasons we've been talking about. So I guess that's the piece that makes me wonder if we need to worry a little bit there as well.

Cris deRitis:                      Yeah, I would say we want to look at different portfolios. So FHA for example, which does cater more to the lower income segment and the folks typically do have lower scores there. That certainly is an area you'd want to watch out for. And you do see that delinquency rates and foreclosures are rising in that part of the mortgage market versus the total. So there's definitely risk there. I'm not disputing you there. Auto might be more vulnerable.

Mark Zandi:                     It's going up. I think you might have mentioned that, but they're off bottom. They're rising again.

Cris deRitis:                      Oh yeah.

Mark Zandi:                     FHA.

Cris deRitis:                      Yeah.

Mark Zandi:                     Which is about a fifth of the mortgage market debt outstanding. So not inconsequential. Hey David, I'm a little surprised no one said consumer finance, where the fin techs reside and where you see a lot of those buy now, pay later. Any concern there or not really?

David Fieldhouse:           I think there have been concerns. I think they've materialized a bit earlier. That was the first category to show signs of stress. And the cost of capital increased quite significantly for those firms, you really saw a bit of more pullback and a little bit more prudence there. So I think they were very nervous. Their life cycle on these loans is much shorter. And I think you saw a lot of pullback pretty quickly. So I don't have as many concerns. That market is starting to stabilize.

                                           In terms of buy now, pay later, and some of those short term loans, that's going to be very interesting to see how that plays out. So there's a bit of big growth category. Consumers are tacking on small amounts of additional debt, a purchase here, a purchase there. And we don't know, the whole lending industry doesn't have a great view into that.

                                           We're starting to get some reporting to the bureau on buy now pay later. But for the most part, these loans are almost just an adjacent risk for the typical consumer. So we don't really have a great view into how much extra debt those... I'm going to be cast this with a broad brush, but the millennials, the younger population who typically gravitates to buy now, pay later, we don't really know how much debt they have outstanding there. So even though credit card might have been low in '21, '22, maybe someone that was buy now, pay later, and now we're seeing really rapid credit card growth. And then maybe you add on buy now, pay later, and then you put a personal loan here. It all comes together and it can add up and be quite a concern.

Mark Zandi:                     Here's the other thing is student loans. Right now there's a moratorium on payments, which has been President Biden put in place when the pandemic hit. Has been extending the deadline for renewing those payments again and again. And his course is trying at this point to get through the Supreme Court his executive order to forgive a lot of student loan debt. What happens if he loses that court case and there is no forgiveness and the moratorium on those debt payments end? that means a lot of those student loan borrowers who have not been paying on their debt now have to resume paying on the debt at the same time that they're struggling with their credit card bills and consumer finance bills. Cris, am I got that right? That feels like that might be an issue here too in the not too distant future.

Cris deRitis:                      Yeah, absolutely. Absolutely.

Mark Zandi:                     Okay. All right. Marisa, anything to add on that, on the student loan side? No?

Marisa DiNatale:            No. Other than it's not looking promising, the forgiveness.

Mark Zandi:                     Although I did see, did you see... And I didn't read the press report carefully, but I guess is it the solicitor general of the United States who speaks before the court on behalf of the government apparently did a fabulous job presenting and now there's no longer a consensus as to how the court's going to rule. Did you guys hear that?

Marisa DiNatale:            I didn't, no. The last thing I saw was that it wasn't looking good for the Biden administration.

Mark Zandi:                     No, I think there's some question about that now. She apparently did a fabulous job making a case. So anyway, we'll see how that plays out. But okay. Obviously, reasons to be nervous about the credit environment, the household credit environment. Mortgages a little less, but in the world of falling house prices, you can't be too complacent.

Cris deRitis:                      Right.

Mark Zandi:                     And 3.4% unemployment, to Scott's point. Got a lot of issues with cars, consumer finance and auto. And so a lot of things to be worried about. Now taking it to the final step, what does it mean for broadly consumer spending in the broader economy? And one, I'm going to make a case and then hear what folks have to say is that all these issues are don't add up to a significant macroeconomic issue, at least at this point in time, because the numbers are too small.

