INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics. I'm joined by my two co-hosts, Ryan Sweet, Director of Real Time Economics and Cris deRitis, Dr. deRitis, Deputy Chief Economist. Cris, you're now speaking to us from Denver, I see.

Cris deRitis:                       I am. Yeah, first live conference for me since the pandemic, so.

Mark Zandi:                      And who are you speaking to?

Cris deRitis:                       Oh, it's the National Multifamily Housing Council, apartment researchers or investors, people interested in apartment markets around the US.

Mark Zandi:                      How are they feeling about things?

Cris deRitis:                       I think in line with everyone else, seeing things perhaps slowing down, but they remain quite optimistic when it comes to apartment demand. They see a lot of demographic demand out there. Some slowing maybe in prices, but they're not looking for a collapse anytime soon.

Mark Zandi:                      Yeah. I guess with mortgage rates rising and affordability getting crushed, that would help demand, right?

Cris deRitis:                       Yeah, yeah. People can't buy homes, they have to rent, so.

Mark Zandi:                      Right. Yeah, a lot going on in that market, for sure. Any discussion around the rental evictions and all of that controversy or is that faded away from the discussion?

Cris deRitis:                       That wasn't top of mind.

Mark Zandi:                      Top of mind, okay.

Cris deRitis:                       No.

Mark Zandi:                      Yeah, okay.

Cris deRitis:                       Lots of discussion around rent increases and the explosive growth that we've had in rent increases over last year, 13%, 14% year for year for new leases. And how sustainable is that? How can that really go on?

Mark Zandi:                      That sounds like a podcast.

Cris deRitis:                       Oh yeah, for sure.

Mark Zandi:                      We haven't done that. We should definitely do that. Maybe we'll get some of the folks there that were ... Yeah, that's a great idea. Okay, good.

Cris deRitis:                       They're all big fans of the podcast, by the way. Lots of-

Mark Zandi:                      Pardon me?

Cris deRitis:                       Lots of fans of the podcast here.

Mark Zandi:                      I'm sure they're fans of mine, right?

Cris deRitis:                       Yeah, yeah, absolutely. Groupies here.

Mark Zandi:                      You guys too, or really?

Cris deRitis:                       Ryan Sweet came up a couple times.

Ryan Sweet:                      No, no, that's never good.

Mark Zandi:                      Right. No, no, no. This has been a year, we've been doing this for an entire year. This is our one year anniversary. A lot of fun for sure, I think people can tell that from the conversation, but I think highly successful. I can't remember this. Do you guys know the statistics on how many downloads or any of that stuff?

Ryan Sweet:                      Isn't it half a million?

Mark Zandi:                      Is it half a million, really? Wow. Boy.

Ryan Sweet:                      I could be off.

Mark Zandi:                      That feels good.

Ryan Sweet:                      I think that's what Sarah put in her email.

Mark Zandi:                      Okay, all right. And Ryan, have you made your way back into the office yet? I actually went into the office this week for the first time in quite a while.

Ryan Sweet:                      I heard that you were there. No, I haven't made it back yet. I might go next week. I think that's when the office officially opens.

Mark Zandi:                      Officially opens. Just in time [crosstalk 00:03:24] for the next-

Ryan Sweet:                      We should do a podcast all together in the conference room.

Mark Zandi:                      Yeah, that would be fun. Yeah. Just in time for the next wave of this thing though, it feels like

Ryan Sweet:                      Probably.

Mark Zandi:                      Yeah, right, good. And we have a guest, Michael Strain. Michael, good to see you. How are you?

Michael Strain:                 I'm well. Thank you for having me.

Mark Zandi:                      Oh, yeah, it's a pleasure. Michael is the Director of Research at the American Enterprise Institute. Is that the right title, Director of Research ... of economic research?

Michael Strain:                 Director of Economic Studies.

Mark Zandi:                      Economic studies. Great, good. So good to have you, because we're going to talk about the economy. We're going to talk about what feels like has come to the fore in the broad discussion around recession and recession risk, that just seems to have come out of nowhere. We're always hand wringing about recession, but the odds of a recession seem to have risen quite a bit here. So we're very lucky to have you on to be able to help us navigate through that discussion. But before we do that can you, Michael, give us a little bit of a sense of AEI, the organization, the institution, and you? Just a little bit about your background and how you got to be Director of Economic Studies?

Michael Strain:                 Yes, I'd be happy to. AEI is a think tank. That term, I think should be retired because it applies to such a broad range of institutions that it almost has no content. But AEI is over 80 years old and is one of the older think tanks. It still follows the university without students model that is also followed by the Brookings Institution and the Peterson Institute and organizations like that. AEI has researchers and experts in a really wide variety of different fields. We're very large as think tanks or public policy research institutes go. Experts on foreign affairs, experts on education policy, experts on public opinion studies, experts on defense issues and of course, experts on all areas of economics.

                                             We are a non-partisan organization, but I think it's accurate to characterize us as a center right organization. Our economists are generally disposed to free markets, concerned about economic opportunity, things of that nature. As the policy and political landscape on the right has changed rapidly, that's been an interesting time to be in this world. As for me personally, I am an economist. My PhD is from Cornell and I-

Mark Zandi:                      We won't hold that against you, Michael.

Michael Strain:                 Yes. I spent some time at the New York Fed and some time at the Census Bureau. Came here to AEI as an economist and then I was demoted into an administrative role.

Mark Zandi:                      I didn't realize you were at the Census Bureau. What did you do at the Census Bureau?

Michael Strain:                 I was at the Census Bureau, but yeah, I worked for the Longitudinal Employer Household Dynamics program. Then I was also the administrator of the New York Census Research Data Center that's located in New York. That prepared me for my current role. I had to make sure that the carpets were cleaned and make sure the trash cans were emptied and make sure nobody's just bringing a camera into the secure room, that stuff.

Mark Zandi:                      Were you at census and then went to the New York Fed, or was it the other way around? New York Fed to census?

Michael Strain:                 The other way around, yeah.

Mark Zandi:                      Yep, right. In anticipation of this conversation, I went up and took a look at your recent research and work. You have a very broad portfolio. It's pretty amazing. I mean, talking about SEC and activists and minimum wage and just a really broad portfolio. Feels like a really cool job you've got there.

Michael Strain:                 Well, a lot's happening. The universe is not refusing to serve up material.

Mark Zandi:                      Yeah, exactly. Well, it's wonderful to have you and great to have you onboard. AEI is a great institution, just a wonderful place, I think, for research. You have this really cool event that you are kind enough to invite me to and I've been going for a number of years where you bring in folks from both sides of the political spectrum. Some of the policy people and politicians, and it's just a wonderful two, three day event where people really have a chance to think about things and talk about things.

Michael Strain:                 Yeah, just last month.

Mark Zandi:                      Yeah, just last month. Really cool. Very, very cool. Okay, what do you guys think we should do here? Should we play the game first or go talk about recession risks? What's your preference? Ryan, I'll leave it up to you.

Ryan Sweet:                      Nah, every time I pick, it's the wrong one.

Mark Zandi:                      That's why I asked you.

Ryan Sweet:                      Thanks, Mark.

Mark Zandi:                      Which one is it going to be, Ryan?

Ryan Sweet:                      Let's do the game and then the recession.

Mark Zandi:                      Okay, I'm going to go with that. Let's go with the game. Just to remind everybody, the statistics game just is a way to help people get their minds around and digest the mundane economic statistics. But I'll have to say, the statistics are popping. There's a lot of records being shattered in the economic statistics these days. It seems like every day, a new record.

Ryan Sweet:                      Which makes it interesting that we're talking about a recession.

Mark Zandi:                      Pardon me?

Ryan Sweet:                      With all the data coming in, some of it's coming in really, really strong, but we're still going to talk about a recession.

