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Moody's Talks - Inside Economics

Episode 24
September 17, 2021

Shortages and Supply Chains

Tim Uy, Todd Metcalfe, and Jesse Rogers, all economists at Moody's Analytics, join Mark and Ryan to discuss global supply chains and commodity shortages. The focus is on issuances around semiconductors, lumber, and copper.

Full transcript can be viewed here

Mark Zandi:                      Welcome to Inside economics. I'm Mark Zandi, thanks for joining this week. We've got a real group here today. We're missing Chris, Chris [inaudible 00:00:22], the deputy chief of [inaudible 00:00:24]. He's on sabbatical, isn't he, Ryan? What's up with him? Where is he? Is he going to make it back for next week?

Ryan Sweet:                      No, he'll be back next week, but have you noticed that our ratings have gone up substantially since Chris has been on vacation?

Mark Zandi:                      Oh, really? How do you know that?

Ryan Sweet:                      No, I'm kidding. No, I'm kidding.

Mark Zandi:                      Oh, you were only kidding. I wish ... oh, I thought ... you had me going there for a second.

Ryan Sweet:                      Yeah, I should have kept it going, because he's probably going to listen to this on the plane to kind of-

Mark Zandi:                      Coming back from Italy. Yeah, well, we've missed him, but it'll be good to have him back next week. But we are in good shape. We've got a few of our colleagues joining us. In fact, this podcast is a little bit of an experiment, because we've got a pretty full house here. In addition to Ryan, who's the director of Real Time Economics, who you all know quite well, we've got Jesse Rogers. Jesse is ... well, Jesse is like a Renaissance man. He does like, almost ... you speak like, 10 languages, don't you?

Jesse Rogers:                    Yeah, three or four, Spanish, Portuguese, and a little bit of Arabic.

Mark Zandi:                      Is that why you said three or four?

Jesse Rogers:                    Yeah, depending if you count the three words I know [inaudible 00:01:32]. It's a family heirloom, we've lost it over the generations. My mom's a native speaker, but it just didn't get passed down.

Mark Zandi:                      Oh, is that right? I didn't know that. What is her nationality? Where's she from?

Jesse Rogers:                    She's American, but-

Mark Zandi:                      Oh, but she is Arab.

Jesse Rogers:                    ... my grandparents, yeah, were from Syria.

Mark Zandi:                      Oh, from Syria. Oh, okay, very cool. And you are critical to all the work we do in Latin America. In fact, we were thinking about buying a Brazilian company. Was it Brazilian? I think it was Brazilian. And actually, I remember, I asked you to go down and run that business, and you said, with some intrepidation, after some real deep thought, yep, you were ready to go. And then, of course, the deal didn't happen, so ... you were so bummed out because you were all set to go. Where was it, exactly? I can't remember, Sao Paulo, or where was it?

Jesse Rogers:                    Sao Paulo, yeah.

Mark Zandi:                      Sao Paulo, [inaudible 00:02:32] Sao Paulo.

Jesse Rogers:                    We do have an office there. Yeah, it's going-

Mark Zandi:                      [inaudible 00:02:38].

Jesse Rogers:                    ... to be a bit of a different thing, though.

Mark Zandi:                      Yeah. So Jesse, tell us a little bit about your background. How did you find your way to Moody's Analytics?

Jesse Rogers:                    Sure. My background's in public policy in journalism. I cut my teeth, actually, living in Mexico City and working at a small research institute in [inaudible 00:03:00] there. I was there for three years, came back for my master's, and I don't know, almost by accident, a recruiter kind of called me up towards the end and asked me one thing. He said, would you be prepared to move to Westchester. I'm thinking it was Westchester, New York, and I said, yes. So ...

Mark Zandi:                      No, no, seriously?

Jesse Rogers:                    ... that kind of set the whole thing in motion. Yeah, yeah.

Mark Zandi:                      Oh, no.

Jesse Rogers:                    So that was the first thing he asked me. So ...

Mark Zandi:                      Well, Westchester, PA is a lot nicer than Westchester ... well, I shouldn't say that. I like it, because it's home.

Jesse Rogers:                    I'm comfortable. I'm in Philadelphia now, but I miss going to the office.

Mark Zandi:                      Yeah. But how long have you been with us at Moody's Analytics now?

Jesse Rogers:                    It's going to be seven years.

Mark Zandi:                      Wow. Yeah, cool. Well, and I should've said right up top that, after we get through some of the numbers, like we typically do, and we're going to play our game and everyone's going to play, we're going to talk about global supply chains. And so, Jesse, I think you're on board to chat about copper and other commodity prices. And of course a lot of that's produced in Latin America, and so it all kind of fits. So you're ready to talk about copper?

Jesse Rogers:                    Yeah, Doctor Copper, looking forward to it.

Mark Zandi:                      The answer is yes, yeah, you are ready.

Ryan Sweet:                      That's Mark's favorite answer.

Jesse Rogers:                    [inaudible 00:04:21], oh, I'm ... yeah.

Mark Zandi:                      It's my favorite indicator. We'll come back to that.

Jesse Rogers:                    More than ready.

Mark Zandi:                      Although, I forgot to look at the price before I came on, but I'm sure Jesse knows the price.

Jesse Rogers:                    4.3.

Mark Zandi:                      We also have ... what is it?

Jesse Rogers:                    4.3, kind of static.

Mark Zandi:                      4.3? $4.30 a pound. Yeah, okay, still very high. Okay, we also have Todd Metcalfe. Todd, how long have you been with us? Not seven years, it's been more like three, four years.

Todd Metcalfe:                Three and a half.

Mark Zandi:                      I was going to say three, four. How about that? Yeah, very good. And you are critical to all our housing analysis. In fact, we've been going back and forth, recently, on a house price modeling at the metro area level, and we seem to be getting that together. A lot of good work there. And you're here to chat about ... because we are talking about global supply chains, obviously, there's been a lot of disruptions to supply chains for building materials. Lumber has been kind of the poster child for supply chain issues, and so I know you've been watching that very carefully, so it's good to have you on board. And did you come to us right from your PhD? Because you got your PhD in Syracuse, you were just telling me. Did you come to us directly?

Todd Metcalfe:                No, I worked as an economist at Towson University. They have a little think tank that they do regional economics there, and so I worked there first. And then Evan Andrews was in the same PhD program as I was, and he's the one who-

Mark Zandi:                      One of our colleagues.

Todd Metcalfe:                ... he's the one who got me into Moody's.

Mark Zandi:                      Yeah, you can't be too familiar on this podcast. You're talking to me, but you're also talking to the world, so they're going, who the hell is Evan Andrews? Yeah. So just ... great guy, by the way. He's a great guy, but ... and so you went from Syracuse, you got your PhD. Actually, Syracuse has a really good public policy. Is that where you were, in the public policy area?

Todd Metcalfe:                So I was actually in a multi-disciplinary program. So basically, I was an applied economist, but all of my professors, or all of my committee members, were actually public administration professors ...

Mark Zandi:                      Yeah, [inaudible 00:06:38].

Todd Metcalfe:                ... generally economists in the public administration program.

Mark Zandi:                      Yeah, really good group of folks there. Well, it's good to have you here. And then, finally, Tim Uy. Tim, he's our chip guy. He's been following the chip industry carefully for some time. And obviously, that's also kind of a poster child for global supply chain issues, it's really messed up the vehicle industry, which has really been a real problem here. So good to have you here, Tim.

Tim Uy:                              Yeah, thanks, Mark. Good to be here.

Mark Zandi:                      Yeah, and I like to tease Tim because he got his PhD in Minnesota, and when I was back at school, they were all about real business cycles. Did anything ever come out of that whole thought process around real business cycles? Do you think it's had an impact on people's thinking?

Tim Uy:                              I think to some degree, yeah. I think it's influenced sort of a lot of the modern [inaudible 00:07:36] modeling that we see coming out of central banks and academic institutions nowadays. But to me, it's yet another kind of sort of way to think about the world, right? And it's, I think, come into some kind of acceptance, right? I'm sure Todd will agree that Syracuse also teaches real business cycle theory at some point during its macro curriculum. So ...

Mark Zandi:                      You guys are both from schools that got it wrong, so what can I say?

Tim Uy:                              Well, Penn also teaches RBC stuff, Mark, so ...

Mark Zandi:                      They do? When did that happen?

Tim Uy:                              ... they do. Oh yeah, they do. Absolutely. I mean, they've hired a lot of Minnesota guys, so I mean, I think if you go back there, I think you'll see that RBC constitutes a huge chunk of their macro curriculum.

Mark Zandi:                      I [inaudible 00:08:19] joke. As you know, Tim, I tease you all the time. I give you a lot of grief. Yeah.

Tim Uy:                              Yeah, I know.

Mark Zandi:                      But you moved from Minnesota to ... you didn't come to us directly from Minnesota, did you? No.

Tim Uy:                              No, that's right. No, no. I've been through the ringer in some ways, because I'm originally from Canada, but as you said, I went to school in Minnesota for my PhD. I went to Cambridge after that. I was a fellow at the University of Cambridge in the UK for three years, and I worked in consulting after Cambridge. So that's actually how I got to Moody's, was through consulting. So ...

