INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics and I'm joined by only one of my co-hosts Cris, Cris deRitis, he's the Deputy Chief Economist. Hey Cris, what's going on?

Cris deRitis:                       Hey Mark.

Mark Zandi:                      We lost Ryan. I thought he said-

Cris deRitis:                       I know.

Mark Zandi:                      A lifer for this podcast but he bailed on us.

Cris deRitis:                       I know, I don't know what's happened.

Mark Zandi:                      Family [crosstalk 00:00:40] comes first, I think. He told us-

Cris deRitis:                       That's true.

Mark Zandi:                      Is he at Hershey Park? Is that what he said, he's at Hershey Park?

Cris deRitis:                       Yeah, that's right.

Mark Zandi:                      Oh, okay.

Cris deRitis:                       That's right. He took the family there. Loading up on chocolate-

Mark Zandi:                      Have you ever been to Hershey Park?

Cris deRitis:                       I have not been to Hershey Park.

Mark Zandi:                      Oh, you got to go to Hershey Park. I can't believe that. Well, you're she she, you only go to Disney World or something with your kids. When I was-

Cris deRitis:                       I haven't been there either with my kids so I got-

Mark Zandi:                      What the heck? Y'all not been to Disney world?

Cris deRitis:                       Nope, no.

Mark Zandi:                      Oh, well, I highly recommend Hershey Park. I had three kids and we all went to Hershey Park back in the day when I was your age. And I had this iconic photograph of my middle daughter, Anna, holding up Hershey bar and she was so happy to have that Hershey bar, I'm telling you. It was like the best thing in the world. Actually, if I could find that I'm going to put that up with the podcast. So it's one of my favorite pictures of all time, the three kids, my wife and me and my daughter holding up the Hershey bar with great excitement. Yeah.

Cris deRitis:                       Pure joy.

Mark Zandi:                      It was pure joy but yeah. Well, we'll miss Ryan. Actually, this gives me more of a chance to win the statistics game. Although I was beating him pretty easily, I would say, right Cris? Haven't I been beating him pretty regularly.

Cris deRitis:                       You were, you've been on a hot streak.

Mark Zandi:                      I've been on a hot streak. So much [crosstalk 00:02:17].

Cris deRitis:                       So last week you.

Mark Zandi:                      It was thought it was a [plant 00:02:20], yeah.

Cris deRitis:                       That was amazing.

Mark Zandi:                      Amazing.

Cris deRitis:                       So actually, fair warning. I upped my statistics game this week so-

Mark Zandi:                      Uh-oh.

Cris deRitis:                       In light of that so just keep that in mind.

Mark Zandi:                      And we have two guests. One, our favorite colleague, Mike, Mike Brisson. Hey Mike, how are you?

Mike Brisson:                    Mark, how's it going?

Mark Zandi:                      Good. Mike's all things vehicles for us and good to have you on board because this is the topic of the podcast, the vehicle industry. We've got Jonathan, Jonathan Smoke from Cox Automotive. Thank you for joining us, Jonathan.

Jonathan Smoke:            Oh, it's great to be with you guys.

Mark Zandi:                      Yeah. And Jonathan, before we dive in, maybe you can give us a quick sense of Cox Automotive just to give the listener because you guys are doing lots of different things. It'd be good for the listener to-

Jonathan Smoke:            Yeah, we are. And we're a privately held company so the name Cox doesn't necessarily register with a lot of folks but we are the largest auto services company in the world. You mainly know us from the brands that are more well known. We own Manheim Auto Auctions which is the largest commercial auction house in the U.S. and several other countries as well. We also own the consumer facing websites, Kelley Blue Book, which has, I think about a 100 years of helping dealers and consumers understand vehicle values. And Autotrader is the number one destination for shopping for new and used vehicle in the U.S. So we've got quite a bit of understanding of the consumer and dealer side of things but we also own various software products that are basically the underpinnings of how dealers run their businesses. So, it was very a attractive when they were looking for a chief economist for me to think about the treasure trove of data, because for those of us that have plied our profession and being a business economist, we know that having data is key to really having good insights. And-

Mark Zandi:                      Absolutely.

Jonathan Smoke:            So that's what got me to do this.

Mark Zandi:                      Cool. And interestingly enough, you were a, what I would call a houser before you became a vehicle maven, right? You were in the housing, you were at realtor.com, you were at Hanley Wood, yeah.

Jonathan Smoke:            Yes and as a result, I've been a close client of Moody's Analytics and back to the old of economy.com.

Mark Zandi:                      Oh, I didn't know that. All the way back to economy.com.

Jonathan Smoke:            That's right.

Mark Zandi:                      You look too young for that. I don't know how... Yeah.

Jonathan Smoke:            Yes. I am. I look a lot younger than I really am now. It's had it's disadvantages at times but now I'm of an age that I enjoy it. But yeah, I start started off in home building and actually ended up being responsible for strategy for a national public home builder. And as a result really tapped into my economic roots to really build models and help understand that. And that's really, I think at one point your team used to tell me that I was the single biggest user of data buffet when it was quite an issue.

Mark Zandi:                      No way.

Jonathan Smoke:            Because we were building models and downloading data at a local level, trying to connect the dots with what was happening in housing. I ended up-

Mark Zandi:                      So you know my brother, Carl, well then.

Jonathan Smoke:            Oh, yes. We actually have a joint project that Mike and I have been doing for probably a year and a half, maybe two years on vehicle affordability. So yeah, the roots go back a long way but started in housing. So I did home building. I then created my own data company for a while called Housingintelligence.com. And I had the best of all timing. I started that in the fall of 2006 and was doing extremely well until 2008, things got a little bumpy. I did predict that we would have a decline but no one predicted quite the decline that we had.

                                             I ended up selling that business to Hanley Wood which is a media and data business for new construction. And that's actually where I first started getting the title of chief economist and so really focused on home building and home improvement and building product type of industries. And then I was recruited by realtor.com to become their first chief economist. So got to live in that elite world of the competitive economist that have been in that space across Zillow, Redfin, realtor.com, super exciting. And then the opportunity at Cox came up and I had originally been from Atlanta, Cox is based in Atlanta, fantastic kind of family run business and the opportunity to learn a new industry was entertaining and to me, in a way to kind of keep the juices flowing. Plus, as I shared with you, the treasure trove of potential data was the real kicker. And I've been here five years now, so...

Mark Zandi:                      Fantastic.

Jonathan Smoke:            I'm [inaudible 00:07:52].

Mark Zandi:                      Well, thank you for joining us. It's a real pleasure and honor to have you. We play this statistics game and I'm hopeful you'll be able to play and willing to play but I'm afraid to say with Ryan kind of AWOL, we don't have the cowbell. We ring this cowbell if you get the answer right and that certainly shows a flaw in our are planning here but my problem-

Mike Brisson:                    Supply chain.

Mark Zandi:                      Supply chain problem, yeah. Actually, it's a brother problem. My brother, Carl, what I want to do is I want to give guests you a cowbell. We give a guest a bottle of wine but I want to give a cowbell but he won't give me budget it for it. I don't know what the hell... "Carl, come on, give me some budget for the cowbells." And he goes, "No, budgets are tight" is what he tells me, my own brother. No, he-

Jonathan Smoke:            He brought the [lean chip 00:08:54].

Mark Zandi:                      What's that? Lean? He does, doesn't he? He wants some lean chip.

Jonathan Smoke:            Well, global supply chain problems, it's tough to get those cowbells.

Mark Zandi:                      It's tough to get those cowbells. But anyway. All right, but back to business, why don't we start with there's been a couple major economic releases this past week. The first was the Consumer Price Index, CPI inflation. Cris, you want to give us a rundown on what was in the CPI report?

Cris deRitis:                       Sure. I'll give you a high level because I don't want to take any one's numbers away. So CPI inflation for March was reported on Wednesday. It was in line with, I would say broadly in line with consensus. Consensus was for inflation to be high and the BLS did not fail to deliver. Headline inflation was 1.2% Month-over-Month so from March to February so that is high. It had been [0.8% 00:09:52] the month before so some acceleration. And then on a Year-over-Year basis, the number everyone's quoting is 8.5% Year-over-Year so that is the highest since December of 1981. I don't know what you were doing back then, Mark but.