Mark Zandi:                      Oh, yeah. Yeah, that juxtaposition is Alice in Wonderland for sure. But the game is we each state a statistic, the rest of the group tries to figure out what that statistic is through questioning and clues and deductive reasoning. The best statistic is one that isn't so easy to slam dunk. Everyone gets it quickly. But you don't want something that's so difficult that no one's ever going to get it. It's nice, you get a bonus if you can pick a statistic that is relevant to the topic at hand or something that's come out recently over the last week or two. But we're talking about recession risk, so that would be a bonus. But doesn't have to be, can be anything.

                                             With that, let's start with you, Ryan. What's your statistic? And by the way, Michael, Ryan is a maven at this game. Although, I have been giving him a run for his money in the last couple months, I'd say. Right, Ryan?

Ryan Sweet:                      Yeah, you've been doing really well. I've been really impressed. 

Cris deRitis:                       On a streak. Yeah. 

Mark Zandi:                      I'll take that. Oh, and I should say, if you get this right, Michael, you get a cowbell, a ring, so.

Ryan Sweet:                      Oh, wow. A cowbell.

Mark Zandi:                      We got two of them actually. Ryan's got two of them.

Ryan Sweet:                      Got two, yeah. 

Mark Zandi:                      Yeah, two.

Ryan Sweet:                      Yeah, and if we're going to the office next week, I'll bring him in.

Cris deRitis:                       All right.

Mark Zandi:                      Yeah.

Ryan Sweet:                      We'll say the number is 107.5 billion.

Mark Zandi:                      107.5 billion. And is this statistic that came out this week?

Ryan Sweet:                      It did. And it's negative.

Mark Zandi:                      Well, that helps. [crosstalk 00:11:24] Negative 107.5 billion. I'm going to take a shot in the dark just to get the conversation going. Is it related to trade, trade statistic?

Ryan Sweet:                      It is.

Mark Zandi:                      Ah, and I don't think ... that's not the nominal trade deficit for the month?

Ryan Sweet:                      No, that 89.2 billion.

Mark Zandi:                      Yeah. Okay. I was going to say that actually, 89.2 billion.

Ryan Sweet:                      You're getting there.

Mark Zandi:                      Okay. Could that be the current account deficit? No. The quarterly current account deficit.

Ryan Sweet:                      No, no.

Mark Zandi:                      Okay. We're so we're back with-

Ryan Sweet:                      Stick with trade. You're there.

Mark Zandi:                      Stick with trade. It can't be real, can it? 

Ryan Sweet:                      No, it's not real. 

Mark Zandi:                      No, can't be real.

Ryan Sweet:                      It's not.

Mark Zandi:                      Nominal trade deficit in, is it some subset of overall trade?

Ryan Sweet:                      Yeah. What makes up the trade deficit? There's two things.

Mark Zandi:                      Goods and services.

Ryan Sweet:                      Right? So which one's 107.

Mark Zandi:                      Goods deficit.

Ryan Sweet:                      Good deficit. Very good.

Mark Zandi:                      Okay. All right. See how that's done, Michael? That's how you do it.

Ryan Sweet:                      Rights. Not a cow bell, though.

Mark Zandi:                      [crosstalk 00:12:33] close though.

Michael Strain:                 That was very impressive.

Mark Zandi:                      What's that?

Michael Strain:                 That was very impressive.

Mark Zandi:                      Oh, okay. Yeah. I'm getting to know Ryan pretty well. I know his thought processes.

Ryan Sweet:                      Yeah, certainly be able to forecast what numbers I'm going to pick.

Michael Strain:                 It's tactics.

Mark Zandi:                      Yeah. We should actually begin with that. That's a good one. So, okay. Why'd you pick that though? What's the importance of that?

Ryan Sweet:                      We're importing a boatload of things. So it's 107.5 billion is our goods deficit. So it's good that we're import minus exports and that's overall trade, 89.2 billion that we talked about is going to shave one and a half percentage points off first quarter GDP growth. So that's going to be an enormous weight. So getting back to the recession discussion, we have net exports, that's going to subtract one and a half percentage points. And then inventories, which are going to subtract one and a half percentage points as well. So that's three percentage points of growth that we're getting cut out in the first quarter because of trade and inventories.

Mark Zandi:                      Let me ask you this. What's our tracking estimate now for Q1 GDP?

Ryan Sweet:                      0.7% annualized.

Mark Zandi:                      So based on all of the economic statistics we've gotten to date, that would suggest GDP increased only seven tenths of a percentage point annualized in Q1.

Ryan Sweet:                      Yeah. We were north of one, like one point 1.1, 1.2 and then the trade deficit came out and brought us back down below 1%.

Mark Zandi:                      Yeah. And what's the probability that you think that we could get a negative number in Q1. Because if you said inventories and trade, we don't really have a good fix on that, do we?

Ryan Sweet:                      Trade, we have a pretty good idea, because we have through February. We're missing March and we'll get some improvement in the overall trade deficit. Because the services surplus was affected by the Olympics, because us businesses or companies had to buy the rights to broadcast the Olympics and that caused the services surplus to shrink. That's not sustainable. It's going to come back. So I think probability still 25% that it falls, but yeah, that inventory drag really scares me. Could be more than what we're thinking.

Mark Zandi:                      Right. Hey, can I ask fundamentally what's driving such a weak Q1. I mean, what's fundamentally behind that in terms of GDP growth, I should say. It's not weak in terms of job growth.

Ryan Sweet:                      No.

Mark Zandi:                      I mean, that's booming.

Ryan Sweet:                      And I don't think it's fundamental. It's again, it's net exports, it's inventories. And that inventories bill is just because we needed to replenish a lot of inventories and we did in the fourth quarter, it raised the bar. We're not going to be able duplicate the amount of inventory bill that we got in the final three months of last year. And that sets us up for a weak first quarter.

Mark Zandi:                      Yeah. Did Omicron play a role?

Ryan Sweet:                      I mean, yeah, Omicron did. Yep. But if you strip out inventories, you look at real final, that should post a solid gain in the first quarter.

Mark Zandi:                      Right. Okay.

Michael Strain:                 Okay. I got one.

Mark Zandi:                      Okay. Fire away, Michael.

Michael Strain:                 11.8%,

Mark Zandi:                      11.8%

Michael Strain:                 Is this is inspired by the template that Ryan just laid out for me.

Ryan Sweet:                      So we're sticking with trade?

Michael Strain:                 Nope.

Ryan Sweet:                      All right.

Mark Zandi:                      The template.

Michael Strain:                 The general theme of a relevant to by economic outlook.

Mark Zandi:                      Ah, okay. 

Ryan Sweet:                      11.8.

Mark Zandi:                      Is it a statistic that came out recently, Michael?

Michael Strain:                 It's a statistic that relates to the month of March.

Mark Zandi:                      Oh, okay. And is it a price, a measure of prices, inflation?

Michael Strain:                 It is a measure of a price in a very important market.

Mark Zandi:                      In a very important market. Is, are you not being sarcastic when you say that?

Michael Strain:                 No. No. 

Ryan Sweet:                      We talking about house prices?

Mark Zandi:                      Rent growth. Is it rent growth in the month of March? No.

Ryan Sweet:                      Some food category?

Michael Strain:                 It's a price that has a name that begins with the letter W.

Ryan Sweet:                      Wheat prices up more than 18%. Yeah.

Mark Zandi:                      I think Michael froze.

Michael Strain:                 Important. The market I referring to is the labor market.

Mark Zandi:                      Oh, okay. 11.8%. Could that be wage growth? Like in leisure and hospitality, or something like that?

Michael Strain:                 Bingo.

Ryan Sweet:                      Yeah, there it is.

Mark Zandi:                      Oh, okay. Now wait, that's-

Ryan Sweet:                      That's a cow.