                                           So if I add up all the bank card debt outstanding and add in all the retail card debt outstanding, there isn't a whole lot of that, but throw that in. That's the retailers having their own credit cards. And then you throw in all the consumer finance, you're talking maybe a trillion dollars outstanding. And if you look back historically, take the trend lines and growth pre pandemic, extend them out, the current level of debt is not much higher than you would've thought it would've been if there had been no pandemic. Because that debt fell sharply during the pandemic. It's coming back strongly, but still landing in a place that's very consistent with where you would expect it to be if there was no pandemic.

                                           Yeah, auto lending is up. But again, that's 1.5 trillion. So maybe it's a little bit higher than you would've thought it would be, but we're not talking trillions of dollars. We're talking maybe hundreds of billions, maybe 10 tens of billions of dollars. Student loan debt has actually gone nowhere in recent years. It's just kind of flat. So, you add up the numbers, the dollar amounts that are at risk here, it doesn't feel like it's a macroeconomic threat.

                                           And then to corollary to that is the problems, the credit problems are really concentrated in low income groups, younger people. Not in folks, certainly not in the top high parts of the income distribution or even in the middle parts of the distribution, the low parts of the distribution. And I don't mean to belittle that, the concern that we should have for those folks that are under a lot of stress. But from a macroeconomic perspective, the consumer spending is done by folks in the top part of the distribution. So this rule of thumb I have that strikes that point home is that folks in the top third of the distribution account for at least two-thirds of the spending, maybe probably closer to three-quarters of the spending. So if they're doing okay, the consumer spending and the economy, they'll navigate through without a pullback.

                                           Okay. That's a big statement. I'm basically saying, yeah, I hear you on the credit quality's eroding. We got some further erosion dead ahead, but it's not a macroeconomic threat. Scott, what do you think?

Scott Hoyt:                       Okay, I accept everything that you said, but I guess I want to take it a step further and look at the question.

Mark Zandi:                     You notice that, he's always taking it a step further. He's always taking it another six, 12 months down the road.

Scott Hoyt:                       Exactly.

Mark Zandi:                     Go ahead. Go ahead.

Scott Hoyt:                       Exactly. As we get towards the end of this year, how are consumers going to finance their spending? If credit quality continues to deteriorate and lenders remembering the financial crisis and under pressure from regulators cut back, restrict lending standards significantly, which they've already started to do, borrowing gets very difficult for all but very creditworthy borrowers who may not need to.

                                           Wealth is falling. The stock market's going nowhere. House prices are falling. That's going to undermine spending, particularly probably in the middle of the income distribution, potentially the high end too. You basically come back to the only source of funding for spending is growth in real incomes.

Mark Zandi:                     Now you're talking about folks in the bottom part of the distribution though. Right? Because there's a lot of excess savings sitting in the rest of the economy. Right?

Scott Hoyt:                       Okay at the top.

Mark Zandi:                     [inaudible 00:57:33], right?

Scott Hoyt:                       But I'm also assuming that the amount of excess savings that consumers are wanting to spend is going to diminish significantly over the course of the year.

Mark Zandi:                     But that hasn't been their behavior to date.

Scott Hoyt:                       Well-

Mark Zandi:                     They're spending the money.

Scott Hoyt:                       The saving rate's been rising for the last six months.

Mark Zandi:                     But it's still well below pre pandemic. I mean the amount of excess saving has been declining steadily for the last 18 months.

Scott Hoyt:                       Yes. But if you were to take a ruler to the saving rate over the last six months, by late this year, you'd be back near pre pandemic levels and you'd essentially be saying that there's no more drawdown of excess savings.

Mark Zandi:                     Okay, fair enough.

Scott Hoyt:                       So I'm presuming that again, by towards the end of the year, the excess savings that is available in consumer's mind for spending is not large.

Mark Zandi:                     What about this though, Scott? If I look at real incomes after inflation incomes, they are now rising and they've been rising for since last summer.

Scott Hoyt:                       Yes. But that is exactly my point is that consumer spending will be, at that point, entirely dependent on real incomes.

Mark Zandi:                     Again, you're saying they're not going to draw down any more of the savings? That's a working assumption on this.

Scott Hoyt:                       Working assumption. At least very not enough to materially contribute to spending growth. Even if the saving rate levels off at five and a half or something like that, and yeah, there's some draw down-

Mark Zandi:                     Think this is the Amish in Scott talking. That is not the rest of America. They are spending that saving.

Scott Hoyt:                       But look at the trend in savings. I don't know where that stops.

Mark Zandi:                     As you know, those saving rates are going to be revised again.