Mark Zandi:                      Well, great to have you. And so, you can see, this is a little bit of a Brady Bunch thing going on here. We've got five of us, so this is a little bit different than what we've had previously on the podcast. So a little bit of an experiment, but it's good to do this experiment with you guys, so welcome aboard. And as the listener knows, first, before we dive into the topic, which is going to be, again, global supply chains, we talk about the statistics and play a little bit of a game here. So I'm going to, just so that you get a sense of it, we're going to start with Ryan. And of course, Ryan is a maven at this. He's really, really good at this. So Ryan, what's your statistic for the week?

Ryan Sweet:                      All right, it is -1.5%.

Mark Zandi:                      -1.5%.

Ryan Sweet:                      This is something on everyone's mind, and it has been one of the big contributors to fluctuations, recently.

Mark Zandi:                      Fluctuations, what? What'd you say?

Ryan Sweet:                      Recently, over the last few months.

Mark Zandi:                      Fluctuations in what? Just ...

Ryan Sweet:                      I'm not going to give it away.

Mark Zandi:                      ... oh, that gives it away?

Ryan Sweet:                      Yeah, that gives it away. It's like a [inaudible 00:10:11].

Mark Zandi:                      Damn, I thought I got him. Oh, yeah, fluctuation. You guys have any idea what minus one ... and this is a statistic that came out this past week.

Ryan Sweet:                      Tuesday. There's another hint. 8:30 AM.

Mark Zandi:                      Oh, geez. Everything comes out ... well, not everything comes out at 8:30 AM. Well, CPI came out Tuesday morning-

Ryan Sweet:                      You're on track.

Mark Zandi:                      ... and, -1.5%. Guys, do you see how I do this? This is called deductive reasoning. Isn't it called deductive reasoning? Yeah, it's called deductive reasoning. Jesse would know. And it's probably the decline in used vehicle prices in the month.

Ryan Sweet:                      I'm impressed, very good.

Mark Zandi:                      Oh, baby, ding ding ding.

Ryan Sweet:                      You got it.

Mark Zandi:                      Hey, we need to get a bell on Inside Economics.

Ryan Sweet:                      [inaudible 00:11:05].

Mark Zandi:                      I can ring it. In fact, I need to get the bell. I need to get the bell.

Ryan Sweet:                      Anyone talks, you can just ring the bell.

Mark Zandi:                      Yeah. I will have to say, though. I'm not sure I would've gotten it unless you told me Tuesday. I would have ...

Ryan Sweet:                      Yeah, because a lot of stuff came out this week, but-

Mark Zandi:                      Yeah, a lot of stuff came out. Yeah.

Ryan Sweet:                      ... used car prices have been driving the CPI up hot, like over the last few months, it's been adding a lot, and now it's subtractive in August.

Mark Zandi:                      Yeah. Well, tell us about the CPI report, in general. I mean, I thought that was a pretty important report, but I'll let you kind of lead the way on that. So why don't you fill us in on that one?

Ryan Sweet:                      Yeah, so August was like the first glimpse of inflationary pressures beginning to moderate. The CPI rose less than what the consensus anticipated. And if you strip out the volatile food and energy components, the CPI only rose 1/10 of a percent in August. And that's a lot weaker than what we've seen over the last several months, and a good chunk of that is because used car prices fell, a lot of the reopening components of the CPI, so used rental car prices, lodging away from home, they also moderated. Airfares, they plunged, that could be Delta, as well, in August. So we're getting a little relief on the inflation front.

Mark Zandi:                      Yeah, it feels like inflation has peaked. It's rolled over. I think overall, CPI, consumer price index inflation, peaked in June, I think. But on a year over year basis, 5.5%, still elevated, obviously, because of the base effects, but it feels like we're now ... and given the 0.1% increase, very modest increase in core CPI, excluding food and energy, which is what economists generally look at to gauge where the inflation rate is headed, and then your term suggests that we've peaked on inflation. So the idea or the view that this spurt in inflation, this spike in inflation, is temporary, or transitory, as the Federal Reserve might say, that looks right. That looks like what's happening here. Would you concur with that?

Ryan Sweet:                      I agree. Yeah, [inaudible 00:13:16] would agree. Yeah, next month, so for the September data, it could be a lot of noise in there because of some hurricane effects that drove up energy prices. But looking past the hurricane effects, I think inflation is definitely beginning to moderate.

Mark Zandi:                      Yeah. Okay. Okay, so should I give you my statistic, or should we go on to the guys? Guys, like Jesse, do you have an indicator, a statistic?

Jesse Rogers:                    Yeah, yes, I do, Mark.

Mark Zandi:                      You do? Oh, okay. You have a good one, it's a good one?

Jesse Rogers:                    Yeah, I believe so.

Mark Zandi:                      Did Ryan give this to you, or did you come on this on your own?

Jesse Rogers:                    This is mine. I may have work shopped it a little bit with Ryan, so maybe we should count him out for this round.

Mark Zandi:                      All right, Ryan.

Ryan Sweet:                      Jesse's stressed about this, Mark. We talked, he was-

Mark Zandi:                      I know he is, a good deal. Look, his hands are folded across his chest-

Tim Uy:                              I know, they're all clammy.

Ryan Sweet:                      He's really nervous about this.

Mark Zandi:                      ... he's sweating a little bit. Yeah.

Ryan Sweet:                      Don't disappoint, Jesse.

Mark Zandi:                      Actually, I can see, he cleaned up his room. We're all on Zoom, too, so I see you cleaned up your room there a little bit. I can tell he's ready. Okay-

Jesse Rogers:                    [inaudible 00:14:22].

Mark Zandi:                      ... fire away, Jesse. What's the number? What's your statistic?

Jesse Rogers:                    It's 15%, and one clue is, it's year-to-date.

Mark Zandi:                      15%, on the nose, 15%, you say.

Jesse Rogers:                    Yeah, roughly.

Mark Zandi:                      Cumulative year-to-date. And this is a statistic that came out this week, or relatively recently?

Jesse Rogers:                    So it's a weekly average. So it's a weekly average of ...

Mark Zandi:                      Okay. Weekly average, whoa, that ...

Ryan Sweet:                      This is not the one you ran by me.

Jesse Rogers:                    Yeah, this is a different one. I was thinking the other one I ran by Ryan.

Mark Zandi:                      ... yeah. Ryan, do you have any ... is it related to global supply chains in some way? Or ...

Ryan Sweet:                      [inaudible 00:15:13], it's got to be.

Jesse Rogers:                    Yes. Yes, it is.

Mark Zandi:                      It is. Is it a price? Are we looking-

Jesse Rogers:                    Yeah, it is a price.

Mark Zandi:                      ... oh, it's a price. Okay. Again, you see how I do this, guys? Deductive reasoning, deductive reasoning. It's a price ... 15%, it's up 15% so far this year.

Jesse Rogers:                    Since the start of this year, yeah.

Mark Zandi:                      And it's a weekly average. And I'm guessing, given where you're coming from, it's a price for a commodity? Would that be fair?

Jesse Rogers:                    Yeah. Yeah, that is.

Ryan Sweet:                      Is it copper?

Mark Zandi:                      No, it can't be copper, can it?

Jesse Rogers:                    Copper. Yeah.

Mark Zandi:                      It is copper? Oh, okay.

Jesse Rogers:                    It is copper.

Ryan Sweet:                      Here we go.

Mark Zandi:                      It is copper prices. Okay.

Ryan Sweet:                      We got him pinned.

Mark Zandi:                      I thought that would be too easy. That's why I said it can't be copper. That's like ... yeah, okay, copper prices, up 15-

Jesse Rogers:                    [inaudible 00:15:56].

Ryan Sweet:                      Chris only talks about housing, Jesse's only going to talk about copper.

Mark Zandi:                      ... oh, okay. All right.

Jesse Rogers:                    Yeah, you guys have typecast me already. I'm not on for 10 minutes, and I'm typecasted.

Mark Zandi:                      Good point. Well, we do that on Inside Economics. We can figure you out pretty quickly, right away. But that was a good one. That was very good. Yeah, okay. Well, we'll come back to copper prices in just a few minutes. Okay, let's go to Tim. Tim, do you have a statistic, Tim?

Tim Uy:                              Yeah, I do, it's 75%.

Mark Zandi:                      75%, okay. And don't tell me it's chip prices, year-to-date.

Tim Uy:                              No, it's not chip prices. That would be [inaudible 00:16:39].

Mark Zandi:                      Okay. Yeah, that would've been too easy. All right, so it has to do with global supply chains?

Tim Uy:                              Yes, it does. It also has to do with chips.

Mark Zandi:                      But it's not a price.

Tim Uy:                              It's not a price.

Ryan Sweet:                      Is it capacity utilization?

Tim Uy:                              Getting there, getting there. Close, yeah, close. Not quite yet.

Mark Zandi:                      Hold it, 75% sounds low for capacity utilization.

