INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist at Moody's Analytics, and I'm joined by three of my colleagues today. We've got, of course, my co-host, Ryan Sweet. Ryan is the director of real-time economics, and Cris deRitis, who is the deputy chief economist. We've also got Gaurav Ganguly. This, I believe Gaurav, is your second appearance on Inside Economics. Do I have that right?

Gaurav Ganguly:             Something like that.

Mark Zandi:                      Gaurav is hailing from, where are you hailing from today, Gaurav?

Gaurav Ganguly:             London.

Mark Zandi:                      London. Because we're going to talk about Europe, the thinking being that recession is on the mind. A lot of concern about that here in the US, but if the US is headed towards recession, it feels like Europe will get there faster. We want to get Gaurav's take on that, what's going on in Europe and whether it's sending out any early warning signals for US recession. But before we get to all of that, well, first I should say, because it's increasingly tradition, I got to say something about each of the guests. Cris, where are you? You are still on vacation, aren't you?

Cris deRitis:                       I am. I'm in Italy.

Mark Zandi:                      You're still in Italy? Okay.

Cris deRitis:                       Yep, but I've moved a little bit. I'm in Central Italy now.

Mark Zandi:                      Oh really? Which do you like better Northern, or Central Italy?

Cris deRitis:                       Well, it's pretty hot right now. There's a heat wave going on. The north was a little nicer this time around, but everywhere in Italy is beautiful.

Mark Zandi:                      It's a great country. I really love Italy.

Cris deRitis:                       Can't complain.

Ryan Sweet:                      That's why Europe won't go into a recession in the next week, because Cris is there spending all his Bitcoin money.

Mark Zandi:                      All his excess savings.

Cris deRitis:                       Excess Bitcoin? I don't know. I don't have a lot of that going around.

Mark Zandi:                      I have a great story about Italy. I took only my brother and our daughters, so the five of us, and we were driving to, I'm not sure where, and we wanted a restaurant. We figured, well, all the good restaurants were at the top of a hill. So we started driving up this road that's going straight up to the top of the hill, and then it turns into a sidewalk but we keep going. That was a huge mistake. I can still see the face of all these Italians looking at me. They're like, what the hell are you doing? Where are you going? Had to stop and come back down the mountain. We found the restaurant in someplace, but good memory. Anyway, it's warm in Italy. It's also warm in Pennsylvania, right Ryan? But you're in your sweatshirt. What's that all about?

Ryan Sweet:                      It's still early in the morning. Later today, when I take the kids to the pool, I'll put a T-shirt on.

Mark Zandi:                      You have had your coffee and everything?

Ryan Sweet:                      I don't drink coffee, unlike you and Cris.

Cris deRitis:                       Oh my God. That's the problem.

Ryan Sweet:                      I can't do it.

Mark Zandi:                      Okay. And of course, Gaurav, the thing about Gaurav is, he looks younger every time I see him. I don't know what the hell that's all about.

Gaurav Ganguly:             It's just because I have these pins and I keep stretching the skin and pinning them to the back of my head.

Mark Zandi:                      You're doing really well. Definitely, we're not working you hard enough. That's the reason. It's just not doing its job wearing you down.

Gaurav Ganguly:             Yeah, but I've got to plug me a bit harder.

Mark Zandi:                      All right. Okay. Well, we've got a great gang here. This is July 4th weekend. I don't know that this will be a long podcast, but it'll be a good one. Before we dive into things, maybe we'll have Ryan give us a sense of the GDP numbers. This is a so-called third print so we're still focused on Q1 2022. This will be the third release of the GDP number and it's gotten revised, and the revisions this time were pretty large with some pretty significant implications. Is that right, Ryan? Do I have that right?

Ryan Sweet:                      Well, the revision was small overall for total GDP. It was revised lower from minus 1.5% annualized decline, to minus 1.6, but that masked a lot of revisions within the components. They were just offsetting, but there were some enormous revisions to consumer spending and it alters the trajectory of spending. We're now basically moving sideways, whereas before, we were trending higher and that bodes it over the near term outlook.

                                             Also, inventories were revised up a lot, roughly 40 billion at a annualized rate. The inventory build in the first quarter is now close to 189 billion at an annualized rate. That's an enormous inventory build and that makes Q2 even more difficult, because the way they account for inventories in GDP, it's the change in the change in inventories that matter. We have to get at least 188 billion increase in inventories in the second quarter for inventories just to be neutral for second quarter GDP growth, and that's not going to happen. Inventories are going to be a big weight on GDP again.

Mark Zandi:                      I was surprised by the size of that revision to consumption. Basically, what they figured, the BEA, the Bureau of Economic Analysis, the folks that put the data together, figured out was that people actually consumed less and more of that ended up in inventory. That's effectively what happened here.

Ryan Sweet:                      Correct.

Mark Zandi:                      Was it revision suspending, consumer spending across all categories, or was that mostly services or was this more broadly than that?

Ryan Sweet:                      I think it was more broadly than that.

Mark Zandi:                      More broadly, that would-

Ryan Sweet:                      Overall spending added 1.2 percentage points to first quarter GDP, and that's down from 2.1 percentage point contribution in the government's second estimate. That's a massive revision to spending.

Mark Zandi:                      If nothing else changes, given this now much larger inventory gain in Q1, which means in all likelihood, inventories are going to be a pretty sizeable drag in Q2, the current quarter, or the just ended current quarter, This is July 1st. What does that mean for GDP growth in the second quarter?

Ryan Sweet:                      Our tracking estimates, we have this high frequency GDP model that takes all the source data that's released throughout the quarter, and every day we run it and it tells you what current quarter GDP is tracking based on all the information that we have. Now, we don't have all the data for June yet, but after the GDP number came out, we were at close to 1% at an annualized rate. That got knocked down to half a percentage point, and then the monthly personal income and spending data came out and that put us negative. We're now on track to decline minus 0.2% at an annualized rate.

Mark Zandi:                      Okay. Right. The other folks that do a good job of creating these tracking estimates, is the Atlanta Federal Reserve, similar approach. What is their estimate?

Ryan Sweet:                      Minus 1%, right around there.

Mark Zandi:                      Oh goodness. Odds feel like they're pretty high we're going to get a negative Q2 on GDP on top of the negative Q1 that we got.

Ryan Sweet:                      Correct. Atlanta Fed Model does a really good job. It just sometimes overstates some of the moves, because they use more survey-based data that isn't exactly an input into the source data. Ours is really like a bean counting approach, but typically, our models go in the same direction. This is not a good sign.

Mark Zandi:                      In Europe, correct me if I'm wrong Gaurav. But in Europe, if you had two consecutive quarters of negative GDP growth, that would be called a recession, would it not?

Gaurav Ganguly:             That would be called a technical recession, yes. That's the statistic that newspapers focus on. It looks like you guys might get there ahead of us because in the Eurozone, we had about 0.3 percentage points growth in Q1, and Q2 doesn't look too great, to be honest. Eurozone Industrial Production Retail Sales month-on-month declined in April. Latest business confidence is pretty weak. BMI has fallen below of 50. New orders don't look too great so the pipeline doesn't look too good. Consumer confidence has been absolutely shocking.

                                             So Q2, we'd be lucky to post a positive number in the Eurozone at least. UK might even post a negative number, by the way. It's clearly on the edge there in the UK. UK posted a positive number in Q1, but Eurozone might just scrape by despite everything that's going on, which feels a bit odd. Cris spending all his money in Italy means that that's going to keep us above water in Q2. But actually, all the other tourists who go on holiday in Europe in Q3 should keep Europe well above water in Q3. And then we get into some fairly uncertain, and from where I'm sitting, it looks fairly dark times in Q4 and Q5. Q4 of this year in Q1 of next year.

Mark Zandi:                      Q5, that would be cool.

Gaurav Ganguly:             Q5, that'd be good. That'd be good.

Mark Zandi:                      Bring that on.

Ryan Sweet:                      We need a bonus.

Mark Zandi:                      We need a bonus quarter.

Gaurav Ganguly:             Not working the adjusted basis use, GDP would be up big time.

Mark Zandi:                      I've heard this term many times, technical recession, particularly in Europe. What does that mean exactly, technical recession?