Mark Zandi:                      1981.

Cris deRitis:                       It's like going on back.

Mark Zandi:                      No, I was just about ready to ask my wife out for a first date. I think in 1981, believe it or not. Yeah.

Cris deRitis:                       You had to be quick because the prices were going up, right?

Mark Zandi:                      That's right, that's absolutely right. I remember those days pretty well. 1981. I probably could tell you the unemployment rate. Let's see. June of 1981, that was kind of in between recessions, I'd say the unemployment rate was about seven, three. Someone should go see June of '81. No? Seven three. Yeah. Mike's looking.

Cris deRitis:                       Mike's looking, all right.

Mark Zandi:                      Yeah, Mike's looking. Anyway, what was I going to say? Oh, how much of this pick up of inflation would you ascribe to Russia's invasion of Ukraine and the resulting surge in oil and other commodity prices? How big a deal was that?

Cris deRitis:                       Yeah, so definitely gas prices were up 18% alone and BLS subscribes 50% of the increase to gas. Energy prices more broadly were up 11% in March, three and a half percent up in February. So it just compounding the impact there. If you want a little bit of... Well, everything's relative. Bit of good news is the core inflation. So inflation [crosstalk 00:11:33] less food and-

Mark Zandi:                      Before you go there, I guess, I would say, the obvious connect the dots, Russian invasion to CPI was gasoline prices but obviously that affects lots of other stuff in the CPI like food prices...

Cris deRitis:                       Food prices were up 1% as well.

Mark Zandi:                      Because diesel prices, you got to ship the food, the stuff from the farm to the store shelf and diesel prices are a record highs because of Russia invading Ukraine.

Cris deRitis:                       Absolutely.

Mark Zandi:                      I saw airline fairs, right? I mean they were up, I think a lot, I think a lot going on there related to higher jet fuel costs, that kind of thing. So felt like to me, correct me if I'm wrong, but I felt like or if you have a different view, that a big chunk of what was going on here was Russia's invasion of Ukraine kind of really-

Cris deRitis:                       That definitely was the accelerant here. I will say owner's equivalent rent, we've talked about this before so the housing portion of this, it increased 0.4% as well, the same as the previous month but that's still this underlying, slow-moving factor. That's going to continue to prop up inflation for a while. The price gains that we've had over the last couple of years still have to make their way through the CPI inflation.

Mark Zandi:                      Yeah. Okay, so the good news, what's the good news you said?

Cris deRitis:                       Good news, I would say-

Mark Zandi:                      I think it's the good news. Yeah. Relative-

Cris deRitis:                       Relative. The core inflation. So inflation, less food and energy, that grew at a 0.3% Month-over-Month rate which was actually down from February which was growing at 0.5%. So a little bit of deceleration, hopefully, going on in the core. So a six but it's still six and a half percent above last year's level. So the light is still green for the Fed to move here. Clearly six and a half percent on the core is way too high. So there's little doubt. There's actually no doubt that they're going to be very aggressive in May with rate hikes and Quantitative Tightening.

Mark Zandi:                      I think one of the key aspects of the moderation and core inflation ex food and energy was a decline in used vehicle prices, I believe. I think new kind of was flattish but used was down. So I'd love to bring the auto maven into the conversation here. Jonathan, what's going on with vehicle prices? Obviously they went stratospheric back beginning about a year ago I think and are they now coming back down to earth? So what's the dynamics here with regard to using... And also, correct me if I'm wrong but I think the movements and vehicle prices have had a very significant impact in overall inflation, if I'm not mistaken.

Jonathan Smoke:            They have. Goods inflation has been the story up until now really and last year ground zero was the auto market and the used market, which because of the Manheim Index that we put out was the poster child for how extreme the inflation was, how quick we were seeing those prices move up. And it was all tied to the computer chip shortages, semiconductor shortages and a lot of the supply chain problems that were very acute. But also clearly related to the environment and the amount of stimulus and the real frenzied spending that especially we had a year ago.

                                             So, jump forward to now and what we've been seeing this year has been a moderation in pricing. We've seen used vehicle prices, both wholesale and retail come down in the first three months of this year, the CPI is tracking retail use prices but there historically has been a pretty tight correlation over time with what the Manheim Index sees. By the way, I'll put a plug, especially because of it's in your neighborhood, if you've never been to an auto auction before, sometime you've got to go see Manheim in Manheim, Pennsylvania, the largest auto auction.

Mark Zandi:                      It's in Pennsylvania? I didn't know that.

Jonathan Smoke:            It is.

Mark Zandi:                      Oh, okay.

Jonathan Smoke:            Namesake is the town and it is a thing to behold because I would argue outside of the stock market, it is probably the best example of an efficient and live market that you're ever going to see in your life. Plus it's pretty cool to see all the vehicles.

Mark Zandi:                      Yeah, where's Manheim, PA? Where is that relative to Philly where we live?

Jonathan Smoke:            It's north of you closer. Yeah, I've [crosstalk 00:16:29] driven and I've flown but I...[inaudible 00:16:33] For that.

Mark Zandi:                      Well, that sounds like a day trip. Maybe we'll take a Moody's Analytics excursion up to Manheim, PA.

Cris deRitis:                       Do the podcast up there.

Mark Zandi:                      Oh, a podcast.

Jonathan Smoke:            And the reason why I bring up the wholesale market is a very dynamic market. Historically it has more price movement in it because effectively every day the market is attempting to clear based on the supply that's feeding the market and what the available demand is. And I will describe what we've gone through in the pandemic is the most extreme demand versus supply gap that we've ever seen historically because we literally had an absolute limited supply situation because of new vehicle production stopping worldwide. There had been no scenario, perhaps you can say world war II was this way but there in the modern era there had never been a time that all the factories in the world were shut down and all of the supply chains were shut down. Then you had the mistakes that the manufacturers made of actually canceling orders of goods and semiconductors was where there was a real problem with that.

                                             So it wasn't just about getting the factories back up and running, it was actually getting the supply chains running that feed that. And because of decades of globalization, generally speaking, there wasn't a lot of resiliency in the global automotive production landscape. And so we never got back to a 100% capacity. We were getting close in the fall of last year when then the Omicron wave of COVID struck and then we've entered into another series of unfortunate events. We've been dealing with things earthquakes in Japan, Canadian truckers strike, the Felicity Ace, the cargo ship that caught on fire and sank taking down 4,000 European luxury cars with it. So all kinds of random things have also contributed to this. So you've got acute supply challenge, boosted demand because not only did we have stimulus and record low-

Mark Zandi:                      Although can I interject there quickly, Jonathan, on for vehicles, vehicle sales never really got very high, right? We were getting 17 million units per annum sales rock solid before the pandemic and was there ever a month we got above that since pandemic hit? I don't think so.

Jonathan Smoke:            No, we had a few strong months at the very beginning when we reopened in the economy and we had more supply and the very beginning of last year have to check with the BEA numbers for-

Mark Zandi:                      I don't think we ever got much above.

Mike Brisson:                    March and April of 2021 we got 18.

Mark Zandi:                      Oh, we had- [crosstalk 00:19:35]

Cris deRitis:                       Those two months.

Mark Zandi:                      Yeah. But- [crosstalk 00:19:37]

Cris deRitis:                       That set records, yeah.

Mark Zandi:                      It feels like to me in this debate about demand, whether the high inflation is related demand or supply, in the vehicle market it's got to be mostly supply, right? Yeah.

Jonathan Smoke:            I would say it was both. I think it has been more of a supply problem and it's all theory but I would say we probably would've sold more than 18 million vehicles last year had we had-

Mark Zandi:                      Supply.

Jonathan Smoke:            Formal level of supply.

Mark Zandi:                      Yeah. Here's a statistic because I calculated this for this conversation but I look at the five years prior to the pandemic, the average annual sales rate was 17.25 million. Since the pandemic it's been 14.65 million so that's not demand, that's supply, right? You just can't produce enough.

