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Moody's Talks - Inside Economics
LNG and Long Tail (It's a Groundhog, not a Chipmunk)
Mark, Ryan, and Cris discuss unemployment insurance benefits, Delta variant, and what happened this week in Washington, DC. The main topic is the long-term economic consequences of the pandemic. Also, Mark reveals his favorite movie.
Full episode transcript can be found here.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist at Moody's Analytics, and I'm joined by my two colleagues, per tradition. We've got Ryan Sweet, Director of Real Time Economics and Cris deRitis, the Deputy Chief Economist. Hey guys, we have no guest this week, a little unusual for us. We're going solo, I guess. How do you feel about that?
Cris deRitis: That's all right. Mix it up a little.
Mark Zandi: Mix it up a little. This reminds me of the first couple podcasts we did. I don't think we had guests on the first one or two or three.
Cris deRitis: There's probably three, a little bit of nostalgia here.
Mark Zandi: Yeah. It's good to have guests, but I think it's good to go it alone here. I think this will be very productive.
Ryan Sweet: Now we're [crosstalk 00:00:56].
Mark Zandi: It probably won't be an hour and a half podcast, so listener, you'll be off the hook. Well, I don't know.
Ryan Sweet: I don't know.
Mark Zandi: Ryan's pretty long winded, so it could be.
Ryan Sweet: Well, now I don't have to be on my best behavior because it's you and Cris.
Mark Zandi: Oh, that's true. Yeah.
Cris deRitis: Unleashed.
Mark Zandi: Ryan unleashed. How was your week? How'd it go this week? Anything unusual?
Ryan Sweet: No.
Cris deRitis: No. The usual.
Mark Zandi: Groundhog Day? Yeah. By the way, that's my favorite movie of all time. Did you guys see Groundhog Day?
Cris deRitis: Oh yeah, multiple times.
Mark Zandi: Bill Murray.
Cris deRitis: Yeah, Bill Murray.
Mark Zandi: What was the actresses name? She was good. Shoot, it just slipped my mind, but a great movie. Fantastic movie, yeah.
Cris deRitis: It's been like Groundhog Day for me since the pandemic began.
Mark Zandi: I know, but it changed up for me this week. You know where I was?
Cris deRitis: D.C.
Mark Zandi: I spoke at a, well I was in Miami, I spoke at a commercial real estate conference, NAOIP, the National Association of Office and Industry, I don't know what the P stands for. They'll be mad at me. We sponsor, apparently Moody sponsored it. I didn't know that, but it was good to be in front of an audience. I'd forgotten how energizing that is, to speak before an audience.
Ryan Sweet: [crosstalk 00:02:16]. Before you move on. Your favorite movie off all movies is Groundhog Day?
Mark Zandi: Yes, indeed it is. Indeed it is. I have seen that movie maybe a dozen times. Yeah. I love that movie.
Ryan Sweet: All Cris, what's your favorite movie?
Mark Zandi: [crosstalk 00:02:32]. You don't want to know why? To me, that's life right there. Every single day, you do basically the same thing. Sometimes you mix it up a little bit.
Ryan Sweet: It's a good movie.
Mark Zandi: Basically, and it's all about perfecting, I think, that day. Making sure that you do...Each day is a little bit better than the next day. It's not a straight line, obviously. Bill Murray didn't have a straight line. The other thing is it's funny. It's a funny movie. Remember the scene with the chipmunk in the truck? That was hilarious. I'm still laughing. I've seen it a dozen and I still laugh every time I think about it.
Anyway, we're going to get off this topic, but next week, Ryan, I'm going to ask you what your favorite movie is because I'd like to know.
Ryan Sweet: All right. You'll be surprised.
Mark Zandi: True insight, and Cris, you too.
Cris deRitis: Field of Dreams.
Mark Zandi: It can't be some Italian 1945.
Ryan Sweet: That's where he's going.
Mark Zandi: Yeah, I know he's going to do that. Some artsy movie, director Rudolph Valentino kind of thing going on. Anyway.
Cris deRitis: [inaudible 00:03:48]/
Mark Zandi: What's that?
Cris deRitis: More of a Frederico Fellini fan.
Mark Zandi: Okay. Well, this podcast, we've got a lot to talk about. Obviously, the data, the statistics, and what we've learned about how the economy's performing. We're in a soft patch here. Delta has done some damage, but we'll talk about tat. Then, a lot going on in Washington D. C. We've been doing a lot of work, research, writing, and talking about that. Want to address that. Then the big topic is the longer term consequences of the pandemic. We've been so focused on the here and now and what's going on this week, last week, what's going to happen next month, next quarter, but we want to take just a step back and think about what are the longer term implications of the pandemic. What's the long tale of the pandemic? Each of us has been thinking about that, and we'll focus on a few of the longer term consequences.
Okay, so let's dive right in with the statistics. Here, let me frame this a little bit. We play the game, obviously, where we each spout off the statistic and the rest of the group tries to figure out what the statistic is. I'm hopeful that this week we can pick statistics that provide insight into the question how is the economy doing. Really, things have slowed down here in the third quarter, the just ended third. Is this October 1st today? Yeah, just ended third quarter, and just how significant is this slow down. Do we have any insight from the data on where we're headed here? Will Q4 be better? Will we pick right back up and kin into gear, which is key to our forecast. We remain optimistic.
With that as a frame, let's go to you, Ryan. What's your statistic for the week or statistics?
Ryan Sweet: I've got one, 73.4.
Mark Zandi: 73.4 and this is a statistic that came out this week.
Ryan Sweet: It did. Came out today.
Cris deRitis: Confidence.
Mark Zandi: Oh, it came out today. University of Michigan?
Ryan Sweet: It's not.
Mark Zandi: U Mich?
Cris deRitis: No. It's around there though.
Mark Zandi: I didn't see it.
Ryan Sweet: It's not buried in the reports, so you guys are going to give me a ton of grief about this number.
Mark Zandi: Oh, I know what it is. I think I know what it is.
Ryan Sweet: What is it?
Mark Zandi: To be blunt or to be perfectly honest, I haven't had a chance to look at today's data very carefully. This has got to be the ISM manufacturing survey.
Ryan Sweet: It's within the ISM.
Mark Zandi: Yeah. Yeah.
Ryan Sweet: You're right.
Mark Zandi: It probably has to do with supplier deliveries?
Ryan Sweet: Very good. You're hot streak continues. This deductive reasoning is working.
Mark Zandi: Well, you did give me a big hint.
Ryan Sweet: I did.
Mark Zandi: Today's statistics, yeah. I did a pretty good job without even looking at the data.
Cris deRitis: Yeah.
Ryan Sweet: You did.
Mark Zandi: That's bordering on clairvoyant, I would say.
Ryan Sweet: Let's not go that far.
Mark Zandi: No, you know what it is. It's just I know you. I know you well.
Ryan Sweet: Yeah, you do.
Mark Zandi: I know you well. I know where you're going to go.
Ryan Sweet: It's getting to the point where we can forecast each other's indicators, not necessarily hit the number.
Mark Zandi: That sounds weird somehow. You can predict my indicator. That's just not good. You know me too well.
Ryan Sweet: Yeah.
Mark Zandi: All right, well tell us about the 73.4. What does it mean? What is it and what does it mean?
Ryan Sweet: Supply delivery, so it's a fusion index. Anything greater than 50 indicates slower deliveries, which is getting tied back to the pandemic, globe supply chain issues. This is making it difficult for manufacturers to source materials and to rebuild their inventory. When we were talking about implications for near term growth, inventories are making up the bulk of GDP growth for the third quarter and should make up the bulk of growth in the final three months of the year, but if the these supply disruptions continue and linger, we might be kicking GDP further into next year and the second half of this year could come in lighter than what we think.