Gaurav Ganguly:             Oh, that's interesting. I thought you guys had that over in the US as well, because I was quite surprised by this. This came out, I don't know, maybe a decade ago or so. I started noticing that newspapers like Financial Times, whatever, the big broad sheets they were carrying this term. Two quarters of Q on Q negative prints of GDP growth would be something they'd call a technical recession. I don't know. Maybe that just makes it easier for the readership to grasp rather than the classical economics, the Burns and Mitchell style business cycle definition of a recession, which is so broad based and something you can only really fix quite long after the event.

Mark Zandi:                      Right.

Ryan Sweet:                      In the US, there's the dating committee, right? The NBER, National Bureau of Economic Research dating. That is final [inaudible 00:10:30] who decide.

Gaurav Ganguly:             Well, that's what goes back to Burns and Mitchell. That's what goes back to Burns and Mitchell in 1947 and all that. UK is the same.

Ryan Sweet:                      So in the UK and Europe, there is no...

Gaurav Ganguly:             No. They're formal dating committees and they will expose data recession. Those are of course, very similar in style and contents to the NBER dating system. It's just that in the popular press, you get to see this concept. You hear a lot about this concept of a technical recession.

Mark Zandi:                      It feels like we're going to be debating here now, whether we're in recession and have been in recession since the beginning of the year.

Ryan Sweet:                      We'll be debating it, but the press is just going to be all over this. They're already writing about a technical recession. So this is how we're going talk ourselves.

Mark Zandi:                      Do they use that word, technical recession? People are saying that?

Ryan Sweet:                      This morning I heard it twice.

Cris deRitis:                       A textbook recession.

Ryan Sweet:                      Yeah. A textbook technical.

Mark Zandi:                      Is that what they're saying, textbook recession?

Ryan Sweet:                      This morning, they used technical.

Mark Zandi:                      Who's they? Like Wall Street Journal they?

Ryan Sweet:                      Bloomberg.

Mark Zandi:                      Oh, okay. Interesting.

Gaurav Ganguly:             A technical recession is typically what they say in Europe to capture this concept.

Mark Zandi:                      They call it a technical recession, right?

Gaurav Ganguly:             Yeah.

Mark Zandi:                      But as we've been discussing, we don't think that the National Bureau of Economic Research, the business cycle dating committee of the NBER, which is, I think we've all agreed, is the official arbiter of our business cycle here in the US. We don't think they're going to date this period as the US being in recession. No.

Ryan Sweet:                      How could they, when you're creating 400,000 jobs a month? The only weakness is really in GDP and that's subject to enormous revisions.

Mark Zandi:                      Right. It feels like this could be really revised a lot when you get the annual benchmark revisions. The other thing to consider here, this is the third print on Q1, but there's also these annual, more comprehensive benchmark revisions. And then they've got a even bigger set of revisions, the BEA, to these studies, I think every three years, don't they? I believe that's the case. And so given what's going on with this data and given a lot of it is around inventory, it feels in trade, which is hard to measure, certainly in real time, it feels like there could be massive revisions here to this data. It feels like it.

Ryan Sweet:                      Yeah. I agree.

Mark Zandi:                      Right. The other implication actually, of all this is if GDP is declining and we're creating a lot of jobs, by definition, productivity growth is getting hammered here. Okay. All right. Well, before we go on, let's play the statistics game. I will admit, I'm ill-prepared for this week, but I know you guys are on top of it, but the game...

Ryan Sweet:                      Are you on vacation?

Mark Zandi:                      No, I'm not. I've been working. I think we just lost Cris. I've been working, but this just got away from me somehow to prepare for the statistics game. But I do have one, I just thought of a good one, actually. All right. I'm sure Cris will come back. Just to remind everyone, and this is for folks that don't follow regularly. I apologize. I know this sounds, it's getting increasingly redundant, but the game is we each provide a statistic. The rest of us try to figure that out through questions and clues and deductive reasoning. The best statistic is one where it's not so easy that we all get it quickly, not too hard so we never get it, and is a statistic that is related to what's going on recently, or a topic at hand would be a bonus. So with that, let me turn to Cris, are you on the line? Did we get you back?

Cris deRitis:                       I am. Can you hear me?

Mark Zandi:                      Yeah. You sound great. Why don't you go first, just in case we lose you again?

Cris deRitis:                       Yes. Okay. Three numbers all related, 8.6%, 22% and 6.5%.

Mark Zandi:                      Is it coming from an economic release that came out this past week?

Cris deRitis:                       Yes.

Ryan Sweet:                      Is it inflation related?

Cris deRitis:                       It is.

Ryan Sweet:                      So one of them is the S&P, or the Case-Shiller House Price Index.

Cris deRitis:                       No.

Ryan Sweet:                      No?

Gaurav Ganguly:             One of them sounds suspiciously like June Eurozone annual inflation rate.

Cris deRitis:                       You got it. You know what the other two are?

Gaurav Ganguly:             Just the 8.6. That's me done.

Cris deRitis:                       Yep. That's Eurozone.

Gaurav Ganguly:             That was also easy because Cris is in Italy.

Mark Zandi:                      Right. He's adding to the inflationary pressures. But what is 8.6? What is that?

Gaurav Ganguly:             That's the June print on Eurozone inflation year-on-year.

Mark Zandi:                      Year-on-year comparable to consumer price inflation?

Gaurav Ganguly:             That's right. So it was 8.1% in May and it's just gone up to 8.6%.

Mark Zandi:                      Which, by the way, is exactly equal to the US CPI inflation print for the month of May, which is interesting. What's the second number, Cris?

Cris deRitis:                       22%.

Mark Zandi:                      22%.

Cris deRitis:                       It's related. They're all related.

Mark Zandi:                      Is that what energy prices are? No, that would be even more. Is it a component of the CPI that's up 22% in Europe?

Cris deRitis:                       No. Not really.

Mark Zandi:                      See how he it delayed that. Is that 22%-

Cris deRitis:                       It's getting close.

Mark Zandi:                      Getting close.

Cris deRitis:                       It's not a direct component.

Ryan Sweet:                      Is it another country?

Cris deRitis:                       It is. Very good.

Gaurav Ganguly:             What about the Baltics?

Cris deRitis:                       Yes. Which one?

Mark Zandi:                      Lithuania.

Gaurav Ganguly:             I've got one chance of getting this right.

Mark Zandi:                      I like Lithuania. I'm going with Lithuania. Estonia.

Gaurav Ganguly:             Estonia.

Mark Zandi:                      22% over year.

Ryan Sweet:                      Inflation is that much in Estonia?

Cris deRitis:                       Yes.

Gaurav Ganguly:             So across all three Baltics actually, inflation is really high right now.

Mark Zandi:                      Why? Energy?

Gaurav Ganguly:             That's right. So they're very exposed to Russia. They import a lot of energy from Russia. They export a lot of goods to Russia. They've had a massive supply-side shock as a result of all the sanctions.

Mark Zandi:                      That makes sense.

Cris deRitis:                       Conversely, there's another country that's at 6.5%.

Gaurav Ganguly:             That's France.

Cris deRitis:                       Just to show you the range. That's France. Very good.

Mark Zandi:                      That is very good.

Gaurav Ganguly:             That's just gone up from 5.4% to 6.5%. And by the way, I'm not showing off anything, but that's because they've got all these exemptions. They've got a 18 cent subsidy on petrol, and they've got caps on electricity prices.

Cris deRitis:                       And they produce a lot of their own nuclear power.

Gaurav Ganguly:             Well, that helps them because there's of course, an internal electricity market in Europe. So everybody gets the same marginal cost at the wholesale level at the retail level, because France produces so much nuclear. The French Government can get away with putting a cap on electricity prices.

Mark Zandi:                      Interesting. Okay. So that was a really good one, Cris. Very good. It does highlight a broader point that inflation is high everywhere across the planet. It's not just the US, it's everywhere that we're seeing that. That goes to the debate around what's causing the high inflation, whether it's demand side or supply-side? If it's demand-side, then you'd see much bigger differences in inflation across the world. But since we're seeing similar inflation rates across the world, that suggests it's supply-side, and there's two obvious supply-side shocks; the pandemic and obviously, the Russian war in Ukraine.

