INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a bevy of colleagues. My two co-hosts, Cris deRitis. Cris is the Deputy Chief Economist. Hi Cris.

Cris deRitis:                       Hey Mark.

Mark Zandi:                      How are things?

Cris deRitis:                       A little bit gray here in Philadelphia.

Mark Zandi:                      Well, I'm not going to brag about things down here in Florida. It's summertime, baby down here. At least for today. And Marisa DiNatale. Marisa.

Marisa DiNatale:              Hi Mark.

Mark Zandi:                      Good to see you.

Marisa DiNatale:              It's nice to see you. I would say springtime in Southern California.

Mark Zandi:                      Yeah, right. Maybe this is too personal. My daughter got engaged.

Marisa DiNatale:              Oh, congratulations.

Mark Zandi:                      Thank you. Yeah, very happy. The fellow she's going to marry is a great guy. That's a whole other podcast in of itself. But anyway, we went looking for a venue for the wedding and we were in St. Michaels, Maryland. The eastern shore?

Marisa DiNatale:              Yeah.

Mark Zandi:                      I'd never been, have you guys been there?

Cris deRitis:                       It's nice, yeah.

Marisa DiNatale:              It's really cute little town.

Mark Zandi:                      Yeah, I liked it. And the thing that struck me was there was a daffodil that had bloomed and it was this in all its glory out there. And this was February what? 10th. And a daffodil, that's how crazy warm it's been in the northeast. Much of the world, I think. I'm not sure. I'm not what to make of that. Certainly enjoyed it while I was there, but makes me a little nervous about summer dead ahead. I'm not sure. Anyway, and we got Bernard. Bernard Yaros. Bernard, good to have you back.

Bernard Yaros:                 Yeah, happy to be here.

Mark Zandi:                      It's been a while. Bernard is, I'd have to say Moody's analytics renaissance man. He's like... and I hope you don't take this the wrong way, Bernard. You're almost like Forrest Gump, you end up being everywhere all the time in the right place at the right time. I don't know how you do it, but you do it and you make a valuable contribution. So I'm really thrilled to have you here. And you're going to do double duty because we're going to talk about the debt limit. You do all our estimates of the X date, when the treasury's going to run out of cash and someone's not going to get paid. And we're going to talk about that. And also you are covering the inflation statistics on economic view. Of course, we got a lot of economic statistics, inflation statistics this week, and we'll come back to that. We'll play the game, the statistics game, and we have a couple listener questions that if we have time, we'll dive into that as well. So that sounds like a pretty action packed podcast. What do you guys think? Yeah.

Bernard Yaros:                 Yep.

Marisa DiNatale:              Sounds good to me.

Cris deRitis:                       We'll keep it under two hours.

Mark Zandi:                      Yeah, right. Yeah. Have you noticed though, the podcasts end up being one hour and 10 minutes no matter what we do, somehow. We say, oh we're going to make this one short, it's an hour and 10 minutes. Oh, this one's going to be longer. It's an hour and 10 minutes. Have you noticed that?

Cris deRitis:                       Yes.

Mark Zandi:                      It's irregularity, it's like a law of physics or something. I'm not sure why.

Cris deRitis:                       Stamina.

Mark Zandi:                      Is that what it is? That's exactly when I run out of juice, probably. We all run out of juice.

Cris deRitis:                       We all do.

Mark Zandi:                      And we've had a lot of debate about how long these podcasts should be. My brother says it should be a lot shorter, like a half hour, 45 minutes. A lot of people say, no, give me more. Give me longer. So think an hour and ten is okay.

Cris deRitis:                       Yeah. Even our hour and a half webinar this week, we had people seeing...

Mark Zandi:                      Yeah, right.

Cris deRitis:                       A little bit short, could have been longer.

Mark Zandi:                      Yeah. You know what I think it is? I think people like to work out to our podcast and you need an hour to work out and maybe five minutes to begin, five minutes to end while you're stretching and trying to think about, well, do I really want to do this? Or I'm not so sure I want to do it. Yeah, I'll do it. I'll do it. So it takes about an hour and 10 minutes. Maybe that's what it is. That's a theory.

Cris deRitis:                       The stats game is the cardio section about more [inaudible 00:04:28].

Mark Zandi:                      That's right. That's where the heart gets pumping in the stats game. That's right. Yeah.

Cris deRitis:                       Got it.

Mark Zandi:                      Anyway, okay. Very good. Okay, well let's talk about the key statistic of the week, and that was the consumer price index, CPI inflation measure. Bernard, do you want to give us a rundown on that? Your perspective on what the numbers are and what they're saying about inflation?

Bernard Yaros:                 Of course. So there was a lot to unpack, not just the numbers themselves, but also a lot of methodological changes. So we also got seasonal adjustments to the consumer price index over the last year. And normally, again, in normal years we don't care about these seasonal adjustment updates, but they did change the trajectory of inflation over the past year. So it turns out that inflation was just not quite as fast or strong as it was as we had thought during the summer, during last summer. But it did tell us that these new seasonal factors did show that inflation ended last year a bit firmer than we had previously thought. So annualized over the prior three months in core CPI inflation. So CPI, excluding food and energy was running at a rate about 4%, whereas previously we had thought that it was closer to 3%. So I think a lot of people, there was a lot of hand ringing about what this meant. I think this was just further news that inflation is proving stickier than maybe we had all hoped for.

Mark Zandi:                      Can I stop you right there just for a second? Because I had missed what you said earlier about it lowering the rate of inflation back in the summer. So in my mind's eye, the peak in inflation as measured by the consumer price index was in June of 2022.

Bernard Yaros:                 Exactly.

Mark Zandi:                      We hit 9% year over year. Is that still the case?

Bernard Yaros:                 So annualized over three months, it was 8% in June of last year, it ended up being lesser 7%, which is still high, but just not quite as high.

Mark Zandi:                      So year over year peak still 9%. Do you know? In June?

Bernard Yaros:                 Year over year is still nine. But when you look at the month to month and the annualized, when you look over shorter timeframes, it's changed.

Mark Zandi:                      And I want to come back to talk about seasonal adjustment broadly because it feels like to me it-

Bernard Yaros:                 It's affecting everything,

Mark Zandi:                      Everything. All the data. And I'm not so sure I believe the current data, why do you think it's any better than the data we had before the revision? Because... well, we'll come back to that. That's something we need to discuss. But anyway, go on.

Bernard Yaros:                 And then the next major update was we're getting new weight. We had new weights for the January CPI and there's even a new weighting methodology. So starting this year, the BLS is going to be updating the spending weights that it uses to calculate the CPI every year rather than every two years. So spending weights are essentially the share of total household consumption, it goes towards each good and service that makes up the CPI. So food for example, counts for roughly 14% of the CP1 and that's meant to approximate the share of a household budget that goes towards food. So this new weighting methodology, it's a big improvement.

                                             We should care about it because it's going to improve the accuracy and the relevance of the CPI. So just to give the example of now as of the January CPI, we're using weights that reflect 2021 spending patterns, whereas under the old methodology we would've been using weights that reflected 2019 to 2020 consumer spending patterns, which would've been problematic given how much we've been talking about how the pandemic has scrambled a consumer spending pattern. So this is definitely an improvement over the prior methodology. It eases some of the concerns that I think we have with seasonality, but it's definitely an improvement, especially after the pandemic.

Mark Zandi:                      Can I stop you there? So my intuition is that by adopting weights that are more timely, and especially if we're now using 2021 weights, we still had a lot of spending on goods.

Bernard Yaros:                 Exactly, yeah.

Mark Zandi:                      Because during the teeth of the pandemic, we were stuck home. We bought stuff, we couldn't go travel, we couldn't go to restaurants, we bought stuff. And of course the prices and inflation for goods has been inflated, significantly juiced because of the pandemic, the supply chain issues and also the shift in demand, right? Because there's been a lot of demand for stuff and that cost prices go- So my intuition is that this adjustment to have more timely spending weights in this particular time would serve to push up measured inflation, not down. Am I wrong there or have you looked into that?