Scott Hoyt:                       Well yeah, I know.

Mark Zandi:                     A gazillion times, yeah. But anyway, I hear you.

Scott Hoyt:                       I'm raising a concern anyway.

Mark Zandi:                     Yeah, raising a concern. Yeah, fair enough.

Scott Hoyt:                       And if the Fed raises rates enough to slow the job market as much as we say they're going to, then even with lower inflation, real income growth is not going to be much.

Mark Zandi:                     Yeah.

Scott Hoyt:                       And so my question is, when we get to nine, 12 months from now, where is the funding to sustain spending growth coming from? And it wouldn't take much of a shock or a blow to the system, and what comes from, well, there's a little bit there to no, there isn't anything there could happen.

Mark Zandi:                     Yeah. And I guess if inflation doesn't come in, then-

Scott Hoyt:                       Inflation doesn't come in, you're getting higher rates and-

Mark Zandi:                     Yeah. Of course it keeps going back to that damn inflation. If inflation doesn't come in, the Fed steps on the brakes harder, interest rates go up, it's going to hit the job. We go in and then we got some real-

Scott Hoyt:                       The point is, if we don't get a significant slowing in job growth, then the fed's going to be raising rates more or there's something going on. But if we get a significant slowing in job growth, if we're down to, let's say 50 K a month on jobs and inflation is down to what, 3%, do you really have much real income growth?

Mark Zandi:                     Right, right. Okay. That's a good counter. Marisa, what do you think?

Marisa DiNatale:            I kind of agree with Scott and also that we know interest rates are going higher. We know the Fed's going to do at least one more rate hike, maybe up to three more. So all of this in the context of a higher rate environment, which makes all of this revolving credit even more expensive for people that have high balances, low income, and are more vulnerable to a slowing in the economy to begin with.

                                           So how do people that are now paying, I don't even know what it is, 25% on a credit card, flash forward nine months. What are the rates going to look like on this revolving credit? And they, I assume, will have drawn down any excess saving they have at that point. And credit will be not only tighter, but a lot more expensive. So I have a lot of the same concern that Scott has. Now just because I'm an economist, to buy a little bit of that back-

Mark Zandi:                     But can I just, again, going back to my earlier point, it's not a lot of dollars. Right?

Marisa DiNatale:            That is what I was going to say next.

Mark Zandi:                     Okay, fine. Okay, fair enough.

Marisa DiNatale:            So why is it different from the financial crisis?

Mark Zandi:                     You should, let me play your other side.

Marisa DiNatale:            There was mortgages and that is 75% of all of the debt outstanding or something huge like that. I might be off, but it's something like that. So there, when you have things going belly up, that was catastrophic to the entire economy just because of the sheer size of it. Now what we're looking at is something that's a much smaller percentage. And if we think the vast majority of mortgages are okay, really it's really only the people that bought houses in the last couple of years that have real risk to delinquencies or foreclosure. And that's very, very small compared to what we saw in '07, '08.

                                           So yes, I agree. I think there's a lot of risk out there that I'm worried about, but I think it's a smaller proportion of the total economy than it was if we go back to the '08 recession. So I don't think we're looking at anything like that in terms of the economic impact, but I wouldn't discount what may happen over the next 24 months.

Mark Zandi:                     Yeah, I mean because on the mortgage side, people have locked in those low rates.

Marisa DiNatale:            That's right.

Mark Zandi:                     And they're not going up.

Marisa DiNatale:            That's right.

Mark Zandi:                     The average coupon announcing mortgage is 3.5% and that's not changing. And just to give context, and tell me if I'm wrong, but I'm going to fire it off, 800 billion in credit card debt, maybe 200 billion in consumer finance, 1.5 trillion in auto, 1.5 trillion in student loan debt, and probably 12 trillion in mortgage debt, first mortgage and home equity. Just to give you context, that's the balance sheet, I think roughly speaking.

                                           Cris, and then I'll come to you, David, on the macro. Anything you want to add there? Are you leaning more on the pessimistic side or the... The pessimistic is led by Mr. Hoyt, the optimist is led by Mr. Zandi. What do you think? Are you leaning more pessimistic in regard to this particular issue? I'm not asking about your general state of thinking, or your mood, but on this issue, where are you landing?