Ryan Sweet:                      Exactly.

Mark Zandi:                      You came to the same conclusion, right?

Ryan Sweet:                      That's right.

Mark Zandi:                      Gaurav, is that consistent with your thinking too? That this is largely supply-side?

Gaurav Ganguly:             Yeah. That's exactly what we see here. Partially supply-side. Well, it's going to be interesting how this plays out, I think. How much disinflationary pressure we see going forward, because of these high prices that are really eating into consumer disposable income? So in the UK, for instance, there's an unprecedented squeeze in consumer disposable income and that's coming through now. We can see retail spending going down and with the Bank of England raising rates, that's another squeeze on households. So it's going to be interesting to see how that plays out.

Mark Zandi:                      Well, this goes back to the potential for recession. The proximate reason for recession is the inflation. There are many different ways that hurts the economy and raises recession risk. First is what you just mentioned, this negative income shock. So people's real incomes have declined. They have less purchasing power. They pull back on their spending and that raises the odds of recession.

                                             Second is, central banks; Fed, BOE, Bank of England, ECB, European Central Bank, are trying to slow the economy's growth rate and keep inflation expectations down. So they're raising interest rates, and that's the other key way that this results in higher recession odds.

                                             But going back to the real income shock, the thing that confuses me a little bit there is that households here in the US, and in the UK, and in Continental Europe, have a fair amount of excess saving that they built up during the pandemic, because of sheltering in place in government support. That should help cushion the blow, but it feels like, or maybe I'm just reading too much into the recent data. It feels like it's not as big a cushion as one would've thought. Is that your sense of things, Gaurav?

Gaurav Ganguly:             I get the sense that there is some cushion. I get the sense that things could be worse than they are right now because actually, consumers are holding up pretty well. I also think that we might see some of that cushion being released in the third quarter of the year when Europeans go on holiday. So they're paying quite a lot for their holiday tickets right now, if they get to go anywhere at all, by the way. So watch out whether I'm not sure when Cris plans to get back from Europe to the US, but might actually be chaotic.

Mark Zandi:                      I don't know. He may never come back.

Cris deRitis:                       Next week. I love remote work.

Mark Zandi:                      He better get better internet connectivity if he's going to stay over there for very long.

Cris deRitis:                       Yeah. I got to fix this.

Gaurav Ganguly:             Europeans are looking to go out and spend in summer, so I think some of that cash cushion is going to be used for the summer holiday plans. So I think there is some, and I think it is helping. I think things could be worse. So what I'm worried about is when we get into the end of this year and early part of next year, will that cushion still be there?

Mark Zandi:                      If prices stay high, inflation doesn't recede, then at some point, certainly low income households blow through the excess saving. And then they have no choice but to pull back, and that feels like eyes of recession might.

Gaurav Ganguly:             In some countries like the UK, actually low income households didn't get much of a chance to amass extra savings in any case.

Mark Zandi:                      Interesting. You said one thing that I found, I just want to make sure I heard it right. You're saying that people bought their tickets in Q2, and that's taken away from their ability to spend in Q2. And then they're going to travel in Q3 and that's going to show up in the spending, is that what you were saying?

Gaurav Ganguly:             So bit of both. I think people have been spending. They spending on holidays. So the tickets that they bought in Q2, that's in Q2 spending, obviously. They're going to go out and spend more in Q3, of course. They're going to go to places and wine and dine and all that sort of stuff.

Mark Zandi:                      I see. So you're saying the travel showed up in Q2 spending kept it going a bit, and there's still more coming in Q3, because now they're going to go on the trip?

Gaurav Ganguly:             Right.

Mark Zandi:                      Got it. All right. That makes sense. All right. Let's go on the next person in the statistics game. Gaurav, you want to go next?

Gaurav Ganguly:             Yeah. I've got a weird number. I'm handing out a prize to anyone who gets it, which is totally against the spirit of-

Mark Zandi:                      What's the prize?

Gaurav Ganguly:             I don't know. We'll see.

Ryan Sweet:                      It's the cowbell.

Gaurav Ganguly:             Exactly.

Mark Zandi:                      A Swiss cowbell. We want a-

Gaurav Ganguly:             A Swiss cowbell.

Mark Zandi:                      Cris was telling me that there's differences in cowbells. So we'd go for the Swiss cowbell.

Gaurav Ganguly:             But it's a number I'm following quite closely right now. So it's 57.

Mark Zandi:                      A number you're following very closely, and it's 57.

Gaurav Ganguly:             And it's 57 and it's a European number.

Mark Zandi:                      Okay. Is it a confidence measure?

Ryan Sweet:                      I thought it was Heinz ketchup related.

Mark Zandi:                      Heinz ketchup.

Gaurav Ganguly:             I don't like ketchup, so not following it. That's not it.

Mark Zandi:                      You don't like ketchup? Who doesn't like ketchup? What the heck?

Gaurav Ganguly:             So this is a European thing. I like mayonnaise.

Ryan Sweet:                      Don't tell me you put mayonnaise on your French fries.

Mark Zandi:                      That is gross.

Gaurav Ganguly:             I put mayonnaise on my French fries. Yes.

Mark Zandi:                      Oh my God. That is weird.

Cris deRitis:                       We're talking 4th of July though.

Mark Zandi:                      That's weird.

Cris deRitis:                       A little context.

Ryan Sweet:                      57.

Mark Zandi:                      Is that a confidence measure? Is 57 a consumer confidence measure?

Gaurav Ganguly:             No, it's not a confidence measure. It's a commodity measure.

Mark Zandi:                      Oh, a commodity. Is that natural gas prices?

Gaurav Ganguly:             It's close. It is related to natural gas.

Mark Zandi:                      It's related to natural gas. What's related to natural gas other than natural gas?

Ryan Sweet:                      Inventories of natural gas?

Gaurav Ganguly:             It's something to do with natural gas.

Ryan Sweet:                      So inventories?

Gaurav Ganguly:             Inventories. Exactly. So cowbell to Ryan.

Mark Zandi:                      57%.

Cris deRitis:                       Oh 57%.

Mark Zandi:                      I get it.

Gaurav Ganguly:             I should have said that. I should have said 57%. I'm sorry. Okay. Two cowbells to Ryan Sweet, one each for each of you. So that's 57%, that's...

Mark Zandi:                      That's very diplomatic.

Gaurav Ganguly:             That's the amount of gas in storage, amount of capacity that's been filled to date in Europe. Europe has the ability to store about a quarter of its annual gas consumption. It does that to even out seasonal peaks, and it's roughly at 57% of capacity right now.

Cris deRitis:                       That's more than usual, right? That's ahead of schedule.

Gaurav Ganguly:             It's unfortunately not actually. If you look back, so what happened...

Cris deRitis:                       It happened last year.

Gaurav Ganguly:             ... over the course of the year. Last year was a bad year. Last year was a bad year. It's ahead of last year. But if you look back last 10 years, this isn't particularly special. So the European Union actually wants to achieve a target of 90% of gas and storage, fill up storage to about 90% by the 1st of November, which is the seasonal peak in storage. After that, the net withdrawals from the gas system, from the storage system. 90% of capacity is something Europe has achieved in the past. I don't know if it'll actually manage to achieve that this year. It's an ambitious target. Last year, it certainly didn't, as Cris was saying.

                                             What's been happening recently is that Russian gas flows have slowed down considerably coming into Europe. It slowed down anyway in 2021, but actually, one of the big pipelines that comes into Germany, Nord Stream 1, capacity in that pipeline flow, in that pipeline is about 40% of capacity right now. So Europe, if it wants to get through next winter, really wants to get about 90% of gas in storage as a buffer. That should help a lot, but it doesn't look like it'll achieve that right now.

Mark Zandi:                      Of course, the gas is being impaired intentionally by Russia, correct? They're sending a signal.

Gaurav Ganguly:             Correct. They're sending a signal. They're doing what we've been worried about for a long time, which is essentially weaponizing gas. It knows that Europe is vulnerable on this front.

Mark Zandi:                      Right. Do you have a sense of the price of natural gas? Where it was pre-Russian invasion and where it is today?