Mark Zandi: I may have missed it. Did you say 73.4, is that a new high?
Ryan Sweet: It's not a new high. The recent high was 78.8, but if you take that out, the 73.4 that we got in August is among the highest since the early 1970s.
Mark Zandi: Okay. I know you and Dante, one of our other colleagues, because we were emailing about this last night, developed or in the process of developing a, what do you call it, a supplier delivery, no, supply chain stress index.
Ryan Sweet: Correct.
Mark Zandi: Great name by the way.
Ryan Sweet: You've got to give Matt Calley, our colleague, all the credit on that one.
Mark Zandi: Yeah, that's a pretty good one. What is that index, and are you going to cover that on economic view, by the way?
Ryan Sweet: We will.
Mark Zandi: You're going to put it up there, okay. What is it and what is it saying?
Ryan Sweet: We've got a lot of client interest about, they're asking is there one metric that can highlight whether or not supply chain issues are getting better, staying the same, or getting worse. What we did is we went through all the high frequency data that we have, pulled out all the data that would be relevant to gauging stress in supply chains, and then using, basically mashing them all up together, creating an index. It does show that things have gotten a little bit worse over the last couple months.
Mark Zandi: What do you take away from this in a broader context? Does this make you more nervous about the outlook? Less nervous? About the same? Is this what you expected? Any insight from the number that bears on the outlook?
Ryan Sweet: It makes me a little bit more nervous. Just getting back to the composition of GDP growth is going to be very heavy in inventories, and if you look at the ISM survey and it's got a lot of great anecdotes in there, all the purchasing manufacturers are grumbling about the availability of commodities and the number of commodities that are listed as in short supply. That list is very, very long. I'm a little concerned that we're not going to get as much boost to manufacturing over the next few months once it pencils in our baseline and that inventories won't add as much to GDP growth. If you strip out inventories, we barely grew in the third quarter. Fourth quarter is likely going to be the same.
Mark Zandi: Yeah, right. I think this goes right back to the pandemic and the delta because the delta's disrupted supply chains, particularly Asia. Asia, Southeast Asia more specifically got creamed by delta and that's the beginning of a lot of these supply chains. A lot of the manufacturing facilities are sitting in Southeast Asia at the start of the supply chains, like chip production which we've talked about in the past.
Ryan Sweet: Delivery times are increasing and the number of ships off ports in the US continues to climb. We've just got these bottlenecks all through the supply chain and, unfortunately, they're not going to get resolved overnight. It's going to take a few months.
Mark Zandi: Your supply chain stress index, which is a compilation of all these measures of what's going on in the supply chain globally, that's sitting at a record high. Is that right, or close to?
Ryan Sweet: You had a great suggestion going further back, we only went back to, what did we do, 2012. We're going to extend it back further, but I would imagine, unless we go back into the '70s, I think it's going to be the highest in the past 30 years.
Mark Zandi: Right, okay. The last data point is for the month of August?
Ryan Sweet: We got the ISM today, so we'll run it for August soon.
Mark Zandi: Oh, okay. Yeah, I'm very curious.
Ryan Sweet: We have the September ISM, but we're missing a few inventory to sales ratios that we'll get next week, so we'll have the August data point then. I think it's going to get worse.
The other thing why we wanted to create this index is now we can quantify the impact on employment, GDP from supply chain stress.
Mark Zandi: Right, great. Yeah. That'll be very interesting to see what kind of impact this had. Okay. Okay, very good. Cris, you're up. What's your statistic?
Cris deRitis: All right, it's six dollars. At least it was six dollars yesterday. This is going to give it away. Six dollars yesterday, five dollars and 60 cents right now. It's pretty volatile movement.
Mark Zandi: This is a price for, got to be some kind of commodity because it's trading daily.
Cris deRitis: Yep.
Mark Zandi: We know it's not copper because copper's sitting just north of four dollars per pound. We know it's not gold. Gold is at, I think 1,750 an ounce.
Cris deRitis: It's not close to six dollars.
Mark Zandi: No. I'm just trying to show you that I know these numbers pretty well. This better not be something like a bushel of wheat or something.
Cris deRitis: No, no.
Mark Zandi: Okay. No wheat.
Ryan Sweet: The only one I can think of close to six dollars is natural gas.
Cris deRitis: You got it.
Mark Zandi: Oh, that's it. You're right.
Cris deRitis: That is it. That is it.
Mark Zandi: Excellent. Way to go, Ryan. Yeah. It's five dollars 70 cents per million BTU.
Cris deRitis: Correct, right now.
Mark Zandi: Okay. All right, that's a really good one actually.
Cris deRitis: Yeah.
Mark Zandi: Give us context. Where's it been? Why's it here? What's going on?
Cris deRitis: It's up big. Up 140% plus, well, again, volatile, so 130-140% over the last year. That's a huge increase. I'm particularly worried about it mostly because of Europe. Natural gas is really important to the European economy, Italy of course. When I was there, lots of people concerned about their electric bills, gas bills going up. I worry that this rise in natural gas prices, due to some of the supply chain bottlenecks you mentioned, Ryan, is going to crimp consumer spending. People are going to have to pay utility bills, who knows what the winter holds here, and that could take some of the steam out of the expected consumer spending over the holiday season next few months.
Mark Zandi: Natural gas in the United States, natural gas prices seems like forever have been sitting somewhere between two buck 50 and three dollars per million BTU. Now, all of a sudden, they've basically doubled.
Cris deRitis: Yeah.
Mark Zandi: In Europe, am I wrong Cris, but I think I heard $25 per million BTU? Is that right? Did I hear that right? Maybe it was in the UK, it's at $25 per million BTU? Is that right?
Cris deRitis: It is a regional market, right?
Mark Zandi: Yeah, it is.
Cris deRitis: There is liquid natural gas that trades to some extent, but largely regional. That very well could be the case. I haven't seen that, but I could take a closer look.
Mark Zandi: What's going on? Why are prices up all of a sudden?
Cris deRitis: Well, you've got a number of different factors. Everything from tension between Germany and Russia, or Europe more broadly and Russia. That's clearly playing a role.
Mark Zandi: Russia provides the bulk of natural gas to the rest of Europe.
Cris deRitis: Correct, correct. At the same time, related to this is the climate change issues in Europe, migrating away from coal and looking for alternative fuels, but those might not be ready yet. You have this crunch time there. You just have the restarting of the economy itself more broadly. During the pandemic, we cut back on the some of the exploration and fracking that was going on. Now we have to restart that, so clearly that could be an issue in some markets as well. You just have this confluence of all these different factors playing a role here in terms of the price increase, and then suddenly you have more demand coming up.
Mark Zandi: Could it also be the case, and I'm just throwing this out, is it that because prices, you said these are regional markets but they are connected to some degree through liquified natural gas, LNG. Could it be the case that prices are so high in Europe, it makes sense for natural gas producers here in the US to liquefy it, put it on a ship, and send it over to Europe and that's contributing to our prices here? Is that possible?
Cris deRitis: Certainly possible. Also Asia, of course, as they're restarting their factories during the recovery period here, also demanding more. Yeah, that is certainly a factor here in terms of how the distribution of this liquefied natural gas.
Mark Zandi: Hey, I've got a good story for you on natural gas in Europe. This might have been, I don't know, 15 years ago or something. I don't know why I was invited to this event, but you know The Pickle, the building The Pickle in London? It looks like a pickle, I think they call it The Pickle. It's a beautiful building and at the top of The Pickle, they have an area for events. I was invited to come for an event that was being sponsored by Gas Prom. Gas Prom is, well at least it was, I guess it still is, the Russian Gas company, and they had just inked a deal to ship natural gas to Europe. This was like a congratulatory event. Everyone's saying nice things about everybody else.