Cris deRitis:                      As usual, a little bit of both. On the optimistic in the sense that I don't see this as a financial crisis. So to Marisa's point, the issues are certainly not apparent in the mortgage market. So the issues that we're talking about, they're really in these smaller markets. So unlikely that banks would have to take a lot of losses or and certainly, they won't have to take losses given their capitalization rates that would push them over the edge. So I don't see that as an imminent threat. And obviously anything could happen, but I don't see that playing out as a repeat of the great financial crisis.

                                           But in terms of the spending outlook and what we see, I am sympathetic to Scott's view in terms of what the future holds here. And one thing I might add to Scott's argument is just some of the demand that we've already pulled forward. So some of that durable goods spending or other spending we did during the pandemic, that's not going to be repeated anytime soon. So that also would call for some weakening in spending growth going forward. And with higher financing costs, it's going to be difficult to see that consumer really revving up their spending and producing a lot of additional or contributing a lot to output going forward.

Mark Zandi:                     So I'm going to turn to you, David, but I'm going to guess you're on the lugubrious side. Anyone who has a Moro painting behind them... Is that Moro, by the way behind them?

David Fieldhouse:           Yes.

Mark Zandi:                     Yeah.

David Fieldhouse:           Yes it is. Yes.

Mark Zandi:                     Yeah, I love Moro. But I always get very, very morose when I look at Moro.

David Fieldhouse:           Yeah.

Mark Zandi:                     I'm not sure why. So I'm guessing you're going to come down on the Mr. Hoyt side.

David Fieldhouse:           Yeah, I will. I know I might be a bit biased because I-

Mark Zandi:                     Damn Canadian.

David Fieldhouse:           ... work with risk models. Yeah. But yeah, no, I think this will be a drag. One, we looked at the data that we got from Equifax today. Bank card balances have grown year over year. They're at 21%. It has not rolled over yet. We thought it was about to roll over. And then to Marisa's point about all the high, it's really expensive. That debt is expensive. Now we're dealing with the average interest rate on a balanced weighted calculation for credit cards is over 20%. You can't have 20% financing cost and grow 20% year over year. Something has to give. There's the additional spending, that additional dollar just is getting more and more costly.

                                           So I think it's going to be a drag for the next year. And borrowers are going to run up against credit lines and it's going to be a problem. And then this will spill over, not just to the spending channels. Some of these credit cards are used to support small businesses and other channels as well. So I think it's just going to be a drag overall. And just financing, credit availability is just going to be a problem throughout the whole year. And there's just a lot of uncertainty out there.

                                           So I'm a bit pessimistic and I actually talked to one of my clients. They had grew in the auto space year after year after year, very aggressive growth. They're just exiting auto finance altogether. They said it's too uncertain. That's what their investors are saying. It's too uncertain. So they're just going to park their assets somewhere else and we're just going to see tight lending standards and it's going to be costly debt going forward in 2023 and just a lot of uncertainty out there. And until that uncertainty resolves itself, I think household finances are going to be a drag on the economy.

Mark Zandi:                     Yeah.

Cris deRitis:                      Have a great weekend everyone.

Mark Zandi:                     Yeah. I mean no argument. It's going to be a drag. It's just a question of how big a drag. Is it going to take us down, kind of drag? But yeah, good point. I thought this was going to be shorter. Never is. It's always the same.

Marisa DiNatale:            You say that every time.

Mark Zandi:                     Yeah, I know. So let's take one question. I think anything else on that? That was a wonderful discussion. We covered a lot of ground. Anything else anybody wants to add before? Because I think we want to take one listener question before we call it quits. Anything? No, hearing none. Marisa, you want to give us one of the... Because you said we got a number of good questions this week.

Marisa DiNatale:            We did. And actually, one of the ones I was going to read, which was tweeted to you, we just answered, which was the impact on the economy and the consumer because of these variable rate products.

Mark Zandi:                     They tweeted that to me?

Marisa DiNatale:            Yep.

Mark Zandi:                     How come you know it and I don't know that? Should I know that?

Marisa DiNatale:            Because Sarah sent it to me.

Mark Zandi:                     Oh, Sarah. Okay. Okay. Sarah's my assistant or more than my assistant. She kind of does everything. So

Marisa DiNatale:            She keeps you in line.

Mark Zandi:                     She keeps everyone in line.

Marisa DiNatale:            Okay. So that was the one topically relevant question we had, so this is a switch gears-

Mark Zandi:                     Oh, we're switching gears. Okay.