Bernard Yaros:                 Some of the most notable changes in the weights was actually the used carve CPI-

Mark Zandi:                      Used vehicle.

Bernard Yaros:                 The used vehicle weight actually got cut almost in half for pretty significantly. So that means that any swings in this pretty volatile component won't cause as much variation in the core CPI. Then the shelter, the weight to shelter increased notably, at least by a percentage point in terms of its weight of the core CPI. So as we'll talk about more that's bad for the near term but-

Mark Zandi:                      And again, that would lift measured inflation, right? Because-

Bernard Yaros:                 Exactly, yeah.

Mark Zandi:                      ... we've experienced a surge in the cost of housing services going back to the very strong rent growth a year, year and a half ago. And so if you put a higher weight on housing services, that's going to push up measured inflation, right?

Bernard Yaros:                 Yes.

Mark Zandi:                      At least compared to where we were.

Bernard Yaros:                 Exactly. Yeah.

Mark Zandi:                      Yeah. Do you think the adoption of these more timely weights had a material impact on how we think about inflation now that it's higher or lower compared to what it was before? Has it juiced things up or weighed things down or had no meaningful impact?

Bernard Yaros:                 As we'll talk about a bit more later when it comes down to the core CPI or CPI, it's really shelter that matters the most given its preponderance. I saw something that I think the weight, shelters weight in the core CPIs is now the largest, it's been over since at least the late 1990s. So that means that as we continue to get very high shelter price increases in these next months, I think that's going to create more upside risk for CPI inflation.

Mark Zandi:                      Really?

Bernard Yaros:                 In the near term, yeah.

Mark Zandi:                      Really? I thought just the opposite because now we're going to get the cost of housing services growing more slowly because rent growth has gone flat. That's going to translate into lower cost and if we put a higher weight on it, that's going to actually push measured inflation down lower compared to what it otherwise would've been. No?

Bernard Yaros:                 I would say that disinflation we're going to get from shelter that's coming but it's going to come midyear.

Mark Zandi:                      Okay, fine.

Bernard Yaros:                 I'm saying very near terms.

Mark Zandi:                      Oh, very near term. Okay, yeah.

Bernard Yaros:                 February, March, April, it's going to be-

Mark Zandi:                      But you see where my line of questioning is going, right? It feels like to me the change certainly in the terms of the weighting has pushed up inflation, measured inflation compared to where we thought it was. But going forward later in the year, it's going to actually do the opposite.

Bernard Yaros:                 Exactly.

Mark Zandi:                      So it feels like inflation's all really hyped up, more hyped up than we thought here. To your point, about 4% three month annualized CPI core inflation, but that in fact not too distant in future's going to be starting to work in the other direction.

Bernard Yaros:                 Exactly.

Mark Zandi:                      [inaudible 00:12:16] should come in more quickly. Would you agree with that characterization?

Bernard Yaros:                 Yeah, a hundred percent.

Mark Zandi:                      You would? Okay.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Okay. Sorry, I know I'm interrupting, but there's a lot to unpack.

Bernard Yaros:                 No worries.

Mark Zandi:                      Yeah, go ahead. Oh Cris has something to ask. Go ahead Chris, sure.

Cris deRitis:                       BLS provides a comparison right before and after the weights on their site, right? My read is-

Bernard Yaros:                 They do, yeah.

Cris deRitis:                       The change is...

Mark Zandi:                      Small.

Cris deRitis:                       The overall impact is very small. We're talking basis points. So yeah, I think it's all consistent with what you're saying Mark, but I don't think it's-

Mark Zandi:                      It's not, it doesn't add-

Cris deRitis:                       Radically-

Mark Zandi:                      A whole lot. Yeah.

Cris deRitis:                       [inaudible 00:12:52] picture here.

Mark Zandi:                      Okay.

Bernard Yaros:                 All right. So I'll take a deeper dive now into the actual numbers of the CPI.

Mark Zandi:                      [inaudible 00:13:00] he kind of pause because he's now a little gun shy. He knows I'm going to [inaudible 00:13:04]. Sorry about that, Bernard, fire away. I'll leave you alone [inaudible 00:13:09] 30 seconds maybe. Go ahead.

Bernard Yaros:                 So as we expected, the CPI rose 0.5% in January. So this comes after smaller gains of 0.1% in December and 0.2% in November. So the main takeaway I would say from this is that we are still getting disinflation on a year over year basis. So year over year, the headline CPI was up 6.3%, which is the slowest since October, 2021. But what this is telling us is that this inflationary process is going to be a bumpy road. It's not to quote the Beatles, but it could be a bit of a long and winding road. It's not going to be a straight path as you've said. And there were a lot of one time factors that pushed it up. There were a lot of one time factors working in both ways in this particular report. So if we focus on the most volatile components like energy for example, energy prices went from a drag to a big driver of the index.

                                             So we saw gasoline prices rising. Unfortunately, gasoline prices, if you look at current prices, they're a bit higher than their January average. So this is probably going to be sticky through February. But we did see a one-time jump in the CPI for energy services. In particularly, close to 7% rise in the CPI for utility gas services, which refers to natural gas. And this is obviously something that's going to hit home with Marisa because this was largely driven by California. The BLS does produce CPI estimates for the major census regions and in the west natural gas bills were up, according to the BLS, by about 37%. And this goes to Southern California Gas Company and San Diego Gas and Electric, which implemented new natural gas and electric rates that were up, I think more than double from where they were a year ago.

                                             This is a one-off because natural gas prices are falling in the early part of this year, and all forecasts really are for wholesale natural gas prices to come down over the rest of this year. So I wouldn't expect this to really be a contributor in February and going forward, even though motor fuel prices I think will boost headline inflation in the next month. Then in food prices we had a bit of an acceleration and the CPI for food rose 0.5%, which was a bit faster than before, but on a year over year basis, again, food price inflation has already peaked. It peaked in August and it's been coming down. And the good news is that we're going to get more food price disinflation. We like to look at the price of processed consumer foods that domestic producers are charging because that typically leads the CPI for food by up to three months.

                                             And what we're seeing is that a lot of these wholesale prices for consumer foods have been coming down in recent months. That's a good sign that there should be more grocery store relief for consumers going forward. So energy, I think is a mixed bag. I think we'll get... gasoline, we might get a bit of a higher read for energy next month, but for food, I would bet that we continue to see a bit more deceleration in the near term. Ultimately, we care a lot more about... as economists, we like to look at the core CPI, so excluding food and energy because this is a better gauge of underlying inflation. And the core CPI rose 0.4% for the second month in a row and annualized over the prior three months, the core CPI was up 4.6% in January. So that's about three tenths of a percentage point higher than the December pace. And hence that's why everyone is really saying that this January CPI just shows that this is going to be a bumpy road in the path towards this inflation in the path towards the fed's 2% inflation target.

Mark Zandi:                      You said everyone thinks that.

Bernard Yaros:                 Or most, yeah.

Mark Zandi:                      Do you think that?

Bernard Yaros:                 I think it could be a bump, yeah.

Mark Zandi:                      Bumpy road, how much weight in your thinking do you put on this data? Does your view change? Does your forecast for inflation change? Because of the January CPI and all the revisions to the historical data that occurred with that release.

Bernard Yaros:                 I think maybe I would push out by a couple of months when we get to target inflation, but I still think we're going to moderate, it's just maybe a bit longer than I'd expected.

Mark Zandi:                      Okay. I'll let you go. I just wanted to get that context because we're going down and deep into the bowels of this report. People might get a little lost. What's the larger picture? But the larger picture you're saying is okay, maybe inflation's a bit on the margin. More persistent than I thought, but not a lot more persistent than I thought.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Okay. Fair enough. Okay. Fire away. So we're going-

Bernard Yaros:                 And basically the most important if we shift to shelter, which is the most important component of the core CPI, it's 43% of the core CPI, those actually decelerated slightly in January. So the most important ones, which are the CPI for tenant rent and then the CPI for homeowners of equivalent rent, which is the hypothetical rent that a homeowner would have to pay themselves to live in their own homes. Those both rose 0.7%, which was a bit less than the 0.8%, [inaudible 00:18:57] that they had in the last month. On a year by year basis these have really have yet to top out and they're at record levels. But as we've been talking about, shelter and disinflation is coming down. So there's been some criticism, people have pointed out that these rent measures and the CPR are lagging indicators.