Gaurav Ganguly:             So right now in Europe, it's about €145 per megawatt hour. About a year ago, it was closer to 25. So it's been a massive increase in gas prices.

Mark Zandi:                      Right. Of course, natural gas is very key to home heating throughout Europe and a lot of industrial activity, particularly in Germany, which is very dependent on Russian gas.

Gaurav Ganguly:             Exactly. So Europe consumes about 400 billion cubic meters of gas a year. 40% of that is for households for heating purposes and heating, cooking, et cetera. And then another 25% goes to industry, but a lot of that is actually for heating. About 15% goes to actual industrial processes like in chemicals or cement, steel, et cetera. The problem is that even where gas is used for process heating in industry, you can't really shut down the gas or ask people to consume less. So things like precision engineering, actually rooms need it to be heated to a specific temperature for cutting instruments to be at their optimal, so you can't really have one or two degrees less.

Mark Zandi:                      Right. It is what it is.

Gaurav Ganguly:             Yeah, exactly.

Mark Zandi:                      Interesting. So we're at 57% of storage capacity. The Europeans want to be at 90. And so you're watching that very carefully as a gauge to how vulnerable Europe is when we go into the winter months.

Gaurav Ganguly:             Exactly.

Mark Zandi:                      Okay. Very good.

Cris deRitis:                       Are you hearing talk of rationing, Gaurav?

Gaurav Ganguly:             Yeah. There's lot of talk about-

Cris deRitis:                       Or only hearing that here?

Gaurav Ganguly:             There's a lot of talk about rationing. Some of this is just, well, a lot of this is actually readiness, I think. So all the countries have national gas emergency plans given the sensitivity to natural gas. Germany has just got a three point emergency plan. It triggered the first part of it in March, just after the invasion. It's now triggered the second phase of its national gas emergency plan. All of this doesn't mean that much yet. There are things that German industry can do under the phase two of its emergency plan, but nobody is doing any of that yet. Phase two basically, is a state of heightened alertness when gas prices are incredibly high and there's potential for disruption, but actually markets still manage to clear and supply manages to meet demand.

                                             If you get into phase three, that's when gas rationing could occur. Thinking about it, it's not clear to me that gas rationing has to be something that immediately follows curtailment of gas supply, because in a way we've been facing disruption for a year and markets have been coping, Europe's been coping, then that's where storage comes in. So if there's a fair bit of storage and Russian supply ceases completely, Europe can draw down on its storage rather than seek to ration gas to industry. That's probably the way it'll go.

                                             So if it happens at the start of winter, 90% gas in storage, there's a bit of a buffer there. Europe doesn't use up all 90% of its gas just for heating homes in winter. It can easily emerge with 30%, 40% of gas still in storage at the end of a winter. So there's some buffer there to provide to industry. If it happens now, Europe faces a choice. Is it going to ration gas to industry, or is it going to slip on its storage target? So again, it doesn't have to happen immediately.

Mark Zandi:                      Well, it's also driving up natural gas prices here, because of LNG, Liquified Natural Gas. Because of the high price in Europe, there's a arbitrage opportunity, so US producers of natural gas want to ship it to Europe, get the higher price. I think the US has now become the largest exporter of Liquified Natural Gas in the world as a result. But it has pushed up prices here. Nothing compared to Europe, but we're paying last I looked, $6 and 50 cents for, what is it, Ryan? Is it million BTU? I think it's million BTU.

Ryan Sweet:                      Million BTU.

Mark Zandi:                      That's more than double what it was a year ago, so that hasn't really had a big impact here. But if we stay at these prices going into the winter months, that could be more of a deal just because it costs households a lot more.

Gaurav Ganguly:             Europe needs that LNG. It really needs that LNG from the US right now. So if I look at what's happening, last year, Europe imported about 150 billion cubic meters of gas from Russia. It wants to get down to about a third of that by the end of this year. So it doesn't want to import more than, I don't know, 45 billion cubic meters. It might just do that even with these reduced flows from Russia.

                                             So I just estimated that even with these reduced flows from Russia now, Russia could end up sending about 50 billion cubic meters of gas to Europe over the course of the rest of this year. So that would balance it out if Europe would have what it needs, but the rest, it's all really coming from LNG. Europe needs about 170 billion cubic meters of LNG over 2022 to balance it all out and meet its annual consumption.

Mark Zandi:                      An increasing amount will come from the Middle East, or the US and Middle East?

Gaurav Ganguly:             Some from the Middle East. Yes. But the big potential for the Middle East, well, that's a medium-term play getting Qatari gas on stream and sending that over to Europe. That'll take some time.

Mark Zandi:                      Right. Okay. All right. Let's move on. Ryan, you're up? What's your statistic of the week?

Ryan Sweet:                      2.04%.

Mark Zandi:                      2.04. Is it an inflation number?

Ryan Sweet:                      Yes. It's related to inflation.

Mark Zandi:                      Related to inflation. Is it a commodity price?

Ryan Sweet:                      It is not.

Mark Zandi:                      Okay. Related to inflation. Is it a survey based measure?

Ryan Sweet:                      It is not.

Mark Zandi:                      It is not. Is it a market based measure?

Ryan Sweet:                      It is. And I'll give you context 2.04, it peaked recently in April close to 2.6%.

Mark Zandi:                      Okay. 2.6%, now 2.04. Is it inflation expectations measure?

Ryan Sweet:                      Mm-hmm.

Mark Zandi:                      Is it 5 Year 5 Year Forwards?

Ryan Sweet:                      Yeah. Correct. Good job. There you go.

Mark Zandi:                      Gaurav, you see how that's done? You see that? I just slowly whittled him down.

Gaurav Ganguly:             There's another cowbell there for you Mark.

Mark Zandi:                      I want a Swiss cowbell though.

Gaurav Ganguly:             Yeah, absolutely you got it.

Mark Zandi:                      I know it's part of Switzerland, I like it from please.

Gaurav Ganguly:             Cris is going to bring them all back.

Cris deRitis:                       I'll work on it.

Mark Zandi:                      Okay. You want to explain? Is this the ICE measure, the 5 Year 5 Year Forward? Or do you know where you're getting this from? What is this?

Ryan Sweet:                      We calculate it.

Mark Zandi:                      So we calculate it.

Ryan Sweet:                      It's based off the Fed paper, but it's also consistent with what you see in the Bloomberg Terminal or any other way of calculating 5 Year 5 Year Forwards.

Mark Zandi:                      Do you want to just explain what that is?

Ryan Sweet:                      So 5 Year 5 Year Forwards are what the bond market expects inflation five years from now, five years after that to be. So it's a good measure of long-term inflation expectations and it's based on the Consumer Price Index. So in fact, it's probably running a little bit below where the Fed would want it to be right now, if you adjust it for the Personal Consumption Expenditure. So the Fed has put a lot of emphasis on inflation expectations and that's one reason why the Fed went 75 basis points in June instead of 50, is that survey based measure of inflation expectations have jumped.

                                             But I think Mark and I have put a lot more emphasis on the bond market, because those are people putting their money where their mouth is. Basically, the market is saying, we're not worried about inflation. If you look at inflation swaps, same story. They expect inflation to come down in the medium-term. I think this reduces the odds we get another supersized rate hike in July if inflation expectations remain at the low end of where the Fed will want them to be.

Mark Zandi:                      There's so much to unpack there. The measure I find most useful, I'm curious what you think, is the 1 Year 5 Year Forward from ICE. ICE constructs these inflation expectation measures based on breakevens and swaps, so bond market measures, and they combine those two into this one measure. I think 1 Year 5 Year Forward, so that's inflation a year from now, and the subsequent five year period.

                                             That feels like what central banks or the Fed has most control over, what they should be most focused on. I did look this morning, it was 2.2%, which is low, to your point. Feels like inflation expectations are exactly where the Fed wants them. By the way, in conducting monetary policy, I'm just going to lay out a little framework. I'm curious what you guys think of it. The Federal Reserve and other central banks are trying to raise rates high enough, fast enough to slow growth, so that economies don't blow past full employment and exacerbate the inflation of pressures. And more importantly, keep inflation expectations anchored to their target, which is 2% or 2.5% depending on the measure.