Marisa DiNatale:            ... kind of question. Okay.

Mark Zandi:                     Yeah.

Marisa DiNatale:            Because we don't have another question about this topic. So this is about inflation. Actually, there's two really good ones. Do you want one on monetary policy or shelter inflation?

Mark Zandi:                     Okay, we're going to do both quickly. Oh, we can't do both quickly. Okay. Cris, what do you want to do? David, what's your preference?

David Fieldhouse:           Shelter is very interesting right now.

Mark Zandi:                     Let's do shelter.

Cris deRitis:                      Shelter.

Mark Zandi:                     There we go. David wants shelter. Fire away.

Marisa DiNatale:            Okay, so this listener wanted to ask a question regarding how rent feeds into the CPI calculation.

Mark Zandi:                     Okay.

Marisa DiNatale:            And now I didn't verify this, so hopefully somebody else can. The way the BLS calculates shelter, rent as a primary residence contributes only about seven and a half percent of the total shelter weight of the CPI. And we know that total shelter in the CPI is about a third, a little higher than a third. Right?

Mark Zandi:                     34%, yeah.

Marisa DiNatale:            Yep. So he said, "Listening to your podcast, I had a feeling that you're putting much more weight on the fact that the lease signings are a lagging indicator in the CPI. So it could take 12 months for any changes in the price of new leases to show up in shelter." So he said, "Am I right to assume that only that 7.5% of rent is the lagging indicator and that the rest is coincident or leading?" Do you understand? So basically saying-

Mark Zandi:                     He's saying we're using market rents. They've gone flat and saying that that is going to translate into slower cost of housing services, but for rent of shelter. What about the homeowner's equivalent rent? The other component, which is much larger, which is I think 25.5% of the index. So how does that relate back to rents?

Marisa DiNatale:            Right. Because presumably the OER is not lagging in the same way rents is.

Mark Zandi:                     Owner's equivalent rent.

Marisa DiNatale:            Yep, yep.

Mark Zandi:                     Yeah. Right. Cris, do you want to take a crack at that?

Cris deRitis:                      Sure. So I would say it is, the approach is similar for the owner's equivalent rent as well. It's also survey. It is survey based in terms of the expenditures. And I'm really going off of memory here, but the actual rent that is used is from the same rental survey. So that goes into the rent of primary residences in the CPI.

                                           So both measures, you'll actually see that the two measures are quite highly correlated. So the weight splits it out, but the effect is the same. Does that make sense?

Mark Zandi:                     Yeah. The answer is that the rents are affecting both the rent of shelter and the homeowner's equivalent rent. Interestingly, in the last month when the BLS, Bureau of Labor Statistics, updated its methodology for the CPI, they do this once a year, they did do two things that are relevant here.

                                           One, they increased the weight on housing was. It's actually higher now by about a percentage point than it was previously. And secondly, I think they added more survey based information on single family rental. So renting a single family home, because that gives you a better sense of rent for homeowner's equivalent rent. So they've improved the information they're using to construct that measure.

                                           But as Cris points out, they're highly, highly correlated, very closely correlated. And so the fact that market rents have gone flat to down here in recent months will translate through into the lower cost of housing services, both for rent of shelter and homeowners of equivalent rent, which add up to now 34%, I think. Maybe it's a little even over 34% of the CPI index. By the way, it's meaningfully less for the consumer expenditure deflator. I don't know that. I think it's closer to 20% of that index. I'm sure I don't have that exactly right, but that gives you a order of magnitude. Do you think that answers the question, Marisa?

Marisa DiNatale:            Yeah, yeah. I think, yes. Yep.

Mark Zandi:                     Okay. Do you want-

Cris deRitis:                      There's actually a write up on the BLS website.

Mark Zandi:                     Oh, is there?

Cris deRitis:                      [inaudible 01:14:41] wants to look.

Mark Zandi:                     Did we get it right, Cris?

Cris deRitis:                      Yeah, well that's my memory.

Mark Zandi:                     Okay.

Cris deRitis:                      Yeah, I remember going to the site and they explain very clearly how they're calculating the owner's equivalent rent versus the primary rent, the different series, the surveys they use. So if you want more info, it's there.

Mark Zandi:                     All right. Real quick, well, we'll try to do it quick, the monetary policy question. What was that?