I remember the CEO of Gas Prom, oh and by the way we all got party gifts and the party gift was a natural gas light, a lighter for a pilot. You know those pilot light? I don't know if people still use them, but a pilot light, if your pilot light goes out, you can use this thing to turn it back on. It's like a little lighter. I think I have it somewhere, but anyway. The CEO of Gas Prom is this large guy, Russian, and all I remember of him, and he's up on this stage looking down at all the rest of us, and I can remember him saying, "You will buy my gas. You will buy my gas." He said it like three times. It scared the hell out of me actually.
Now, the Europeans may be ruing the day that they inked that deal because that's a pretty difficult position to be in. Anyway, that's a really good one. Geez, how does that bear on the outlook? I guess that makes you a little less optimistic, huh?
Cris deRitis: Yeah. Absolutely, it's a negative.
Mark Zandi: Well, the one thing I will say, though, we got a lot of fracking capacity here, and at least so far, the natural gas frackers have not really kicked into gear. I don't think they're really ramped up production, so they've been very "disciplined" about raising production. I don't know how long that can last at these prices because they can make a lot of money I think. I'd be surprised if we don't see fracking kick in to a higher gear. Although, as you point out, maybe because of the climate change issues and other regulations, it might be a little more difficult to do that this go around. I don't know.
Cris deRitis: Yeah, I've heard the frackers have some, like everyone else, labor problems. They're having trouble finding workers as well. That's also contributing to some of the supply constraints.
Mark Zandi: Yeah, good point. Good point. You guys are bring me down, geez Louise.
Ryan Sweet: All right, [crosstalk 00:19:30]. What about excess savings? Should that help cushion the blow from higher energy prices? We have $2.5 trillion in excess savings.
Mark Zandi: Yeah, for sure. For sure. Actually, we got another data point this week on that. We get the Fed's, I think we got the Fed's financial counts this week or last week and we use that. That's the Fed every quarter releases data on balance sheets, on household balance sheets, asset side, liability side, and for corporations, businesses. You can take a look at that and construct estimates of saving based on changes in the value of assets and liabilities. If you think about it for a second, you can connect those dots.
Anyway, we use that data to calculate excess saving, and in Q2 2021, the excess saving is about 2.5 trillion. Excess means that amount above which we would have expected if there had not been any pandemic and people had not sheltered in place and had not stayed at home and not spent. 2.5 trillion, that's a lot of savings. That's about, what is that, that's probably 12, 13% of GPD, something like that. Of course, a lot of that sits with high, very high income households who aren't going to be affected by these natural gas prices, but lower income households, they'll have less excess saving but they have some. Yeah.
Okay, all right. I'm going to try to cheer you up with my statistic. This is going to be, I'm just going say it and see if you get it, but I won't make you suffer, remain in pain for very long. I'll give you a hint. 0.5. 0.5. [crosstalk 00:21:13]. No, okay. I'll give you the hint. It came out on Monday. This is a monthly statistic. It comes out every month. It's key to the GDP numbers. We follow it pretty carefully. What else can I say to make this easier? The top lines--
Ryan Sweet: It's got to be durable goods, something in durable goods.
Mark Zandi: Exactly. Yeah, you got it. Durable goods. Durable goods is the spending by businesses on, well, durable goods, and that 0.5 is the increase, the percent increase, in new orders for non-defense capital goods, x transportation spending. I know that sounds like a mouthful, but what that is is a very good window into business investment, 0.5. Shipments were up, 0.5 is new orders. Shipments were up. Unfilled orders, they were up, and they're all very high. Record highs. By orders of magnitude high. Business are investing very aggressively. A lot of it's machinery, primary metals, a little bit on computer equipment, although, it's up relative to our spend in the last decade or so, but still well below where it was back in the '90s and early 2000s. I'd say broad based improvement in investment.
To me, gives me, businesses are expanding. We've got a record number of open job positions, almost 11 million. Typically, in a really good economy, we have six and a half, seven million open positions, so a lot of open positions. They're investing very aggressively. To me, that's more fundamental. It feels like underneath all the things going on in the economy, including the fallout from the delta variant, that businesses remain inherently upbeat, optimistic, willing to expand, able to expand. Profits are strong. Gives me a good vibe about where the economy is headed. How do you guys feel about that? Is that consistent with your view?
Ryan Sweet: Yeah, overall still positive. How much of that is substitution away from labor? Investments in automation, machinery? Do you think that's a major factor here, or is this more general investment into existing processes?
Mark Zandi: I think it's shifting. Well, obviously, at the start of the pandemic, I think it was work from home. Business had to invest in new equipment, new software, to get their employees up and running in a work from home environment. Each of us did that, right? Most Moody's employees got some sort of stipend, I think we all did, I'm not sure, for going out and buying whatever we needed to be able to do what we're doing now, and that's working from home which, by the way, is one of the consequences, longterm consequences of the pandemic that we'll come back to.
I think early on there was this surge of investment related to remote work, but that's now shifting. Now, because businesses are having difficulty finding labor, they're raising wages, but the other way to address the labor shortage is to invest in labor saving technology. That's what they're doing. In fact, the other interesting thing that's happening is because, if you go back five, 10, years ago, there was a shift in investment spending the business investment dollars towards energy investment, into the fracking fields. It took away from investment in labor saving technology, but now that investment has been made where businesses aren't investing nearly as much. A lot less capital is flowing into the energy sector, and it feels like that's freeing it up for labor saving technology. Maybe that's one reason why underlying productivity growth has improved.
Ryan Sweet: Yeah, I think so.
Mark Zandi: Yeah, yep.
Cris deRitis: Before we move on, I just want to remind you of the grief you gave me when I picked durable goods a few podcasts ago.
Mark Zandi: Really?
Cris deRitis: Oh, you gave me a ton of grief. You're like no one pays attention to durable goods.
Mark Zandi: I said that?
Cris deRitis: Yeah.
Ryan Sweet: Ben's got the tape. That's the beauty of this podcast is we'll rewind it. It's on record.
Cris deRitis: I picked core capital goods.
Ryan Sweet: Yeah, you said.
Mark Zandi: You picked core capital goods?
Cris deRitis: Yeah.
Mark Zandi: You probably picked it when no one was watching it.
Cris deRitis: Right, okay.
Mark Zandi: What can I say?
Cris deRitis: All right.
Mark Zandi: No, no, no. You're right. It's kind of an unsung statistic I think. Many people don't watch it, but it's a really good window.
Cris deRitis: It's very important.
Mark Zandi: Yeah, into business investment which is a good window into business expansion decisions which key to economic growth. To me, [crosstalk 00:26:06], go ahead.
Cris deRitis: I was going to mention that's one indicator. There's a couple that can really move the needle in our daily high frequency GDP model, which takes all the source data that feeds into the Bureau of Economic Analysis, estimate of GDP. That one can really move the needle a lot.
Mark Zandi: I don't think you said it in this podcast, but where are we sitting on that in Q3 GDP? Is it 3-9? Is it still [crosstalk 00:26:34]?
Cris deRitis: It's running right now because we got personal income and spending this morning. Spending and the prices are the most important, but my guess is it's going to come down.
Ryan Sweet: Maybe to three and a half.
Mark Zandi: The 3.9 is our estimate of third quarter GDP growth based on the monthly statistics including things like durable goods that we've gotten.
Ryan Sweet: Correct.