Mark Zandi:                      That is definitely a cowbell.

Ryan Sweet:                      That's a good one.

Mark Zandi:                      I didn't hear the cowbell.

Ryan Sweet:                      Oh my.

Mark Zandi:                      There you go.

Ryan Sweet:                      There you go.

Mark Zandi:                      By the way. Do you guys notice? I don't see the dog behind Ryan. What happened to the dog?

Ryan Sweet:                      She moved.

Mark Zandi:                      [crosstalk 00:17:20] back there? I can't see her.

Ryan Sweet:                      She'll be back.

Mark Zandi:                      Oh, she'll be back.

Cris deRitis:                       Where's the other dog, Ryan. Where's Fenway?

Ryan Sweet:                      Fenway is outside chasing all right. Squirrels and everything. She lives loves it outside.

Mark Zandi:                      That's a good one, Michael. 11 point. Now that year over year, March over March wages were up 11 ... This is average hourly earnings.

Michael Strain:                 Average hourly earnings. Yep.

Mark Zandi:                      Yeah. 11.8%. That is an amazing statistic actually. Yeah.

Ryan Sweet:                      One of the few industries that's keeping up with inflation.

Michael Strain:                 Totally.

Ryan Sweet:                      You're seeing a real average hour earnings increase in there.

Michael Strain:                 Yeah, yeah, yeah. Which is related to a prediction, which is that people are going to start pulling back on dining out here quite soon. And that's going to show up in consumer spending statistics.

Mark Zandi:                      Right. So you're saying that the surge in inflation is going to start to bite here and consumers have no choice, or they have a choice, I suppose. They could borrow, but they're going to pull back on their spending.

Michael Strain:                 The law of demand will reassert itself.

Mark Zandi:                      Yeah. Yeah. Actually I saw a survey done by CNBC basically saying that. They were asking consumers, are you pulling back on any of your spending? And they're doing two things, they're starting to pull back on their dining out. And of course they're driving, they're driving less as a result. Yeah.

Michael Strain:                 I get increasingly irritated going to the same restaurants that my family's been going to for several years and spending 175% of what I'm used to.

Mark Zandi:                      Yeah. Well, okay. So I've got a couple of statistics. I like them both.

Cris deRitis:                       I've got one related to the last one.

Mark Zandi:                      Want to have one related to the last one. So do I actually, but oh, can I ask on that one before you go. Cris, you'll go next, but I have a question for you, Michael. So Ryan has done some work, trying to look at the relationship between wages and prices. This concern about getting into a wage price spiral. So far, correct me if I'm wrong, Ryan, you're coming to the conclusion that prices are starting to drive wages. So workers are saying, "Hey, you got to pay me more," but there's not yet a lot of evidence that the wage growth is driving prices. He hasn't seen that. Do I have that right, Ryan?

Ryan Sweet:                      That's correct. So far the causal relationship runs one way, prices driving wages.

Mark Zandi:                      Is that consistent with how you think things are playing out, Michael? Or have you thought about that at all? 

Michael Strain:                 Yeah, that seems completely plausible. I mean, my reading of the evidence of the past few decades is that the effect of wages on prices has been pretty muted. And I think that's largely because we haven't seen a whole lot of variation in prices. And so when the variable that you're trying to explain doesn't vary, that makes it hard to explain it in a very mechanical statistical sense. 

                                             I expect that as we continue to march through this inflationary period, some of these older relationships will start to reassert themselves and I would expect prices to drive wages. I would also expect wages to drive prices, and disentangling a statistical relationship where the causal arrow points in both directions is pretty tricky. Doesn't surprise me that would begin with a situation where prices drive wages. But I don't think that's where it'll land.

Mark Zandi:                      Yeah. Yeah. And I guess we can come back to that in the context of recession risks too, because it plays a role in that. Okay. Okay, Cris, you're up. So what's your statistic?

Cris deRitis:                       All right. I'll give you a twofer, it's 12.6% and 34%,

Mark Zandi:                      12.6%. And-

Ryan Sweet:                      Did this come out this week?

Cris deRitis:                       Yep. It came out today.

Ryan Sweet:                      Came out today.

Mark Zandi:                      Oh, I think I know what it is.

Cris deRitis:                       If you get this that's a double cowbell I would have to say.

Mark Zandi:                      Okay. Okay. Is this around food prices?

Cris deRitis:                       It is.

Mark Zandi:                      Is it the UN's FAO price index?

Cris deRitis:                       Oh, you got it. You got it. [crosstalk 00:21:44]

Mark Zandi:                      All right. Right. Okay. I get two cowbells for that. 

Cris deRitis:                       What are the two numbers? You know?

Mark Zandi:                      I think the 12.6% is the month over month increase. That's a March.

Cris deRitis:                       Yep. That's 34.

Mark Zandi:                      In the 34% is year over year, I would think.

Cris deRitis:                       You got it. That's right. 12.6 in one month.

Mark Zandi:                      Yeah. Okay. Okay. 

Michael Strain:                 I'm impressed. 

Mark Zandi:                      So I'm sure someone out there is thinking that was a plant. Was that a plant, Cris?

Cris deRitis:                       That was definitely, that was not a plant. No.

Mark Zandi:                      All right.

Cris deRitis:                       We're just in sync.

Michael Strain:                 That was more impressive than the 11.8.

Ryan Sweet:                      I think these two are sending emails at night saying, "Oh, watch out for this number. Here it comes." You can't let Ryan get any numbers right.

Mark Zandi:                      Yeah. That's very good. Oh, okay. So you got to explain this. What is this and why is it important? What's going on here?

Cris deRitis:                       Yeah. So this is a food price index. It combines food prices from a number of different categories like cereals. So wheat, corn, other grains, vegetable oils, dairy meat. Various food categories. It is from the food and agricultural organization of the UN. So it's an international measure, right? So it's trying to capture food prices in different regions of the world as well. So 12.6% in one month is the largest gain I've seen in the history of the data, certainly. And it's a big movement here, and 34% in movement in food prices, just over the course of the year. That's certainly going to continue to contribute to inflation. 

                                             Food is not something you can easily correct. It takes time. There's a cycle here for growing. So I suspect this is going to continue to weigh on us. And certainly this is stemming from the Russia, Ukraine conflict, right? So without those exports, not only are we going to face higher food prices in the US, but these higher food prices are really going to take a toll on emerging markets and other [inaudible 00:23:50] around the globe. So I worry about those repercussions coming back on the US as well.

Mark Zandi:                      Yeah. I think this is a big deal. I mean, not for the US, but particularly for the rest of the world. I mean, I gave a talk to this group of folks in Nigeria. Actually it was, I met Bill Gates for the first time on zoom because he sponsors this group. Very interesting conversation. And in preparation for that, I learned that in Nigeria, if you look at the consumer basket of Nigerians, over half is food. 

                                             Here in the United States, I think it's 10%, 15% right of the CPIs food, something like that. 13%, 14%. But 50%, over 50% of the Nigerian consumer basket is food, pretty significant. So I think this is a big deal. Also, the other interesting thing, this came up in our macro meeting yesterday, Brendan Lacerda one of the other economists that follows the ag industry closely pointed out the collapse. Did you see this? The collapse in farm inventories in the United States?

Ryan Sweet:                      Mm-hmm (affirmative). Yeah. 

Mark Zandi:                      I mean, we got data all the back to World War II. You look at the chart of this thing. In fact, I'm going to tweet this thing because it's just an amazing graph. You see this very sharp decline in the stock of farm inventories and record lows by orders of magnitude, which is spooky a little nerve wracking. And I asked him about the detail, what's driving that and he's still working on it, but it looks like a big declines in wheat stocks and corn and barley, obviously the Russia and Ukraine and Russia, and Ukraine export. So very important. 