Ryan Sweet:                      Oh, I was going to build on your train of deductive reasoning and start-

Mark Zandi:                      Oh, I see.

Ryan Sweet:                      ... chipping away at industry specific.

Mark Zandi:                      Okay. But, so it's-

Tim Uy:                              It's related to capacity utilization, yes.

Mark Zandi:                      ... it's related to capacity.

Tim Uy:                              But it's more geographic in nature.

Ryan Sweet:                      Industrial production?

Tim Uy:                              Production, yes., but production where, of what?

Ryan Sweet:                      Oh, now we're getting ...

Jesse Rogers:                    Can I take a guess?

Mark Zandi:                      Now he's really pushing us.

Tim Uy:                              Yeah, we're very close. We're very close. Sure, go ahead.

Mark Zandi:                      Okay, I'd say, probably Asia.

Tim Uy:                              Yeah, yeah, yeah. So what in Asia?

Mark Zandi:                      So based on Asia ... do I have to tell you what the province it's in?

Tim Uy:                              No, but you're spot on, Mark. So it's, 75% of global chip production is done in east Asia, in particular.

Mark Zandi:                      Oh, okay. Well that's a good statistic.

Tim Uy:                              Yeah, it's going to be-

Mark Zandi:                      Yeah, say that again? 75% of global-

Tim Uy:                              Of global chip production.

Mark Zandi:                      ... and that's all chips, basic-

Tim Uy:                              That's all chips.

Mark Zandi:                      ... chips, high tech, sophisticated chips, the whole shooting match.

Tim Uy:                              That's absolutely right, yep. So all ... basically, 75% of total chip manufacturing around the world is done in-

Mark Zandi:                      Okay. I got one for you. This is for Tim. What percent of global chip manufacturing is in Taiwan?

Tim Uy:                              ... so for high end chips? 90-

Mark Zandi:                      No, I said total chips. [inaudible 00:18:29]-

Tim Uy:                              Total, total. So I would say, in terms of [inaudible 00:18:34] production, it's, 54% is done by TSMC alone. So that accounts for the vast majority Taiwan has-

Mark Zandi:                      TM ... now, who's that? For the listener.

Tim Uy:                              ... yeah, so it's Taiwan Semiconductor Manufacturing Company, so world's largest chip maker. But to dig a little bit deeper into that in terms of high end, right? Mark, you mentioned high end chips, and these are the chips that go into phones, computers, 92% is done by TSMC, so done by Taiwan. And that's incredible.

Mark Zandi:                      That's impressive that ... well, the number is impressive, but the way you kind of answered my challenge was impressive. I had no idea what the answer was, but you did, so very good. That's great.

Tim Uy:                              [inaudible 00:19:16] knowing things about Taiwan.

Mark Zandi:                      That's fantastic.

Tim Uy:                              Hi, I'm glad you think I'm doing a good job.

Mark Zandi:                      No, I thought that ... Ryan, wasn't that impressive?

Ryan Sweet:                      That was impressive.

Mark Zandi:                      Yeah. Todd's not impressed, but he never is impressed.

Todd Metcalfe:                I just don't really want to follow that, but it doesn't look like I have a choice.

Mark Zandi:                      Is that right? Okay. Hey, Tim, that was damn good, very good. Todd, you're up. What's your statistic?

Todd Metcalfe:                1076.6.

Mark Zandi:                      1076.6, and-

Ryan Sweet:                      All right, is this a price?

Todd Metcalfe:                It's price-related, so it is dollars.

Mark Zandi:                      Building materials? Building materials?

Todd Metcalfe:                It is building materials-related.

Ryan Sweet:                      The peak in lumber prices?

Mark Zandi:                      Yeah, is lumber back up to ... no, because that's below that now.

Ryan Sweet:                      No, no, no. It's closer to 500 right now.

Mark Zandi:                      Yeah, closer to-

Todd Metcalfe:                It involves the peak in lumber prices.

Mark Zandi:                      Oh, so this isn't a recent price, this is a historical price.

Todd Metcalfe:                It's both. It's a difference.

Ryan Sweet:                      Oh, we're going to do differences? Is it-

Mark Zandi:                      It's the decline. I know what it is. I know what it is. I know what it is. It is the decline in lumber prices from its peak to the current price.

Ryan Sweet:                      You see how Mark does this?

Tim Uy:                              [inaudible 00:20:33] close.

Ryan Sweet:                      You see how Mark does this? I get him 95% of the way there, and then he jumps in.

Mark Zandi:                      That's not true. Is it really true? I mean, maybe it could be.

Ryan Sweet:                      Watch.

Mark Zandi:                      That may be true. Not intentional, though. You see, I didn't know that I was doing that, but it's possible. It's possible I'm doing that.

Tim Uy:                              Well, if we had that bell, we could settle it. Ring it in and see if the indicator gets it.

Mark Zandi:                      No, well, I'm sorry I even mentioned that, because now Ryan's going to go get the bell, and he's going to ring it when he wants to ring it. I'm getting the bell. I'm getting the bill.

Ryan Sweet:                      All right, you can get the bell.

Mark Zandi:                      I'm getting the bell.

Tim Uy:                              But Ryan, you get a bullhorn.

Mark Zandi:                      Oh, yeah, that's right. Hey, well, that was good. That was good, Todd. That was a good one. Should I give you my statistic?

Ryan Sweet:                      Yep.

Mark Zandi:                      Okay. And of course, I'm not ... it's kind of related to global supply chains, kind of, sort of. I don't want to lead you too far down that road, but it's a statistic that has come out this week. Actually, I'll say it came out very recently, and it goes to a reason for optimism about future economic growth. Ready? 1.25, 1.25. And Ryan, I mean, you got-

Ryan Sweet:                      This is a reason for optimism?

Mark Zandi:                      ... yeah, reason for optimism about economic growth going forward. Yeah, indeed. It highlights what's going on with global supply chains, and why it has been a drag on economic growth, but this-

Ryan Sweet:                      Are you going inventory to sales ratio?

Mark Zandi:                      You got it. Way to go, Ryan. That is right. That is the inventory to sales ratio. So you take all the inventories, that's the numerator, you take all the sales, and that's the denominator, and the ratio, it gives you a sense of how lean inventories are. 1.25 is about as low as that has ever been. This is for the month of July. It was actually lower one month back, in kind of the wake of the financial crisis, when we had that big draw down in inventory. We got to 1.24 for one month, but that quickly came back, so we're at 1.25. And interestingly enough, the census department, which is the source of the data, breaks that down lots of different ways, but-

PART 1 OF 4 ENDS [00:23:04]

Mark Zandi:                      The data breaks that down lots of different ways, but manufacturing, retail, and for retailers, inventories and manufacturers, inventory to sales, that retailers, inventory to sales, that wholesalers and really the thing that is just incredible is the inventory to sales ratio at retailers. It has plunged since the pandemic.

                                             It was kind of headed down over time, Just-in-Time inventory management, that kind of thing has been bringing that inventory, sell ratio down for retailers and also online use, and an increase in Amazon and warehousing much more inventory has been going into warehousing, but that is really collapsed. And the reason for optimism here is because it's so low, as things start to normalize and we iron out the global supply chain issues, and we will, we'll talk about that. Businesses are going to have to ramp up production to rebuild inventory. Inventories are so low that we're going to get a real boost to economic growth, at least for two or three, or maybe even four quarters, maybe all of 2022, because we're going to have to see those inventories rebuilt. Anything else to add on inventory sales? I know you look at all these statistics, Ryan, so any other insight on the I.S. ratios or anything on inventories?

Ryan Sweet:                      So if you take all the data that came out this week, retail sales, the inflation numbers, the inventory data, our GDP model, our daily high-frequency GDP model ticked up from 3.9% at an annualized rate to 4.1. But to your point, inventories are

Mark Zandi:                      Ryan just to explain that, I know you talk about it regularly on the podcast, but that's our tracking estimate for the third quarter, the current quarter GDP growth rate. So we take all these statistics that come out on a daily basis. We have a model, you have a model that you run to translate that into. What does it mean for GDP growth, real GDP, the value of all the things that we produce in the current quarter. You're saying, given the data we got this week, it went from an expected growth rate tracking estimate at 3.9%, which is where we were last week to 4.1 this week.

Ryan Sweet:                      Correct, but if you strip out inventories, barely growing, less than 1% inventory is going to be a big boost to that third quarter GDP [inaudible]

Mark Zandi:                      Oh, and it's not like we're adding inventory. Are we, or is it just that we're not cutting inventory as much?

Ryan Sweet:                      Exactly, we're not cutting as much.

Mark Zandi:                      Wow, are we going to actually add to inventory in the quarter though, according to our modeling?

Ryan Sweet:                      Not yet, the model doesn't have a positive, it just has less of a decline.

Mark Zandi:                      Less negative. Hey, how would you characterize, I've got my own view, but I'm curious in your perspective, how would you characterize the message from this week's raft of data in the context of Delta and the clear negative impact the Delta virus in the wave of infections they've had on economic growth. I mean, the economy feels like it's been dinged meaningfully probably since late June, certainly in July coming into August, but, how do you feel about the data this past week and what it says about how the economy is navigating the fallout from Delta?