                                             The fact that the 1 Year 5 Year Forward or the 5 Year 5 Year Forwards are right where they want to be, it feels like they're accomplishing that. And then the other thing they want to do is not raise rates so high so fast that it pushes the economy into recession. The indicator that, I think is best at measuring that, also bond market related or measured, is the yield curve. So the 10-year Treasury yield, vis-a-vis the 2-year treasury yield. That difference, that spread typically could be 100 basis points, so a percentage point. Now yesterday, I think it was three basis points, 0.003%.

Ryan Sweet:                      It's razor thin.

Mark Zandi:                      But that feels like that's almost perfect, because it hasn't inverted, meaning short rates rising above long rates, because that historically has signaled a recession, but it's so flat, it's suggests the economy is just going to really slow down here, not go in recession, but it's really slowed down and that's exactly what they want. It achieves their first goal, is to slow growth in the economy to the point that we don't blow past full employment.

                                             So it feels like if you look at these bond market measures, and if I were sitting there trying to calibrate policy, those are the two measures I'd be looking at. And right now, they're saying success. Obviously, a lot of script to be written here, but so far so good. What do you think of that frame? And did that make sense to you what I just said?

Ryan Sweet:                      I think I agree with you. The bond market is saying that they're going to pull it off, but we'll see.

Mark Zandi:                      They say they're going to pull this off. So exactly. Maybe the Fed is looking at those two measures, trying to calibrate around those two measures.

Ryan Sweet:                      Well, they're putting a lot of emphasis on inflation expectations and I think they've come down. They came down a lot this week and commodity prices have sold off. So wheat prices are down, oil prices are down. Your favorite, copper, has dropped noticeably. So there's a lot of moving parts in the commodity market.

Mark Zandi:                      Right. Cris, what do you think of that frame for thinking about things in terms of the context of policy, propriately in the current context?

Cris deRitis:                       Reasonable framework, but like you said, we're at three basis points on yield curve that we're right at razor's edge here. It could easily tip, it could go negative today. So I think they're useful metrics, but a lot more script will be written as you suggested.

Mark Zandi:                      But if you were writing a script, you'd say please, Mr. Bond Market, give me three basis points on the 10- year, 2-year spread. That's what I'd want. I'd say give it to me and give me 2.2% on the 1 Year 5 Year Forward. That's what I would write. If someone came to me and said, what would I want today, given what we need to achieve here, I'd write those two numbers down and they've got it.

Cris deRitis:                       If we could hold here then sure. That simplifies the policy dramatically. You're right. This is the sweet spot.

Mark Zandi:                      You're skeptical we can hold it here. I hear you and it's reasonable, but right now, as of today, it feels like it's exactly where you'd want to be.

Cris deRitis:                       Yeah. I agree.

Mark Zandi:                      Even other financial market measures, I would be looking at the gauges, policy appropriate. Am I balancing these things appropriately, like the stock market? The stock market is down 20%, 25% from the all-time high. I'd say that seems about right where I'd want it to be down. Because again, I want the economy to slow. I need to take some steam out of this economy. We're creating 400,000 jobs a month. That's too many, we're going to blow past full employment. So how do I do that? I raise rates and it comes out of the housing market. It comes out of the equity market, which affects consumer spending by high income consumers. Down 20, 25. By the way, the stock market was up 20% last year, so we're back to where we were two years ago. That feels about right to me. Anyone want to argue with that?

Ryan Sweet:                      Based on the evaluation ratios, PE or?

Mark Zandi:                      Yeah.

Ryan Sweet:                      It's like the cyclic adjusted PE. It was overvalued certainly. That's more appropriately valued.

Mark Zandi:                      Gaurav, this frame I just laid out and all the numbers, does this resonate in the European context, the UK or how people are thinking about it in Europe?

Gaurav Ganguly:             Probably less so.

Mark Zandi:                      Less so.

Gaurav Ganguly:             I think you get that meaningful signal out of two stems. You do get meaningful signals out of, I think it's the 5 Year 5 Year Forwards and central banks will be looking at those. So in the Euro area, I think the 5 Year 5 Year Forward is now just about 2.1%. So again, it doesn't look as though inflation is a big concern for European bond markets. There are other factors that play in European bond markets, including what's happening with the ECB and it's asset purchase program, and the fact that it's bought up so much of peripheral bonds and what it might do to buy even more peripheral bonds going forward. By peripheral bonds, I mean the bonds of countries like Italy, Spain, Portugal, Greece, which have seen their spreads widen in recent days.

                                             Bond market finance isn't that important compared to bank finance. There's a big difference in capital markets between Europe and the US. So bond markets don't play such a big role. So what happens in bond markets, what happens to the bond curve isn't as big a deal as it is in the US. So sure. They look at these factors, but I think there are other factors at play here.

                                             I think, given Europe's vulnerability to the energy situation, what we talked about earlier, the possibility of gas rationing, which could be really negative, that would be one thing. And then there's the history of the ECB. It's just been so cautious about lifting off. It lifted off last in 2011, promptly went back down again. Since then, it's adopted this three word mantra, and the three words are gradualism, gradualism, gradualism.

                                             It's only recently that the hawks have taken over and now they're all gung ho about lifting off. We look like we're going to lift off in July, but it's just running to catch up now. So that's where this aggression could play against the ECB starting to lift very aggressively just as the economy really cools rather dramatically. That could really tip the balance in favor of a recession.

Ryan Sweet:                      The other number I was going to use was 550 basis points, that's the high yield corporate bond spread. We were getting really close to that peak in 2018 when the Fed pivoted. So I'm wondering if we go past that, if you're going to see the Fed start to take a more cautious approach.

Mark Zandi:                      Now, going back to measures of financial conditions, what's going on to gauge whether the Fed's calibrating correctly? You're saying, look at the credit spreads in the corporate bond market, the high yield, meaning lower quality, higher risk bonds of companies. The difference between the yields on that and the 10-year Treasury yield is 550 basis points, 5.5 percentage points. That is where things got back in 2018 when the Fed started taking its foot off the brakes.

Ryan Sweet:                      Yeah.

Mark Zandi:                      It started easing up a little bit. Right. Okay. All right. Gaurav, you're saying bond market, not quite the barometer that it is here, just because the bond market is smaller, not as liquid, more affected by ECB, BOE buying, they're quantitative easing, so it's just not sending quite the signals that it might here in the US.

Gaurav Ganguly:             Not as strong signals as you get in the US. I think historically, that's also been the case, even before the ECB started buying bonds back in 2008.

Mark Zandi:                      The yield curve isn't quite as prescient historically there, the shape of the yield.

Gaurav Ganguly:             Exactly.

Mark Zandi:                      Okay. Very good. The indicator, the bond market measure there that people are really focused on is, as you pointed out, the yield on Italian debt or Spanish debt, the periphery countries where fiscal issues are more of a problem where Sovereign debt loads are high. Their yields are high relative to the German 10-year bond, for example. That spread is a pretty good measure of people's angst about what's going on in the European economy.

Gaurav Ganguly:             That's right. If you cast your mind back to 2011 and the Euro Sovereign crisis, of course bond deals amongst these peripheral countries they were as high as 7%, 8% at some point. It was really, really stressful. And then fast forward a few years, and a couple of years ago, Greece issued a 30-year bond. This is a country that defaulted on its Sovereign debt. So that's how much things changed in Europe thanks to the ECB, and thanks to that famous statement from Mario Draghi saying that they'll do what it takes. The best, most costless way of saving economies.

                                             So now we started completely discounting any issues that might arise from debt sustainability. The fact that some Euro area countries had debt to GDP ratios of close to 150% or above. Greece was close to 200%, Italy at about 115% debt to GDP. Even after the pandemic, when debt loads went up roughly by 10 percentage points of GDP, we didn't really worry about it, because the ECB bought all the surplus issuance and interest rates are at zero. Now all of a sudden, the issue of debt sustainability starts to rear its ugly head again, because actually, spreads are rising amongst peripheral countries and they do face fiscal concerns.

Mark Zandi:                      A big difference between now and the European debt crisis coming out of the Great Recession over a decade ago, was the mechanisms for the ECB to buy the debt of these periphery countries to make sure that these spreads don't gap out, and we don't get into the situation we did, back 10 years ago.