Jonathan Smoke:            Yes. You can also, another aspect is describing what is the fundamental demand? What's the natural demand for vehicles? And we've actually seen an increase in the scrappage rate so the number of vehicles that are lost and have to be replaced and that typically contributes to a higher level of fundamental demand. But I would argue one during the pandemic, you also had people's preference moving away from shared and public transportation. And so there was a period of time that people who had no vehicles were looking for vehicles.

                                             But then what we started to observe with mobility and people's movements to different places for housing, whether it was buying housing or renting housing but the movement away from dense urban centers to places that are more vehicle dependent created also a trend that we were essentially following what was happening in the housing market. And historically vehicle demand is correlated with the housing market. The more home sales you have, the more vehicle sales you have, the more homes are being built, the more pickup trucks are are in demand all throughout the country. So that too has contributed to a higher level of demand than what we had before.

Mark Zandi:                      I want to come back to sales. But before I do that, I want to come back to price because I want to try and understand where prices are headed. So my simple way of thinking of about this is that, okay, pandemic hits, factory shut down, severe shortages, prices for new cars go skyward because they're so expensive. And because of the pandemic demand for used vehicles go sky skyward. So prices are just jumping everywhere. Okay, here we are today, we're still not producing, the worst of the supply chain problems seem to be past us but there's still issues and production hasn't quite gotten back to where it needs to be, yet used vehicle prices seem to be, new vehicle prices haven't rolled over yet, they've stopped rising, it looks like, but used vehicle prices look they've rolled over. Okay, so what's what's going on? Why? And where are we headed? Where are prices headed here now going forward?

Jonathan Smoke:            Well, as I was mentioning, wholesale prices, I believe are the most I dynamic and will truly reflect the market conditions at any given time, more so than any version of retail prices and especially new retail, which has this process of a manufacturer establishing what the suggested retail price is. And then seeing actually what the marketplace and that's a place we ought to go actually in the data because there's some extraordinary trends with people paying well above the MSRP which was an unheard of concept prior to this current situation. But it takes an extraordinary imbalance of demand versus supply to take an asset that fundamentally is a depreciating asset and turn it into an appreciating asset. And yes, we had that scenario in 2021 where in most weeks the prices at Manheim were higher each week than they were the prior week.

                                             But that is not the case now. Well, actually technically it is the case again in April because we're in the heart of tax refund season and a-

Mark Zandi:                      I see [crosstalk 00:24:19]

Jonathan Smoke:            Little unknown fact to the broader world is that every single year and we've got data back to 1995, every single year prices have gone up in tax refund season in the wholesale market because there is always a temporary surge in demand and a limited amount of supply that moves into the market at that time of the year. But outside of that effect, I believe we're fully back to vehicles being depreciating assets again. That doesn't mean that we're going to see a price correction, a return to where values were previously. It just means that prices are performing on a go forward basis in a much more normal way meaning your vehicle is likely to be worth 10% less a year from now than it is today.

Mark Zandi:                      So economic gravity's taking hold again. It was suspended for a while but now-

Jonathan Smoke:            That's right.

Mark Zandi:                      It's taken hold again, prices are coming in. So, do you expect used vehicle prices to continue to decline here going forward, at least for the foreseeable future next six, 12 months? And what about new?

Jonathan Smoke:            We do on the used side expect to see fairly normal depreciation which should mean vehicle prices go down. Now depending on how you measure that though, things like the CPI, things like the Manheim Index itself naturally has price increases over time because vehicles constantly have new technology, new capabilities that essentially have an inherent inflation bias built into it. So historically wholesale prices have gained about 2% a year. So if you adjust for inflation, that really typically gives you what the view is. And interestingly, with very high inflation now and we think we're going to see a 3% decline this calendar year in the Manheim Index. That really means a much bigger decline than normal in the calendar year for wholesale prices.

Mark Zandi:                      Good. And new, I guess that depends more on supply chain issues and if production picks up and so forth and so on.

Jonathan Smoke:            New is one where I would continue to expect above average increases in prices. There is some seasonality to how new prices come out. Typically the highest prices are when new models are being introduced so it's the end of the year and we are in the time of the year where prices are tending to come down slightly. So indeed December was the most recent peak we had in new vehicle prices and they've come down the last couple of months. But we're in an environment where supply is right around one million units, 1.1 million units at the end of March, when typically we have four million units. We were just shy of four million units. And at the same time frame-

Mark Zandi:                      I'm sorry, what's that number 1.1 million? What is that?

Jonathan Smoke:            That's the number of new vehicles sitting on dealer lots.

Mark Zandi:                      Oh, dealer lots. Okay.

Cris deRitis:                       Inventory.

Mark Zandi:                      The inventory. Okay. Yeah. So inventories are still, vehicle producers haven't gotten the production up yet to start rebuilding inventory.

Jonathan Smoke:            No. And because inventory's been decimated, it basically means we will sell only what gets produced and delivered to the U.S.

Mark Zandi:                      Okay, so you're saying, okay, used, that's coming in, economic gravity is taking hold again. New, that's going to take a while before that's really starts to come in to any meaningful degree. Hey Mike, do you agree with that? Do you have any different perspectives on that? Or is that roughly with what you're thinking in terms of new and used vehicle prices?

Mike Brisson:                    I'm expecting the used vehicle prices to be pretty flat throughout this year, not have that much of a comedown with that all made sense of what Jonathan said because they already saw a 3% decrease in this first quarter. So they're probably expecting it to be flat the rest of the year, if you're expecting a 3% decrease for 2022. So we're thinking that it stays flat through 2022 and starts to come down in 2023. And that's a supply and demand story. So you have vehicle production starts to normalize in 2023, you also have the Fed putting the brakes on so the demand side isn't something we should forget about here. There's going to be some loss of demand over that end of 2022 into 2023 as interest rates rise. And that's going to be part of the story as vehicle prices come down.

Mark Zandi:                      And new? What about new?

Mike Brisson:                    New, I think the manufacturers are playing catch with the market so we're going to see prices come up. So all those people are paying above MSRP, the OEMs aren't going to leave that cash on the table, they'll start raisings MSRPs. So the dealers can charge it and not feel so bad about it, that we doing something wrong.

Jonathan Smoke:            And there is one wild card that's interesting to talk about because it relates to the CPI numbers as well, because one of the biggest gains for the month in March and in the Year-over-Year category is car and truck rental. And the rental car companies traditionally get all of their fleet from new vehicle manufacturers, their new vehicles that get put into the rental fleet. But with the supply problems last year, rental car companies became net buyers of used vehicles instead of traditionally feeding the used car market and that is continuing this year. And if that behavior continues into the fall, we could see, there's upside to the used prices and it's principally driven by those rental car companies whose economics are extremely positive because of the scarcity of vehicles and the resurgence in travel that's happening, all those people going to Hersheypark and the like.

Mark Zandi:                      Hmm. So just bringing this back full circle to what it means for overall inflation. I think what my conclusion is from the conversation is that vehicle prices really, which added significantly to inflationary pressures over the past year, that's not going to be the case in the coming year but it's not going to be a big drag on inflation until we get into 2023. That's what it sounds like you're saying, both of you're saying. Roughly speaking.

Jonathan Smoke:            Yeah. I think it could be times, especially in the seasonally adjusted series that it could be somewhat of a drag in certain months-

Mark Zandi:                      Somewhat of a drag.

Jonathan Smoke:            Especially as demand starts to soften and indeed the production starts to improve as much.

Mark Zandi:                      All right, I'll take it. We need it. Yep. Okay.

Mike Brisson:                    And to that point, the seasonally adjusted numbers went down for the Moody's Analytics price index and they went up for the unseasonably adjusted in March because there was this big seasonal factor in March and April that Jonathan was talking about is dealers start to build up inventory. So the seasonally adjusted and non-seasonal adjusted went in different directions in [RA Index 00:31:17]. So it is a big seasonal factor here too.

Mark Zandi:                      Yeah. Hey Cris, given all of this in everything else that you throw into the pot, would you say that overall inflation has peaked in the U.S.? 8.5% Year-over-Year CPI through March highest it's been since 1981. Is that the peak or are we close the peak? What do you say?