Ryan Sweet:                      I don't feel good about it. I mean, if you look at retail sales, they were strong in August, but there was massive downward revisions to July. So the decline in July retail sales is now a lot larger than we previously thought. So the spending data when you net it all out, August and July, it's not great. If you look at all the alternative high-frequency data that we have, and you and Dante are quality, and Matt and that CNN back to normal index that's rolled over. So I'm just not feeling good.

Mark Zandi:                      That's Interesting. I mean, cause my take was I've been nervous about Delta and it has lowered our forecast for growth in the current quarter, Q3 and for the year. If you look at our forecast rules, real GDP for calendar year 2021, we had been, if you go back two or three months ago, almost to 7% for the year, we're now back down to about six. Not, not all of that is Delta, but I'd say at least half a point of the downward revision in our growth expectations for this year is because of the effect of Delta. But it felt like this week, the data, everything kind of felt a little bit better to me. I mean, retail sales were surprisingly strong, yeah, downward revisions for July, but it was still,

Ryan Sweet:                      It rose, so it was good.

Mark Zandi:                      Yeah. And just small things like, the Philly Fed index, right. Which maybe many people don't follow this as an index constructed by the Philadelphia Federal Reserve of Manufacturing Activity in Philly. And this index has been around since the beginning of time because Feds been constructing this for a long time. It actually rose, and in the month of August, from July, consumer sentiment seems to have stabilized a little bit,

Ryan Sweet:                      Yeah, but it's still really depressed, it's down where we were during the teeth of the pandemic. What's interesting is if you look at the measures of business confidence, so the NFIB survey, the regional fed manufacturing surveys, their general business conditions index is actually like a question about confidence and our weekly business confidence survey. They're all holding up fine. It's the consumer measures that have just gotten crushed by the Delta variant.

Mark Zandi:                      Okay, so you came out of this week, feeling no better about the impact of Delta than you did last week.

Ryan Sweet:                      No, I'm a little bit more concerned because the number of schools that are closing or going back to virtual learning increased relative to last week. And it's now a thousand schools across 35 states. And that's going to be problematic for labor supply over the next couple of months.

Mark Zandi:                      Say that again, how many schools?

Ryan Sweet:                      A Thousand, over 35 states, so it's spread out, it's not regionally concentrated.

Mark Zandi:                      They have gone back to online learning, because of the infection. Oh, Wow. Okay. All right. Oh Boy.

Ryan Sweet:                      We're going to likely see that effect in the September employment numbers.

Mark Zandi:                      I was actually feeling a little bit better now. Now I'm not so sure, you're right about our back to normal index. That index it takes all of these statistics and brings it together into back normal. What percent of normal, what percent of what we were prior to the pandemic in terms of economic activity. And that's now back down below 90%. So it says we're, had gotten as high as almost 94-95 before Delta. We were 94% of normal, 94% of pre pandemic, but now we're back down to 90.

Ryan Sweet:                      I guess the one last thing I'd say on Delta is I guess my pessimism is being driven more by the alternative high-frequency data, that daily open table or seated dinners through open table, number of people passing through TSA checkpoints, that's capturing what's going on right now. The data that came out this week was showing what happened in August. So I think the September data when it starts to roll in, we'll be on the softer side. So I think we're looking at two different snapshots, I'm looking at today and you're looking at the weekly or the monthly data for August.

Mark Zandi:                      Yeah. Good point. I guess the other reason I was a little more upbeat and I guess curious what you think here too, is it does feel like the Delta wave is kind of rolling over, that there's fewer infections. People are masking up more and there's more vaccinations, and of course more people are getting sick and developing immunity. So it feels like that wave is starting to abate, which we had been anticipating now, but that would be some reason for optimism, no?

Ryan Sweet:                      No. I agree with you. The seven day moving average in daily confirmed cases is dropping, but it's still elevated. It's still above a hundred 1000 per day. So this too will end, just like passed waves. But I just think the economic costs of the Delta wave are going to be a little bit more than what we had previously anticipated.

Mark Zandi:                      Well, we're anticipating it, because we do have stronger growth in the fourth quarter of this year, and in significant part to the expectation that this wave will abate over the next few weeks, certainly over the next couple of months,

Ryan Sweet:                      I think your baseline forecast is spot on. You get a big pickup and groove of the final three months of this year, I'm just worried about the next few weeks.

Mark Zandi:                      Well, we'll certainly be talking about this next week on the podcast as well. Let's turn to global supply chains it is certainly an issue that's come to the fore again, as the Delta virus has re-intensified and caused, and by the way, this is not just a U.S. phenomenon, this is a global phenomenon. We've seen Delta create havoc everywhere, and it's scrambled already some global supply chains to a significant degree. And the supply chain issues is a really important one from a macro economic perspective and just a parochial personal perspective. It feels like you can't get anything these days without having to wait for it.

                                             My son ordered a couch for his new apartment probably two months ago and it arrived yesterday. So, not easy to get stuff, and part of that is just the surge in demand. Demand has been very strong certainly throughout the pandemic for goods, for things that travel through the global supply chains, but the chains have been severely disrupted by the pandemic. People getting sick and Malaysian chip plants have chip plants close to messing with ports.

                                             We saw the Chinese have to shut down various terminals and various major ports because of the discovery of COVID, to obviously a corollary to the global supply chain issues or the labor supply issues, because people are sick, or taking care of sick, or people are fearful of getting sick. They haven't been going to work and that exacerbates the global supply chain issues. And all of this is, come together and is now creating very significant disruptors. So far, most of the economic damage has been around prices.

                                             Inflation has spiked, so we've seen prices jumped for almost everything, all kinds of products have jumped because of the supply chain issues. But it also seems to be in areas where it gets a little more worrisome, demand destruction. You can see this. I feels like it's happening to some degree in the vehicle industry, right? Because the chip plants closed, the vehicle manufacturers who need all those chips can't produce as many vehicles. So they can't sell as many vehicles and they probably will lose those sales. To some degree though, there's going to be some pent-up demand. We'll get some of those back, we might not get all those back. So I don't think that's happening in a lot of industries yet, but certainly something to watch there is another concern.

                                             That how I would frame the discussion around this. And so the conversation I'd like to have is we're going to dig deep into different parts of the supply chain issues, try to understand what exactly is causing these problems. What will it take to solve them in? When do we think they will be solved? That's a tough one to answer, no one knows for sure, because a lot depends on the pandemic and how it's going to play out. But in our baseline outlook and our forecast for the economy, where we think it's headed, what are we assuming about this? Does that sound like a reasonable conversation? Guys?

Ryan Sweet:                      Sounds good.

Mark Zandi:                      Sounds good. Okay.

Ryan Sweet:                      On board.

Mark Zandi:                      You're on board, okay. Well, who wants to go first? I'm not even going to ask, I'm going to pick. I'm going to pick Tim, unless you're on Zoom or let's join YouTube, watching this, resuming this thing. Tim looks like Superman. He's got a bright blue, what would you call that? It almost looks like it's not even a shirt. It looks like he's going to go scuba diving or something. I don't know.

Tim Uy:                              It's a sweatshirt, it's a sweatshirt, I don't want to sound like I'm naked Mark, it's a regular sweatshirt.

Mark Zandi:                      No, that's not a regular sweatshirt. You guys agree with me? There's something going on with that sweatshirt.

Ryan Sweet:                      Don't sweatshirts have to have hoods?

Tim Uy:                              Not in Canada.

Mark Zandi:                      Not in Canada, they've got the park,

Jesse Rogers:                    Tim has a secret life that he's hiding from us.

Mark Zandi:                      There's definitely an "S" somewhere over there.

Tim Uy:                              Yeah, I'm moonlighting as Superman. Oh, and I'm not working at Moody's.

Mark Zandi:                      Well, let's begin with you, Tim, and what's going on in the chip industry. Give us a little bit of history. How did we get into this mess that we're in, in the chip industry?

Tim Uy:                              So, actually Mark, what you and Ryan were just talking about, I think in terms of Delta is particularly pertinent to the chip industry. Because I think before the Delta variant sort of really came to the fore, I think we were sort of this mindset where, the chip industry they were hampered by hampered in the sense that there was a shortage because of the pandemic, because demand just surged while supply is relatively constrained. So I think a bit of background kind of taking a step back.

                                             I mean, chips, there are many different types of chips. So, you alluded to kind of high-end chips earlier Marks, so these are sort of seven nanometer or less tech chips. These are the chips that are used in phones. So those types of chips, basically, you only need a handful of them, to make some of the major electronic gadgets that you see phones, gaming console, those laptop computers versus some of the more mature chips.

                                             So these are the chips that are used in cars, sort of much older technology, 15 years or older, you need a lot more of these chips, thousands of them to make a single car. So early on in the pandemic, what we saw was, we saw a severe sort of shortage for the car industry, but maybe not so much for some of them are high-end chips and that's in part because there's a lot more incentive for chip makers to make these high-end chips, margins for those chips are a lot higher.