Gaurav Ganguly:             Just tremendous firepower now.

Mark Zandi:                      Tremendous firepower.

Gaurav Ganguly:             So wouldn't really. I'd talk about European Sovereign stress at this point, but I wouldn't talk about European Sovereign crisis. It's pretty much the way I look at it. I really can't see that happening with the amount of firepower at the ECB's disposal, and also EU institutions. ESM is still there. The European Union does have this great capacity to issue its own debt. I just think there's enough firepower there to avert a crisis.

Mark Zandi:                      The way I would think about what you're saying is it's a good indicator of this mounting stress, but it's very unlikely that that's going to boil over and we get a crisis, because of the ability and the will, frankly, of Europeans to keep it together and make sure that we don't get into a crisis situation like we did 10 years ago.

Gaurav Ganguly:             Exactly. I think if you looked at this trickle down of that stuff in stress onto financial conditions, onto the banking sector, for instance, it's no way similar to what we saw back in 2011 and 2008/9. So banks have plenty of access to wholesale funding. They're really well capitalized. Their credit impairments are pretty reasonable thanks to accounting standards.

                                             Even in the UK where there were some issues around how banks could resolve themselves, the whole concept of living wills, that banks could actually put in effect resolution plans in distress without having to cease operations. Well, that was a sticking point for the UK regulator for a long time. But I just read a couple of weeks ago that the UK regulator issued a statement saying it's actually quite satisfied with the status of those plans for the UK banking system. So I don't see banking systems being exposed.

                                             I should mention that while we were concerned back in February, around the exposure that European banks might have to Russia, Ukraine, actually, all of that has worked out, worked itself through the system. Those banking systems actually have very little exposure to Russia and whatever exposure there is, has all been dealt with by now.

Mark Zandi:                      Right. Okay. I'm up. I've got a statistic. $3 and 57 cents.

Ryan Sweet:                      Is that gasoline prices or the futures? Future gasoline prices?

Mark Zandi:                      They're that low, $3 and 57 cents?

Ryan Sweet:                      I thought so.

Mark Zandi:                      Really? No? Can't be.

Ryan Sweet:                      Let me double check.

Mark Zandi:                      That can't be, because we're just under $5 for retail prices. It can't be.

Ryan Sweet:                      Hold on.

Mark Zandi:                      That's embarrassing.

Ryan Sweet:                      $3 and 65 cents.

Mark Zandi:                      What? Hold on.

Ryan Sweet:                      They've come down a ton.

Mark Zandi:                      They've come down that much?

Ryan Sweet:                      I can share my screen. It's $3 and 65 cents.

Mark Zandi:                      Oh my gosh. Does that mean retail prices are going to come in here pretty quickly?

Ryan Sweet:                      Mm-hmm. They've been falling the last several days ahead of July 4th.

Mark Zandi:                      I did not know that.

Ryan Sweet:                      If you look at wholesale prices, they lead retail, so the prices that we pay at the pump, by two weeks. So we should see a pretty decent drop in gas prices soon.

Mark Zandi:                      That's encouraging. So we were peaking at $5 a gallon nationwide for regular unleaded. Where are we headed now, do you think, given these wholesale prices?

Ryan Sweet:                      I got to double check. It's probably...

Mark Zandi:                      Like $4?

Ryan Sweet:                      Not in two weeks. No.

Mark Zandi:                      No. If we stayed here at these wholesale prices.

Ryan Sweet:                      Yeah. You'll probably get down to $4.

Mark Zandi:                      Oh boy. That would be nice.

Ryan Sweet:                      That would help.

Mark Zandi:                      That would help a lot on a lot of things.

Cris deRitis:                       Without waiving the gas tax.

Mark Zandi:                      Without waiving the gas tax.

Cris deRitis:                       Correct.

Mark Zandi:                      Wow. I didn't realize that. Well, I knew crude oil was down quite a bit. We were at 120, 125, and I think last I looked, we were at 105, 110 on a barrel of oil. But I didn't realize gasoline prices had come in that fast. Wow. That's interesting. Okay. Well, that's good news. No, well, that's not the answer. Although pretty good guess. I thought that was an embarrassing guess, but that's a pretty good guess. I'm embarrassed that I was-

Cris deRitis:                       Dr. Copper.

Mark Zandi:                      Do you see the way Cris said that? It was like, I'm so disappointed in you for bringing that. It's too easy. Did you hear that in his voice?

Ryan Sweet:                      I did.

Mark Zandi:                      Gaurav, do you know Cris well enough that you heard that in his voice?

Gaurav Ganguly:             I don't know Cris well enough perhaps, but I heard it in his voice.

Mark Zandi:                      Really?

Ryan Sweet:                      The eye roll.

Mark Zandi:                      That's the [inaudible 00:51:42] you came up with?

Ryan Sweet:                      Yeah. That's why I was hiding his video. He's rolling his eyes and he's disappointed.

Mark Zandi:                      He looks like a baby in that photo, by the way. I'm just saying.

Ryan Sweet:                      That's probably the first photo that he took when he joined Moody's. You know how you get your photo taken and everything?

Mark Zandi:                      It's good. All right. You're right. Dr. Copper. That's the price of copper $3 and 57. Wait a second. Is it? Now I'm confusing myself. Yeah. It is $3 and 57 cents. Exactly. It had been well over $4 for a long while. This is one of those statistics. Remember back when the podcast started about a year ago, we each called out a statistic that we would follow to gauge where we were in the business cycle. I think Cris was Unemployment Insurance claims, UI claims. And Cris, I'm going to ask you to talk about that in a minute. Ryan, you were the 10-year Treasury yield.

Ryan Sweet:                      Correct.

Mark Zandi:                      We're watching that. By the way, just as a sidebar, I was exactly right about where the 10-year was headed relative to you guys. You guys are nowhere.

Ryan Sweet:                      I don't know. I don't know if you want to use the [inaudible 00:52:45]

Mark Zandi:                      We don't have to go down that path. I don't need to embarrass you on this one, but I'm just saying. Then $3 and 50 cents, that was copper. Anything over four bucks is consistent with a very strong global economy. Anything down near two is recessionary, at least historically has been the case. And now we're at $3 and 57 cents, which would suggest we're coming off the boil, growth is obviously slowing, recession risk, but it's still elevated.

                                             Now, that may be overstating the case given the supply shortages and supply chain disruptions, that kind of thing. But it feels like that's also moving in the right direction here. It's falling consistent with a slowing economy, but it's not falling out of bed, which would be consistent with a recession. Does that sound right? Anyone would disagree with that characterization?

Ryan Sweet:                      No, I would agree with your assessment.

Gaurav Ganguly:             Me too.

Ryan Sweet:                      I'm rooting for it to come down a little further.

Cris deRitis:                       Can you hear me?

Mark Zandi:                      Yeah. Now we can hear you, Cris.

Cris deRitis:                       Can you hear me?

Mark Zandi:                      Can hear you now. So let me ask, well, let's get down to brass tacks here and recession risk. We've been talking about this, talking around it. Here in the US, everyone I talk to thinks we're going into recession. CEOs, CFOs, investors, just friends, they're going, we're going into recession. It's almost like a fait accompli we're going into recession. Economists are a little bit more cautious circumspect, but even all economists think that recession risks are high here and pretty close to even odds. Gaurav, is that also the sentiment there that it's almost like yes, we're going into recession?

Gaurav Ganguly:             So a lot of people I've spoken to are pretty much of the same opinion as you've just described. They think recession is around the corner, if not, even just upon us. Over the next 12 months, it's highly likely that we'll get into recession. I think where the conversation breaks down is when we start to dig into the details and try and figure out what that recession looks like, because clearly we are doing a bit like you guys.

Mark Zandi:                      So you've already concluded we're going into recession then?

Gaurav Ganguly:             Well, a lot of people I talk to have concluded that. I haven't concluded that we're going into recession.

Mark Zandi:                      You haven't gone all the way in to that.

Gaurav Ganguly:             I'm attaching 50% probability to Europe going into recession in the next 12 months. Some people I talk to think we're nearly there.