Cris deRitis:                       I think we're close.

Mark Zandi:                      Close.

Cris deRitis:                       If not already there because so much of this is driven by energy and gas prices. If you do believe that there are no more sanctions coming to restrict some of the supply and we will get some additional supply coming from other countries in short order that should help to bring those gas prices down, maybe gradually but at least they shouldn't accelerate much more from here. And if the Fed is stepping on the brakes here, that also is going to reduce some of the demand out there.

Mark Zandi:                      Okay. All right. Hey, maybe we'll play part of the game now or I'm not sure we're going to play all of the game but I got a really good question that's apropos to the conversation up to this point in time. So would you mind if I-

Cris deRitis:                       Fire away.

Mark Zandi:                      Put that forward just to mix things up a little bit? Is that okay? All right because a little bit different. So just remind everybody the statistics game. We each put forward a statistic, the rest of the group tries to figure that out through questioning, clues, deductive reasoning. The best question is one that's not too easy that everyone gets it right away, not too hard that no one will ever get it and a bonus if you can make it apropos to the conversation and then to recent statistics. Okay. So this is a little different.

                                             Instead of me giving you a statistic, I'm going to pose a question to you and everyone has to look up, you can't look at your screens. I don't want anybody looking at the BLS, CPI report. But if you go into table two of the Consumer Price Index report from the Bureau of Labor Statistics, that's the detailed accounting of all these prices for all these goods and services. So I don't know how many there are but there's got to be couple 300 of them and you can do this as a group. If you can get three items for which the Year-over-Year price actually declined, you win. Okay, you're a winner. So of all the goods and services in table two, hundreds of services, which items, goods and or services, actually fell Year-over-Year in the month of March of '22. And [crosstalk 00:34:04] obviously there aren't many.

Cris deRitis:                       Used vehicles. We just said it.

Mark Zandi:                      Okay.

Cris deRitis:                       That's one.

Mark Zandi:                      And that's easy. Oh wait, hold it. No. That's not down Year-over-Year, that's down month-to-month.

Cris deRitis:                       Month-over-Month, okay.

Mark Zandi:                      Yeah, that no. So forget about that. I was wrong. That's not one of them. Okay, let's see how good you guys really are.

Cris deRitis:                       Smartphones.

Jonathan Smoke:            Smartphones.

Mark Zandi:                      Smartphones. Yeah. Ding, ding, ding, ding. Very good. That's a good one because why? Because that's more the quality adjustments I think.

Cris deRitis:                       Right.

Mark Zandi:                      The CPI tries to account for the quality of whatever it is you're buying like vehicles, they do the same thing. And even if the actual price is rising, the measure price in the Consumer Price Index could fall because the quality of the product is improving like a smartphone. Jonathan, you were going to say something.

Jonathan Smoke:            I was going to guess something related to sporting goods. Pelotons are top of mind to me is suddenly no longer being the focus.

Mark Zandi:                      I think Pelotons a little too narrow of a... Actually I did read, I think they are cutting their price, although they're going to raise their subscription fee. And the only reason I know this is because I'm a avid Peloton user. So but no, that isn't in, I think that's too narrow an area but no, not sporting goods. I didn't notice that.

Cris deRitis:                       There has to be some commodity that was really high in the beginning of the year. So lumber, I know that skyrocketed in late 2020, early 2021. Does it come down at all or?

Mark Zandi:                      No, that's not it. Yeah.

Cris deRitis:                       All right.

Jonathan Smoke:            How about-

Mark Zandi:                      Go ahead.

Jonathan Smoke:            How about some type of personal goods that we were buying last year? I'm thinking something related to healthcare probably could. It could be down on a Year-over-Year basis.

Cris deRitis:                       Just become sanitizer.

Mark Zandi:                      Well another kind of straightforward... No, not really. But think about, go back to Cris' smartphone. What else goes along on with a smartphone? What else are you buying? The smartphone is the phone itself.

Mike Brisson:                    Yeah, the service, the cellular...

Mark Zandi:                      The wireless service, that's declining in price. Wireless service prices was declining in price.

Mike Brisson:                    Is that your Mint Mobile coming online and-

Mark Zandi:                      What's that?

Cris deRitis:                       Straight Talk Wireless and Mint Mobile.

Mark Zandi:                      Yeah. I don't know exactly-

Cris deRitis:                       Discount carriers.

Mark Zandi:                      Yeah, but the measured prices down in the CPI Year-over-Year. Technology, what other technology?

Cris deRitis:                       PC.

Mark Zandi:                      PCs. They're down, yeah. How about consumer technology like TVs, yeah? Audio equipment. Okay. Here's one that'll blow your mind.

Mike Brisson:                    Oh, film and photographic, right? That's always down.

Mark Zandi:                      Yeah, exactly.

Mike Brisson:                    VCRs.

Mark Zandi:                      Yeah.

Mike Brisson:                    DVDs

Mark Zandi:                      Actually that is one. Yeah, VCRs. They're falling in price, yeah. Here one that's really interesting. Checking and other bank services, checking account and other banks which makes sense, right? Because obviously a lot of online competition for financial services. One other is and I don't know what's going on here, might be just a technical artifact, food at elementary schools. Maybe because schools were closed. Yeah. Maybe they aren't opening, I'm not sure what that's all about but that's it. That gives you a sense of what's going on. Usually there's a lot of things that prices are falling, certainly it's measured in the Consumer Price Index but not here. So I thought that was pretty illustrative. No cowbells I'm afraid but not bad. Does anyone else have a statistic that's apropos to the discussion so far?

Jonathan Smoke:            Yeah, I've got one for you.

Mark Zandi:                      Okay, fire away, Jonathan.

Jonathan Smoke:            And this is really going to put Mark to the test.

Mark Zandi:                      Oh-oh, geez.

Jonathan Smoke:            It's 204 billion dollars.

Mark Zandi:                      204 billion. Is it something related to consumer purchases, consumer spending?

Jonathan Smoke:            I would say it's directly related to buying power.

Mark Zandi:                      Oh, buying power.

Cris deRitis:                       Import/export, since that came out this week.

Mark Zandi:                      204 billion. I'm going to make this up just to throw it into the mix and maybe we'll get some clues. Is that the amount that people have to spend on interest on their auto loans?

Jonathan Smoke:            That's a good guess.

Mark Zandi:                      Huh?

Jonathan Smoke:            Yes. And I teased the concept earlier when I mentioned something that was impacting the seasonality.

Mark Zandi:                      Oh my goodness. This is really tough.

Cris deRitis:                       Refunds of some sort.

Mark Zandi:                      Oh, tax refunds.

Jonathan Smoke:            204.4 billion is the amount of refunds issued by the IRS as of April 1st this year. So the latest numbers was out.

Mark Zandi:                      Is that up or down?

Cris deRitis:                       [crosstalk 00:39:48] Last year.

Jonathan Smoke:            Down 4% against 2019, which was our last normal cadence, despite the average refund being up 14%. So basically what has happened is tax refund season is about four weeks behind normal. And as a result in the used car market, we typically see a surge in sales in March and it didn't happen in March. It's happening now in April. And that's why we're seeing a lot of the seasonal adjustments really because strange movements and non-seasonal moving one way and seasonal moving the other way.

Mark Zandi:                      That's interesting.

Jonathan Smoke:            And it impacts credit too, because delinquencies have an extreme seasonal pattern to them and it's based on the receipt of funds that is pretty sizeable because tax refunds will probably be about 400 billion this year.

Mark Zandi:                      So why are they delayed four weeks compared to pre-pandemic?

Jonathan Smoke:            Backlog the IRS is just so far behind.

Mark Zandi:                      So far behind. Oh, interesting. Okay. So that has depressed, I mean the conclusion is that and maybe depressing retail sales for March were soft and we'll come back to that in a second. That could be because refunds were shy of where they're typically by the month of March.

Jonathan Smoke:            That's right. By my calculation, I make a projection of how many people will receive a refund. And based on that estimate, I estimated using that number that less than half of folks who will get a refund had received one by then when at the same point in 2019, 77% had received their refunds by that point.