Mark Zandi: 3.9, and as you pointed out just a few minutes ago, a lot of that is just inventories. Just the rebuilding of some inventory, or maybe even just the less reduction in inventory, which would be an add.
Ryan Sweet: Correct. Three percentage points of GDP growth.
Mark Zandi: Three percentage points.
Ryan Sweet: Yeah. It's enormous.
Mark Zandi: If it comes in at 3-9 and inventories are three, you're saying the rest of the economy added only 0.9.
Ryan Sweet: Correct.
Mark Zandi: Tough quarter.
Ryan Sweet: Yeah, it was a rough one.
Mark Zandi: Tough quarter.
Ryan Sweet: Remember, we started off north of seven.
Mark Zandi: I know.
Cris deRitis: The data has soured pretty quickly.
Mark Zandi: Now, while I'm thinking, this is in my mind's eye, that the bulk of the weakness was in July going into August, and September feels a little bit better to me, and given the winding down of infections, if you take a look at a graph of infections, it feels like that has rolled over and starting to decline. That suggests that Q4 should be better. That growth should revive. That's in our forecast. Do you think that's still a pretty good forecast?
First of all, is my characterization of the data correct? July being bad, August not quite as bad, September feeling better. Do you agree with that, and what do you think that implies for Q4 going into 2022?
Ryan Sweet: Cris looks skeptical.
Mark Zandi: Oh really?
Cris deRitis: My recollection is August was pretty bad too. Trying to, [crosstalk 00:28:29] back in July.
Mark Zandi: Well, the employment number was bad in August, but that lags the GDP. July was bad output GDP. You've got a [crosstalk 00:28:35].
Cris deRitis: That was spending.
Mark Zandi: Yeah, or sales. Weren't they down in August too?
Ryan Sweet: Retail sales.
Mark Zandi: Yeah. You're going more pessimistic about Q4 too, then?
Cris deRitis: No, no, for Q4, but I agree with you in terms of the infections and COVID seems to be moving in the right direction. I think that's going to set us up for some strength in Q4. I'd be curious for Ryan's high frequency indicator for Q4. It is October 1st, right?
Ryan Sweet: Hey, Cris, come on.
Cris deRitis: Oh, that's really pressure on the guy.
Ryan Sweet: I can get it to you for the next podcast because we get, do we get, no, no, no. We got to wait. Vehicle sales is the trigger for--
Mark Zandi: I think we get that today, Ryan.
Cris deRitis: We did.
Ryan Sweet: Is that September or October?
Mark Zandi: September.
Ryan Sweet: It's got to be September.
Mark Zandi: Oh, September.
Ryan Sweet: Yeah, I need the October number and then I can run it.
Mark Zandi: Oh, so we're a month away.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay, all right.
Cris deRitis: I know he's got a number though. You've always got a number.
Ryan Sweet: I've got a number for everything.
Mark Zandi: By the way, talking about numbers. Next Friday is the September employment report. What's that going to be?
Ryan Sweet: Not good. Relative to expectations?
Mark Zandi: Yeah.
Ryan Sweet: The early consensus, all the economists, we have to submit our forecast on Fridays. Towards the later end of the day, we'll have a more solid consensus number, but right now it's 500,000 for total non farm payrolls and that change. I'm taking the under.
Mark Zandi: Less than 500K will, at this point--
Ryan Sweet: Don't ask me why.
Mark Zandi: Okay.
Ryan Sweet: I'm not going to give away the recipe
Mark Zandi: The secret sauce.
Ryan Sweet: Yeah.
Mark Zandi: You like us.
Ryan Sweet: [inaudible 00:30:13].
Mark Zandi: Which we need to talk about. Let's talk about it now. UI Claims, unemployment insurance claims, they feel like they're pushing up a little bit.
Ryan Sweet: Yeah, moving in the wrong direction, 362, 362,000 last week. That was up 11,000.
Mark Zandi: Yeah. Since it was declining and since when has it been basically flat to up? Really in the last month or six weeks? Is it longer than that?
Ryan Sweet: Three weeks I believe.
Cris deRitis: Three weeks, you're right. You're right.
Ryan Sweet: That's the first time it's been rising since last year April.
Mark Zandi: Yeah. What do you take away from that? It's just a reflection of this soft patch that we're in.
Ryan Sweet: I think it's COVID. That's California, Texas, and Michigan saw the biggest increases. I think it's COVID related and now that infections are coming back down, I'm hopeful that things start moving in the right direction.
Cris deRitis: Michigan's partly autos.
Ryan Sweet: Yeah.
Cris deRitis: The great thing about the claims data is that states can comment about what drove either the increase or the decrease in claims. That's why you can identify hurricane effects, and Michigan and other auto heavy states have mentioned layoffs in the automobile industry.
Mark Zandi: Okay. This is an indicator we should be watching to gauge whether our outlook for Q4, a Q4 bounce and recovery Q4 is going to come to pass or not, and right now, coming into September, it's not there yet.
Ryan Sweet: Yeah, we just be careful claims because California has really driven the increase in the last two weeks, and California announced recently that people that are still unemployed or either have their hours cut can file for regular state unemployment insurance benefits. We might be having a lot of refilers. It might not be, basically not newly unemployed workers, people just refiling again. Claims count the number of people that file, not necessarily receive unemployment insurance benefits.
Mark Zandi: Got it. Well, it's not great that UI claims are drifting higher here. That can't be good.
Ryan Sweet: No.
Mark Zandi: It's probably overstating the case.
Ryan Sweet: If you recall, California's UI benefits system was a disaster during the pandemic. They had a lot of fraud issues. Need to take these numbers with a little grain of salt.
Mark Zandi: Yeah, okay. Okay. A statistic that we've been following regularly that seems to be signaling something else, just the opposite of a weakening economy, all else being equals signals a strengthening economy I guess, I want to hear your view, is the rise in the ten year treasury yield. For context, we got as low as, I believe, 1.2, 1.25% on the ten year treasury yield back I'd say in May, maybe in June. I think more closely to June. Then in the last week or so, it's really the bond market has sold off, interest rates have risen, we're back, last I looked, at 1.5% on the ten year, which is obviously still very low by any historical standard. Back in the spring of this year, we were at 175. It's still low, but it has moved up, at the same time that we've been getting these weakening economic statistics for Q3. That seems incongruous. How do you square that circle, Ryan? I know you follow that ten year yield very closely.
Ryan Sweet: I also know you're not buying in to my explanation.
Mark Zandi: Yeah. Well, let's hear your explanation and I may push back.
Ryan Sweet: Let's see if Cris buys into it.
Mark Zandi: Okay.
Ryan Sweet: This is what's happening. When you decompose the ten year treasury yield into its three main parts, one being longterm inflation expectations, they haven't budged. That doesn't explain any of the wiggle in the ten year treasury yield. The expected path of the real Fed fund rate has risen since the FOMC meeting, when the dot plot showed the Fed was kind of divided, 2022, 2023, but they also raise the amount of tightening in the cycle and markets responded to that. Market expectations for the expected path of the Fed fund rate rose since the end of the last FOMC meeting. That explains some of it. Then the Fed also announced tapering. Didn't announce tapering, kind of sent a signal that tapering is coming. Powell said it's going to be an eight month tapering process, which means that's $15 billion per month. They're going to go from 120 billion down to zero in the course of eight months. Market consensus, and you can get this from the Fed's survey of primary dealers which they do right before any FOMC meeting, they were expecting 15 billion per FOMC meeting.
Shorter tapering window and a little bit more aggressive, that pushed up the term premium or the extra compensation investors need to hold long term rates versus short term rates. It's a combination between a higher term premium and a higher path for the Fed fund rate has nudged the ten year treasury yield higher.