                                             And that's because they're measuring the change in rent for all tenants. But because most renters are locked into long-term leases for up to 12 months, changes in market rents aren't going to affect every single renter. It's only going to affect those who are moving into new rental units. So it's this broader scope of the CPI for rents, along with just delays between when rent changes occur and when the BLS is surveying these units, you get quite a bit of a lag between changes that we're seeing in market rents and changes in the CPI for rent. And one interesting thing is that the BLS, they created their own repeat rent index based on their rent micro data [inaudible 00:20:04] and this one is just not looking at all tenants, it's only looking at new tenants who are moving in recently and year over year growth in this new tenant repeat rent index peaked in the second quarter of 2022 at about 12%, but in the following quarter it really decelerated to half that pace.

                                             And the takeaway from the BLS analysis was that this new tenant repeat rent index typically leads the CPI for rent by about four quarters. So if this relationship continues to hold, that means that we should see the CPI for rent to really turn a corner in mid 2023. And once that happens, that's really going to be a big deal in terms of getting less... disinflation getting less lower monthly as well as year over year CPI prints. So that's a big deal. It will happen. We have to be a bit patient in the next couple of months.

Mark Zandi:                      Great. And I'm sure when go around the horn here and hear from Cris and Marisa, we'll talk a little bit more about that. But the one thing I wanted to ask you about, because we were going back and forth on this over the past week, is the so-called super core inflation, which is inflation and services that exclude energy services and housing services. And this is... come to the fore because Jay Powell, the chair of the Fed, has shown a light on this saying hey look, this inflation is tied back into the cost of labor. And the cost of labor is something we, the Fed, can influence through monetary policy by slowing the economy, slowing job growth, slowing wage growth. What did you learn there based on the work that you did there? Because actually it surprised me actually measuring super core inflation from the CPI is a bit of a project, it's not like the BLS [inaudible 00:22:08].

Bernard Yaros:                 Yeah. We're going to be working with the data team to really construct this.

Mark Zandi:                      Yeah, you went back and forth with the BLS to make sure that you constructed it the appropriate way. So what did that say? Because that's also really critical to getting inflation back down to the fed's target. Unless super core service price inflation gets back in the box, in the bottle, we're never going to get back to target. So this is really also important.

Bernard Yaros:                 Yeah. So on a year over year basis, the CPI four core service is excluding shelter that has been decelerating over the past couple months. It's running at about a rate, right now about 6.1%. And other estimates that I've seen of the CPI for quarter services suggest that it rose 0.3% in January after rising 0.4%. So that actually moved in the right direction. As Jay Powell has rightfully said this is important because wage growth really matters a lot for these services, which are very labor and labor-intensive. And one thing we've done at Moody's has been we created an aggregate measure of wage growth that, for industries that are really relevant to the CPI for core services, we're looking at education, health services, public transportation, car repair services, so on and so forth.

                                             And that wage growth in these industries that are relevant to the core services, excluding shelter that peaked in earlier last year close to 9%, but it's come back down to 5%. So that's still, again, still high, but when you look at wage growth it's moving in the right direction, maybe a bit slower than we had hoped, but that should put some downward pressure on inflation and core services, excluding housing. One thing I do want to mention is that in the CPI core services, excluding shelter, it only accounts for about 30% of the core CPI. And the reason that Jay Powell is putting a lot of emphasis on this is because it accounts for even larger, more than 50% of the core personal consumption expenditure deflator, which is the fed's preferred measure of inflation. And when we look at the PCE index for core services other than housing, that's up about 4% annualized over the prior three months. So again, it's high, it should be obviously much lower, but it was previously rising, but it's sort of stalled out at about 4%.

Mark Zandi:                      One quick point, when you calculate this measure, CPI super core inflation and CPI, the BLS told us not to use seasonally adjusted data, but to use seasonally unadjusted data. So when you talk about three month annualized change, don't we have to take that with a bit of salt because [inaudible 00:25:18].

Bernard Yaros:                 That annualized change was for the PCE.

Mark Zandi:                      Oh, that was for the PCE?

Bernard Yaros:                 Yeah, for the-

Mark Zandi:                      Okay, fine. All right.

Bernard Yaros:                 Yeah. Which is much easier, the PCE deflator is a much easier index to work on.

Mark Zandi:                      Well here broadly is my takeaway from the work that you did here in looking at the data was that super core inflation is still hot, but it's moderating very quickly. It's cooling off. And right now it feels like it's kind of sort of four to five percent-ish on a... not year over year, year over year is still six. You saw the strongest growth back almost a year ago in this matter and now it's come in maybe four-ish percent, somewhere around there? Is that about right?

Bernard Yaros:                 Yeah, I'd say we're range bound between 4 to 5%, but core [inaudible 00:26:09].

Mark Zandi:                      Okay, fine. Okay. Anything else in the bowels of that report you want to call out?

Bernard Yaros:                 I would say the biggest surprise was really used car prices. So they fell 1.9%, there's been a string of declines of about 2%, 1.5% or more. And this was surprising because this was a big concern of mine that if you look at wholesale used car prices as measured by Manheim Consulting, you actually saw the largest seasonally adjusted increase in wholesale used car prices in January just because of unseasonably strong demand. And typically, these wholesale prices lead the CPI for used cars vehicles by a few months. So I wouldn't count going forward, I just wouldn't count on such large declines in the CPI for used car vehicles at least for the next couple of months.

Mark Zandi:                      What about new vehicle?

Bernard Yaros:                 New decelerated-

Mark Zandi:                      It's still going up, yeah.

Bernard Yaros:                 It's still going up, but it rose only 0.2%, whereas it rose 0.6% in the prior month.

Mark Zandi:                      And presumably at some point that's got to come back to earth because that's been-

Bernard Yaros:                 Exactly.

Mark Zandi:                      ... straight up.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Supply chains improve and Japan and Germany get their production back up.

Bernard Yaros:                 Exactly.

Mark Zandi:                      Okay.

Bernard Yaros:                 Yep.

Mark Zandi:                      Okay. So well I was going to do my [inaudible 00:27:40], but I'm not going to. I'm going to stop and turn to you Marisa. That was a lot. There's a lot there.

Marisa DiNatale:              Yeah.

Mark Zandi:                      Is there any piece of that that you want to chew on or broadly say something about what Bernard put for here?

Marisa DiNatale:              Well, I can personally attest to the natural gas increase here. I have SoCal gas, and just to give you some perspective of how shocking the increase was. In December, my gas... and I have a little house, like 1200 square feet barely, my gas bill was around $75.

Mark Zandi:                      But worth a lot of money.

Marisa DiNatale:              Yeah.

Mark Zandi:                      The listener thinks, oh, poor Marisa. No, Marisa is incredibly wealthy woman, just so you know.

Marisa DiNatale:              Hey, my house prices here are falling, Mark.

Mark Zandi:                      Oh yeah, yeah.

Marisa DiNatale:              Less wealthy than I was a year ago.

Mark Zandi:                      Went up 80% [inaudible 00:28:32]. Fair enough.

Marisa DiNatale:              Anyway, my gas bill went from $75 in December to $350 in January.

Mark Zandi:                      Say that again, what was it?

Marisa DiNatale:              From $75 in December to $350 in January.

Mark Zandi:                      Wow, and that's not weather.

Marisa DiNatale:              That's pretty typical. My sister called me screaming when she saw her gas bill for her house that's much bigger. And they warned customers that that was going to happen well in advance, but they've since sent out emails saying, well now natural gas prices fell 70% in February, so your gas bill's going to be much lower next month and we're going to give everybody a credit back.

Mark Zandi:                      Oh cool.