                                             So, to give you another statistic, nearly 50%, 49% of TSMC revenues come from phones alone. So that's nearly half versus only 4% from automakers. So clearly there's a huge, and then another 30% comes from advanced computing. So that's cloud computing, artificial intelligence, all of these sort of high-end chips.

                                             So the high-end chips basically make up about 80% of their revenue book, which makes sense. Given that these are really advanced technologies, very few manufacturers are able to produce them. And so they have pretty strong monopoly power over these chips. So now fast forward to the Delta variant and what it's doing to Asia, which is where I started off my spiel. So 75% of global chip production is done in Asia and Asia, unfortunately is bearing the brunt of, or at least sort of really experiencing some of its record highs in terms of COVID-19 cases because of the Delta variant. In particular affecting Japan, Korea, Malaysia, Thailand, as well as Vietnam.

                                             So these are five big countries that are to some degree involved in chip production, whether it's in assembly or integration or testing. So these are all essential in getting shipped out the door. So Toyota is like the poster child basically for car makers in terms of supply chain management. They've always done a very good job at that because they have a long history of creating. Speaking of inventories, you mentioned that earlier as well, they have sufficient bumper inventory and they have a very well known tracking system where they basically have an online, real time tracking system that sort of looks at over 6,800 parts. What the lead times are and how much inventory they have, so that they can manage all those changes. And even Toyota has had to curtail production significantly. They've just raised it to 400,000 less vehicles this month because of these disruptions that are going on in specific plant closures in Asia that we hadn't really seen before the area. So, please go ahead

Mark Zandi:                      No go ahead, finish up.

Tim Uy:                              I was just going to end by saying, in terms of high level, what Delta has really done is its sort of exacerbated a lot of the existing shortages that are already out there. By creating yet another natural disaster of sorts. So, the chip industry they're always affected by natural disasters. They're affected by earthquakes, they're affected by drought, these are very significant. If there's a drought in Taiwan, the whole world suffers because Taiwan basically produces a vast amount, more than half of all chips that are manufactured. But, Delta is something that even TSMC can't plan for it. So TSMC has business continuity plans that account for droughts, that account for earthquakes, what does it do? Right. But it can't bring

Mark Zandi:                      Can I bring up droughts? Can I say just because people don't know, producing chips is pretty water-intensive. So if you have a drought, you don't have water, you can't produce basically as though

Tim Uy:                              You can't produce at all. So, with droughts and earthquakes, to some degree, you can kind of plan around that. So Toyota's planned around earthquakes, that's actually the Genesis of their sort of world-class tracking system. It was because they had this 2011 Fukushima earthquake that devastated them. And so since then, they basically tried to keep a very tight hold on how much inventory they have for each, every single individual part that goes into their car models. But even they can't plan around factory closures in Thailand and Vietnam. That's just like a natural disaster almost, that's unforeseen.

Mark Zandi:                      So, just to summarize, we saw a surge in demand because everyone's at home and they're not traveling, going to restaurants, so they're buying stuff and all that stuff. And of course we're remote work that means you're buying computers and telecommunications equipment and Game Boys, and just all kinds of things. And every single thing these days has a chip in it of one form or another of course, vehicles as well. And so that drove up demand. And then you have, or it sounded like what you're saying is the chip industry on the supply side already was pretty fragile, kind of vulnerable to anything that could go wrong, Fukushima, nuclear meltdown in Japan to Taiwanese droughts, to whatever. And now you throw in Delta, particularly because this is the first time that Southeast Asia got crushed. And there's a lot of chip production. I keep going back to Malaysia because there you have plants that actually have closed because everyone's sick. They literally are sick and can't work, and so the confluence of all that is this very severe shortage of chips and the spiking prices, that's it that's what's going on.

Tim Uy:                              That's absolutely right. The only thing I will add to that Mark, is that I appreciate how difficult it is for new production to come online. Typical lead times for existing capacity, so this is machines that are already in place, production lines that are already in place. Typical lead times right now are in excess of 26 weeks. That's half a year. Right. And that's basically

Mark Zandi:                      Wait, 26 weeks is not to build a new FAB chip?

Tim Uy:                              No, so this is for existing FABs, existing production lines. Just to get one chip from the manufacturer out the door to the end user, it's over six months, that is remarkable. And so if you want to build new plants or FABs as they call it, so TSMC has been working on this for a while in Arizona, and that FAB isn't going to come online until 2024. Samsung has the same plans to create new FABs in the Southern U.S., they've filed papers with Texas and with a couple of other states and their plant's not going to come online until 2023. So it's just near impossible to create instantaneous supply.

                                             The only thing you can do is try to basically, talking about Ryan's point earlier about capacity utilization to basically ramp that up to a hundred and over if you can, and basically work overtime to make up for what you currently have and what's currently missing. The other issue with that is that you can really repurpose these chips. So I alluded to it a little bit earlier in terms of there's a big distinction between high-end and low-end chips. And that's not a superficial distinction, you have very specific machines.

                                             I wrote a paper earlier this year that dug a little bit deeper into global foundries, one of the actual U.S. manufacturers of chips and what they do in their plants. They have basically specific lists of graphic machines that can essentially laser into silicon wafers, these specific chip designs. So you can't just anyhow switch from one chip design to the other.

PART 2 OF 4 ENDS [00:46:04]

Tim Uy:                              Right. So, you can't just anyhow switch from one chip design to the other just because the auto industry needs it more and maybe you're getting less demand from the gaming console makers. You can't just switch it over to auto. It doesn't quite work that way. So, the supply constraints are real, right? These are actual, tangible supply constraints, and they're only going to be made worse if the factories closed down.

Mark Zandi:                      Okay. One thing you did not mention is a cause, is the US Chinese tensions and the fallout from that, Huawei. Has that played any kind of role here, in terms of what's going on?

Tim Uy:                              Absolutely. It's played a very big role. So, Huawei is kind of more historically in nature, I would say. But I think some of the things that happened after that, a lot of companies that basically adopted the same strategy. So, taking a step back, right? So, what happened sort of earlier on in the Trump administration, as they were basically imposing this boycott, not allowing, specially Chinese companies, to buy from the US. And of course, there was a lot of bickering back and forth and sort of reciprocity in that manner.

                                             What a lot of the Chinese telecom and electronic companies did was they actually stockpiled a lot of chips, right? So, they knew that this was coming, right? There was clearly a lot of discussion around it. It took months as is always the case with government for it to pass. And so, they actually stockpiled a lot of chips and what a lot of companies are doing now, and this is something that Toyota has always done in the past, is that they've always just had huge buffer inventory. But what a lot of companies are doing now is they're basically stockpiling chips as much as they can, right? It's not just automakers. It's a lot of, you mentioned gaming consoles earlier, I don't know about Gameboys anymore, Mark, but PlayStation [crosstalk 00:47:49].

Mark Zandi:                      That's my son. my son was a game boy.

Tim Uy:                              Yeah.

Mark Zandi:                      Is there a such thing left? Are there any more Gameboys?

Tim Uy:                              Yeah. So, the counterpart, nowadays, is PlayStation fives, right? So, these are kind of, I'm not that young, but I mean, those are really in high demand.

Mark Zandi:                      That's why he's got the blue sweat shirt that says, "Gaming shirt." He's going to go on a PlayStation five and he's a gamer. That's what's going on. He looks like a gamer.

Tim Uy:                              Mark, I need to make some YouTube income, because I'm clearly not getting paid enough at Moody's. [crosstalk 00:48:22].

Mark Zandi:                      That's a low blow.

Tim Uy:                              I'm just kidding. No, but I think, with PlayStation five, right? So, it's the same thing. So, they basically had so much demand, far more in fact, than they had forecasted, which kind of brings to light the importance of the work that we do. And so, they've had several months basically where they had demand where it was just not getting met because they just had no chips. So, what they've done is they've more than doubled their normal order, right? so, this is basically what people are doing in anticipation, right? Of what these geopolitical tensions can do. So, I think the US China tensions, they still matter, particularly for Taiwan, right? I mean, because it's such a huge kind of manufacturing hub. But I would say that it's more and maybe sort of what happened after and the lessons that we learned from that.

Mark Zandi:                      Yeah. It's classic human behavior around hoarding, right? As soon as there's a whiff that you're going to have trouble getting something, people hoard, and then you have a problem. I can remember, at Moody's conference, everyone's getting breakfast and someone says, "Oh. I think we're running out of coffee." And of course, everyone starts pouring all the coffee, and we run out of coffee rapidly. It was a run-on coffee. So, I'm sure this sounds like what's happened in-

Tim Uy:                              The toilet paper shortage during the pandemic.

Mark Zandi:                      Toilet paper. And by the way, I am fully stocked. My wife is all over that. There's never going to be, if you've got anybody wants, of course I might charge you a price for it, but I've got toilet paper. Hey, so two quick things, Tim first, what was the first thing?

                                             Oh. First thing is, so how is this going to get resolved? Are we seeing any progress here in resolving the supply chain issues? I mean, generally things happen on the demand side, you see higher prices, so people kind of adjust and try to switch to something else. Although, you just articulated that's not so easy in the chip industry, then you see more investment, existing plants figure out new ways to go from 26 weeks to let's say to 20, 21 weeks to kind of speed things up. Are you observing any of that happening? Is that happening?