                                             Okay. That was a good statistic. Okay. I've got a good one. It's a little, I'm going to state it in a little different way. I hope this isn't too hard. This statistic is as low as it's ever been since Thanksgiving week, 1968, 1968.

Cris deRitis:                       Jobless claims?

Mark Zandi:                      Very good, jobless claims.

Cris deRitis:                       That number was outrageous.

Michael Strain:                 Drat, you beat me by one second. Yeah.

Mark Zandi:                      Is that right? Oh, okay. That was easy. I thought that was going to be hard. Geez.

Michael Strain:                 No, no.

Cris deRitis:                       That one stuck out this week.

Mark Zandi:                      That one. Okay. So go ahead, Ryan. You want to? Or, Michael, do you want to talk about that? What happened this week with UI claims?

Michael Strain:                 Well, they were the lowest they've been since Thanksgiving week of 1968.

Mark Zandi:                      There you go. There you go. Very good. And I think, correct me if I'm wrong, but I think on a four week moving average basis, which is how economists tend to look at it, because you can have these weird weeks every once in a while. Yeah. Yeah. I think it's the lowest it's ever been in the data. 170,000 initial claims for unemployment insurance in the last four weeks. And that's the lowest. There may be a week. I couldn't see it, though. I think it might be the lowest on record. That is just outrageous, incredible. Shows you how [crosstalk 00:27:14]-

Ryan Sweet:                      I mean it just shows that businesses are very reluctant to lay off workers because they know how hard it's going to be to replace them, so.

Mark Zandi:                      Yeah. Well I guess this is a great segue into the topic at hand, and that's recession risk. The way I want to introduce this conversation is begin by asking each of you, I guess broadly, how are you feeling about things in terms of the economy and where we are in the business cycle? But more specifically, what odds would you put on us going into recession at some point over the next 12 to 18 months? So just to give people context as to how you're feeling. So, Michael, let me begin with you. How would you characterize things and what odds would you put on a recession over the next 12 to 18 months?

Michael Strain:                 I would put two thirds probability of recession over the next 18 months or maybe we broaden it not so much 18 months, 20 months at some point in-

Mark Zandi:                      End of 2023. 

Michael Strain:                 Yeah. End of 2023. I see two big risks to the outlook. One is what we discussed a little bit earlier, which is the law of demand reasserting itself. I expect to see consumer spending weaken under the face of these prices. I expect to see business investment spending weaken under the face of huge increase in producer prices. And when you have businesses pulling back and consumers pulling back, that's a pretty large chunk of your economy right there. 

                                             I think a second risk is a policy mistake by the Fed in the face of this. I think the Fed just fell extremely behind the curve over the course of 2021. I'm becoming increasingly worried that they are going to make a symmetric mistake in 2022 that they underreact in 2021, and might overreact in 2022.

                                             If the economy is going to slow down on its own. Cris is at this housing conference, you're seeing 30 year fixed rate mortgages, jump up considerably based on forward guidance and quantitative tightening. That should slow the housing market down. You're seeing the 10-year jump up pretty considerably as a consequence, again, of a combination of short rate and QT tightening. That should slow down investment spending. 

                                             And households again, are I think they're going to be less likely to go out to eat and they're going to be less likely to buy a new dishwasher. And that's going to naturally slow things down on it. So to say nothing of what's happening over in Europe and in China, which you're going to depress US exports. So in light of that, I think the Fed still needs to tighten. I mean, there's not much question about that, but if we're really talking about trying to tighten 250 basis points in 2022 really aggressive, quantitative tightening, could we have two quarters of negative growth? Yeah, I think we might.

Mark Zandi:                      Wow. Two thirds probability that is high. So you feel pretty confident we're going in. Let me just tease out a couple things you said. First, your point that because of the high inflation that obviously undermines real after inflation income and people will respond by pulling back on their spending, which is the fodder for recession, but what about all of the so-called excess savings that consumers have? 

                                             So, if you take a look at all the savings that was done during the pandemic above which would've happened without it, so go to the savings rate before the pandemic, just assume that would be the same and do the calculation. There's two and a half, 2.6 trillion in excess savings above which people normally. So that's sitting in people deposit accounts, that's been driving a lot of home purchases, maybe investments in the stock market. How do you think about that in the context of they'll pull back, because they have all that cash?

Michael Strain:                 Yeah. It's a great question. It's one of the best examples, I think of the extent to which over the past two years, we've been an uncharted territory. How do we think about how households will spend down two and a half trillion dollars of excess savings that were built up by supply restrictions and by restrictions on business activity? I don't know. I think the closest historical analogy I've seen is from World War II, where factories were repurposed to produce more materials and munitions. And so there were gaps in consumer markets where consumers would've spent money on things that they weren't able to buy. Households accumulated a lot of excess savings during the World War II years. And my understanding is that it took several years for those savings to be run down.

                                             And so one answer, Mark, to your question is based on that period, which obviously is not a great fit for the period we're currently in, but based on that period, we might expect a gradual rundown of these savings. We aren't seeing really depressed savings rates. And so there's not much evidence over the past six months or so of dis-savings. So consumers aren't pulling into their savings as a way to cope with reductions in the purchasing power of labor income.

                                             I think a more detailed forensic analysis of these savings would be helpful. If I had to speculate, I would say that there are two things happening here. Middle class households, upper income households put those saving in the bank, so to speak. They use them to purchase homes. They use them to fill up 529 accounts. They use them to invest in equities. And they're not going to take money out of the 529. They're not going to take out a home equity loan. They're not going to sell stock in order to pay for their Saturday afternoon lunch bill. 

                                             Lower income households, I think these excess savings likely contributed to the stagnation of the workforce participation rate that really only began to climb six months ago or so. And those savings may have been used to finance normal expenses, to pay rent and to pay for groceries, things of that nature. So I would've thought that we would've had more of a Mardi Gras type atmosphere when the pandemic ended. And you would see households burning through this cash. And maybe it's because we didn't have an abrupt end to the pandemic. It's ebbed and flowed more, but I mean, I expect that would be a boost to consumer demand, but I don't think it'll be such a big boost that it will act as a complete counterweight to the effects of inflation on consumer spending.

Mark Zandi:                      Got it. Yeah, we've done a little bit of work trying to decompose that excess saving across different demographics, including income. And it's based on data from the survey of consumer finance and financial accounts from the Fed. So we have the last data points for the fourth quarter and it's still pretty considerable across all income groups. So I wonder what cushion. And I think you're right about high income households. They view it as wealth. They don't view it as income, but they're not the folks that are going to be really hurt by the high inflation. But the low income households, they've got a little bit, if you believe the data. And again, it's pretty ... they're estimates on top of estimates, feels like they got a little bit a cushion there, but that's a good point. 

                                             Let me ask you one other question about what you said about recession risks and about the Fed and the Fed making a mistake. So the markets, they seem to be anticipating some pretty significant tightening here, half point tightening in the funds rate and at the meeting of the Fed, probably another half a point in the June meeting, getting the funds right back to the so-called equilibrium rate, our star of about two and a half percent by no later than this time next year.

                                             And then even a higher rate than that. A terminal rate that's somewhere closer to three. There also, the markets also seem to be now completely counting quantitative tightening. That is allowing the balance sheet of the Fed to run down, and maybe even selling, the Fed starting to sell securities. They were that's why one reason why mortgage rates have jumped is that the markets are concerned that they're going to sell mortgage securities that they purchased. 

                                             Okay, so that's what the market thinks. It looks like the Fed and Fed governors are okay with the market thinking that, they're not pushing back on that. So let's say that's the forecast for monetary policy. Do you think that's a mistake, or? Obviously there's a lot of script to be written here, but based on what you know, do you think that's roughly right with getting the economy to navigate through without a recession, or that's not, that's just not going to work? They're not going to do it?