Marisa DiNatale:              For kind of the end of the month when that started happening in January. So definitely-

Mark Zandi:                      Fingers crossed.

Marisa DiNatale:              ... I think underscores why when we look at inflation. To Bernard's point, we want to exclude generally energy and food because these prices are so incredibly volatile and the markets for them are influenced by stuff that's kind of beyond the control of policy makers for the most part.

Mark Zandi:                      Well, I just want to push back on that a little bit, maybe a lot actually in the current context because I do think energy prices, particularly gasoline prices have a lot to say about inflation expectations, how people perceive inflation is going to be in the future. And that I think had a big impact on wage demands.

Marisa DiNatale:              Wages, yeah.

Mark Zandi:                      Yeah. So I think generally, totally agree. If you want a forecast of inflation, you go to the recent core inflation, that'll give you a much better forecast than looking at actual overall inflation. Because as you pointed out, energy and food go up and down all around. But in the current context, I think energy, particularly gasoline prices are playing a incredibly important role in determining overall inflation because of its impact on the inflation expectations. So we can't discount the importance of that.

Marisa DiNatale:              Right, I guess my point was more that the FOMC can't do much about gas prices or energy prices, right? So just in terms of policymaking-

Mark Zandi:                      Good point.

Marisa DiNatale:              ... and why they exclude it is because they're trying to look at what they believe is in their control when it comes to monetary policy.

Mark Zandi:                      Great.

Marisa DiNatale:              I guess just the overall takeaway on the report, it reminds me of when we're talking about the jobs report and just... this was in line with our forecast, but these blips in the data, and again, I think it just goes to, you can't look at one month of data and be whipsawed by one month of data to change your thinking. There's seasonality issues, I think abound in all of the economic data that's been coming out, not only because of literally the seasonality in terms of the weather, but just also the seasonal factors that are in this data now based on the last few years that are all screwed up because of the pandemic. It doesn't change my overall thinking about inflation. I agree it may not be down every single month in a straight line, but I don't think this means we need to be more worried than we were a couple of months ago.

Mark Zandi:                      A couple of months ago. You make a really good point about the seasonality, it's not only the weather and the weather, January was an incredibly warm month and creating havoc in the seasonal adjustments, particularly in the jobs data. We discussed that back a week or two ago. But the so-called residual seasonality, the seasonality introduced in the data because of the pandemic effects on the labor market and economy when it's shut down and then reopened very quickly back in early 2020, that really messes with the statistical techniques that the government agencies like the Bureau of Labor Statistics use to tease out that seasonality in the data. So I totally agree. Cris, what do you think? What's your perspective on the report?

Cris deRitis:                       So I'm curious if Marisa's going to go electric now. You're going to get the heat pump installed? Take advantage of the IRA?

Marisa DiNatale:              No, I think I'll stick with gas for the time being.

Mark Zandi:                      Because she just went through a massive renovation, right? Didn't you?

Marisa DiNatale:              It's still going on, yeah.

Mark Zandi:                      It's still going on?

Cris deRitis:                       Oh, [inaudible 00:33:09] still time to go-

Marisa DiNatale:              Now's the time.

Mark Zandi:                      Now's the time.

Marisa DiNatale:              No, I should go solar.

Cris deRitis:                       There you go.

Marisa DiNatale:              Is what I should do.

Cris deRitis:                       But in terms of the report, didn't really change my perspective. I do think, data's never as smooth or as straight line as you might imagine. So there are going to be little bumps along the road, but I don't see this as taking us off course. And also, I think we alluded to a couple of these lags, lag defects in the data. So the natural gas is one good example where gas prices are coming down, so that's going to get reflected in the next CPI or future CPIs. If you look at the wholesale market for some of the food commodities like eggs, well they've plummeted, but they're not really reflected in the CPI just yet. So I think you don't want to read too much into a single month. And then the rents, of course, we already alluded to that as well. That's just going to take time for those rent to clients to make their way through the reports but still the downward trend seems intact.

Mark Zandi:                      Yeah, I think maybe because there was so much moving, so many moving parts here in this discussion. Let me just give you my forecast for CPI inflation and explain it briefly and then get your reaction to it. And it's consistent with our baseline forecast, Moody's forecast. And I hope I have the data right, but the peak in CPI inflation was June of 2022. I'm saying year over year was about 9%. I think it was 9% on the nose. As of January of 2023 we're down to 6.3% year over year. By December of 2023, I expect it to be somewhere between three and three and a half percent year over year. And by spring summer of 2024, I expect it to be within spitting distance of the fed's inflation target, which for CPI inflation is probably somewhere around two and a half percent, maybe two and a quarter or two and a half percent.

                                             There's a few reasons to be optimistic, and I feel confidently optimistic about the inflation outlook. First, cost of housing services. Very confident that's happening because rents have gone flat and that will translate into lowered measure cost of housing services. As you said, Bernard, it takes about a year for that to translate through. But the peak in market rent growth was back now just about a year ago. So by the second half of this year, we're going to get some real nice moderation in the cost of housing services, which were the CPIs, you pointed out is a big chunk of the index.

                                             Second reason you mentioned food prices, that's coming in, that's going to come in. The egg prices is just an example. But broadly speaking, as you pointed out, Bernard, if you look at the PPIs, they kind of lead the CPI and we'll come back to the PPI in a minute because I want you to talk about that Bernard, the Producer Price Index, that feels like that's going to start coming in with regard to food. New vehicle prices, they're going to fall, and they have gone literally straight north here since the supply chain issues became a problem back in the delta wave of the virus in late 2021 when all the chip plants and Asia shut down and global vehicle producers couldn't produce. So we're going to get a lot of benefit there.

                                             And I do think labor costs are coming in. You look at wage growth, of all the measures we look at, they do indicate very strongly that wage growth has hit a peak and is now moderating pretty quickly. And that goes back to inflation expectations. Inflation expectations have come in because we have seen gasoline prices come down and people are feeling a little bit better about things. So I feel actually quite confident that inflation's going to come in in a reasonably graceful way, bumps for sure, but mostly measurement issues in my view, not reality, it's just the vagaries of the data, timing issues around the survey, seasonal adjustment, weather effects, that kind of thing. But broadly speaking, we should see a reasonable, graceful moderation and inflation. And that did not change with that CPI number that came out on Tuesday. This past Tuesday. Okay. I'll stop there. Bernard, what do you think? Take any umbrage with that?

Bernard Yaros:                 No, I agree. I agree. I think it's going to really come down to shelter and that for sure we know is going to happen and when it does, it's going to be a big deal.

Mark Zandi:                      Yeah. Marisa, would you take exception to any of that?

Marisa DiNatale:              No, I agree. And now shelter's more important in the measure of inflation in the CPI, right? So just at least by the measure of data, it could be even faster and larger.

Mark Zandi:                      Yep. Cris, seem reasonable to you?

Cris deRitis:                       Yeah.

Mark Zandi:                      Yeah, a lot of uncertainty obviously.

Cris deRitis:                       Eyes open for the other risks, right? Russia, Ukraine goes on, could very well be some other shocks there, China reopening. But assuming that those are handled reasonably well and the narrative makes sense.

Mark Zandi:                      Yep. Okay. We got two other inflation numbers, more tertiary people don't pay as much. Well, although this week it felt like the equity and bond market did pay attention to the PPI, the Producer Price Index, and then we also got import export prices this morning. I don't know if you covered those, Bernard, but can you just explain to people what is the PPI and how much weight should they put on it when thinking about inflation more broadly? And then we can talk about the import export prices briefly.

Bernard Yaros:                 Yeah, so the Producer Price Index also, I think that was maybe a mark and mover because it increased more than expected. So it rose 0.7% in January. But again, this was largely driven by much higher energy prices, which again, as we're saying, it's likely a one-off. And then we saw food, the Producer Price Index for foods dropped 1%. So that's a pretty meaningful drop and that's also something that augers for lower consumer prices on the food side. Maybe one concern that I had, and again, I think I should have started with this, producer prices. These are prices that suppliers will charge businesses and governments and other customers for goods and services. One thing that I think was a big concerning when I looked was that-

Mark Zandi:                      [inaudible 00:40:04], just to make it clear to the listener, I always thought of producer prices kind of like wholesale prices. It's not you and I pay at the store at the gas pump, but it's one step back. It's what wholesalers are-

Bernard Yaros:                 Exactly.