Mark Zandi:                      Interesting. Okay. Good. Oh, that's a great one. Should we move on? Oh Mike, you got one. Okay, by the way.

Cris deRitis:                       Yeah, I got two numbers.

Mark Zandi:                      Two.

Cris deRitis:                       Positive, 7.6%. Negative 1.3%. Couple of hints. This is a release we used to cover on Economic View, we don't have it on there anymore. Now I used to write it. And the other one is, this is the highest, the 7.6% is the highest growth rate since 2017.

Mark Zandi:                      Oh wow. Okay. So two statistics up seven, six down, what'd you say, one, three?

Cris deRitis:                       one, three and they're both a Year-over-Year.

Mark Zandi:                      And this is a release-

Cris deRitis:                       Auto related.

Mark Zandi:                      Auto related. Is it auto finance related?

Cris deRitis:                       Yep.

Mark Zandi:                      Is it the-

Mike Brisson:                    Affordability?

Mark Zandi:                      The loans are up seven, six and leases are down one, three?

Cris deRitis:                       Nope.

Mark Zandi:                      No.

Cris deRitis:                       Close. So it's balances are up 7.6% but accounts they're down 1.3%.

Mark Zandi:                      Okay. Well I got to get some credit for quote but any way, that's a good one. So you're saying auto loans and leases...

Cris deRitis:                       Yep.

Mark Zandi:                      Outstanding are up 7.6% Year-over-Year through, I guess March.

Cris deRitis:                       Yes.

Mark Zandi:                      That's based on credit file data we get from [crosstalk 00:42:56]

Cris deRitis:                       This is the Credit Forecast release we used to do.

Mark Zandi:                      Equifax data, the credit file data. And you're saying that the number... Oh, okay. So the number of people with vehicle loans is down one, three.

Cris deRitis:                       Yes. And that's the largest contraction since 2011.

Mark Zandi:                      Oh 2011.

Mike Brisson:                    So the average is up.

Mark Zandi:                      Oh

Cris deRitis:                       Yeah. So-

Mark Zandi:                      That goes to higher prices, I guess, right?

Cris deRitis:                       Higher prices. But it's also the first sign of depressed demand that we're seeing that maybe some affordability issues. I mean our affordability index at Cox and Moody's does together is at the highest level or near the highest level. It takes almost 43 weeks of income to purchase a medium family income to purchase a new vehicle. We've had index going back to 2012 and this is at the same time we had the Loan Officer Survey where they're saying they're loosening lending standards. So they have the diffusion index on the loan, the lending standards from the Loan Officer Survey from the Fed. And that's the spigots are open. All different credit scores are increasing in balances so they're not constricting thinking that there's a risk out there. I think it's more on the consumer side saying that they're not going in and we don't really want to take out a loan for this vehicle if we think the prices are going to come down in the near future. So I think it's the first sign of demand starting to get hit.

Mark Zandi:                      Interesting. Can it be demand destruction, the prices? I guess I that's what you're saying. The prices are so high, I can't afford this so I can't buy. Or is it, there's no inventory too? They can't buy because there's just no inventory?

Jonathan Smoke:            Yeah. Supply is definitely a part of it too. Because a big chunk of that total account decline Year-over-Year is in leases. Leases are down 11% in my read of the Equifax data Year-over-Year as of March. And the lease story is a supply. Well, it is fundamentally a supply traditionally manufacturers [Sabine 00:44:51] and make those lease payments more attractive than financing. And they are simply not attractive at all. So lease penetration is at the lowest level and more than a decade as a result.

Mark Zandi:                      Interesting. Okay.

Cris deRitis:                       What prices that high risks are really high for just these loans going underwater. And so even the lease side, does the lender want to give a lease out if they think prices are going to come down so quickly that they'll end up losing a lot of that? They'll they take a lot of that residual risk when they start assigning payments for those leases.

Mark Zandi:                      Hmm. Yeah, for sure. Yeah. Things are so topsy-turvy that they just don't know what to make of it so the natural instinct has turned cautious.

Cris deRitis:                       Yep.

Mark Zandi:                      Not do them. Yeah. Okay, that was a good one. And in terms of credit quality, in terms of delinquencies and repossession rates on vehicles, that's still pretty good, right? Or very good.

Cris deRitis:                       That's two and a half percent, I think, is the total auto delinquency rate. And that's would be prior to the recession, that'd be the lowest of all time. So it's come up from the bottom, which is close to one and a half percent but it's up to two and a half percent. And that still would've been an all time low prior to the pandemic.

Mark Zandi:                      I guess when you think about it, why would... You got low unemployment, you got lots of jobs, you got...

Cris deRitis:                       Student loans deferred.

Mark Zandi:                      Student loans deferred, you got vehicle prices that are up. So, you got-

Mike Brisson:                    Need more options.

Mark Zandi:                      Equity in the car.

Cris deRitis:                       You might have locked in a low rate, right?

Mark Zandi:                      Locked in a low rate, yeah. So it all feels pretty good. And underwriting has been pretty good or okay. Not, it's okay, I guess is the way you would characterize it. I would characterize it. Would you agree?

Cris deRitis:                       The early on, right after the pandemic, it was only high risk scores that were getting loans. They've gone down into the low prime, subprime, much more than they were right after the pandemic. So banks and finance companies are getting a little risky, banks more than finance companies. So it's surprising.

Mark Zandi:                      Now they are. But what the-

Cris deRitis:                       Yes. Prior to that, it was all very high credit scores.

Mark Zandi:                      Got it.

Mike Brisson:                    How about the loan term? Are there still out of seven year, 10 year auto loans?

Jonathan Smoke:            Loan terms are growing, that's part of the loan access that's expanding. And the average is right at 70 months right now. And you are seeing an uptick as prices and interest rates are going up now, you are starting to see that move higher again but it's still a very low percentage that are more than seven years.

Cris deRitis:                       Yep. Good news on that for data nerds, the Federal Reserve, they usually only release the 60 months interest rate in the 48 months interest rate, which is laughable since no one gets a 48 month loan anymore. But they're going to start releasing the 72 months interest rate sometime this year. So it's good news for all of us.

Jonathan Smoke:            Well and also, since we were talking about CPI for data nerds in the auto business, get ready for a major change in the new vehicle component of the CPI because it's-

Mark Zandi:                      You guys are really, you're almost too nerdy for my taste, Cris. Now we're going to get a lecture on the change in the vehicle pricing CPI index. Go ahead, Jonathan. Feel free. Go ahead.

Cris deRitis:                       Well, we did housing not too long ago, right? We went deep. I predict

Jonathan Smoke:            Next month about new vehicle prices, substantially revised hire.

Mark Zandi:                      Oh, really?

Jonathan Smoke:            They basically have been testing a new methodology that I believe is way closer to reading what is happening in the marketplace. And the last comparison I did would suggest that new vehicle prices are up more in the range of 19% Year-over-Year rather than I think the latest one was closer to 12%.

Mark Zandi:                      Oh goodness. So we are going to see, this is next month you said, for the month of April?

Jonathan Smoke:            I believe it, yeah. For the month of April in the numbers that get released in May we'll include the shift to the new methodology.

Mark Zandi:                      And it's not a level shift in price, it's going to actually affect the growth rate over the past year.

Jonathan Smoke:            Well, yeah, they're restating the historical series by shifting this methodology, yeah.

Mark Zandi:                      But you think it is going to show an even greater acceleration in new vehicle prices. [crosstalk 00:49:15] Oh, we may not have peaked on inflation then if that's the case.

Cris deRitis:                       I need to change my tune here. So,

Jonathan Smoke:            But it's important for this intellectual exercise of where used vehicle prices need to go because the absolute relationship that governs where used vehicle price is, has to be what new vehicle prices are because they are the tether or the anchor to which the used vehicle prices can't get too far away from. And we think that new has not been measured accurately historically and this will be a big move in the right direction.

Mark Zandi:                      Okay. Well, I'll just keep our eyes on that one. That's interesting. Hey, Cris, is your statistic relevant to prices or should we move on and come back? Or what do you want to do?