Michael Strain:                 I think they're just in such a bad position. I mean, let's say the funds rate is a 2% or 2.25% at the end of the year, it's still going to be considerably negative. And the markets are, its expecting this for sure. But what actually happens in the real economy when you have that degree of tightening over a short period of time, but where you're still looking at a interest rate that is negative 3% or something like that, depending on which inflation measure you use. I don't know the answer to that. I think we're in the territory we haven't been in for a half century, but I worry about the jolt.

                                             I also worry about the balance of what the Fed is doing. The Fed was still purchasing mortgage back securities last month, which is I think bizarre. The Fed seems to be averse to relying more on quantitative tightening and relying less on policy rate increases. I would flip that. I mean, I think they should be more aggressive on QT and less aggressive on the funds rate because QT will use rates at the long end of the curve. QT will slow the housing market, which is where a lot of our problems are, but that will still not invert the yield curve and it'll reduce the risk of the scary stuff happening that actually jolts people, even when markets are still expecting pretty aggressive action.

                                             So I feel like the Fed isn't a damned if you do damned if you don't type situation, and it will be hard to get the lag structure of monetary policy right. In an economic environment where I think it's pretty clear that consumer spending is going to slow, but it's not clear how aggressive it's going to slow. So my concern is that it's looking like, if you look at some of the anecdotes and some of the data that have come in really recently, it's looking like consumer spending is going to slow faster than I would've thought two months ago. And I worry about the Fed not being able to keep up with the pace of change in the economy, similarly to how they didn't in 2021 with the [inaudible 00:40:37].

Mark Zandi:                      Okay, let me turn to Ryan. Oh, maybe I should turn to you, Cris, because I know you have to leave in about 15, 20 minutes to catch a plane. So you heard what Michael said. So what's your assessment of the probability of recession over, let's say through the end of 2023, because Michael says two thirds through the end of 2023. And also if you have any comments or thoughts around what Michael had said, that would be also, I'd be very curious in that as well.

Cris deRitis:                       Yeah. So we have models that try to predict probability of recession.

Mark Zandi:                      We've got many models.

Cris deRitis:                       We have many models, right. So based on economic variables, based on financial variables like yield curve. Right now, based on my reading of it, and you're right, there are lots of variations, but looks like they're all converging around 35%. 30%, 35% is what I'm seeing. That sounds like-

Mark Zandi:                      Is that what you're saying?

Cris deRitis:                       I'd say that's my starting point.

Mark Zandi:                      I know you're a slave to your models, so you're saying-

Cris deRitis:                       Well, that's where I'm going. I'm not a slave.

Mark Zandi:                      Oh, you're not a slave to your model. Okay. [crosstalk 00:41:47]

Cris deRitis:                       That's a starting point. Model says that about a third chance, but then I would certainly overlay the high probability of a Fed error during this types of very ... I'm much in agreement with Michael. These are unchartered waters, very likely that at some point will make an error given the lag in the process here, right? You hike the rate, you don't see the effect for a few quarters, ultimately. So you're driving in the fog or in the dark here. So I would bump up that 35% to maybe 45% based on that. 

                                             And then on top of that, I think we are extremely vulnerable to any other type of shock from here on out. So some additional geopolitical risk, another wave of COVID. There could be another strain out there. The food insecurity. I just see that there are so many possible risks here, and it doesn't take much at this point to tip us into recession because we don't have a lot of firepower left at this point. So, for that reason, I actually bump the probably to 55%, so.

Mark Zandi:                      Whoa. Oh, that actually-

Michael Strain:                 Bump it up a little bit more. 

Cris deRitis:                       We're almost there, right?

Mark Zandi:                      Hold it. Okay, sir. Does that mean you disagree with our baseline forecast of no recession?

Michael Strain:                 That's what above 50% means.

Cris deRitis:                       I'm getting there. Yeah.

Mark Zandi:                      Oh, oh my gosh. What did [crosstalk 00:43:20]-

Cris deRitis:                       But then that would be consistent with your views on house prices.

Mark Zandi:                      So this is a change though, right? Because, Cris, if I asked you this last month, you wouldn't have said 55%.

Cris deRitis:                       No, no. But things have changed in the last month. Right.

Mark Zandi:                      And what changed?

Cris deRitis:                       The I'm really concerned about the inflation expectations.

Mark Zandi:                      Okay. Russia invades Ukraine, all prices go skyward, takes inflation expectations with them. That's what's changed.

Cris deRitis:                       Yeah. There's no sign of bending the curve there. And that has to be the top priority for the Fed. And I think there's a good chance that, like I said, they'll overdo it.

Mark Zandi:                      So Michael's at two thirds. You're at 55%.

Cris deRitis:                       Yeah.

Mark Zandi:                      Oh good. Goodness gracious. Okay.

Cris deRitis:                       But Ryan's the optimist, so.

Mark Zandi:                      Going back to this before I go to Ryan quickly, because I know I'm going to lose you in a few minutes. 

Cris deRitis:                       Yeah.

Mark Zandi:                      Going back to Michael's point about the consumer pulling back, and I push back a little bit saying, hey, excess savings. The other thing that you and I noticed, and Ryan noticed yesterday, looking at the consumer credit data, there's been a big increase in borrowing recently. Or at least in the amount of debt outstanding, which may also be just an increase in transactions, people using their credit cards more, because they're traveling more, that kind of thing. How does that fit into all of this? Is that worrisome to you that we're seeing this significant increase in credit growth? Or do you view this as a cushion to us not going into recession? So how do you think about that?

Cris deRitis:                       Well, I think consistent with Michael's view, there are people borrowing for different reasons. So the nice thing about our data or interesting thing about our data is that we can actually break out this credit growth by credit score. People with higher scores, who tend to be higher income, are borrowing at a fast clip. But I view that as more the traveling or the getting back to spending.

                                             I'm worried about the very fast growth, of fast pace of growth of the folks with lower credit scores. Right. And I think there, we're seeing a lot more borrowing for necessities to deal with inflation. So yeah, there's some cushion that's being put on here are in the short term, but with rising rates, payments going up, these are variable interest to varying accounts. So there's going to be much more stress on those lower income consumers. And I think they're tapped out. Once you get your update of the data, I think that the savings of those lowest income households are now below what they were in at the start of the pandemic.

Michael Strain:                 They spent that money in the last four months.

Cris deRitis:                       Well, it's been a steady decline since the middle of last year, since the end of the unemployment insurance benefits and stimulus checks. In the savings.

Mark Zandi:                      Steady decline in the saving rate.

Cris deRitis:                       Yeah, exactly. Well, yeah. So they're drawing down those savings. I think they're back to where they were.

Mark Zandi:                      Okay. Boy, that's a shock. Hey, Michael, that's a real strong shocker. Because usually Cris is this down the fairway, don't stir up kind of economist, but that's a statement. Okay.

Ryan Sweet:                      Yeah. I thought he was going with the traditional 40%. Did you read about that? It's like 40% is like the ideal probability for economists to say, because-

Cris deRitis:                       For forecasting. Yeah.

Ryan Sweet:                      Right, for forecasting. Because not always going to be ... like, you're not wrong if you say 40%, so.

Michael Strain:                 Isn't that also the unconditional answer? I mean at any given year there's a 40% chance, so [crosstalk 00:46:57]-

Ryan Sweet:                      There you go. That's where I thought Cris is going.

Mark Zandi:                      Okay. Well then [crosstalk 00:47:02] you guys are going to be laughing at me. I'm a little nervous to tell you about my probabilities now. You guys are bullies. You're intellectual bullies. I can feel it. Yeah. Right. Well I'm coming. We'll come back to me. But, Ryan, now I'm really nervous. Ryan, what's the probability recession between now and the end of 2023.