Tim Uy:                              Yeah. You're you're right on. So, I think in terms of prices, right? So, TSMC is going to raise prices by as much as 20% for some of its chips. Actually, more on the lower end of things, because those have traditionally been cheaper. And you're also seeing like China, in fact, basically find three of its ship makers, almost half a million dollars for what it's called abnormal price practices. Basically trying to keep these prices artificially low. And also, I think, we're going to see a lot of pass through, right? I think we're going to see laptop prices go up. We've already seen vehicle prices go up, significantly, average vehicle prices in August were up $8,200, which is crazy. From a couple of years ago. So, I think the price mechanism is certainly at work, I think in terms of inventories and in terms of adjustments, a lot of companies have been doing that.

                                             Tesla in fact, is famous for trying to cut out the middleman. So, what they've tried to do is they've tried to have sort of a more direct relationship with the actual chip makers. This is very difficult, obviously, because a lot of production processes, you kind of inherit them, right? So, you kind of already know, "Oh. This car part I'm going to get from this guy, this electronic unit I'm going to get from this other guy." And they're trying to cut that out so that they have more direct access. But that's not something that all consumers and suppliers can do, right?

                                             So, there's some movement to try to make it more efficient. But I think in the short run, it's going to be very difficult to kind of really get around it. I think the hope really is that Delta gets more controlled and we're seeing that as some of these places, right? So, Japan, I think, numbers are coming down. In fact, even Malaysia has now come down from all-time highs. So, we are seeing some progress there. And obviously, if that works out, then we'll be closer back to normal.

Mark Zandi:                      Okay. Well, we could have had a podcast just on the chip industry. I feel like I haven't really been able to ask all my questions. But I do want it to save your forecast though, because as I said, I'd like to know, in terms of timing, when you think some of these things will start to iron themselves out to a point where it's not disruptive to the economy, to the vehicle industry or any other industry, but we'll come back to that at the end.

                                             Okay. So, let's pivot and we have a choice. We can either go with Jesse and talk about Copper commodity prices. Or we can go with Todd in lumber and building material prices. Anybody want to go first? Or should I pick.

Todd Metcalfe:                Your podcast.

Mark Zandi:                      My podcast. Actually, Ryan, what do you think?

Ryan Sweet:                      Let's go Todd.

Mark Zandi:                      Todd. Okay. So, Todd-

Ryan Sweet:                      Everyone's always talking about lumber prices.

Mark Zandi:                      I know. And actually, that could be a good case study, here, for the future of how this is all going to play out. So, I don't know, Todd, I mean, it seems to me, we do a lot of work with folks in the housing, multifamily, commercial real estate industries, and whomever I talk to, they're talking about shortages of something else that matters to them. For example, I was at a function in Southern California and I was talking to this multi-family developer, very successful developer, mostly in the west in California.

                                             And he builds a lot of affordable rental, multi-family, which is obviously incredibly short supply rents, are screamingly higher across the country, particularly for affordable rental, for a rental out of necessity. And he does a lot of so-called LIHTC rental. LIHTC is low-income housing tax credit. That is a subsidy to get builders to build more housing for lower-income households at lower rent points. And he was telling me he's got projects, but he won't actually begin them because he doesn't know when he's going to get the delivery of appliances. So, toaster ovens, I guess, I don't know-

Todd Metcalfe:                That's Tim's issue again, because a lot of them are chips.

Mark Zandi:                      Oh, chips. Chips, right. It all goes back to Tim.

Todd Metcalfe:                Because my oven now is smart.

Mark Zandi:                      Yeah, there you go.

Todd Metcalfe:                So, yeah. And that's part of the issue. But then, not only are there the chip issues with that part, there's also the fact that all the chips are stuck in port waiting to get unloaded because of the backup and kind of the global supply chains over all. So, that's part of it. It's kind of been a rolling calamity of what is going to be in shortage for the house building industry. And that's actually where it's a little hard to say, in some regards, what was the impact of lumber. Because I would actually argue that-

                                             I'm going to spoil a punchline already. From a lumber standpoint, things have kind of, I don't want to say they've come completely to normal because we're still, I think up 61.6%, I had that statistic handling nearby, from two years ago, price-wise. From 9, 16, 2019. So, lumber prices are still elevated to where they were two years ago, but they're actually down from where they were last year. And as I mentioned, with that $1,076 at the beginning with my stat, we're actually down almost 65% from the peak in May.

                                             So, lumber prices have definitely calmed down pretty drastically. The appliances have always been an issue and still are an issue. That's kind of similar to the couch and furnishing, of course, that's not really the home builders issue. That's the home buyers issues. But yeah, that's still very much there. And from the-

Mark Zandi:                      I was going to say, so going back, I guess we'll just pick on lumber a little bit, because that seemed to be the first kind of major product that, at least in my mind, it came to the fore with regard to global supply chain issues. It was well over a year ago when we started to see lumber shortages. And as you say, things seem to be kind of normalized. They're not normal. We're not back to normal. We've got ways to go there, but they have been normalizing. So, if you go back to the beginning, when the supply issues began to manifest, that too, was in part increase in demand, right? The housing market navigated the pandemic incredibly well for lots of different reasons we've talked about on previous podcasts, obviously record low mortgage rates being first among the reasons why, but we saw this-

Todd Metcalfe:                Demographics and shifting. Yeah. And shifting preferences.

Mark Zandi:                      Yeah. Shifting preferences, Because people weren't traveling. And they wanted to get out of the big cities where they were renting and out into the suburbs. So, we saw a lot of home improvement because people were sitting on their back decks like me and investing in their back deck in their homes. And then, on the supply side of the market, explain what happened there. Why wasn't the industry able to kind of ramp things up to meet that increase in demand?

Todd Metcalfe:                So, of course the industry, at first, really expected that that demand was going to just fall out. And so, the industry actually shut down and they weren't really producing the lumber that was needed. And only-

Mark Zandi:                      So, you say they we're looking at our forecast. Our forecast was saying housing's going to have a lot of problems. So, they shut down and say, "Oh. Moody's is saying, 'Hey, this is going to be a problem.'" Actually, isn't that your forecast, Todd?

Todd Metcalfe:                For the record, that was right when I got transferred. And so, I'm just going to say that [crosstalk 00:59:36].

Ryan Sweet:                      It's still your forecast.

Mark Zandi:                      It was Todd's forecast. Geez Louise. So, you're saying your bum forecast caused the entire housing industry, lumber industry to kind of shut down, turn off all the lights and all of a sudden they go, "Oh, my gosh. People are knocking on our door saying, 'Where's the lumber?'" Is that what you're saying?

Todd Metcalfe:                It's all my fault.

Mark Zandi:                      Oh. I knew it.

Todd Metcalfe:                So, yeah. So, the lumber industry basically, I mean, everyone, when the economy shut down, everyone thought that the sky was falling and everything went down. And so, no one really knew what to expect. I don't think you would have said in February of 2020, that that would have been the case. And so, basically they shut down production and actually, overall, in the end, production was actually up in 2020 for lumber for the entire year compared to 2019.

Mark Zandi:                      Be specific. When you say lumber, you mean sawmills, right? We're talking about sawmills here.

Todd Metcalfe:                So, timber is you grow a tree and that goes to the sawmill. Timber has been flat, sawmills are the bottleneck. And so, sawmills are where all the money is being made. And so, the sawmills had a great year last year, but the home builders not so much. Well, the home builders had a good year, too.

Mark Zandi:                      Well, let's fast forward. Okay. So, now we have these severe shortages, what happened? So, how is it that things were getting resolved? So, what's the dynamics in the market that caused things to start normalizing?

Todd Metcalfe:                So, one, after kind of realizing their error and prices started increasing, lumber mills did basically start going as full out capacity wise as they could. There were some things that kind of slowed them down. Generally they're rural. Some of them had problems finding labor, kind of the common issue, but they were basically running as full capacity as they could, as quickly as they could. And had been more or less running at full capacity since. In Canada, just in the last month, some of the sawmills have actually started running below full capacity.

Mark Zandi:                      Oh, is that right?

Todd Metcalfe:                In at least British, Columbia, their breakeven point is higher than the American breakeven point. So, some sawmills in British, Columbia had actually, I don't want to say idled production, but they've lowered production.

Mark Zandi:                      Got it. I guess the US tariffs on Canadian lumber might be one reason for that. Their breakeven price point's higher.

Todd Metcalfe:                I think that's part of it. It's also just, with Canada, the different provinces have different fee structures for cutting.

Mark Zandi:                      Right.

Todd Metcalfe:                Because basically the whole tariff thing is that in Canada, most of the land where the trees are cut is owned by the government. Whereas in the United States, most of it's owned by private companies or is privately owned. And so, the argument is that the Canadian suppliers are overly subsidized by the government. And I think it just depends on what province you're in as to kind of what those prices look like.