Cris deRitis:                       It is relevant. So let's get it out of way.

Mark Zandi:                      Okay then fire away.

Cris deRitis:                       It's a twofer 4.7% and 20%.

Mark Zandi:                      4.7 and-

Cris deRitis:                       20.

Mark Zandi:                      20. Is this in the CPI report?

Cris deRitis:                       It's derived from the CPI.

Mark Zandi:                      Oh, this is your own concoction?

Cris deRitis:                       No, it's not my own concoction. It is officially released at the same time.

Mark Zandi:                      But it's not a part of the Consumer Price Index report.

Cris deRitis:                       It is not. It is not released by the BLS.

Mark Zandi:                      Oh, is one Month-to-Month, the other Year-over-Year?

Cris deRitis:                       They are both Year-over-Year.

Mark Zandi:                      They're both Year-over-Year. And are they related to prices?

Cris deRitis:                       They are.

Mark Zandi:                      Is it the PPI or producer pricing?

Cris deRitis:                       Nope.

Mark Zandi:                      No.

Cris deRitis:                       No. I told you I had to make it hard because of last week.

Mark Zandi:                      No, I know. Yeah, no [crosstalk 00:50:58] last week was hard but yeah. Last week was the Food Price Index, I believe, here from the UN. Jonathan, Michael, any thoughts there? You're saying it's derived from the Consumer Price Index, CPI and-

Cris deRitis:                       Fuel related?

Mark Zandi:                      Both. [crosstalk 00:51:25] Both Year-over-Year. Is it something and we cover regularly, or is this kind more of esoteric series? It's more esoteric series.

Cris deRitis:                       It's [crosstalk 00:51:34] from the Atlanta Fed.

Mark Zandi:                      It's from the Fed.

Cris deRitis:                       Atlanta Fed.

Mark Zandi:                      Is it the wage tracker?

Cris deRitis:                       Nope. [crosstalk 00:51:42] That's the cool one.

Mark Zandi:                      Atlanta Fed is another-

Cris deRitis:                       This is another cool one they have.

Mark Zandi:                      Wage tracker. Yeah. Tracks wages. Geez Louise. Can you give us another hint without giving it away? Atlanta Fed.

Cris deRitis:                       Think of the magnitudes, right? The...

Mark Zandi:                      Yeah. Can you give us one and not the other?

Cris deRitis:                       Well, if I give you one you'll guess the other.

Mark Zandi:                      We'll get the other. Okay. Right. I give, [crosstalk 00:52:10] you guys give?

Cris deRitis:                       You guys give?

Mark Zandi:                      We all give.

Cris deRitis:                       So 20% is the flexible price CPI and 4.7% is the Sticky Price CPI calculated by the Atlanta Fed.

Mark Zandi:                      Right, you know what? I never look at that. I look at all the Cleveland Fed median and trimmed-mean but I don't look at the Atlanta Fed. It sounds like I should. So explain this to people and what it's saying.

Cris deRitis:                       Yeah. So the idea here kind of like the difference between the headline and the core, trying to abstract some type of volatility, if you will. The idea here is to look at each of the 300, 400 individual price components and identify those prices that tend to move very rapidly. So gas prices are a good example. They move very rapidly within say a three month period period. And there are other prices that tend to be Sticky, they don't move around all that much, they're more gradual. So the idea is to separate out all the different prices in the CPI report, into these two categories and track those measures over time.

                                             The reason why you probably don't look at it most of the time is because they tend to be pretty stable, right? Doesn't really give you much more information but at a time like this, it does give you some sense of what's going on. And in particularly the theory behind the Sticky Price Index is that actually should incorporate more of an inflation expectations. If there are prices that you can't really change all that frequently, that tend to get stuck, then the price setter is going to incorporate more of the inflation expectations.

Mark Zandi:                      Oh, you know that's an interesting point, very interesting point, yeah.

Cris deRitis:                       Yeah, so four point-

Mark Zandi:                      People are more influenced by businesses inflation expectations.

Cris deRitis:                       That's right, because the flexible you have. "Well, If I get it wrong this month, the market will adjust relatively quickly but these other ones maybe have more-

Mark Zandi:                      And what'd you say Sticky was? Four what? Four...

Cris deRitis:                       4.7%.

Mark Zandi:                      Okay. Because house prices are key. I mean the housing, not house prices but the housing costs, Consumer Price Index is a big part of that, I would assume.

Cris deRitis:                       Yeah. That's right.

Mark Zandi:                      Did you say that already? Okay, I missed that. Okay.

Cris deRitis:                       Yeah. Okay. And so the Sticky Price Index was 4.5% last month. So it is indicating that consumers certainly are still worried about inflation and that's feeding into the expectations and prices as well.

Mark Zandi:                      It's interesting. That was a good one. I start falling. Jonathan, did you know that? That's the rest of your Fed? The Atlanta Fed?

Jonathan Smoke:            No.

Mark Zandi:                      Did you know that?

Jonathan Smoke:            It's not something I follow.

Mark Zandi:                      You're not as data geek as I thought you were. Thought you were really one of those really...

Cris deRitis:                       Yeah.

Mark Zandi:                      Mike's really a huge data geek. I think Mike processes, I think Jonathan, you told me before we started that you were the biggest user of our data buffet, data service.

Jonathan Smoke:            Yeah, one point.

Mark Zandi:                      One point. And I think Mike is now. Mike-

Cris deRitis:                       Carl's going to start charging me.

Mark Zandi:                      Yeah. Carl's going to... Yes, exactly.

Cris deRitis:                       [inaudible 00:55:16] Yeah, Carl.

Mark Zandi:                      He's definitely making your life more difficult, I know that. Talking about budget cutting. So anyway. Okay. Well, I wanted to talk about the other big economic release of the week and that was retail sales, that came out and Cris, you want to give us a run down there? What happened with retail sales for the month of March?

Cris deRitis:                       Yeah, so I'd say on the surface retail sales looked healthy. They grew half a percent in March, so that's good. In the sense consumers are still spending, they're not cutting back dramatically. However, if you dig into the data a little bit, what you find is that much of that increase is due to rising prices. So gas station spending for example, was up 8.9%. That's a big contributor to that measure. What else can I tell you? There was a revision to the retail sales for February. They increased from 0.3% to 0.8% growth. That actually is important or is relevant as we think about GDP in the first quarter. So these retail sales numbers do feed into the GDP calculation. I think Ryan's gotten into this in the past about the control retail sales and whatnot. So from that standpoint, our GDP estimate has actually gone up a bit for the first quarter. So that' the positive but again, there's some cross currents here. People are increasing their spending but not organically it's because they're facing these higher prices and...

Mark Zandi:                      Yeah, well, Scott Hoyt, who's another one of our good economists, who's all things retail. I think it was formerly chief economist, J.C. Penney. He said data yesterday showing nominal retail sales, that's what you're talking about, the 0.5 and then so-called well, not so-called but real retail sales after inflation. And this is deflated with retail prices. So, corresponding prices to what's being measured here, retail goods. And this, I didn't know this but the real retail sales has not increased at all in about a year. It increased about a year ago when the economy reopened, when vaccines became available and then we had the American rescue plan that helped support demand. But since about March, April last year, they're flat, there's no increase in real retail sales, which is a part of that may also be shifting now because people are out and about, they're traveling again so spending on services is important. So overall consumer spending continues to move forward. But so part of this is just to shift in preferences back because the pandemic is fading. But nonetheless, I found that pretty fascinating, very interesting.

Cris deRitis:                       Yeah. I guess related to that non-store, I don't know if you caught this, but non-store retail sales actually fell.

Mark Zandi:                      Yeah. I saw that.

Cris deRitis:                       To 4%. So...

Mark Zandi:                      Big decline.

Cris deRitis:                       Yeah. That does suggestion people are changing behavior. Going to the market.

Mark Zandi:                      It's got to be. We're going back to stores again.

Cris deRitis:                       Yeah.