Ryan Sweet:                      75%.

Mark Zandi:                      Whoa.

Michael Strain:                 Wow.

Ryan Sweet:                      It's done. I think the seeds of recession.

Michael Strain:                 That was the middle of the fairway. 

Ryan Sweet:                      Yeah, exactly. We're in.

Mark Zandi:                      Okay. All right. When you say it's done, okay, what's your thought process? Is it different than Michael's or what's your thinking?

Ryan Sweet:                      No, I agree of everything Michael's said. I mean, if you look at just the shift in Fed rhetoric in the last few weeks, I mean, they're hell bent on bringing inflation down and they're in a bad situation and it's very hard for me to see them pulling this off without some misstep. So they're going to do too aggressive on rates. I agree that they should use the balance sheet more aggressively and then ease into rate hikes. But I don't think they're going to do that. 

                                             I mean, if you look at Powell, Powell's usually like right down the middle of fairway, kind of like Cris. His comments recently have been, if he doesn't see inflation moderate on a month to month basis, which we're not going to for the next several months because of higher gasoline prices, that's his signal to really tighten with regards to rate hikes. I think that they're going to make a policy mistake and the labor market's just, it's rip roaring, and there's nowhere to go for the unemployment rate to go but up. So once the unemployment rate starts rising, a recession always follows.

Mark Zandi:                      Well, I mean, you're saying the Fed's going to press on the brakes too hard. I mean, the way I framed it for Michael was, here's what the market thinks. Do you think that's the catalyst for recession? So let me ask you it in the same way. You know what the market is saying, the equilibrium funds rate two and a half percent by this time next year, if they follow that script, you're saying that's recession, that's a mistake?

Ryan Sweet:                      That's a recession. The market's already-

Mark Zandi:                      They shouldn't press on the brakes. Why wouldn't they just press on the brakes less hard?

Ryan Sweet:                      Well, they could do that. If they were going to adapt, and that's the wild card. The Fed could adapt. It doesn't seem like they're going to.

Michael Strain:                 Yeah, prices are going to continue to go up. And they, I think are not ... I just think they're not nimble enough to say, okay, our policies kick in with a lag. Here's why prices are going up. We need to adjust on the fly. I think they're going to say we raised 50 basis points in May, and then the May CPI came in at 10% and that means we need to raise even more. And I think that's the dynamic that could take hold.

Ryan Sweet:                      Yeah. In the past, they've usually signaled that they're going to take a breather, a pause, reassess how appropriate monetary policy is. No signal that they're going to do that this time. I mean, they're going. Once they start, it's going to be a steady pace of aggressive rate hikes.

Mark Zandi:                      Okay. Okay. Okay. Look. So we sit down and we do a forecast that we put pen to paper, we provide to clients. Are you saying to me the two of you ... Michael, I'll put you aside in a second because, but this is really critical to our client base. Are you saying to me, we should have a recession in our baseline? Is that what you're saying to me exactly? Are you just playing podcast one-upmanship here?

Ryan Sweet:                      No, there's no podcast one-upmanship. If I had to create a forecast, I would-

Mark Zandi:                      Have to create it. What are you talking about? You have to create a forecast. We create this forecast. You're saying if I were Chief Economist, is what you're saying. [crosstalk 00:51:01] You're saying, Mark. If you weren't around, I'd have recession. Is that what you're telling me?

Ryan Sweet:                      I'd be very close to having a recession.

Mark Zandi:                      No, no, no, no. Not close.

Ryan Sweet:                      No, I would. Okay. I would have a recession.

Mark Zandi:                      Because 75% is not close. That's like, you said we're done.

Ryan Sweet:                      Yeah, I think yes. By the end of 2023, we will experience a recession.

Mark Zandi:                      All right. Cris, I'm out of here. Monday, you're the Chief Economist. You're telling me you would put a recession in the baseline forecast. Is that what you're telling me?

Cris deRitis:                       So if we use your two thirds rule, I would. But [crosstalk 00:51:38]-

Mark Zandi:                      [crosstalk 00:51:39] He's so smart.

Cris deRitis:                       I'm getting awfully close.

Mark Zandi:                      Explain the two thirds rule.

Cris deRitis:                       Did it originate with you, Mark, or I don't know what the history is. 

Mark Zandi:                      Yeah. This is my rule.

Cris deRitis:                       This is your rule. 

Mark Zandi:                      This is my rule. Yeah.

Cris deRitis:                       Yeah. So the two thirds rule states that you have to have conviction of at least two thirds of an event happening before we alter the forecast.

Mark Zandi:                      So if Michael were Chief Economist, he said two thirds recession in the baseline, we would change recession in the baseline.

Michael Strain:                 I would put recession [crosstalk 00:52:10] but just to be completely fair to Ryan and I, if there's a 33% or 25% chance of rain you probably still bring an umbrella.

Ryan Sweet:                      Right. That's a great point.

Mark Zandi:                      Good point. Okay. Does anyone care what I think? No?

Cris deRitis:                       Cheer us up.

Mark Zandi:                      Well, okay. Sure, Mark. You tell us what you think. Well, obviously I'm very nervous about recession risk, but I'd put the probability at 40%.

Cris deRitis:                       40%

Ryan Sweet:                      There we go. There it is.

Mark Zandi:                      Through the end of 2023. If you said through the end of 2024, then I'd say, okay.

Michael Strain:                 That's 60.

Mark Zandi:                      Yeah. Could be at least even odds, if I've went through 20 ... Because the other thing that could happen is, and this is why my questioning around the Fed. The Fed could say, "Oh, I don't want to push the economy into recession. So I'm going to ease up," but then you get into a more stagflation environment. And then ultimately they have to push us in. And that's a later event. That's not a 2023 event. That's a 2024 or 2025 event. [crosstalk 00:53:12]

Ryan Sweet:                      Have rate cuts priced into 2023. So the Fed, the markets are basically saying the Fed's going to make a mistake and you're going to have to ease next year.

Mark Zandi:                      But let me just fundamentally tell you why the odds are that we don't go into recession. And it goes to the fundamental strength of the consumer and of American businesses. I mean, the consumer isn't ... I'm painting with a broad brush obviously, and there's difference between high and low income, but the American consumers in fabulous shape, right? I mean, lots of jobs, low unemployment, wage growth is falling behind inflation now, but generally we're getting positive real wage gains. And I expect that to occur if in fact we don't get another supply shock here, and if Russia doesn't go off the rails or China doesn't shut because of the pandemic.

                                             Leverage is low. Debt services, record lows. People have locked in these low rates. They've refied down into three, three and a half percent mortgages that aren't going up. Asset prices are high. The stock prices, they've come a little bit, but they're 5% down, up 30% last year, house prices still going ... lots of equity. You got, and this is my term, boatload of excess savings, pretty much across the board. So, okay, I hear ya. I think we'll see some pullback in spending by low income households that are getting nailed by the higher gasoline and food prices and rents. I get that. So I expect slowing, but we need slowing. I expect that. American business. I don't know. I've never seen a time when American businesses are in as good as shape as they are right now.

                                             I mean the corporate profit margins are as wide as they've ever been. They're making a lot of money. Cash is rolling in. Leverage, they've locked in. Leverage, and again, here I'm painting with a brush, and I think corporate leverage is a little bit more of an issue than a household leverage, because you do have some businesses that have levered up, but mostly because of financial engineering, but corporate leverage is low in aggregate and they've locked in. And investment is very strong. 

                                             And even with the rise in rates, we're talking about rates as normalizing. We're talking about rates going to 2.5% on the funds rate or 10-year yield of 3.5%, 4%. Mortgage rates of 5% to 6%. So I don't know. It just feels like fundamentally we're in good shape here. That we can weather a pretty ... this is a no doubt, a storm, very significant storm, but we can weather this storm. Okay. I'll stop my rant. Did I change your probabilities at all guys?