Mark Zandi: Okay. Okay. Ten year yield equals inflation expectations plus real short term interest rates plus term premium, which is the yield compensation, the extra yield that investors demand, for buying a long term bond versus a short term security.
Ryan Sweet: Correct.
Mark Zandi: You're saying inflation expectations, no change there, okay, which is actually good. Buying investors don't think inflation's a problem. They think the spike in inflation we've experienced is temporary, transitory as the Fed would say. Real short term interest rates have risen, and so that means bond investors are thinking the Fed's going to be a little bit more aggressive in raising short term interest rates. In fact, in the dot plot that we got which shows the forecast of the FOMC members, the folks on the Fed that make policy, they pulled forward when they are actually going to begin raising short term rates into late 2022, as opposed to early '23, so that makes sense.
Then you're saying because of this somewhat more aggressive, at least compared to expectations, bond market expectations, aggressive winding down of quantitative easing QE bond buying that has lifted the term premium.
Ryan Sweet: Correct.
Mark Zandi: It's really those somewhat higher real short rates and higher term premiums. You don't think the debate, discussion, over the debt limit is playing any role here?
Ryan Sweet: Not at the long end of the yield curve. The short end of the yield curve, very clear evidence that people are getting worried, got that normal kink in the treasury bill curve. Bills that are maturing right around the drop dead date, which Yon puts it October 18th, are trading to a premium relative to bills on either side. We've seen that 2013, 2011, when we had that ceiling fight to get this kink in the treasury bill curve, but if you also look at the auction results for four week treasury bills, very little demand, and that's another telltale sign that investors are starting to think more about the debt ceiling.
Mark Zandi: Okay. Don't you think that also is impacting the term premium then? You don't think?
Ryan Sweet: Maybe a little. I think tapering [crosstalk 00:38:04] is much more. I think maybe you're right, the debt ceiling is having a little bit, but maybe--
Mark Zandi: How could it not? If it's affecting short yield, it's got to have some impact. [crosstalk 00:38:13].
Ryan Sweet: I think we're still too far away.
Mark Zandi: Margin. Too far away.
Ryan Sweet: I think coming up that will play a larger role, but right now, just given the relative distance to the debt ceiling drop dead date versus market's still digesting the Fed, I think the Fed's driving rates up. It's not a temper tantrum like 2013. It's still pretty orderly.
Mark Zandi: Oh yeah, right. Okay, very interesting. Do you think the run up in the ten year yield has more to run here? Our forecast is for the ten year yield to end the year, roughly speaking, 175. That's up 25 basis points, and then to keep rising next year as the economy continues to improve and approaches full employment. We're sticking to that? We're good with that?
Ryan Sweet: Cris?
Cris deRitis: That's the Moody's analytics forecast. Right Ryan?
Ryan Sweet: Yes.
Mark Zandi: You guys [crosstalk 00:39:12] still don't think that's going to happen?
Ryan Sweet: No. Whoa, whoa. Don't throw me under the bus on this one. We, Maverick, we.
Mark Zandi: Fair enough. Fair enough. Although, I think we had a bet, we'd have to go back to the tapes here, I think you're on the lower end, right, if there is a difference?
Cris deRitis: Ryan's on the lower end, right?
Ryan Sweet: Yeah, yeah.
Mark Zandi: Yeah, I think I was on the high end.
Ryan Sweet: You're on the high end.
Mark Zandi: Are you saying you don't think 175 makes, you're uncomfortable with that? At this point, you're uncomfortable with 175?
Ryan Sweet: Feels a little high.
Mark Zandi: Ten year yield, end of year, 25 basis points away.
Ryan Sweet: Feels a little high.
Mark Zandi: A little high? Cris?
Cris deRitis: A little high.
Mark Zandi: Really? Goodness gracious, we rose 25 basis points in one week, maybe ten days.
Cris deRitis: We can go down 25 basis points.
Mark Zandi: Why would that happen exactly? Don't answer that question. I don't care. You're wrong.
Cris deRitis: Tapering doesn't actually kick in, right, okay?
Ryan Sweet: Or Congress completely falls apart and we don't get an infrastructure bill that has been priced into the bond market.
Mark Zandi: Ah, well let's go there. That's a good place to go. That's where I wanted to go next because this has been a busy week in D. C. I guess the good news is that Congress and the administration came to terms on the short term funding bill to keep the government opened as of today, the start of the new federal fiscal year, October 1. [crosstalk 00:40:36] It's a short term funding bill continuing resolution through early December, I believe. That's good news. Dodged that. I guess that was a modest bullet, right?
Ryan Sweet: Yeah.
Cris deRitis: Yeah.
Ryan Sweet: Until December. Just kicking the can.
Mark Zandi: Yeah, yeah. Right. That gets us to the infrastructure package and the reconciliation bill for spending and tax credits for social, very social programs and climate change because if that's passed, then there is no funding issue. That resolves the funding issue for the remainder because that's the budget going forward.
Right now, we are assuming, and I think the bond market and other investors are roughly assuming the same thing, that the infrastructure package gets passed, that democrats, right now the Democratic House is embroiled in, the democrats are, trying to figure out how to thread the needle here politically and get moderate democrats and progressive democrats together and sign on the dotted line. We're assuming that that happens. Maybe not today, but in the near future. That would be an additional 550, 575 billion over 10 years on public infrastructure. Then we're also assuming that this reconciliation bill, which just requires all democratic votes in the Senate, is not going to be 3.5 trillion over 10. That's sort of what's on the table right now. It ultimately ends up being 2.5 trillions, splitting the difference between the 3.5 trillion on the table and the 1.5 trillion that Joe Manchin, the centrist democrat from West Virginia has said that he would be comfortable for.
My take is he said 1.5, 3.5's on the table, the compromise is two and a half. Of that two and a half, roughly a trillion and a half is, maybe a little bit more, is paid for with tax increases. You get a budget deficit over the next 10 years. It's about a trillion higher than it otherwise would have been without the legislation.
That's what we're assuming. Ryan, let me ask you this. Do you think, and I know it's impossible to know, but is your sense that that's what investors are discounting?
Ryan Sweet: Yeah, I think so. I think that's close.
Mark Zandi: Close.
Ryan Sweet: They're definitely not pricing in three and a half trillion.
Mark Zandi: They're not pricing in nothing.
Ryan Sweet: Right. I think splitting the difference is appropriate.
Mark Zandi: Right. If they don't pass that, if they can't get the reconciliation bill through and they can't get the infrastructure bill through, what happens in markets?
Ryan Sweet: You'll see the 10 year drop.
Mark Zandi: You think the 10 year will drop?
Ryan Sweet: Yeah. Not a lot, but it will come back down.
Mark Zandi: It'll come back down because of less growth.
Ryan Sweet: Correct.
Mark Zandi: Right. That would be my inclination as well. My thought as well. Cris, same perspective?
Cris deRitis: Yeah, I don't think it's a lot though. I don't think that's a major factor.
Ryan Sweet: Right.
Mark Zandi: We might go back down to one and a quarter or 1-3, something. All this run up we saw in the last 10 days will get wiped out.
Ryan Sweet: Yeah.
Mark Zandi: Right. Of course, then my forecast for the end of year will be wrong, more likely be wrong, and yours is more likely to be right. Okay. Okay.
Let me ask you this. What probability, and again this is our baseline assumption around fiscal policy, but what is your own subjective probability of that baseline coming to pass? We get that infrastructure bill, we get that 2.5 trillion reconciliation bill? What do you think, Ryan? What probability you put on that?
Ryan Sweet: 40%.