Marisa DiNatale:            Okay, this is a good one. So St. Louis Fed President Jim Bullard was quoted as saying, "This is the age of forward guidance and so the long and variable lags argument doesn't make as much sense as it made decades ago." The listener wants to know what is your opinion on that? So this is referring to the time it takes from when the Fed changes monetary policy, makes a move in the Fed funds rate, and when that actually feeds into economic activity.

Mark Zandi:                     Do you want me to take that one, guys?

Marisa DiNatale:            Yeah. Sure.

Mark Zandi:                     Okay. I agree with the forward guidance that is, the Fed officials are through speeches, through minutes, through statements, FOMC statements, making it clearer to everyone what they're going to do with monetary policy, both in terms of rates and in terms of their balance sheet. That means that what they're doing gets embedded in so-called financial conditions like immediately. Or you watch when Powell gives a speech or is testifying in Congress, you can see the bond market and the stock market going up and down based on what he's saying because they're listening to the guidance he's giving with regard to future monetary policy.

                                           So stock prices, bond yields, foreign exchange to value of the dollar, underwriting standards, everything is getting affected much more quickly, almost immediately. And that's the financial conditions which are the link between what the Fed's doing with monetary policy and what it means for the economy, the real economy. And so that transmission of that information to the marketplace into financial conditions is much faster. Therefore, the lag between shifts in monetary policy and its impact on the real economy probably aren't as long as, and aren't as variable as they have been historically.

                                           So in fact, I would go far as to say that the maximal impact of the rate increases the Fed has put in place so far are probably behind us. They probably occurred in the fourth quarter of last year. Unless monetary policy deviates from the forward guidance that the Fed has articulated to us, the impact of monetary policy on the economy is going to fade here pretty considerably as we move through the year. And is one reason to think if the economy isn't going into recession now. And it's not.

                                           You can see that in the job market data, less likely it's going to go into the future unless this isn't the end of the rate hikes. Unless inflation isn't coming in and they have to double down again and start giving guidance that they're going to raise rates to 6%. Right now they're closer to five, we're going to six or six and a half. Financial conditions will tighten again. Stock prices will go down, bond yields will rise, and then we'll go into recession.

                                           So in my mind, the most likely scenario scenario is no recession, but I'm not going to argue with anyone who says recession next year. I will argue strongly with anyone who says recession this year or certainly anytime in the early parts of this year, first half, middle parts of the year. That's just not happening. But maybe I would concur that there are increasing risks for next year, but that would require the Fed to change forward guidance again. But bottom line, I agree with what he said. Anybody want to add to that or take umbrage with that?

Scott Hoyt:                       I agree with you fundamentally. I guess the one question I have is for both consumers and businesses, they have debt outstanding that's fixed rate, but it rolls over. And so that as it rolls over, the past rate increases suddenly impact their budgets. So I think, while I agree with you that the largest impact is immediate, it's not drawn out. I think there still is a tail to that, that I wonder if you may have understated a bit.

Mark Zandi:                     Yeah. No, no, I agree. There's still a drag, no doubt about it. It's just the drag is quickly becoming less powerful. The other thing I'd say though, idiosyncratic to your point, is the actual amount of debt that's going to roll over is actually quite modest in the grand historical scheme of things, at least in 2023. So if rates do start to come down in '24, that so-called rollover risk becomes less of an issue.

                                           I mean it's not that big an issue this year compared to other recessions when you had a lot more debt rolling over than you do in 2023. But great question. Those are great questions and thank you listeners for those questions. And we clearly would like you to continue to pass those along. They're really important and insightful and love addressing them. So thank you for that.

                                           Okay guys, like it always is the case, this is longer than I expected, but only because it was a wonderful conversation. It was great to have David first time on the podcast and Scott three times and a bit of a gadfly, I'd have to say. So we're going to have you back, buddy.

Scott Hoyt:                       I look forward to it.

Mark Zandi:                     Any other comments before we part ways here and we get on a plane to Phoenix?

Cris deRitis:                      If you want more, you got to catch Marisa's session on Monday.

Mark Zandi:                     On Monday. Is it going to be taped?

Cris deRitis:                      No, I think it's just live. You have to be there.

Mark Zandi:                     Oh, it's live. Got to be there. Got to be there, friends.

Marisa DiNatale:            Scottsdale, Arizona.

Mark Zandi:                     All righty. Take care, everyone. Have a good week and we'll call it a podcast. Bye-bye.