Mark Zandi:                      ... charging retailers and gasoline stations and so forth and so on. Is that fair characterization?

Bernard Yaros:                 Yeah, that's a fair, yeah.

Mark Zandi:                      Okay, fine. Go ahead. All right.

Bernard Yaros:                 So one thing that I think was a big concerned was that if you look at the PPI for goods, excluding food and energy, that did accelerate to 0.6%. Again, I have a hard time seeing that really stick just because we've updated recently our supply chain stress index and global supply chains are continuing to heal. If our forecast for growth is right, we should cease lower demand. So I don't see that acceleration in core goods really sticking for a while. So overall, I just felt that the PPI just hammered home the message that as the CPI that this is going to be a bumpy ride, but I still think we're on the right path, the sharp increase in energy that's not going to stick for longer and we're seeing good developments in food. If you want to move to the import-

Mark Zandi:                      Yeah.

Bernard Yaros:                 ... price.

Mark Zandi:                      Yeah, feel free. Go ahead.

Bernard Yaros:                 So import prices, there we saw kind of a divergence. So total import prices fell 0.2%, but this again was due to lower natural gas prices imported and lower imported petroleum prices. But the one concerning thing here was that non-fuel import prices rose 0.3%, and this was the second monthly gain in non-fuel import prices after, I think it was a streak of about seven monthly declines for most of 2022. And this matters because non-fuel import prices, they mattered the most for consumer prices here in the US. And I think this has a lot to do with the recent dollar depreciation that we've had in recent months. However, again, here... and the dollar will affect import prices with the lag by one to two months. So some of the strong depreciation that we got towards the end of the year, I think that's starting to have an effect really on these core import prices.

                                             But that said, just this month, you've seen there's been a pop in the dollar. It hasn't fully reversed the depreciation that we've gone over the past couple of months, but really after the jobs report, you saw the dollar [inaudible 00:42:48] increase, I think month to date, it's about a 1% depreciation or more. And I think that's just under the expectation of tighter monetary policy than previously expected. So if we get a stabilization in the dollar, maybe a bit higher, I think that should ease some of the pressure on non-fuel import prices, which should also ease some of the pressures on consumer prices down the road.

Mark Zandi:                      Just for a little bit of context, the import price, these are goods, right?

Bernard Yaros:                 These are all goods.

Mark Zandi:                      Yeah, and goods are a very small piece of the inflation puzzle, right?

Bernard Yaros:                 Inflation puzzle, right.

Mark Zandi:                      Import prices are important to watch, particularly if they're moving big time in one direction, non-fuel import prices in particular, if you're moving big time in one direction or another, but right now it's on the margin, it's really not going to be a big impact one way or the other. Is that fair to say?

Bernard Yaros:                 Yeah, that's fair.

Mark Zandi:                      Okay. Very good. It is interesting to watch market reaction to all the data. I think the stock market, kind of hung in there reasonably okay but got a little nervous towards the end of the week here about the inflation numbers. And I did see a couple of folks put in another hike in the federal funds rate target because of the numbers saying, oh, the fed's going to have to be a bit more aggressive in raising interest rates here to get the economy where it needs to be to get inflation back in. So I take a pretty sanguine view of all these numbers, and again, as Mercer said, you can't get swayed by any months-worth of data, particularly in the month of January, but it did have some impact on kind of market sentiment on the margin at least.

                                             Okay, let's play the game. Oh, before we play the game, anything else anybody want to say about inflation at this point before we move on to the game? I know you're biting at the bit to play the game, but... no, anything else? No? I don't see any takers. Okay, very good. Let's play. The game, the statistics game. We all come up with a statistic, the rest of the group tries to figure what that is through questions and clues. Reasoning. The best question is one that's not so easy. We get it immediately. Not so hard. We never get it. And bonus if it's apropo to the topic at hand, which so far has been mostly inflation, but I don't think we should be limited that we talk. Bernard probably took somebody's statistic already because he mentioned-

Bernard Yaros:                 I took my own statistic.

Mark Zandi:                      You took your own statistic. Okay. And has become tradition, Marisa is up first. So Marisa, what's your statistic?

Marisa DiNatale:              It is 22% in January.

Mark Zandi:                      22%. Is it an inflation statistic?

Marisa DiNatale:              It is inflation-esque.

Mark Zandi:                      Inflation-esque.

Marisa DiNatale:              Inflation adjacent, yeah.

Cris deRitis:                       Inflation related.

Mark Zandi:                      Inflation adjacent. This feels like... and I'm just going to take a wild guess just to show my prowess here, if I'm right.

Marisa DiNatale:              If you're right.

Mark Zandi:                      Lack of humility if I'm wrong. That comes from the small business survey and it's one of the questions around percent of respondents that are raising prices.

Marisa DiNatale:              You're really close.

Mark Zandi:                      Oh!

Marisa DiNatale:              You're really close.

Mark Zandi:                      Okay. Now everybody's got to bow down. Bow down.

Marisa DiNatale:              But you're wrong.

Mark Zandi:                      Okay, I'm wrong [inaudible 00:46:16]. Compensation, percent raising compensation.

Marisa DiNatale:              It's the percent of small businesses who said they plan to raise compensation.

Mark Zandi:                      Oh, come on. Where is the cowbell for that one?

Marisa DiNatale:              Well, your first guess was about raising prices, so wasn't quite correct.

Mark Zandi:                      You're right. I should-

Cris deRitis:                       It was the right survey though?

Marisa DiNatale:              Yes, he got the right survey. Yeah, so it's a net percentage of respondents and small businesses who say they're going to raise compensation. This is down from the previous month when it was 27% in December. And this has been coming down pretty steadily since last fall. And now it's back to where it was in about May of 2021. And it's really close to where it was prior to the pandemic as well. So I think we forget the job market was also really strong prior to the pandemic and coming into the pandemic. Wage growth was not anywhere near where it was now, but the unemployment rate was quite low. And so it's just a little bit above where... it's average for 2018 and 2019.

                                             And the reason I picked this is kind of what I said before, as Bernard explained, the super core inflation is watch very closely because the major input to the price of these services is labor costs. Wages are really important for us to look at, this suggests wages are still going to be rising as they typically are, but at a slower pace, which would be good news on the inflation front, particularly core inflation front.

Mark Zandi:                      This maybe [inaudible 00:48:08] for a question, but did you know the average for that particular survey question over the history of the survey? It's a long survey. That small business survey goes back a long time. Do you know what it is?

Marisa DiNatale:              I think it goes back to the '80s.

Mark Zandi:                      '80s.

Marisa DiNatale:              I can eyeball it for you.

Mark Zandi:                      Yeah, just roughly, because I wanted- '22, is that high relative to long run historical norm or is that average? I guess it's on the high side.

Marisa DiNatale:              The value of '22 you're asking.

Mark Zandi:                      Yeah, the value of '22.

Marisa DiNatale:              Let's look.

Mark Zandi:                      Okay.

Marisa DiNatale:              It's high.

Mark Zandi:                      It's high, okay.

Marisa DiNatale:              Yeah, it's still high. It's still up there with the peaks that we've seen since the series began. So in the mid-'80s 2000 when the job market was very, very tight, and then prior to the pandemic when the job market was really, really tight. So it's kind of up there in those peaks. The average looks to be about 15-ish, I'd say.

Mark Zandi:                      15, okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                      And what was the peak in... if you go back a few months, I'm sure the peak was about a year ago or not quite. What was the peak? Can you tell?

Marisa DiNatale:              Yeah, the peak was in...

Mark Zandi:                      Like March of '22 or April.

Marisa DiNatale:              It was...