Mark Zandi: Oh, so you don't think it's going to happen.
Ryan Sweet: I'm getting increasingly pessimistic.
Mark Zandi: Both bills? Both infrastructure and reconciliation?
Ryan Sweet: Oh no. No. I think infrastructure's a done deal.
Mark Zandi: Oh, you do?
Ryan Sweet: Yeah, I think it's done. It's a done deal. They'll figure that one out. I'm concerned that they're not going to be able to pass the reconciliation one.
Mark Zandi: Oh, okay.
Ryan Sweet: 2.5 trillion.
Mark Zandi: Yeah. Okay, [crosstalk 00:45:06], you think it'll be something smaller than that?
Ryan Sweet: Two trillion could be a ceiling.
Cris deRitis: I think so.
Mark Zandi: You're saying we'll probably get a bill, but it's not going to be two and a half trillion.
Ryan Sweet: Yeah, it's not going to be two and a half.
Mark Zandi: What's the probability of a $1.5 trillion bill, reconciliation bill?
Ryan Sweet: 70, 70%.
Mark Zandi: Oh okay, fine. Okay. I hear you. I got it. Now I understand. Okay. [crosstalk 00:45:27]. Cris? Pardon me?
Ryan Sweet: Have you been called down to D.C. recently? You need to give them a pep talk.
Mark Zandi: Well, physically I haven't been down there. A lot of Zoom calls, a lot going on. Bernard Yarros and I have been doing a lot work on opposite of the debt limit. We have a paper out that if folks haven't read, can find on economic view or you can just Google, which I think has had some impact on the debate and discussion around the debt limit. We've done a lot of analysis of these various elements of the fiscal package, of the reconciliation and the infrastructure plan. Been doing a lot of work around that.
Cris, what is your probability assessment of this?
Cris deRitis: It's pretty close to Ryan. I think the infrastructure will go through. I'm more pessimistic, though, on even two trillion or even 1.5 trillion.
Mark Zandi: Really?
Cris deRitis: Yeah, I think the negotiations are just going to break down here because I don't know that --
Mark Zandi: Ryan puts a 70% probability on 1.5 trillion, 40% probability on 2.5 trillion. What are your--?
Cris deRitis: I'm at 50/50 on each.
Mark Zandi: 50/50.
Ryan Sweet: Typical Cris. That's a typical Cris response.
Cris deRitis: Oh geez.
Mark Zandi: I know. I know. I know. That's what he does, yeah. You can't pin him down. Cris, 49 or 51, which is it?
Cris deRitis: On which one? The 1.5?
Ryan Sweet: Yeah, I know.
Mark Zandi: That's okay. No, that's fair, 50/50. Basically you're saying you just really don't have a good, you don't have a strong view one way or the other.
Cris deRitis: Yeah, I think it's really to placate Manchin, you're going to lose the progressive. I don't see how this, so probably I'm putting even more weight on nothing. There's such a stalemate. We just kick the can. We continue to revise the bill and it's kicked into next year.
Ryan Sweet: Got it.
Mark Zandi: Well, I say 75% probability on the infrastructure and two-thirds probability on some form of reconciliation bill. Ryan, I hear you. It could definitely be less than two and a half trillion. Somewhere between one and a half and two and a half, I say two-thirds probability. I just think the democrats understanding, well first of all, I think this is good economics and they understand the politics of it. If they don't get something through, then it means, I think in mind of much of the electorate, that they can't govern. They couldn't get it together, and that's not good for the mid-term elections which are already going to be pretty rough just given history for the incumbent party. The mid-terms are always tough. I think that wins the day, and they come to terms one way or the other.
What's going on now, this may be Pollyannish, but my view this is a good thing that they're debating, discussing, going back and forth. It's not fun to watch, but I actually think it makes for a lot better legislation. They really hone in on what their top priorities are and what's going to be most cost effective and important to them. We get a better piece of legislation out of it. I view it as kind of a positive process. The legislative process, the analogy sausage making, and I think it kind of like sausage making, but I think it makes for better sausage at the end of the day.
Ryan Sweet: Would you and Cris sign on if it's just one and a half trillion? Cris, I know, wouldn't still.
Mark Zandi: If that's my only, one and a half, the choice is 1.5 or nothing?
Ryan Sweet: Yeah.
Mark Zandi: Yeah, I'd sign on.
Cris deRitis: What's in that 1.5?
Mark Zandi: Good stuff. [crosstalk 00:49:17].
Ryan Sweet: Part of sausage.
Mark Zandi: Yeah. I think you're partial to the child tax credit, I believe. Aren't you?
Cris deRitis: I'd do child tax credit and the EITC, earned income tax credit.
Mark Zandi: Yeah.
Cris deRitis: I think there's a lot of good things in there that we need to pursue. Yeah.
Mark Zandi: Anyway, that's a topic we've had in previous podcasts and future podcasts. We've got to move on.
Let's go to the big topic, and the longer term consequences of the pandemic. I think there are potentially many, but I think the way we'll do this, we'll each identify a consequence we think is particularly important and just lay that out and we'll have a little bit of a discussion around that. I will say, just to preface it, that one of the long term consequences that I was fearful of happening as a result of the pandemic is not going to, and that's scarring, the so-called concept of scarring. That you go through a wrenching downturn or shock like a pandemic, and that creates all kinds of bankruptcies and failures and just really scrambles the economy to such a degree that its long term prospects are impaired.
If we had seen a lot of business failure, it would have been much more difficult for the economy to recover, kick back into gear, and to get back its groove, but that did not happen. It's very fortuitous, and I think a lot of that goes to the policy response. It was so aggressive that, both the monetary side and on the fiscal side, that it allowed the economy to avoid those scarring affects. In fact, to some degree, I don't know if you've been following, but we did get a late level of failure, business failure, but it was pretty modest compared to my fears.
Countervailing that, something that I did not expect at all but is evident is a surge in business formation. At least judging by the number of businesses, new businesses, that are filing for tax payer identification numbers, really cool data, and that has surged. Amazing and it's across almost every industry. I think every industry's up a lot, across every part of the country.
It feels like this pandemic has unleashed a certain amount of entrepreneurism. No scarring effects, and I think that's a very positive thing. One reason why to be optimistic that the economy can get back all it lost and back to full employment here pretty quickly, at least compared to past recessions. Certainly compared to the expansion after the financial crisis when there was a lot of scarring that we had to work through to get back to full swing.
Well, we just had a series of technical difficulties. First Ryan's Zoom crashed, and he's now back up and running, but then I got kicked out. Now, I'm back. Sorry about that. Let's kick back into gear. I'm just letting you know this, listener, because I might sound a little bit different now, but we're all together again.
Let's pick up the conversation with long term consequences of the pandemic and Ryan, I was turning to you. What's at the top of your list of long term consequences of the pandemic? What would you like to highlight?
Ryan Sweet: I think something that's going to be with us for an extended period of time is the large amounts of sovereign debt. In response to the pandemic, various countries, they did the right thing. They were very aggressive with fiscal stimulus, fiscal support, but that caused the debt to GDP ratio in a number of countries to skyrocket. Eventually, that's not on a sustainable pace. We're going to have to get, even in the US, our fiscal house in order, and I'm a little concerned how other countries are going to address this given the varying degree of economic recovery and when interest rates begin to normalize because right now everything's fine. Interest payments are still very, very low because rates are rock bottom, but in a rising interest rate environment, I think we're going to start to see some warts emerge.
Mark Zandi: Yeah, that's a bold statement. You're thinking that a couple three years down the road, this is, what? How does it manifest itself, this issue?