Mark Zandi:                      Okay. So, the sawmills kind of turned back lights on a little bit of delay because of labor supply and other issues, but they kind of iron that out. So, now they're producing flat out, I guess demand is moderated a little bit too, in response to the higher prices. So, you've seen people kind of balk at the building their back deck out another five yards because it's incredibly expensive to do. Home builders have actually kind of pulled it in a little bit, too, because of the high lumber and other building material costs.

                                             So, there's been a demand side response to supply [inaudible 01:03:50] and correct me if I'm wrong, but the other aspect of this, which is interesting and has played out in other markets as well, there's some speculation going on here too, right? I mean, lumber is, in a sense, a financial market. And because there was all these shortages, you saw people kind of speculate in lumber and that drove up the price. And of course, once it became clear that the supply demand dynamics were shifting in the other direction, all that speculative demand has gotten rung out and that's caused prices come in. Is that a fair characterization of what's going on? Or did I get that wrong?

Todd Metcalfe:                I have seen a speculation. It's hard to tease that out versus there was hoarding. Because a lot of home builders are-

                                             If you can buy it, you just say, "Yes. I want it." Partly because there were delays in even getting it, getting lumber. And so, there was some hoarding, I think, going on in the industry, also. And I think it's kind of hard to tease out exactly what that is.

Mark Zandi:                      Let me get a different points. There might be some hoarding, you're saying physical hoarding, right? Physical hoarding of- [crosstalk 01:05:04] financial kind of financial spec-

                                             Ryan, you're shaking your head up and down. [crosstalk 01:05:08].

Ryan Sweet:                      Yeah. I'm with you on this one. I think there was definitely some speculation. I mean, we could do some work around it to tease out the exact effect. But I think there was some clear evidence of speculation.

Mark Zandi:                      And that's one of the reasons why prices rose so sharply, we kind of went parabolic there for a while and that's why they've come crashing back down.

Todd Metcalfe:                There are absolutely anecdotes about that, but I haven't seen kind of any smoking guns in exactly how much.

Mark Zandi:                      Well, there never is with investors. They're not going to leave a smoking gun, my friend. You got to piece it all together. Yeah. Okay. And so, tell me, pre pandemic, what was kind of the benchmark lumber price?

Todd Metcalfe:                Probably, it would be roughly, I guess high three hundreds, roughly 400.

Mark Zandi:                      400. What is that four? What the unit?

Todd Metcalfe:                I believe it is board feet.

Ryan Sweet:                      1000 board feet.

Mark Zandi:                      1000 board feet. And then, what was the peak?

Todd Metcalfe:                The peak was a 1670.5.

Mark Zandi:                      Okay. And when was that? Roughly speaking, when was that?

Todd Metcalfe:                That was May 7th of this year.

Mark Zandi:                      May 7th. And where do we are today on price?

Todd Metcalfe:                We closed yesterday at basically 594.

Mark Zandi:                      Okay. So, we're within spitting distance of pre pandemic. We're not quite there yet. But we're spitting distance.

Todd Metcalfe:                Yeah. I mean, I'd say, well, we're still up, I mean, about 60% from two years ago. Because it was like 367 two years ago.

Mark Zandi:                      Okay. Yeah. It feels like we're in spitting distance, but you're saying it's still pretty high. Yeah.

Ryan Sweet:                      And that 590 is a little bit misleading because we had contract expiration yesterday. So, we shifted from the September contract to November. So, if you look at late September when we're still in that September contract. We're below 500.

Mark Zandi:                      We're below 500. Okay.

Ryan Sweet:                      So, we'll get back down there.

Mark Zandi:                      We'll get back down there. So, is that arc of pricing and the dynamic that generates that arc playing out across all building materials appliances or not?

Todd Metcalfe:                So, no. Basically, the new kind of issues is, so I think steel is up year to date 80%. Building, paper and [crosstalk 01:07:41].

Mark Zandi:                      So, just for the listener, Todd's looking over at his screen because he knows that I want precision down to the third significant digit, but don't worry about that, Todd.

Todd Metcalfe:                So, I mean, basically NAHB has really laid out just that-

Mark Zandi:                      National Association of Home Builders.

Todd Metcalfe:                Yes. Sorry. That basically everything is up for their expenses. Asphalt, public water, plastic pipe for water, fertilizer for the lawns, Veneer. So, the other wood products are up and actually they've been a little more sticky. So, plywood, they're all related to that upper lumber price, but some of the hardwoods and other things, they can still have some of their own dynamics. They kind of move together, but they will kind of be-

                                             Now the other thing is [crosstalk 01:08:40].

Mark Zandi:                      Okay. Go ahead. Sorry.

Todd Metcalfe:                I was just going to say, is that even with the lumber prices going down so much, the contractors aren't paying that futures price. They're still paying a higher price than what we're saying, because on the way down, the prices are sticky because the wholesalers don't want to sell at a loss. And so, they hold it back a little bit more. And so, they're-

PART 3 OF 4 ENDS [01:09:04]

Todd Metcalfe:                Well, they hold it back a little bit more. And so there's still some elevated prices even for, for us home builders, plus when you buy it versus when you have it today.

Mark Zandi:                      The dynamics that are in play in the lumber industry are playing out in other building materials, but in varying degrees depends on the material.

Todd Metcalfe:                Yeah. I mean, the other thing I would say, you're not getting the same spikes. Steel is one where obviously just industry-wide, the home building or multi-family probably more for steel, they're a small part because industry-wide, or worldwide, we use a lot of steel for other things like cars and whatnot.

Mark Zandi:                      All right. Well, I'm going to come back to your forecast on, we're going to use lumber as the benchmark, you know, when are we going to normalize?

Ryan Sweet:                      Before we go on? I have a policy question for you.

Mark Zandi:                      For me, mark?

Ryan Sweet:                      Yes. Mark Sandy, any other Marks here?

Mark Zandi:                      No, I thought maybe Todd, go ahead. Fire away. I'm good at talking.

Ryan Sweet:                      I was curious why didn't the Biden administration and the tariff on Canadian software?

Mark Zandi:                      Well, they certainly, there was a lot of pressure on them to do that. I just think that that has all other kinds of storylines and complications and political fallout; it's a pretty complicated mess. So it might've created more havoc than it was worth, and at the end of the day, the market seems to have adjusted pretty quickly, even without the tariffs. I'm no fan of the tariffs. I would have gone there immediately, but given all the political issues involved in many things that I don't understand and none of us may understand because there's a lot of other dynamics here. They didn't do it, but that's a good question.

Todd Metcalfe:                So let me have a crack at it if you don't mind. So my alternate stat for today was going to be 18.32%. And that's actually the recommended tariff from the department of commerce for what the lumber price should go to on Canadian lumber. It's currently at 8.99%, which was lowered by the Trump administration at the beginning of the year from 20.2%, which had been what the Trump administration put on in 2017. So the lumber trade issue has been going on since Reagan. There's been five, I believe, five major lumber deals. The last one ended, I want to say 2015. And then there was a grace period of like a year where it kind of stuck. There's kind of broader trade negotiation issues. I think probably also at stake here where it's probably preferable to have a broader trade agreement allness than to just kind of keep fighting it up or down.

Mark Zandi:                      Yeah, that sounds right to me. There's a lot of moving parts here. I think we need to move on. The podcast is getting a little long in the tooth here and Jesse, you probably should have volunteered to go after Tim, so you're going to get a little short shrifted here. Sorry about that. I apologize, but it's actually well past lunchtime here in the east coast. I still have to get forecast from you guys on how this is all going to play out. What's going on in the copper market? As Ryan noted early on, that's been one of my favorite statistics for gauging the strength of the global economy and the potential for inflationary pressures developing. What's going on in the copper market? Where's copper prices typically? Where is it now? What does it mean? And why are we here?

Jesse Rogers:                    I kind of elbowed my way on here because we don't really have a shortage in global copper markets right now. But the message I have to bring, I think is a really important one. And it's that this balance is really fragile and it's something that we need to pay attention to. So the statistic I chose, which was 15%, copper prices up year to date. That compares to just 10% for the broader index of commodities. Whether you look at Bloomberg's index or the CRB; metals, ag, oil, the whole basket. Copper's kind of in this different class because supplies are very tight over the past year related to various difficulties in bringing on new production in South America.

Mark Zandi:                      Okay. So it's not that the industry has been disrupted by the pandemic or other events. Clearly demand is up, right? Because copper goes into lots of stuff too, just like chips and lumber. So demand is picked up. And of course the home building industry drives a lot of demand for copper. And the supply side has just not been able to keep up with that. But it's not because of any pandemic related supply distortions, is that right?

Jesse Rogers:                    Yeah. In part it's the classic commodity cycle that we were talking before. Periods of underinvestment followed by periods of high prices and the supply side catching up. In comparison to lumber or semiconductor fabs, bringing new mines on is a multi-year process. So we have a market that there's been new investment this year. We're going to have new investment in our big producers, which are Chile, Peru, and to some extent, producers in Africa but it's a delicate balance. Copper prices spike. I think you guys talked about it when Chilean miners went on strike early in August. We're on an edge were anything that happens in South America, whether it's labor related, a lot of political turmoil right now, sort of any false step throws a wrench in global supply chains, a huge copper wrench that we're going to have a hard time taking out.