Mark Zandi:                      I'm going to say March. Now I'm playing my own game.

Marisa DiNatale:              So it peaked in late 2021, and then it started coming down, and then it kind of hit this peak in October of last year as well.

Mark Zandi:                      What's the peak?

Marisa DiNatale:              And then came down again.

Mark Zandi:                      When is the peak? What is the peak?

Marisa DiNatale:              32.

Mark Zandi:                      32. Okay. All right. Okay.

Marisa DiNatale:              Yeah.

Mark Zandi:                      Very good.

Marisa DiNatale:              And I think that hitting the peak in October, I think that goes again to your point about this expectation of where inflation is going, often being dictated by energy prices and people feeling the pain of gas prices or natural gas prices and going to employers and asking for more money.

Mark Zandi:                      That was a good one. Very good. Bernard, should I go to you next or do you want... okay, you're up.

Bernard Yaros:                 Yeah, I can go. All right. So it's 3% on the nose.

Cris deRitis:                       Retail sales.

Bernard Yaros:                 What exactly?

Cris deRitis:                       What is it?

Mark Zandi:                      Yeah. Well, he's definitely right, he deserves [inaudible 00:50:35].

Bernard Yaros:                 Yeah, you're right. Sorry.

Mark Zandi:                      [inaudible 00:50:36] instantaneous.

Cris deRitis:                       Overall retail sales, right?

Bernard Yaros:                 Yeah. So it's nominal retail sales annualized over the past three months.

Marisa DiNatale:              And over the month.

Mark Zandi:                      And over the month, I think. I think the month over month was 3% on the nose.

Cris deRitis:                       [inaudible 00:50:52], yeah.

Bernard Yaros:                 Yeah. I was looking at it over the past three months.

Mark Zandi:                      Really over past three months? It can't be three. No. You mean last month in the month of January over December it was up 3%?

Bernard Yaros:                 Three, yeah.

Mark Zandi:                      Okay. Fine. Right. Because it fell in November, if I recall correctly, in November, December, right? Remember December was disappointing.

Marisa DiNatale:              Yeah. I think it fell in November and December.

Mark Zandi:                      I think it did.

Bernard Yaros:                 Yeah.

Mark Zandi:                      Yeah, pretty sure it did. So it's the month of January, retail sales rose 3% over the month of December, right? Okay. So why'd you pick that statistic?

Bernard Yaros:                 Yeah, again, I think a lot of people saw that and were concerned that there's a re-acceleration in growth. I think there's seasonality issues, a warm weather, but also we're looking ahead to next week. I think the statistic I'm most excited for next week is personal income, because that's probably going to be a blowout number of about-

Mark Zandi:                      Can I stop you right there? That is Bernard through and through.

Marisa DiNatale:              He's excited.

Mark Zandi:                      I am so excited. Personal income. And you see, he said it in a way that he actually meant it.

Marisa DiNatale:              He's genuinely excited [inaudible 00:52:08].

Mark Zandi:                      Genuinely excited about that number. Yeah, you're so cool.

Bernard Yaros:                 Just a lot of just factors occurred in January. It wasn't just the warm weather. You had the largest cost of living adjustment for 66 million social security beneficiaries since the early 1980s, and even last year, at one point we were estimating that social security benefits were falling short of inflation by $150 per month or more. So with this very high COLA adjustment and inflation set to moderate, I think this large chunk of the population could start to see their purchasing power improve.

                                             And then also, if you believe the jobs report, that jobs were up, hours were up, and wages were also up. So if you look at the so-called labor income proxy, that suggests also pretty strong increase in compensation. So all in all, it just seems like in January, people had a lot more money in their pockets and even inflation... if I'm right and income rose 1.2%, and we only have 5% inflation, that means that real incomes really went up, and that just gave a lot of purchasing power. And that shows up, I think, in the strong retail numbers. And it's not just weather, but it's also just as a strong consumer that's holding steady.

Mark Zandi:                      Yeah, I know you follow tax refunds carefully, and I don't know if it's too early to see-

Bernard Yaros:                 It's too early, but last year there was a lot of weird stuff going on because you had the advances on the child tax credit. Ultimately, when you looked at aggregate tax refunds last year, there were a bit better. But what happened was that you just had fewer people receiving tax refunds and for a variety of reasons, those that did receive tax refunds got larger than normal ones. But the tax refunds last year started out a bit slower. But this year I would assume it's going to be more typical of pre-pandemic.

Mark Zandi:                      So maybe that played a role, we don't know.

Bernard Yaros:                 That's really going to play a role. No, because the tax season doesn't really start in... it didn't start till end of January so that was kind too late. This is more a story for February.

Mark Zandi:                      Got it.

Bernard Yaros:                 So February, I will be looking at this closely, because that is an impact. February and March, and to a lesser extent, April.

Mark Zandi:                      Yeah. Well, and that's a great statistic and it just highlights everything felt juiced in January. Jobs, retail sales, vehicle sales were boom like, which obviously feed into retail sales. Well, when I say boom like, boom like relative to what we've been experiencing since the pandemic hit, I think it was what? 15.4 million units annualized new vehicle sales. That's pretty strong compared to what we've been seeing. It just feels like everything got pumped up a bit by the weather and the seasonals, so can't read too much into it. Okay. That was a good one. All right, Cris, you're up.

Cris deRitis:                       All right. 58,000.

Mark Zandi:                      58,000. Is it an inflation statistic?

Cris deRitis:                       Nope.

Mark Zandi:                      No.

Bernard Yaros:                 It's housing, right?

Cris deRitis:                       It is housing.

Mark Zandi:                      [inaudible 00:55:35].

Bernard Yaros:                 Single family units under construction?

Mark Zandi:                      No, that's more like 758,000. Yeah, that's single family. 58,000. Is [inaudible 00:55:48] in the housing [inaudible 00:55:49] report?

Cris deRitis:                       It's in the report.

Mark Zandi:                      Okay. Is it single family?

Cris deRitis:                       No.

Mark Zandi:                      Multi-family.

Cris deRitis:                       It would be single family under the mortgage definition but it's not one unit.

Marisa DiNatale:              Condos?

Mark Zandi:                      No, it's two to four?

Cris deRitis:                       Two to four. You got it.

Mark Zandi:                      Oh my gosh. So starts of two to four-

Cris deRitis:                       Oh, then you didn't get it.

Mark Zandi:                      Permits.

Cris deRitis:                       Permits. Yes.

Mark Zandi:                      Oh, I didn't get it. Oh my gosh. Oh, interesting. That's an interesting one that you picked. Why'd you pick that?

Cris deRitis:                       I picked it because-

Mark Zandi:                      You thought you'd stump us is why you picked it, that's what you thought.

Cris deRitis:                       No. If I threw out 1.3 million, you would've got it in a heartbeat. But no, it has another significance. The census reports one unit, two to four unit and multi-family, which is five plus units. The one unit and the five plus units are all down on a year over year basis. And the single family or one unit significantly right down by 40%.

Mark Zandi:                      Permits are down for-

Cris deRitis:                       Both, that's right.

Mark Zandi:                      Yeah, permits.

Cris deRitis:                       But for the two to four, they're actually up still slightly about 2%.

Mark Zandi:                      Interesting.

Cris deRitis:                       So maybe, and the data's a bit volatile. You don't want to read too much in it, but maybe this suggests that there's building going on, or builders are planning to do more building, but they are focusing more on a slightly more affordable part of the market. Maybe it's not so much the cutting back.

Mark Zandi:                      [inaudible 00:57:19] understand.

Cris deRitis:                       The traditional single family detached and looking more at the two to four. It's still a very small segment.

Mark Zandi:                      Yeah, yeah.

Cris deRitis:                       But it's growing faster than the other two, right?

Mark Zandi:                      Because 58,000 in the grand scheme of things is-

Cris deRitis:                       Is not much.

Mark Zandi:                      I think we place a hundred thousand manufactured homes every year, just for context.

Cris deRitis:                       Yeah.