Ryan Sweet: We're going to have a repeat of the sovereign debt crisis. It doesn't have to necessarily be in Europe, it can be somewhere else, but I think just given the amount of debt that was accumulated over the last 12, 18 months, we're not going to get out of this without at least a couple hiccups. Remember, the bond market, that doesn't matter until the bond market says it matters and you just can't predict when they're going to say it matters for some of these countries.
Mark Zandi: Right. Do you have any countries in mind? You're not saying the United States or are you?
Ryan Sweet: No, no, no. Not the US. We have to get our fiscal house in order, and I think we will, but not next year, not the year after that. No, I'm not worried, I mean I'm losing a little bit of sleep about the debt ceiling, but you take that out, no I'm not worried about the debt to GDP ratio in the US. I'll make a bold statement, but I'm not going to pinpoint a country. That's a perfect crystal ball, which I don't have.
Mark Zandi: Right, okay. I guess the concern is predicated on rising interest rates. The interest rates rise. Are you saying they simply have to normalize, go back to what pre-pandemic levels and this will be a problem, or do you think they have to go even higher than this for this to be an issue?
Ryan Sweet: They probably have to go higher and, again, a lot of conditions have to fall in place. The assumption that we're going to get out of this gracefully I think is a little bit of a stretch. Some central banks are going to overdo it. They'll tighten too much and that could cause some problems down the road for countries that have a lot of sovereign debt.
Mark Zandi: Right. You also mentioned corporate debt. Same kind of, I guess the Evergrande, the Chinese real estate company that has now defaulted on its debt is symptomatic of your concern around corporate debt globally.
Ryan Sweet: Correct.
Mark Zandi: I see. Do you think that's as big a deal here in the United States as it is in other parts of the world or just there's a big deal here in the US as well?
Ryan Sweet: I think it's the biggest deal in China. In the US, I'm not that concerned because when we had the hiccup or the heightened angst around Evergrande, if you look at corporate bond spreads in the US, they remained very, very tight. They widened a little bit, but they're still historically low. Even looking at credit spreads up and down the credit ladder, from your investment grade all the way down to your very low grade corporate debt, they didn't really respond. Businesses, corporate profits, as you mentioned before, are very, very strong. Profit margins are still pretty wide. Businesses are flush with cash. I'm not too concerned about any issues on the US corporate side. Even the high yield corporate bond market, demand for that issuance is still really, really, strong. It's on fire this year. That will wean, that will soften, but I'm not too concerned about the corporate side.
Mark Zandi: Right. Cris, what do you think of Ryan's consequence? Do you share his level of concern?
Cris deRitis: Well, perhaps not broad based. I think there will be certainly some countries on the periphery that are exposed and as rates rise, they will have problems. I think we are due for some of those signals, but I don't see, yet, the conditions for that spilling over to broader, certainly global or even regional crises at this point.
Mark Zandi: Ryan, you're saying there's a reasonably high probability that two, three, maybe four years down the road, as rates rise, we're going to see some kind of event, if not a crisis, some kind of event particularly in the sovereign debt market, but I guess in corporate debt markets as well, overseas outside of the US that will be a long term consequence of this pandemic? Something that we still have to work through.
Ryan Sweet: Yeah, and I don't think it's going to be a crisis. When I say a repeat of the sovereign debt crisis, on a much smaller scale. Before it was the Portugals, Italies, Spains, and Greeces. Maybe, like Cris said, another country on the periphery where we see this issue, and at the time we'll be able to look back and say that was pandemic related. I think it's going to more like that here and there, sprinkled across the regions. I don't think it's going to be a global debt crisis.
Mark Zandi: Right. [crosstalk 00:58:54]
Cris deRitis: What about, sorry. What about zombie corporations? There's a lot of talk about some corporations that are limping along here, benefiting from the low rates, and actually would be perhaps even therapeutic to go through some reorganization here. Do you see that on the horizon?
Ryan Sweet: Yes, probably on the horizon. The US will experience some of this, but not until 2024 when the Fed starts to, once rates get high enough where they start to bite into the economy. It's still a little ways off.
Mark Zandi: Well, I'm sympathetic to this concern. In fact, I think it will be difficult for policy makers to actually become more fiscally disciplined without interest rates rising to a significant degree and putting pressure on economies so that they can connect the dots for electorate that here's why we have to be more fiscally disciplined because if rates don't rise, what do policy makers say to people. Why are we raising taxes? Why are we cutting spending or restraining spending growth? Because why? What's the logic behind that? There's got to be something that policy makers can point to to say hey, this is the reason why.
In fact, the last time, I think, in the US that policy makers showed any kind of fiscal discipline was in the early mid-1990s under Clinton, President Clinton and then Treasury Secretary Reuben, and that was the period of so-called bond market vigilantes. The bond market investors would drive interest rates up and they were driving them up because of the fiscal situation, the nation's federal government interest payments share of GDP was at a record high. We're spending more on interest than we were on the military budget. The bond market was losing it. Interest rates were rising. Secretary Reuben could say to President Clinton, hey look, this is why we have to do it. President Clinton was able then to articulate the economic logic behind why we needed to be fiscally disciplined to the population, and we got legislation. He backed away from his fiscal support packages and by the end of the decade, many reasons for it, but by the end of the decade, we had a surplus. I think in fiscal year 2000 we had a surplus, believe it or not. That was the last surplus the government ever ran.
I think you're right, Ryan. Unless interest rates just remain low for so long, for much longer for reasons that we're not accounting for, not contemplating, we need those higher rates to get to this. We need that kind of event. We need that pressure to get the political wheel to actually address the fiscal situation.
I don't know how you feel about that argument.
Ryan Sweet: No, I think you and I are in agreement.
Mark Zandi: Yeah, okay. Okay, that's a good one. I think you're right. I think that's a dark tale of the pandemic, something that we're going to have to work through down the road.
Cris, what's at the top of your list?
Ryan Sweet: I knew Mark was going to pick something rosy that came out of the pandemic, so I had to pick something dark to kind of offset it.
Mark Zandi: Well, no, no. Wait. I think mine's--
Ryan Sweet: We'll see.
Mark Zandi: Yeah, we'll see. Yeah, we'll see. Cris, what's at the top of your list of long term consequences?
Cris deRitis: Yeah, lots of consequences, but I would actually group many of them under the demographic impact. I look at the pandemic, lots of the demographic changes were accelerated. Birth rates just one example. Birth rates collapsed back in 2020 and they've started to come up a bit, but I suspect given the lack of housing as well, the household formations were also suppressed, that we won't get back up to the birth rates that we had prior to the pandemic, which were already on the down trend. I think we've accelerated that trend, and that has all sorts of consequences in terms of labor market, supply of workers in the future. Has implications for the housing market in terms of new household formations, say 10, 20 years from now. Looking further out, I think we will continue to see the impacts of the pandemic making their way throughout the economy, really just accelerating those on the trends that were already in place in terms of the demographic slowdown.
I see that globally as well. It's not just the US where we see this down trend in terms of fertility, but across the globe, developed as well as less developed countries. You're seeing those birth rates decline, and I expect that we will see population leveling out sooner than what we would have projected prior to the pandemic.
Mark Zandi: Yeah, no. That's a good point. It's fertility rates. I guess the death rates are up, but just by definition because of the pandemic. Immigration is significantly impaired, has been significantly impaired, and I don't see that changing for a while either. Even before the pandemic, obviously it was under a lot of pressure politically, but in the pandemic world we're in, I think immigration patterns will be significantly curtailed. That's a good one. That has all kinds of long term implications for the economy for sure.
Did you mention the retirement, the mass retirement of the baby boomers in the pandemic?