Cris deRitis:                       No.

Ryan Sweet:                      No.

Michael Strain:                 No. They might have gone up.

Mark Zandi:                      They might have gone up. Oh, that's so funny. Okay. 

Cris deRitis:                       I will say that [crosstalk 00:56:18]-

Mark Zandi:                      Okay, wait a second. We're going to come back to that. I there's one other part of this discussion we got to have. And that is, what are we looking at to gauge which path we're going down? But, Cris, you had something to say before we do that.

Cris deRitis:                       Well, I think I will say for your point that I think the severity of the next recession will be mild. So I'll agree with that.

Mark Zandi:                      He's good. You guys, he's really good. He's really good.

Cris deRitis:                       It's because all the fundamentals are still quite strong, so we'll get into recession, but it's not going to be a total collapse. I don't foresee that. 

Michael Strain:                 I think it'll be one of those recessions where we don't know if we're in until we're out it.

Cris deRitis:                       Yeah. It could be something like that.

Mark Zandi:                      Yeah. That's interesting. [crosstalk 00:56:50] Now I changed your mind. I think I changed your mind a little bit here. I can feel the shading going on here. Oh it's be modest recession. Yeah. Okay.

Cris deRitis:                       Well, remember the definition of a recession.

Mark Zandi:                      Broad based-

Cris deRitis:                       Period of economic weakness. 

Mark Zandi:                      Sustained decline in economic activity. Not two quarters of negative GDP. You could have that.

Cris deRitis:                       Threshold's pretty low.

Mark Zandi:                      Oh, I don't know. That, okay. That's interesting you think that's a low threshold.

Michael Strain:                 It's not going to be a financial crisis or pandemic type recession where there's a deep flaw in the underlying structure of the economy that has to be unwound. It's just going to be, people are going to spend less money because everything's really expensive.

Mark Zandi:                      Yeah. Wow. Okay. All right. Okay. Each of us have now got to articulate a indicator. Let's say one, maybe two that they're looking at to gauge which path we're going down. The recession path, the one we've just been discussing or something more benign we're definitely going to see slower growth, but that's by design, but we avoid a full-blown recession. So what are you looking at? And Michael, what are you looking at?

Michael Strain:                 Real consumer spending.

Mark Zandi:                      Oh, okay. Okay. So there's no like one indicator you look at to say, hey, this is signaling we got the probability of recession being high. I mean, once real consumer spending goes, we're done, we're in recession. Right?

Michael Strain:                 That's where I'm looking. I think that's where this recession's going to come from.

Mark Zandi:                      Got it. Okay. All right. Cris?

Cris deRitis:                       So we're talking recession signal. It's got to be the yield curve.

Michael Strain:                 Got to be the yield curve. 

Ryan Sweet:                      [crosstalk 00:58:40] yield curve.

Michael Strain:                 I thought that ... What's the yield ... Yield curve inverts tells you that we're going to have a recession at some point in the next two years.

Cris deRitis:                       Right.

Michael Strain:                 Yeah. All right.

Mark Zandi:                      Well, that's what we're talking about.

Michael Strain:                 Well, yeah, but I'm saying.

Mark Zandi:                      Yeah, yeah, yeah. You're saying it's not very precise about when this recession is going to occur.

Michael Strain:                 It's not very precise. It's a pretty small sample, and there are yield curve inversions, and then there are yield curve inversions.

Mark Zandi:                      Yeah. For sure.

Cris deRitis:                       For sure.

Michael Strain:                 And I'm talking about a temporary-

Mark Zandi:                      You say yield curve, there's lots of yield curves. What yield curve are you looking at when you say that?

Cris deRitis:                       It's the 10-2. [crosstalk 00:59:24]

Mark Zandi:                      10-year treasury yield minus 2-year treasury yield. And if that's generally positive, 10-year yields are higher than 2, but when the curve inverts 2-year rises above 10-year, that difference goes negative. That would be a signal that we're going down the recession path.

Cris deRitis:                       Right. At least it has been in the past, so.

Mark Zandi:                      What kind inversion? Inverted by the way, 2 and 10-year inverted for a day, I think. Right, Ryan?

Cris deRitis:                       A basis point, right? 

Ryan Sweet:                      Yeah, it was a small-

Mark Zandi:                      Well, I'm asking. What's your signal?

Cris deRitis:                       It's got to be more than that. There are certainly technical issues that can cause the curve to invert that wouldn't signal a recession. So I'm saying 10 basis points or more for several weeks, that's a minimum threshold to say [crosstalk 01:00:15]-

Ryan Sweet:                      It can be misleading.

Mark Zandi:                      Ryan, you don't like [crosstalk 01:00:17]-

Ryan Sweet:                      I hate the yield curve.

Mark Zandi:                      Why, what?

Ryan Sweet:                      It can be misleading.

Mark Zandi:                      Misleading about what?

Ryan Sweet:                      Because [crosstalk 01:00:23] 10-years or longer a true risk free rate. So if the Fed decides to use quantitative tightening more than rate hikes, that 10-year treasury yield is going to rise and it's going to distort the message coming from the yield curve. So you could actually have a recession without a yield curve inversion this time around.

Mark Zandi:                      Yeah. Maybe, but isn't the quantitative easing and tightening, the bond buying, the bond selling pretty much across the treasury curve? It's not just 10-year yields that they're buying and selling. [crosstalk 01:00:53]

Ryan Sweet:                      You're right.

Mark Zandi:                      It's across the curve. The bias is [crosstalk 01:00:57]-

Ryan Sweet:                      It's across curve.

Cris deRitis:                       The [inaudible 01:00:58] is long term, right?

Mark Zandi:                      Yeah. Okay. But there's always bias. Okay. Fair enough. Fair enough. But I do believe the yield curve is a very, very prescient indicator, but it has to be a hard inversion, not a day or two, not a week or two, it's got to be a month or two. And, Michael, you're right-

Michael Strain:                 We haven't seen it yet.

Mark Zandi:                      We have not seen anything.

Cris deRitis:                       No.

Mark Zandi:                      So, that would be consistent with my forecast. Not your forecast. Just saying. All right, Ryan. Oh, and I'm a yield curve believer, maybe even a proselytizer. Cris is a believer. Ryan-

Cris deRitis:                       Fossil.

Ryan Sweet:                      I'm a skeptic

Mark Zandi:                      He's a skeptic. Okay. And Michael is, it sounds like a denier, yield curve denier.

Michael Strain:                 I'm a stronger believer in Cris' definition of inversion than I am in what we've seen so far.

Mark Zandi:                      Got it. 

Cris deRitis:                       Okay. That's fair. 

Mark Zandi:                      All right. Fair enough. All right, Ryan, give me an indicator.

Ryan Sweet:                      Jobless claims. So it's weekly. So It's a count of people that are filing for unemployment insurance benefits.

Mark Zandi:                      Yeah. So what's the threshold? What do you need to see?

Ryan Sweet:                      If we get back up to over 250 close to 300, and that would be a warning.

Mark Zandi:                      Oh, well geez. 

Ryan Sweet:                      We have a long ways to go, but the scheme can turn quick.

Mark Zandi:                      All right. 

Cris deRitis:                       So that's the opposite end of the yield curve discussion. If we see that we are in.

Mark Zandi:                      We're done. 

Cris deRitis:                       Is that right? We're there, right?

Ryan Sweet:                      Jobless claims are useful in predicting what the unemployment rate is going to do. The unemployment rate, if it rises by 30 basis points on a three month moving average basis, a recession has always followed.

Cris deRitis:                       Right. So there's no advanced warning with it, it's just proof positive.

Ryan Sweet:                      Right. It's like Michael's point, we're going to probably ... know we're in recession when we're coming out.