Mark Zandi:                      And I think overall housing starts [inaudible 00:57:44] annualized was 1.3 million to what you were saying, which is, actually, let me ask you this. I'm curious what you think. Are we at the bottom in terms of starts? If you go back a year ago, before rates really started to take off, builders had been ramping up production of homes, and we were at 1.75, maybe even 1.8 million, looked like it was headed north because of the affordable housing shortage. And now we're down to 1.3. Do you think we're pretty close to the bottom in terms of search or is there more to go there?

Cris deRitis:                       Well, that's what we've built into the baseline forecast that we... it's not V-shaped, so we might hang out here for a while, but given the rest of the forecast, if everything else holds, there is still a lot of underlying demand out there.

Mark Zandi:                      Yeah.

Cris deRitis:                       I would expect that... and make no mistake, 1.3 million, it is a very depressed level compared-

Mark Zandi:                      Very, very depressed, right? Yeah.

Cris deRitis:                       History. So even if we don't go lower, it's still not great.

Mark Zandi:                      Well, because that's really important in terms of economic growth, right? Because-

Cris deRitis:                       That's right.

Mark Zandi:                      ... what that would say if we're at the bottom, that would say we're pretty close to the end of the major drag on economic growth from housing construction. There's still more drag to come because of lower house prices, but that plays out over a long period of time. But the real hit from housing was in the second half of 2022. We'll still get a bit of a drag on '23 because it's about completions, that's what really matters. But it feels like the worst of the headwind created by the housing recession may actually, in terms of what it means for GDP and maybe even jobs, we might be pretty close to the end of it. Does that make sense to you?

Cris deRitis:                       It does. I think so. Barring, again, some other shock, but don't expect a boost from housing anytime soon either though, right? It's going to be probably maybe at the end of the year, things start to really start to pick up again.

Mark Zandi:                      Right, right. Okay.

Cris deRitis:                       But the drag should be over.

Mark Zandi:                      Yeah.

Cris deRitis:                       Coming to an end.

Mark Zandi:                      Okay. I've got a statistic and I always say I think this is a hard one, and I'd say it again. This I think is a hard one, but really important in my view. 417 million. What do you think? Any questions?

Cris deRitis:                       Dollars?

Mark Zandi:                      What is that?

Cris deRitis:                       Those dollars?

Mark Zandi:                      Not dollars. And I can't give you the units because that would give it away unless you want me to put you out of your misery.

Cris deRitis:                       Wait, wait, wait.

Mark Zandi:                      Yeah, quickly. No, I'm not going to do it. It is, as I think Marisa put it, didn't you say tangentially related to inflation? Yeah, tangentially related to inflation. Adjacent to or something. You had a nice way of saying it. You're on mute, Marisa. But yeah, it's related to inflation.

Marisa DiNatale:              Is it a like natural gas storage or oil inventories or something like that?

Mark Zandi:                      Oh, baby.

Marisa DiNatale:              Yeah?

Mark Zandi:                      Way to go. Oh, I thought that was going to be so- you did it great, that's fantastic. Yeah, it is inventories of oil, 417 million barrels of oil in inventory and the inventory is rising. If you look at the broad historical series going back into the '80s, we've got data back into the '80s. It's pretty high by historical standards, which is encouraging. We've got these stocks, so if there's any demand from China picks up for oil or the Russian production gets more shut in because of the sanctions and we need more oil, we can draw it down those stocks. And that is very encouraging. And I think it's one reason why, I don't know if you've looked, but gas oil prices are really very tame. They come back down, today we're back down to $75 a barrel on WTI, a little over $80 a barrel on Brent.

                                             And that's pretty low. That would be consistent with 3.50 buck for a gallon of regular, I know not in California, but in most of the rest of the country. And again, we can't understate the importance of oil and gasoline prices to the inflation outlook. Not only the direct effect, how much we're paying at the pump, the indirect effect on how much we pay in the grocery store because of the diesel cost of getting food from the farm to the store shelf, but what it all means for inflation expectations, wage growth, and ultimately monetary policy. Oil prices have to stay down and I take a great deal of solace on that. And then if you go look at natural gas storage it's up 15, 20% above where it was a year ago. And that goes to the warm weather, that goes to the just incredibly warm weather, here and in Europe.

                                             Europe didn't need as much natural gas as they thought they did because the weather there's been very warm and so natural gas prices are down. So that to me, that's really important and very, very encouraging about the inflation outlook going forward. But very good, that was great. I thought that was going to be... I have to put you out of your misery, but you got that one. That was great. Okay, let's double back. I don't want to spend too much time on this, but the debt limit, because Bernard, and we are, just point of interest, we are going to run a bunch of scenarios running through our models and produce scenarios for clients. And we're going to be doing that over the next few weeks.

                                             And then Bernard does [inaudible 01:03:46] work here trying to figure out the timing of when the treasury is going to run out of cash. As everyone knows, the treasury, we have hit the debt limit, the treasury can't issue any more debt, can't issue any more bonds net to increase the amount of debt outstanding. To pay all the bills it's using so-called extraordinary measures, basically rating government pension plans and looking for cash under the proverbial mattress. And the question is, when do they run out of that cash to pay bills on time? And I know, Bernard, do you have an update in terms of your thinking on this. Bernard?

Bernard Yaros:                 Yeah, so we're still looking at about a mid-August X date or mid-August if lawmakers do absolutely nothing, it should be around mid-August or sometime in August that the treasury would run out of these extraordinary measures. They would run out of cash on hand, but it's going to be a roller coaster ride from now until then. So over the next couple of months or through early April, the treasury's really going to run down it's cash on hand to dangerously low levels, probably less than a hundred billion. But fortunately, you have the timing of tax day on April 18th, if I'm correct. And you're going to see a surge in tax payments around them, and that's going to give some life back to the treasury. It's going to give it some breathing room. You've got some further tax payments that come due so people who don't normally withhold their taxes or corporations, in mid-June, you typically have another brief search in tax payments.

                                             You have some other one time, one extraordinary measures that come into place. Over the summer the treasury's headroom under that limit is more or less stable. But come July, the treasury typically runs a meaningful deficit in that month and then in early August as well. By early August, I would say no later than early September, it's very hard to see the treasury lasting much longer beyond them. And incidentally, I think one of the [inaudible 01:06:11] right before the treasury exhausts all extraordinary measures in cash is just a large interest payment that's due in the middle of August. And as we know it, interest payments have risen due to higher interest rates and just a larger stock of debt.

                                             So there's a lot of scenarios, we're updating this based on the Congressional budget office, which just published its 10-year projections. But even the CBO, which has hundreds of economists really looking at this closely, they still don't get their forecasts, on average their forecasts of revenue and outlays are incorrect by two to 5% respectively. And their forecast errors have even risen in this post pandemic period. So there's a lot of uncertainty and it really all comes down to tax season, which I don't think it's going to be as good as it was last year because of last year the treasury really benefited from strong capital gains in 2021. This time around stock prices, as we know, really fell. So you're going to have instead of capital gains, you're going to have capital losses, and we're incorporating that expected decline relative to last year. So if it was anywhere as good as last year, then maybe I would say September, late early October. But it really seems like August will be the moment of truth for-

Mark Zandi:                      So you think mid-August, around-

Bernard Yaros:                 Mid-August, yeah.

Mark Zandi:                      ... when They have to make that debt payment.

Bernard Yaros:                 Yeah. And that's pretty consistent with if you look at the-

Mark Zandi:                      T bill yields.

Bernard Yaros:                 Yeah, T bill yields. From what I've seen, it seems like there's a kink right around mid-August, so those that are maturing afterwards are commanding a higher yield than those right before.

Mark Zandi:                      That's because-

Bernard Yaros:                 They seem to be an agreement

Mark Zandi:                      ... those investors are thinking that they might not get paid on [inaudible 01:08:23].

Bernard Yaros:                 Might not get paid, yeah.

Mark Zandi:                      Therefore the demand for those bills is lower, therefore pushing up the yield relative to where it would be otherwise. Okay. One thing-

Bernard Yaros:                 Exactly.