Cris deRitis: That's [crosstalk 01:05:01], I did not mention that, but that certainly feeds into the demographic effects here as well. It highlights just the aging of the population overall. I do have a number of baby boomers who affected by the pandemic, perhaps approaching their retirement years, and perhaps taking advantage of some acid price appreciation on their retirement portfolios or house prices to take early retirement. That, I certainly expect to see that. I think those labor force participation rates are not going back up. I think they're going to remain suppressed. That's, in terms of the near term effect, I think that's going to be substantial and it's going to contribute to the lack of labor supply.
For that reason, I think we'll have automation speeding up. Some of the durable goods spending statistics we talked about earlier, I think we'll continue to see that push because we just don't have enough workers to go around. We'll probably wake up too late to immigration policies. Meaning when we decide that we need to let more people into the country, it just won't be there because there's a shortage of workers globally. It may be difficult to attract more and more people.
Mark Zandi: Right. A long term consequence of the pandemic, a lot of demographic effects, but one of the more significant in terms of an economic consequence is the impact on labor supply. It'll be more impaired. I think we were going to have labor supply issues.
Cris deRitis: Regardless.
Mark Zandi: Even without the pandemic.
Cris deRitis: For sure. I just think we accelerated it.
Mark Zandi: We accelerated it, yeah. I think you're right, we actually exacerbated it. I think that the foreign immigration effects are going to be long lasting and that significantly affects labor supply and that's going to be a big deal going forward.
Okay, that's a really good one as well. Although, that's also pretty dark. Not very optimistic. Okay. Another dark tale of the pandemic.
All right, well, I'm going to pick one that I think has positive and negatives, and I would argue this may be the single most important consequence at least in terms of, again, the economic implications, and that's remote work. We've talked about this in the past on the podcast and still a fair amount of debate about it. I think increasingly less so. If you go back six, 12 months, certainly 12 months, six months ago, I think there was a fair amount of debate whether remote work was here to stay, and I think that debate is fading away. I think it's pretty clear that some form of remote work is going to be with us going forward.
I think most companies are adopting a hybrid, work from home more often, come into the office two, three days a week, but increasingly I think companies are saying hey, you can live anywhere you want. You don't necessarily need to come into the office. As technology continues to improve, that'll be empowered and given that tight labor market that we just talked about, I think workers have the upper hand here. It feels like, not all workers, maybe not younger workers, but most I think really like working from home. They're not really sure about going back to the office. I kind of feel that way. I really like working, although given the technical difficulties we just had, it's a little frustrating. We'll overcome those, and I think technology will improve. I think remote work is here to stay.
The implications are massive. One is just where people live and the impact on regional economies. We collect this data based on credit files from Equifax. Get a 10% sample of all the credit files in the country every month, and it's anonymized but we can see addresses. We can track address changes and here's a statistic. Prior to the pandemic, say in the year through February of 2020, roughly 275,000 more people left urban cores of US metropolitan areas, there's a little over 400 metropolitan areas across the country, than came to them. 275,000 more people left urban areas for suburbs, exurbs, and rural areas than came from those areas into the urban core.
In August of this year, that's the last data point we have, it was close to 600,000. 600,000 more people left those urban cores. It feels like it's topping out, but it doesn't feel like it's rolling over. Doesn't feel like it's coming in at all, and I think that just goes to this dynamic, this remote work dynamic. If you look, the top 10 cities that are losing people on that, mostly in the northeast corridor, Boston, New York, Philly, D.C., also in California, no surprise Bay area, LA, Seattle. Miami, also losing a lot of people. People in the northeast corridor are going to Atlanta and Charlotte and Charleston, and Jacksonville, Florida, Tampa, Austin, Texas, and the people leaving California and Seattle are moving to Boise and Salt Lake and Denver and Phoenix and Tuscan and Vegas. That has so many implications for those economies.
It has implications for real estate markets, housing markets, commercial real estate markets. Has implications for fiscal situations of state and local governments. I could go on and on and on. It's a big deal, and I just don't see that going backwards.
By the way, Cris, you mentioned on the demographic side, the pandemic just reinforced trends that were already in place. I'm not sure this trend was in place. I think this is a new trend. This is an inflection point. This is something that maybe would eventually happen, but the pandemic really caused a big shift here all at once. I think it's a big deal.
Not necessarily negative, I don't think that. Just an adjustment and ultimately maybe even a positive because I think, ultimately, this works because it improves productivity. People are able to be more effective in their work because they're working where they want to work. I think that's a good thing.
I don't know. What do you guys think about all this? Do you have a different perspective on this, different view, or are you in agreement?
Cris deRitis: I would generally agree that you get better matching. Certainly that's one immediate effect. However, I wouldn't want to overstate it either. There are lots of jobs still, a majority of jobs that don't lend themselves to remote work. Just a little bit of a caution there. Yeah.
Mark Zandi: Yeah, good point.
Cris deRitis: Upper income, upper educated, sure. Big game changer. Other parts of the distribution, maybe not so much. Still need to be in person and those jobs may not have shifted as much as we think.
Mark Zandi: Good point, good point. Ryan, got any comments on this? Any insight?
Ryan Sweet: No, I agree with Cris. I think he made a great point.
Mark Zandi: Yeah.
Ryan Sweet: Nothing else. A personal anecdote, I thought during the pandemic that, I teach at a local university, and I thought online education was just going to, that's where we're going. Back in person now, and there's no indication that they want to move back online. They want in class teaching and everything.
Mark Zandi: Yeah. Yeah. I'm sure, yeah, that's a good point. Well, just tying it all back to where we started. When I was down in Miami speaking to that real estate group organization, NAOIP, which includes office developers and owners. As you can imagine, they weren't too thrilled with this. I talked about remote work and the impact on real estate markets and office markets in particular, and they weren't particularly, they weren't buying in to the same degree you guys are. In fact, they argued and they argued via questions. A lot of people posed questions about the mental health consequence of remote work for workers, particularly younger workers who use workplaces as a form of socialization. It's also important to be at work to develop relationships, mentorships, and that kind of thing. Their view was, again via their questioning, it appeared that they were not so sure that the remote work was going to be quite as prevalent as at least I was arguing. We'll see about that.
In fact, I think this topic of long term consequences would make for a good book. What do you guys think? I think we should write a book. I think there's many, many more consequences and I think people would find that interesting. I don't know. What do you guys think? Would that be a good book?
Cris deRitis: I'd read it. I'd read it.
Ryan Sweet: So would I.
Mark Zandi: Would you write it?
Ryan Sweet: That's a question.
Cris deRitis: Yeah, for sure.
Mark Zandi: You'd read it. I need someone to help write it.
Ryan Sweet: Yeah, a couple chapters.
Cris deRitis: Yeah, we each take a couple chapters.
Mark Zandi: yeah.
Cris deRitis: Yeah. I think it's a good idea.
Mark Zandi: That's what I'm saying. Yeah, we all get together, whoever wants to participate, and we each write a chapter or two or three, and I think people would find that interesting. Don't you?
Ryan Sweet: Absolutely. Maybe [crosstalk 01:15:40] in there along the way.
Mark Zandi: A few bets. Yeah, I wouldn't count on making on money, but I think it would be interesting to do. Okay.
All right, this has been a little odd podcast. We've had so many technical difficulties. Hopefully it hasn't been too disruptive for the listener, but we're glad that you stuck with us. Next week is the jobs number, so that'll be a, I think, a very interesting podcast. Then we have a number of guests coming on after that to talk about different topics, including climate change and ESG and lots of other things coming up. Looking forward to that.
Until next week, thank you very much. We'll see you soon. Take care now.