Mark Zandi:                      Yeah. Interesting. Well, the other part of the story here is vehicle sales. And they remain weak. So in the month of March new vehicle sales were 13.3 million annualized. And as I said earlier, pre pandemic we were rock solid 17 million, at least, units per annum. So I guess I throw it back to the two vehicle mavens, when are we going to get back? Well, I got a bunch of questions, I guess, when are we going to get back to something we've considered more consistent with long run trends which I guess would still be 17 millions per annum? And in that vein or in that context, how much so-called pent-up demand is there out there?

                                             People putting off purchases because they couldn't get a vehicle because they weren't being produced or some demand destruction like Mike was talking about because prices are too high. How much is that pent-up thing going to come back in sales in the future? And, Mike, I should preface this by saying Mike and I have been having a long running debate. Although I think I'm now in his camp or something, I think I moved in his direction, I'm not sure. But anyway, let me throw that to Jonathan first and see what Jonathan has to say.

Jonathan Smoke:            Well, I think we've got years before we see the supply problems which we were discussing earlier are the dominating thing team in the new vehicle market, because this is not a scenario where you just bounce back to what the production once was because you've got multiple new kind of factors leading to the fact that production is actually likely to be less over the longer term or at least severely constrained for a period of time. One, we are undergoing a shift to electrification and that means retooling plants, the plants tend to be more expensive, as a result there's more combinations, more partnerships and in essence, I think you can argue lower long term global capacity for production. And now because of the pandemic and what we've seen with the dependencies on weak parts of the supply chain plus issues with certain parts of the world, Russia, China becoming less reliable in the future.

                                             There's more of a focus on resiliency than absolute lowest cost. And I believe that's reducing overall capacity, reducing overall efficiency and the net is global production probably peaked in 2019. And we're probably not going back to that number anytime soon. So the way that we look at it from new vehicle sales is that we had the potential in the short term to be selling 18 plus, we have built up pent-up demand. We think it's in the neighborhood of three to 4 million units combined across retail and fleet, which further adds to the assumption of supply sitting on dealers lots or traditional measures of supply in total units or day supply, is likely to be well below normal for years as you slowly get that production back up capacity.

                                             But the reality is that the challenges in 2022 will likely persist through the end of year. And this is more of you start to improve in '23 and in to '24. That's not what we thought coming into the year. Coming into the year we thought this was the year you start to see gradual improvement and then by '23 you're getting to some new pace of activity that's likely 16 to 17 million but we think that's been pushed out roughly a year.

Mark Zandi:                      Wow, interesting. So, as I mentioned earlier, the average sales since the pandemic hit is 14.65 million that's annualized. We were 13, 3 in March so where do you think we'll be at the end of the year, Jonathan, roughly speaking? Are we going to be at 14, 65 or are we going to be still...

Jonathan Smoke:            We're calling for 15, three.

Mark Zandi:                      For the year.

Jonathan Smoke:            I think the range is likely 14, 9 to 15, three. So in other words, I think there's risks to the downside to the 15, three that we currently forecast.

Mark Zandi:                      Okay. And you said three and a half to 4 million in pent-up demand. That's the demand that was put off during the pandemic that will come back at some point here when there's enough supply.

Jonathan Smoke:            Yeah. There's a solid 2 million, at least, in fleet that would be buying. And it's not just an issue of prioritization and making those vehicles available. It's literally production. The manufacturers have prioritized where the chips go and where they're staffing issues are preventing them from being at a hundred percent in a factory they're only producing certain vehicles, the most profitable vehicles, the most profitable configuration. So we've got strange shortages, even in things that you would think would be more expensive like vans and things that are important for delivery that there's a substantial amount of pent-up demand that's going to take quite a while to get to a level we can produce.

Mark Zandi:                      Interesting. Hey Mike, you heard that? I think my guesstimate for pent-up to be humble here, estimating pent-up demand is not easy, because estimating trend demand for the vehicle. I've tried this over a 30 year period and it's really tough to do, particularly given the pandemic and the effects that has on preferences and driving and depreciation rates and so forth and so on. But I'm coming up with two and a half million units in pent-up demand. Do you have a view, Mike? I think it's... I know you do-

Mike Brisson:                    Closer to two closer to two-

Mark Zandi:                      Closer to two, that's okay.

Mike Brisson:                    Because I keep a close eye on those miles traveled as well as the employment at vehicle maintenance facilities to be able to try and keep track of who's bringing the cars in for longer, who's basically driving through the demand that they have and who's not driving as much. So you have two different ways that you can decrease the amount of demand that's not being fulfilled. I don't keep as close an eye on the side as Jonathan but we do have those total numbers, which do include fleet from the BEA. But I'm just more concerned in the short term with the neon issue. I know we've beat that drum before but-

Mark Zandi:                      What issue?

Mike Brisson:                    The neon issue-

Mark Zandi:                      Oh, yeah.

Mike Brisson:                    The semiconductors, 50% has been taken offline, neon prices are up. The semiconductor's up. [crosstalk 01:05:23] Producers-

Mark Zandi:                      That's Russia invading Ukraine by the way, right?

Mike Brisson:                    Yeah, Russia invading Ukraine. So Ingas, I believe is it's located in Mariupol so- [crosstalk 01:05:38]

Mark Zandi:                      Is that right?

Mike Brisson:                    They've been shut down. Yes. That's where they're located. So they're not producing, they were shut down immediately. And Cryoin, they're in Odessa and they shut down and they said they don't think they're ever going to be able to open back up because they don't have supply of the raw material to make the pure neon for these lasers. So I'm concerned that these large producers, so Intel, [TLSC 01:06:02], they have six months supply in backlog and then this is going to be burned through faster than they can find new sources of supply. So I think there's a real risk to how some of these conductors are going to be produced in the second half of this year.

Mark Zandi:                      Yeah. Just to connect the dots for everybody. So Russia invaded Ukraine, Russia-Ukraine produce a bulk of the neon for global export markets. That neon is used for lasers that chips, the chips are obviously used in vehicles. So if I don't have neon, can't produce chips, I can't produce cars and that's what you're saying. It hasn't had an impact yet because there's a backlog that their producers are blowing through but it feels like this is going to be an issue in the second half of the year going into '23.

Cris deRitis:                       Definitely.

Mark Zandi:                      I got that right, okay. Jonathan, is that right? Is-

Jonathan Smoke:            Yes.

Cris deRitis:                       Is there any new... That's right, okay.

Jonathan Smoke:            And I don't know if most of the production forecasts have baked in those challenges. Because if you look at the production forecast, they start to improve at the end of this year and that injects risk.

Mark Zandi:                      Okay, all right. That's a little depressing. Hey, we've been chatting here for, I think a little over an hour so I don't want to keep, and I want to respect your time. So we've got probably another five, 10 minutes to go. So the question to the group is, do we want to talk about, I'll give you three choices, one electric vehicles. Two, new innovations in the vehicle industry around the way we sell cars and the way we buy cars and what are in cars, what is a car? Or three, the stagflation because that's people's top of mind and we been dancing around that this whole podcast. We began with high inflation. We talked about weak retail sales, that's kind of in the spirit of stagnation. Okay. So what do you guys want to do? Which one of those do you want to talk about? Mike wants to talk about the Phillies, I know but we'll have to table that. Jonathan, you're our guest. I'm going to let you choose. You pick which one you want to choose.

Jonathan Smoke:            I choose stagflation because I-

Mark Zandi:                      Ooh, interesting. That's not-

Jonathan Smoke:            Because I think it's super relevant and to be talking about and we can have another session to talk about- [crosstalk 01:08:30]

Mark Zandi:                      Absolutely.

Jonathan Smoke:            And new innovations and mobility.

Mark Zandi:                      Absolutely. Definitely. And then by then my brother, Carl will have approved the budget for the cowbell and I can give you a cowbell. But anyway.

Cris deRitis:                       That could be a while.

Mark Zandi:                      That could be a while. Geez.

Cris deRitis:                       All the autonomous vehicles by then.

Jonathan Smoke:            Flying autonomous.

Mark Zandi:                      Flying autonomous vehicle. Yeah. Okay. All right, Cris, you level set, define stagflation for the folks out there. What is... Because I think people, they know, they've heard stagflation. They know they don't like it. They don't want it but what is it exactly?