Mark Zandi:                      As you pointed out, there's a lot of scenarios. One scenario is that lawmakers, Congress administration agree to a short-term suspension of the limit maybe for six weeks to line it up with the budget process, because the other thing that has to happen by the end of September is there needs to be a piece of legislation funding the government, the next fiscal year, fiscal year 2024. Likely lawmakers will want to align those two things up so that they can come to some kind of agreement, maybe some kind of spending restraint for the Republican house to get them to get enough votes to increase or suspend the limit. Does that sound like a reasonable scenario to you?

Bernard Yaros:                 Yeah, it seems like that that's [inaudible 01:09:20].

Mark Zandi:                      [inaudible 01:09:20] going to happen. You feel like that's going to happen?

Bernard Yaros:                 That could happen. Yeah.

Mark Zandi:                      Yeah.

Bernard Yaros:                 And if they suspended it I guess to October... again, I'd have to look at this, but I would assume because October 1st is when they would need to pass the next fiscal year budget. So that's the other must, that's another key deadline. I think then we would be looking at another X date closer to November, December, at latest January, but it would still be an issue later this year.

Mark Zandi:                      Oh, because be in the interim between mid-August and say-

Bernard Yaros:                 Unless they really came up with some restrictions that the treasury couldn't...

Mark Zandi:                      I see.

Bernard Yaros:                 ... boost its cash balance to an excessive degree.

Mark Zandi:                      They might be able to raise more cash in that interim and that buys them a little more time.

Bernard Yaros:                 Yeah, exactly.

Mark Zandi:                      Something like that.

Bernard Yaros:                 Exactly. Yeah.

Mark Zandi:                      Yeah, okay. Very interesting. But in our baseline, in no recession we're assuming that lawmakers come to term terms on this in the nick of time, and it feels like the most logical scenario to get there is this where they have to come up with a budget and they could impose some kind of restraint on spending relative to what's already in the budget. And that would get enough votes from the house Republicans to actually suspend or increase the limit-

Bernard Yaros:                 Exactly.

Mark Zandi:                      ... going forward. Okay.

Bernard Yaros:                 And I would assume that we probably have this debt limit issue could be... I think might extend through the rest of this year. But come next year, it's a presidential year, so I don't think either party wants to play politics with such a scary economic issue like this.

Mark Zandi:                      [inaudible 01:11:06].

Bernard Yaros:                 Yeah, so I would assume that at some point by the time we get to early next year there's going to be some resolution to just push this past to 2005 after the elections is done.

Mark Zandi:                      Okay. Fair enough. Thank you for that. Obviously, we'll be spending a lot of energy on this going forward. There's a lot of interest and alternative scenarios. Suppose these guys don't sign on the dotted line in the nick of time, what then? And again, there's a gazillion scenarios that can unfold here and we'll consider some of those going forward. Okay. Why don't we do this, I told you the hour and 10 minutes, I think we're perfect.

Marisa DiNatale:              I think it's longer.

Mark Zandi:                      I think it's pretty close. So I don't think we have time for listeners' questions. We'll come back, but I do want to, because we haven't done this in a few weeks, talk about recession odds again and get people's collective thinking around what is the probability of recession over the next... Cris, should we just say the next 12 months? So that would put us to early 2024, or would that be just kind of push forward this window that we're considering for recession? Or do you want to do something else?

Marisa DiNatale:              Why don't we say through the first quarter of '24? Yeah.

Mark Zandi:                      Okay. Fair enough. Yeah. Okay. Fair enough. Why don't we say-

Marisa DiNatale:              Why not?

Mark Zandi:                      ... March 30th, 2024?

Marisa DiNatale:              Yes.

Mark Zandi:                      Okay. Why not? Okay. Very good. Okay, so with that, let me turn to our guest, Bernard. Bernard, and I don't think I've ever asked you this question, do you have a view on what the likelihood of a recession is starting between now and the end of the first quarter of 2024? A little over a year?

Bernard Yaros:                 I'd say I'm basically in line, when we surveyed everyone in the company, I'm more like 40 to 50%.

Mark Zandi:                      40 to 50%?

Bernard Yaros:                 Yeah, maybe a bit [inaudible 01:13:11].

Mark Zandi:                      40 to 50?

Bernard Yaros:                 40 to 50%. Yeah.

Mark Zandi:                      Yeah, okay.

Bernard Yaros:                 Because I'm still of the view... I think maybe I was 40% before this week, maybe up to 45 this week, just because inflation may not be as simple of a problem to resolve. But I still feel that the downward trend is there. Especially with CPI, we're going to get less shelter contribution, wage growth seems to be coming down. I think the labor market, I don't think it can be that strong for too long. And I think the Fed maybe they raise another 25 basis points more than we expect in... I think we're expecting through March, maybe there's another one in another meeting, but I still don't see them going too high up because they know that a lot of these disinflationary forces I think should gather steam later in the year.

Mark Zandi:                      Yeah. Very good. Okay, Marisa?

Marisa DiNatale:              I'm still at 50. Still at 50.

Mark Zandi:                      You're still at 50?

Marisa DiNatale:              Yeah.

Mark Zandi:                      Okay.

Marisa DiNatale:              Really haven't changed.

Mark Zandi:                      And that's where you were a couple three weeks ago the last time we did this exercise?

Marisa DiNatale:              Yeah, I've been there for a bit now. And there's nothing that has happened that has-

Mark Zandi:                      It changed your mind.

Marisa DiNatale:              ... really changed your mind?

Mark Zandi:                      Yeah, okay. Cris, what do you think? I think you were 60%, weren't you?

Cris deRitis:                       Yeah, I'll stick with 60.

Mark Zandi:                      60?

Cris deRitis:                       Yeah.

Mark Zandi:                      Okay.

Marisa DiNatale:              60 and coming down though, right?

Cris deRitis:                       Well, my arrow's up now.

Marisa DiNatale:              Oh.

Mark Zandi:                      Because of the inflation numbers?

Marisa DiNatale:              Because of CPI?

Mark Zandi:                      And the growth numbers. Just January in general, that's the January data in general puts the arrow up going up.

Cris deRitis:                       That's right. Even with the revisions, it's still pretty strong if you're the [inaudible 01:14:59].

Mark Zandi:                      I'm lowering mine, 45.

Cris deRitis:                       Of course. Of course.

Mark Zandi:                      Yeah.

Marisa DiNatale:              Really?

Mark Zandi:                      Well, I've been at 50 for a long time. Yeah, but I'm lowering mine at 45%. I'm feeling more confident about navigating through, and I kind of gave you my sense of inflation. I feel more confident in the inflation outlook than I have for a long time. So I feel pretty good about that. But to Cris' point, there's no room for error here. There's no give if something else goes wrong and goodness knows, things happen. So we're still very vulnerable and the Fed hard to gauge. I agree with you, Bernard. I think they raised rates a couple more times, March, May quarter point, but the funds rate just north of five. I wouldn't argue with anyone who said maybe they go three times quarter point each time. I don't think I'd argue too hard.

Bernard Yaros:                 But no more 50 basis points, I wouldn't say that.

Mark Zandi:                      No, I think that's over. But here's the thing I do worry about, this goes to the way we framed the period of which we are considering the probability recession. I think there is a reasonable scenario where they raise a couple three more times, stop, and then they figure out, well, inflation isn't coming back into the bottle completely, and we're going to have to raise rates some more. And they go to six on the funds rate or six and a quarter or six and a half, and then I think probability of recession will be over 50%. So if we extended the horizon, not through the end of the first quarter of 2024, but through the end of 2024, I might say 55%, something like that. So we need to start thinking about that as a possibility as well.

                                             Okay. Very good. We covered a lot of ground. It was an hour and 15 minutes. That's a good workout. Everyone needs to work another five minutes longer. Just suck it up, work out a little longer. Anything else anybody wants to add at this point? We're going to call the podcast. Okay. Okay, very good. Well, thank you, dear listener for listening in and we're going to call the podcast and we will talk to you next week. Take care now.