Mark Zandi:                      All right. Okay. I'm going to give you four indicators. And this is leading indicators, not the it's already we're in indicators. Number one is the yield curve, that gives you 12, 24 month advance notice. And that's got to be a hard inversion 10-year, 2-year. Second, the equity market has to go down a lot. It's got to go down 20%. It's down 5%. There's that old adage, the stock market's predicted 10 of the last 5 recessions. That's true, but we've never had a recession without the equity market, the stock market going down significantly. And that gives you like a 6, 9 month lead to the recession. Third, consumer confidence. That across all measures has to definitively cave. Because at the end of the day, a recession is a loss of faith. Back to Michael's point about the consumer.

                                             But the confidence measures have to go down in a big definitive way 20, 30 points in couple, three months. And that means they're running for the bunker. And then finally, the unemployment rate rising more than a quarter point over a three month period. I agree with that. That is indication that you are in recession because at that point, you're in a self-reinforcing negative cycle where unemployment driving people to run for the bunker, stop spending and you lose jobs and so forth and so on and you're in recession. 

Ryan Sweet:                      Don't we check off-

Mark Zandi:                      So far, fellas, I'm just saying none of those indicators are saying recession. I'm just saying. 

Michael Strain:                 Well, I don't know. Consumer sentiment is lower today.

Ryan Sweet:                      Yes, University of Michigan.

Michael Strain:                 University of Michigan, consumer sentiment is lower today than it was during the lockdowns.

Mark Zandi:                      Yep. That's true. That's the university of ... I'm saying across the board, all the sentiment is ... Because that's got its own idiosyncratic things, but I agree. I hear you. I hear you on that one, but that would say-

Michael Strain:                 The lockdowns were pretty bad.

Mark Zandi:                      Pardon me? The

Michael Strain:                 Lock downs were pretty bad.

Mark Zandi:                      They were pretty bad. Yeah.

Michael Strain:                 Then consumers think that now is worse than that.

Mark Zandi:                      Are you saying we're going to be recession like the next three months? No, we're not going to do. That's not what you're saying.

Ryan Sweet:                      No, no.

Mark Zandi:                      Yeah. Yeah. Okay. All right. Okay. I got one more question.

Michael Strain:                 It can hit at the third quarter.

Mark Zandi:                      We need a gold star on this podcast because we're going to come back to this podcast and I'm going to tell you, I told you so, I'm just saying. Ben, somewhere in Spotify, put a big red arrow on this podcast. On this podcast. I better be [crosstalk 01:05:20]-

Cris deRitis:                       Anniversary podcast, right?

Mark Zandi:                      The anniversary podcast, the anniversary. Okay. I have one last question. This is for Michael. Okay. You talked about what the Fed can or can't do. What about lawmakers? Is there anything they can be doing, should be doing? They obviously ... nothing. Okay. There's nothing.

Michael Strain:                 I think nothing. I mean, the big thing I would say to lawmakers is do no harm. That's the most important thing they can do, and it looks like they aren't going to. I mean, now I think it would be a terrible time to Jack up the deficit, particularly the 2022 or 2023 deficit. But other than that, fiscal policy is pretty limited in what it can do right now.

Mark Zandi:                      Yeah. And you're not. So when you say do no harm, you mean a cut and a gasoline tax, you would consider that to be ... because that's being discussed, I guess [crosstalk 01:06:15]-

Michael Strain:                 The impact of that would be it pretty trivial, I think. It'd be great for the gasoline suppliers.

Mark Zandi:                      Yeah. They just capture some of that cut. Yeah.

Michael Strain:                 What they really can do is they can build a time machine and go back to March of 2021 and not pass the American rescue plan.

Mark Zandi:                      Oh no, no. Okay. [crosstalk 01:06:36] That's a whole nothing podcast. That's a whole other podcast. Damn.

Cris deRitis:                       We almost made it. 

Mark Zandi:                      Oh, last minute you said bomb. Boom. Oh, okay. We're definitely, if you're up for it, Michael, and it won't be the I told you so podcast, but hopefully we'll have you back. 

Michael Strain:                 Oh, for sure.

Mark Zandi:                      We'll talk about the American rescue plan, but this was ... Oh, before we end. Ryan, because we have started a new feature on our podcast where we answer a listener's question, do you have one you want to post to the group from one of our listeners, Ryan?

Cris deRitis:                       Yeah. So a listener reached out and asked how our view of the refugee crisis in Europe is affecting our forecast.

Mark Zandi:                      Oh, okay. Right. Do you want to take a crack at that, Cris? You want me to go take a crack at that? How do you want to respond to that Ryan or Michael? Do you have any views on the impact of the refugee crisis on the economy?

Michael Strain:                 I think the war is having a big impact on commodities prices and on the overall economic outlook for Europe, which has implications for the US economic outlook. I'm not sure that the refugee crisis in isolation is having a big impact on the US economy, but the war certainly is.

Mark Zandi:                      Yeah. Any comments on that, Cris?

Cris deRitis:                       Yeah. I would agree. Not the US, certainly for looking at specific countries in Europe, obviously there's a bigger impact there. So if you're looking at our global forecast and we are factoring some effects, I believe in Poland and Germany, whatnot.

Mark Zandi:                      I think in the near term, obviously it's a very significant economic burden on the rest of particularly Europe. But I think long run, it's probably a big plus, right? Because Europe has some very significant labor market demographic issues in the folks leaving Ukraine are in many cases, highly educated, skilled. They'll be very positive for labor force and ultimately innovation and change and business formation. So I think that will just add to the dynamism of the European economy, hopefully the near term costs aren't too high and they can be absorbed. 

                                             And I think in my view, it makes sense for the United States to make it a bit easier for Ukrainian refugees to come here. We've only allowed, I believe 100,000 in. And I don't know that's anywhere close to what we should be doing to help out here anyway, just my 3 cents. Okay. Thanks for that.

Ryan Sweet:                      Then one question that came up and it wasn't on your list of four things, oil prices. So a listener asked, "Are oil prices is a good predictor of recessions?"

Mark Zandi:                      That's a great point. I think in the current context ... historically they have, every recession we've experienced has featured a very significant in oil prices with good reason, because in times past we were very energy dependent. The thinking is that now oil prices matter less because we've become more almost completely energy or oil independent. But I would say in the current context, oil prices is the fulcrum with regard to whether we go into recession or not because ... and in my thinking, the thing that surprised me about most about the Russian invasion and its impact, the higher oil prices have fanned inflation and fanned inflation expectations and put the Fed in this very difficult spot. They're in DEFCON one.

                                             And so if oil prices are about ... say they're about $100 a barrel roughly now give or take on a given day. If they stay there for the rest of the year on average and move south next year, I think we get the now apparently my baseline forecast, which is no recession. But if they go skyward, say for whatever reason, European sanction, Russian oil, and we have to fill that void. The world has to fill that void, oil prices spike. I think we're going in, and that's how close we are to recession. So I think at this point in time, oil prices are very, very critical to which path the global economy is going to go down. Any other views? Any other perspectives on that?

Ryan Sweet:                      No, I agree. You're talking yourself up in recession odds.

Mark Zandi:                      Well, no, no, no, no, no, no, no. I've been saying this all the long, Ryan, as you know. That's not fair.

Ryan Sweet:                      All right. Oh, yeah. You have.

Mark Zandi:                      Yeah. I've been saying that all along. Okay. Anyway, I think I'm getting tired. I'm sure you guys are too. Thanks for coming, Michael. Cris, I know you got to catch a plane. Ryan ...

Cris deRitis:                       Cheer up. Cheer up, Ryan. 

Ryan Sweet:                      Just a realist, just a realist. 

Mark Zandi:                      All right. Take care everyone. Thank you for joining us this week. Talk to you next week.