Mark Zandi:                      Let me price you. You can't say 50%. It's got to be more than even, or less than even. 50% is you're saying I don't really know, and I get that. But what is your instinct there? Is it are we going into recession or not going into recession?

Gaurav Ganguly:             I think we could escape it. We've got a strong job market, just like in the US. We don't add quite as many jobs as you guys do, but the huge number of vacancies out there, to take the UK, there're actually more vacancies posted out there than people unemployed. Some of that may be optical because of the way in which vacancies are posted, but it's still very tight. If you look across France, Germany, other European job markets, vacancies is at historic highs, so really, really tight labor markets, so where's the recession? Plenty of scope for that to moderate.

                                             Growth is weak, activity is weak, but there still is some spending power. We could get through this. If energy prices fall, that would be great. And in fact, there are base effects coming up, energy price inflation has to start moderating unless there's some really bad shock again. So then that leaves us with something like food, where food prices have been going up quite a lot, and we can't benefit from those base effects, so that's something that could hit us.

                                             And then we've got the wildcard of what else could happen to energy? What could happen to geopolitics? How that might affect consumption? So some positives, some negatives. We could escape it. We've got a strong job market. We've got reasonable housing markets. We don't have big financial imbalances to unwind. On the other hand, we've got really negative sentiment. We've got the possibility of further supply-side shocks, particularly to energy prices, and we've got monetary policy. So if I balance them all up, I'd say it's pretty even odds. Maybe just over, if you want me to come off the fence, I'd say 51% to 55% of going into recession.

Mark Zandi:                      Just over even odds of going into recession.

Gaurav Ganguly:             Just over. But there are people I talk to who are much more negative than that, who'd say there's 80%, 90% chance of going into recession. That chimes with the CRO, CFO community that you're talking about.

Mark Zandi:                      Here, and I assume there, a lot does depend on oil, natural gas, commodity prices, what happens with those prices going forward here? If we've seen the peak in price, they don't even need to come down, I don't think from current levels, but if we've just seen this peak and we stay here for, it feels like the Russian war is going to continue for a while. Just say we stay here for a while, it feels like we can squeak our way through. But if prices go up for whatever reason, that feels like it can be pretty hard to digest and recession will occur.

Gaurav Ganguly:             If energy prices stay where they are, then those base effects will just be a boost. You've got to have energy inflation starting to come down. I'm not so sure about food inflation. Now energy is about 10% of the Eurozone inflation basket. Food is about 20%. So there's a greater amplification from food. Food prices have been going up in recent months. It's been going up roughly 1% a month. And then in June, it went up 2% month-on-month.

                                             I'm not so convinced that food prices come down very quickly. Not only have we got the Russian invasion of Ukraine and what that's doing to commodities like wheat, we've got very high fertilizer prices. Actually, we are not through the growing season yet, so we've got to wait for the summer harvest to come through and what that does to food prices in autumn and winter.

Mark Zandi:                      Right. Okay. Let me ask you, if you say the probability of Europe going into recession is a little over even odds, that means some countries are going into recession, doesn't it?

Gaurav Ganguly:             Yes. Some countries will. And again, we get back to what is recession at this point?

Mark Zandi:                      I see.

Gaurav Ganguly:             So I'd say that European recession, if it happens, is going to be a fairly shallow growth recession. So you'd have contraction in GDP for a few, well, cumulative loss in GDP, which could be fairly mild. It doesn't even have to be successive quarterly contractions in GDP. We could just bump around the zero mark for a while. We could see a small increase in unemployment, and some cooling in house prices. That could be it. So we are certainly not talking about a devastating hit to growth and a massive increase in unemployment in the way we've seen in the past. And yes, some countries will. You've got Italy, which is fairly weak. Germany is looking pretty weak right now, surprisingly. So plenty of scope for individual countries to go into recession.

Mark Zandi:                      Not really surprising though, because they're very dependent on the vehicle industry and that is under a lot of pressure.

Gaurav Ganguly:             Exactly. That's definitely one thing.

Mark Zandi:                      What about the UK, would you think that has more or less of a chance of going into recession than Europe?

Gaurav Ganguly:             I'd put it as slightly more than in Europe.

Mark Zandi:                      Slightly more.

Gaurav Ganguly:             That's surprising. You would've thought that the UK might be slightly better off because it imports less energy, but that's not really the case. Actually, UK inflation is running just above European inflation now. There's this tremendous cost of living squeeze that's going on. The consumer is really taking a hammering. So I'm very negative about the UK consumer. Even into Q3 and Q4, I'm not sure the holiday season will help the UK consumer that much, or the UK consumer will support the economy that much in holiday season. So I'd say it's a bit above whatever odds I put for Europe.

Mark Zandi:                      Okay. All right. Cris, do we have you back? Are you back?

Cris deRitis:                       Can you hear me?

Mark Zandi:                      Yeah. I wanted just to close the loop on something I mentioned earlier, going back to the US, is UI claims, Unemployment Insurance claims. That was one of the indicators we had called out about a year ago to follow to gauge where we were in the business cycle. Can you give us a sense of what they're saying now, the UI claims? Because I think we need to start watching that pretty carefully here as things slow. That would be a pretty good barometer. What's it saying now? Did it come out this week? I didn't see the numbers this week.

Cris deRitis:                       It did. If my memory is correct, it was 231,000 last week. Around there at least. I think it was slightly down from the week before, but it is certainly in that range. That's up substantially from where it was a few months ago. You remember we were, I think, down to 185 or somewhere very low. So you do have claims coming up, but I think hooking onto your theme, again, I would say this is in the sweet spot. Where the economy is slowing. We are getting a few more layoffs, but it's not falling apart. If we can manage to keep this type of level of activity, that's what the Fed needs in order to justify its monetary policy, keep it from hiking the rates very aggressively, and just slowing down the economy to a more appropriate level.

Mark Zandi:                      So if you had to write on a piece of paper, what would be the ideal number that comes from Unemployment Insurance, what would that be?

Cris deRitis:                       So my rules of thumb are 250,000, is the equilibrium. If they get much above 275,000, I start to get worried. Above 300,000, then I really start to get worried. So we're still below what I would consider an equilibrium level.

Mark Zandi:                      Equilibrium, meaning enough layoffs consistent with enough job growth to maintain stable unemployment?

Cris deRitis:                       Stable unemployment, wage growth is not accelerating. Again, shooting for that Goldilocks economy.

Mark Zandi:                      Right. Okay. All right. Good. I think we're coming to the end of the podcast. There's two things I want to do. One, this is an open-ended question to Gaurav. Gaurav, what should we know about Europe that we don't know in the context, given the conversation here around recession? The other is we always end, well, at least we've recently been ending with we give our recession odds here for the US. We'll do that last, but just an open-ended question. What is it that you wanted to say or would like to say that just haven't had an opportunity in the conversation so far, if anything?

Gaurav Ganguly:             I think I've already mentioned that number, 57%, and that feels like sensitivity right now. Watch out for European gas in storage, watch out for Europe being able to actually continue to get reasonable supplies of gas, keep its economy running. Everything else we know. If we follow the path of energy prices and we feel we are at the worst of it now and it'll soon be behind us. Actually things have to start moderating. Prices have to start coming down. Inflation starts getting better. Monetary policy, if it finds that right momentum, then gets the economy in a glide path, maybe we have a quarter of contraction in GDP. That's not a big disaster. You guys look like you'll have two of those. We could be in a good place come early next year. If Russian supply ceases completely and Europe can't sort out alternatives, then I think we're in for a very rough time.

Mark Zandi:                      Okay. All right. This end of the conversation has, we've been doing over the past few weeks, and that is our recession odds. Ryan, what are your recession odds next 12 months, next 24, and has that changed since the last time we chatted?

Ryan Sweet:                      No, it hasn't changed. So 65% probability in the next year. And then I think I was 75% over the next two years.

Mark Zandi:                      65% probability recession over the next year, 12 months, and then 70. No, it can't be. You were at 65% over the next 24, because-

Ryan Sweet:                      Yeah. You're right. It was 65 over the next two years. And what was I, 45 in next year?

Mark Zandi:                      You should know this. You should have this memorized.