Mark Zandi:                      Yeah, now I remember why I wanted you on because embedded in what the mess that's been created by the pandemic to global supply chains, which is idiosyncratic, obviously to the current period. This is very unusual obviously, but embedded in that is this kind of classic cycle that exists in, in particularly commodity markets, agriculture and metals, and even the energy markets. What happens is demand picks up coming out of the recession. The supply side of these markets can't respond quickly enough because the mines have been turned down or turned off. The oil platforms have been fallowed. To get them back up and running takes a bit of time. In many cases there's been underinvestment, through the preceding recession, and the result is you get these.

                                             Then of course you have the financial accelerator that I talked about in the context of lumber, where you have people, speculators, jumping in and speculating on price. So all that comes together and creates this kind of classic commodity cycle, but that augers well going forward, right? At least if you're not a producer of commodities, but a consumer of commodities, because demand starts to moderate because of the higher prices. Because of the higher prices, the supply side of these markets kick into high gear because they can make a boatload of money. Then you see these prices come back in. And so we would expect copper prices to kind of roll over, steel prices, ag prices, energy prices, and kind of moderate as we move forward here. Is that kind of roughly right?

Jesse Rogers:                    Yeah. On the nose. The risk is, and this is the original statistic that I had run by Ryan, the numbers 40%. That's the share of local copper production in South America; mostly Chile and Peru, a little bit in Brazil. And just the pandemic has really amped up underlying political turmoil in Latin America. There are countries that are rewriting their constitution, introducing new tax regimes for the mining industry. And our baseline is not a major shift, but we just don't know. There's a populous thunder current across the region. And this is the reason why I'm really concerned about copper markets moving forward. I mean, it's our baseline. We're going to have demand and supply balance out. And like you said, moderation and prices, but there's certainly plenty of risk involved.

Mark Zandi:                      Oh, okay. So you're saying, given the political instability throughout all of Latin America, and that's obviously from both scenarios in Brazil and, pick your country, there're issues that could be disruptive to investment that's necessary for the price moderation that we expect. They may not happen, and if it doesn't happen, it might be because of the political uncertainty.

Jesse Rogers:                    Exactly.

Mark Zandi:                      Got it. Okay. So very informative, very useful. So let's end the conversation with a bit of a forecast and I'll begin with you, Jesse, because we're at $4.30 for a pound of copper. Typically, it's $3.00. That's what it is on average through the cycle. $2.00 is pretty low; that's kind of recessionary where we shut downs from the pandemic. So we're $4.30. When do we get back to $3.00?

Jesse Rogers:                    In our forecasts, not for some time. We actually have prices trending higher over the next 10 years and implicit in that assumption.

Mark Zandi:                      Wait. We're at $4.30 and we're not going back to $3?

Jesse Rogers:                    No, we don't quite get there. We hit $3.40; $3.20 in 2023. And then we start to get back up again.

Mark Zandi:                      All right. Roughly speaking, we get back to $3.00 in 2023?

Jesse Rogers:                    Yeah. And the next year into 2023.

Mark Zandi:                      Okay. So that's the horizon I'm focused on here cause you know, obviously longer run then there's the general rate of inflation, all kinds of stuff. But we get back to roughly $3 or close to typical by mid 2023 did you say?

Jesse Rogers:                    Yeah, even early in 2023.

Mark Zandi:                      So early 2023. So 18 months from now, you're saying, okay. That feels right to me. Better be right because that's our forecast so sounds good. We're working backwards here. Todd, lumber prices. That's been our poster child for all this. We were at $350, $400 a thousand board feet. Got to a peak of $1600. I think you said we're back now down to about $500, give or take, depending on the contract. When do we get back to $350, $400?

Todd Metcalfe:                I don't think we're going to get back down there. At least not anytime soon. That's not to say that we're going to have a huge spike up, but just demographics and home building...

Mark Zandi:                      No. I want to know over the next 12, 18, 24 months, are we going to be less than $500 bucks and where's it going to be over the next 12, 18, 24 months?

Todd Metcalfe:                I will say, it's a little closer to $600. I would say probably closer to $700 over the next 12 months because of home building demand. We're so critically short on new homes. As much as I know, inventory has creeped up on new homes; I think it's like six or seven months now, 6.8, I think, we still need more housing. So I don't think that we're going to see enough of a dip.

Mark Zandi:                      Even with the supply increases that are coming, because we know saw mill investment has picked up dramatically; we're going to see a lot of new saw mills. You're saying that demand is going to keep up with that and so prices are not going down from where they are today.

Todd Metcalfe:                Yes, because I think sawmills will idle a little bit even before.

Mark Zandi:                      What about other building material prices? I mean steel, aluminum, appliances; you feel the same way?

Todd Metcalfe:                Yeah. I mean, think about what else is competing with them. Chips are going to go into the appliances. So appliances aren't going to go down. Demand is up for everything so I would say unless you think we're going to see, all of a sudden, people stop using less steel.

Mark Zandi:                      The level of stuff we're buying is still very elevated. Much higher than where you would have expected it to be based on pre-pandemic trends. So the answer is yes. Not at home building, that's all a different ballgame, but retailing in general. I mean, stuff, goods, what we retail sales, they're going to, I don't know how they moderate. I don't think they will fall off a cliff, but they are going to moderate. Ryan, do you buy that? What he's saying?

Ryan Sweet:                      No, I think they're going to moderate. Particularly for other commodity prices, construction costs. If you look at the industrial production, so the output for these industries that have high prices right now, it's increasing very, very quickly. Capacity utilization is climbing, so I think the supply response may overshoot and that should put some downward pressure on.

Mark Zandi:                      It feels like we had a bet here. Record this for history. We're going to have a bet. Ryan, what is the current lumber price? The benchmark price? Todd, just said $600. Is it $500 or $600?

Ryan Sweet:                      It's $590 yesterday.

Mark Zandi:                      $590. That's the current contract?

Ryan Sweet:                      Yes. November 9th.

Mark Zandi:                      We'll go with that $600. So 18 months from now, we're going to have Todd back. What do you think the price is going to be, Todd?

Todd Metcalfe:                $650.

Mark Zandi:                      $650. Higher. Okay. Very good. Ryan?

Ryan Sweet:                      I'll go $500.

Mark Zandi:                      I'll go $400. Write that down. Jesse, you recorded that in your 10 languages?

Jesse Rogers:                    Yeah.

Mark Zandi:                      All right, Tim you're up man. No wishy-washy stuff, you know, the rise in 18, 12, 18, 24 months. We don't really have a benchmark chip price, but however you want to characterize it. What is the world going to look like in the chip industry?

Tim Uy:                              I would say most optimistic scenario, second half of 2022 is the earliest that we see sort of easing of the shortage for certain types of chips. What that means is basically lead times coming down from 26 weeks and over to something more like 10 weeks, which it has been in the past. But again, we've spoken at length about sort of general trends in terms of more appliances, as Todd mentioned, using chips and more electronic gadgets;everything's becoming digitized. Right. As you said, Mark, at the top of the hour, it's digitization, right? This is kind of the way the world works now. I don't really think demand is going to fall at all. It's going to be a question of whether supply can meet that demand and whether demand can make adjustments along the lines of what we mentioned earlier in terms of inventory management, in terms of making supply chains leaner, more efficient. But those things take time. So that forecast is my most optimistic forecast. That's assuming no further Delta spikes, no geopolitical tensions that would sort of...

Mark Zandi:                      Tim we're running along in the tooth here. Give me quickly, your baseline. What do you think? Not your most optimistic.

Tim Uy:                              Yeah, I would say baseline if I was playing it safe, I would say 2023.

Mark Zandi:                      Okay. Very good. You know, this is fantastic conversation. I wish I could go on with each of you; we should probably do a separate podcast. This is a long podcast, because obviously we had a lot to say and we had a lot of people on, but hopefully the listener got a lot out of it. I certainly did. I enjoyed it very much and I'm going to put a quick end to it. If you have other topics you'd like us to address, go to, inside economics and give us your suggestion. We'd take that to heart. And we always appreciate any ratings that you provide to us. So thank you for all this.

                                             I guess the takeaway for me is that this normalization in global supply chains, pricing, and availability and inventory, all the things that are impacted by the supply chain issues, is a process and it's going to take some time. It's not going to be tomorrow. It's not going to be next month. It's not going to even be next quarter. Obviously it depends on the product we're talking about. Each one is running on their own dynamic and has their own story, but this could be something that's going to play out at least over the next year, probably over the next two years. In the case of some things, there's no going back here. Prices are going up. Everyone's shaking their heads reasonably up and down. Todd doesn't agree. No, you do agree. Okay. Sort of, not really. Well that's great because we're going to have you back in 18 months from now and we're going to see who wins that bet. Right, Ryan? Ryan never forgets a bet.

Ryan Sweet:                      No I don't.

Mark Zandi:                      He does not. All right. Thank you so much. Take care now. See you next week.