Cris deRitis:                       Well, there's some differences of the definition. I would say it's a combination of high inflation and low growth. So higher unemployment combined with high inflation.

Mark Zandi:                      So would you say if inflation stays, you go back to your Sticky Price say around 5%, four, 5% and unemployment is, let's say four or 5%, right now we're at three, six. So let's say it's closer to five. so five and five. If we had five and five, a period of 5% unemployment, a period of 5% inflation, would you consider that stagflation?

Cris deRitis:                       Well, that's a good question. I probably wouldn't.

Mark Zandi:                      You wouldn't?

Cris deRitis:                       Because I think of... Well, it really depends on the trend, right?

Mark Zandi:                      Yeah.

Cris deRitis:                       If you're saying inflation is high but trending downward and unemployment maybe is up but stable or actually trending down then, yeah, maybe it's stagflation for that short period but in the sense of it being a problem that I have to be worried about-

Mark Zandi:                      Let's say that's the world we live in for at least a couple years. Would you consider that stagflation? Jonathan, would you consider that stagflation or how would you define or would you define it differently?

Jonathan Smoke:            Well, I think of stagflation as the late seventies and that seems more extreme and a longer period and relatively unique. But I really wanted to hear what your opinion was.

Mark Zandi:                      Well, I think there's very likelihood we get to... Well, the seventies and eighties, that was a period of, a period double digit, consistent double digit inflation And a period of, not double digit unemployment but very high unemployment, five to 10% unemployment. So we went back. Mike, did you look up? What was unemployment in June of 1981? I said seven, three. I made that up but I'm just-

Mike Brisson:                    Seven, four.

Mark Zandi:                      Are you kidding me? It's seven-

Mike Brisson:                    Second quarter, yeah.

Mark Zandi:                      Okay, wait a second. We're going to stop for a second. I want everyone to recognize... What do you think?

Cris deRitis:                       All right, Ben.

Mike Brisson:                    You have to splice it, the cow's bell at this point.

Mark Zandi:                      Seven, four and I'm sure the seasonal adjustment factor was off and it was actually seven three. I'm just saying. But anyway, I don't think we're going by, that's pretty hard to get to that kind of scenario. So in my view, if you get five and five, 5% inflation, 5% unemployment, that's going to feel really ugly, bad, and it's already feels bad but that's going to feel really bad. And I consider that to stagflation. But let me ask you this question and maybe I should say also there's a lot of reasons why I don't think we go back to the seventies and eighties, people don't recall but the seventies and eighties took almost a decade and a half to get to the seventies and eighties, with regard to inflation, that became a problem beginning in the sixties, the very expansive fiscal policy, Vietnam War, the Great Society.

                                             It was also related to labor market dynamics where we had a lot of cost of living adjustments built in. So wages rose that got into prices but prices rose that got into wages, which got into prices. And you got into this wage price kind of spiral, Federal Reserve didn't really understand the role of inflation expectations, that wasn't even a thought back in that period. That was something that we learned how important that was coming out of that period. So I think there's a lot more differences between now the seventies and eighties than there are similarities but that doesn't mean we can't go into something that is stagflation to ask a five and a five. But I would say and I'll give you my view on the likelihood of that. And then I'll be curious, your views and whether you'd push back is that the probability of that happening of us going into any kind of stagflation environment is pretty low.

                                             And the fundamental reason is it's a policy choice, there's a choice. The Federal Reserve has to allow that to happen. And based on the very painful experience of the seventies and eighties when they learned that the only weight out of stagflation was a very prolonged and severe recession, in fact, two recessions back-to-back with double digital unemployment to get us out of that mess, they would air on the side of pushing us. They would push us into recession earlier to ensure that we didn't get into that stagflation environment. So, if it felt we're going down that dark path, they'd say, "Okay, I'm going to raise rates now and we're going in and we're going to ring out these inflationary pressures and get inflation expectations back down to something more consistent," that it's a choice and they're not going to make that mistake and make that choice. You can always make a misstep and you can misread and you could end there but I say the probabilities of that are pretty low. I put them at one in 10, something that. What do you think, Cris, do you have a different perspective, a different view?

Cris deRitis:                       I actually think it's even lower than that.

Mark Zandi:                      Even lower than that.

Cris deRitis:                       The Fed is, well, the wild card here is some politicization of the Fed, right? If the next president would appoint someone...

Mark Zandi:                      That's a point, that's a good point.

Cris deRitis:                       To favor certain policies that could backfire. But the, I think fundamentally it's kind of ingrained in the Fed at this point, given the seven eighties experience that inflation has to take priority of the dual mandate at the end of the day. And so I do think they will slam on the brakes hard as necessary to get inflation under control at the cost of a recession.

Mark Zandi:                      Yeah, good point. Hey, Jonathan, Mike, anything you want to add to that conversation around stagflation?

Mike Brisson:                    The oil independence of the United States means that we're not going to have an aggregate supply shock the way that we did in the late seventies.

Mark Zandi:                      Great point.

Mike Brisson:                    We're less dependent on oil and gas than we were at that time as an economy. So those things I think also help with the case that it's not very likely to happen without the, I didn't even think of Cris' point about politicizing the Fed. That didn't even cross my mind. I'm scared of that.

Mark Zandi:                      Yeah.

Mike Brisson:                    But yeah so I don't think it's very likely to happen.

Mark Zandi:                      Yeah. Jonathan, any perspectives, any views?

Jonathan Smoke:            Yeah, I think I agree with all of the arguments that you guys are making that make it a less likely outcome. What I'm observing though, is this interesting thing that Wall Street seems to be presenting as we have two likely binary choices ahead of a stagflation or recession and actually even your podcast last week. I think-

Mark Zandi:                      That was pretty depressing, wasn't it? [crosstalk 01:16:21]

Jonathan Smoke:            Was it 75-

Mark Zandi:                      He went to the dark side on us, yeah.

Jonathan Smoke:            He's still there?

Cris deRitis:                       The very dark side.

Mark Zandi:                      It's pretty dark. I thought you said-

Jonathan Smoke:            But it sounds like making the choice and looking historically, I was looking back at what vehicle sales were in the late seventies and definitely that environment of high interest rates and stagflation scenario was not super supportive of strong vehicle demand. But yet, if we had a recession that broke that and that recession played out more like the 2001 recession which is where my head went in the discussion from you guys last week, that sounded like a much better environment for vehicle markets. So I guess I would root for the recession over to stagflation.

Mark Zandi:                      Yeah. I'm with you on that one. Okay, very good. Hey Jonathan, do you have a Twitter handle?

Jonathan Smoke:            Yes. @SmokeonCars.

Mark Zandi:                      That's a great one. That is a great one. And Mike, do you have a Twitter handle?

Mike Brisson:                    No, I don't.

Mark Zandi:                      Okay, smart move by the way. And I know Cris does, what's your Twitter hand... but you're more a LinkedIn guy.

Cris deRitis:                       I do but I never check on it.

Mark Zandi:                      That kind of guy. Yeah and I'm @Markzandi just saying or at. You know how to spell Mark Zandi, right? Mark Zandi, @Markzandi. Okay.

Mike Brisson:                    And you're not a LinkedIn guy.

Mark Zandi:                      And I am not a LinkedIn guy. I'm not evolved into that. That's a higher level of being, I've not gotten there yet. Yeah. Anyway, Jonathan was fantastic having you on. I appreciate it. And we're definitely having you back because we have to talk about EVs and all these cool things going on in the auto sales market. But

Jonathan Smoke:            That was good. Mike and I are working on EV affordability analysis. So maybe that will be, yes, perfect.

Mark Zandi:                      Okay. Very good. And Mike, good to have you.

Mike Brisson:                    As always.

Mark Zandi:                      You weren't as combative this time. I don't know. Well, maybe because I agreed with you.

Mike Brisson:                    You agreed to my forecast as well.

Mark Zandi:                      That's how it works. Okay. Fair enough. Very good. And with that, we're going to call it a podcast. Take care of everyone.