Ryan Sweet:                      No. I hadn't run the models yet today. Probability recession models.

Mark Zandi:                      This is an astro-seeker. We're not really sure, but you're saying 45% next 12 months. 65% in the next two years?

Ryan Sweet:                      Yes. That's right. That's it.

Mark Zandi:                      That's it. Okay. That's where you were last week. That's where you were a month ago. Nothing has changed.

Ryan Sweet:                      Nothing has changed except for the ISM survey just came out.

Mark Zandi:                      What was that?

Ryan Sweet:                      It dropped from 56.1 to 53, so we're still above. So the ISM Index is a diffusion index. So anything north of 50 is usually signaling growth. Anything below 50 is contraction. But getting to the idea of talking ourselves into recession, new orders is below 50 now, and employment is below 50.

Mark Zandi:                      Okay. But you were saying, this is the Purchasing Manager Survey for manufacturers, you're saying to be consistent with recession historically, that has to be 45?

Ryan Sweet:                      Yeah. So we have a cushion.

Mark Zandi:                      We're at 53. We have to be at 45, but you're saying some of the components of this survey are around orders are weakening more so.

Ryan Sweet:                      Orders and employment. Probably the two areas where businesses are worried about a recession or think we're in a recession. Where are they going to cut back on first? Orders and then employment and hours.

Mark Zandi:                      Okay. 45 and 65. Cris?

Cris deRitis:                       I'm holding at 40% and 60%, but I'm getting nervous because of real per capita disposable income that fell this week. We didn't talk about that, but that's troubling.

Mark Zandi:                      Well, we kind of did in that real income shock, that's the real income shock, right?

Cris deRitis:                       Yeah. We didn't get into the specifics, but that's coming down. That's not good for future spending.

Mark Zandi:                      Right. Okay. So what is it again? 45 and? No wait. 40 is-

Cris deRitis:                       40 and 60.

Mark Zandi:                      40 and 60. Okay. And that has not-

Cris deRitis:                       Unchanged.

Mark Zandi:                      No. Okay. I'm at 40% in next 12 months, and about even odds, give or take, for the next two years. I've actually become more optimistic, not less on the margin, obviously. But just again, going back to the theme, it feels like everything is lining up to where you'd want it to be, given the circumstances that we're in. It's a fragile place, obviously, a lot can go wrong and I'm sure something will. That's Cris's point though. That's why his odds are higher.

Cris deRitis:                       Exactly.

Mark Zandi:                      He's just counting on something going wrong. It doesn't take a lot.

Cris deRitis:                       Not counting on it. It's a probability.

Mark Zandi:                      That's a good point. You're saying there's some probability if something doesn't stick to script, is what you're saying, and we're very vulnerable. That makes a lot of sense. Very good. Okay. I think we covered it. What's that Cris?

Cris deRitis:                       Did Gaurav give his probabilities for US recession?

Mark Zandi:                      Gaurav, do you have recession probabilities for the US?i thought we agreed.

Gaurav Ganguly:             I think the US is in a slightly better place than Europe. So if I'm going to say if I give my recession probabilities for Europe, then I'd say 50%. I've told you this already. 50% over the next 12 months. And it's probably 60%, 65% over the next 24. So it feels to me like the US is in a slightly better place. Not as vulnerable as Europe so it should be about 10 percentage points at least, below Europe.

Mark Zandi:                      So you're 40.

Cris deRitis:                       You're with Ryan.

Gaurav Ganguly:             Like 40, 55 or so.

Mark Zandi:                      40, 55. That's more like you and I, Cris, somewhere around where we are.

Cris deRitis:                       No, but his long-term is higher, 65.

Mark Zandi:                      But he's saying that's for Europe.

Gaurav Ganguly:             That's for Europe. That's Europe.

Ryan Sweet:                      So he's saying 55 for the US.

Cris deRitis:                       For two years.

Mark Zandi:                      What he did appropriately, he said these are my recession odds for Europe, and now subtract 10 percentage points for the US. And I meant 40% probability over the next 12 months and 55% over the next 24. That's right, Gaurav?

Gaurav Ganguly:             That's what I said.

Mark Zandi:                      Exactly. Which is pretty consistent with us. Okay. Well, sorry about that, Gaurav. I didn't mean to leave you out on that one.

Gaurav Ganguly:             No, that's all right.

Mark Zandi:                      Will you have a recession odds for Alabama? No, just joking. I know Ryan-

Cris deRitis:                       Bolivia, Estonia?

Mark Zandi:                      By the way, that does bring up something we didn't talk about, and that's Roe v. Wade, which is a big deal. Maybe we'll talk a little bit about that next week or in subsequent weeks, because getting a lot of questions about the Supreme court's ruling that overturns Roe v. Wade, and the response by states in terms of limiting abortion access. Lots of questions about, well, what does this mean for the economy? And that's an interesting question, so we might want to tackle that at some point, but not today. We've covered a lot of ground today.

                                             With that, let me thank everyone for their participation. I hope the folks here in the US, that be me and you, Ryan, we enjoy July 4th. Gaurav and Chris, you can celebrate as well.

Cris deRitis:                       I'll also enjoy July 4th.

Mark Zandi:                      There you go. Very good.

Gaurav Ganguly:             As will I. I'll have mayonnaise on my chips.

Ryan Sweet:                      Oh God.

Mark Zandi:                      No. Geez. Well, have a hotdog on us and please put mustard on it.

Gaurav Ganguly:             I'll do that. Mustard on hotdogs that's de-regular, that's fine.

Mark Zandi:                      Have you had a hotdog with mustard recently? If you have not done that, I highly recommend it. Highly. With a beer.

Gaurav Ganguly:             With a beer. That sounds like a great idea. It is Friday afternoon here, so...

Mark Zandi:                      Get a Peroni if you're in Italy. Get, I don't know, a Guinness, if you're in UK. Ryan, what do you drink?

Cris deRitis:                       Guinness in the UK?

Mark Zandi:                      Sorry.

Ryan Sweet:                      Oh boy. We just lost him. [inaudible 01:11:24]

Mark Zandi:                      Some Pilsner, whatever.

Gaurav Ganguly:             Some Pilsner. A Stella.

Mark Zandi:                      I'm all for Stella's. What beer people drink is very telling, I find. So Cris, is Peroni your drink, is your beer?

Cris deRitis:                       What is my beer? I've been drinking some Peronis recently. Yes.

Mark Zandi:                      Okay. Very good. Gaurav, what do you drink?

Gaurav Ganguly:             I'm a German beer drinker. So I like German dark beers and German wheat beers.

Mark Zandi:                      That's interesting. I think Ryan, I'm going to guess Ryan before he tells us what he drinks. Bud Light. That's what Ryan drinks,

Ryan Sweet:                      That's what I drank in college. I will never drink that again.

Mark Zandi:                      Okay. Well, what do you drink? Come on man.

Gaurav Ganguly:             Victory. I support the local brew.

Cris deRitis:                       Nice. IPA?

Ryan Sweet:                      Yes. I like the IPAs.

Mark Zandi:                      All right. Well, go enjoy a beer, get a hotdog.

Ryan Sweet:                      What do you drink Mark?

Gaurav Ganguly:             You haven't told us what you drink Mark.

Mark Zandi:                      Like most-

Cris deRitis:                       Negronis.

Mark Zandi:                      Negronis. Exactly. Actually, I admit to drink Negronis. I've been experimenting with rye whiskey or gin. I'm just saying.

Ryan Sweet:                      Weren't you always a big gin and tonic person?

Mark Zandi:                      Very much so. But I'm one of these people that I consume the same thing for a decade. And then one morning, or day, or afternoon I wake up, I just can't drink or eat it anymore. I go on to the next thing and I do that for a decade. So gin and tonic was the 2000s, but Negroni's, I'll have to tell you, there's a lot of alcohol in those Negronis. I don't know what the Italians are doing once they have one of those Negronis. So forget about it. So anyway.

Cris deRitis:                       They're adjusting their recession odds.

Ryan Sweet:                      There you go.

Mark Zandi:                      Well, this was a wonderful conversation. I hope everyone has a wonderful weekend and we're going to call this a podcast. Take care of everyone.