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Moody's Talks - Inside Economics
New Year, New Outlook
To kick off the new year, Mark, Cris, and Marisa share their U.S. economic outlooks for 2023. Which sectors are at risk? Will the Fed tip us in? We discuss the full gamut and introduce a new segment where we take listeners' questions.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Marisa DiNatale and Cris deRitis. Hi guys.
Cris deRitis: Hey Mark.
Marisa DiNatale: Hey Mark.
Mark Zandi: We had a nice dinner last night. We're taping this a little early. We're going to release this podcast, I think right before New Year's, or was it right after New...
Cris deRitis: Yeah.
Mark Zandi: Right before New Year's. Yeah, okay. This is for Christmas, so a little early. We're going to talk about the 2023 economic outlook. A little bit of an evergreen, so not as time sensitive, but we had a nice dinner last night for one of our retiring colleagues, Sophia Koropeckyj. We'll miss Sophia.
Cris deRitis: Absolutely.
Mark Zandi: Did she say she's been with us, with me for 28 years? Something... I think it was 28 years.
Cris deRitis: That's what you said, yeah.
Mark Zandi: Yeah. Pretty amazing career. She was in the background. She's not a publicity hound like Marisa is. She's always looking for publicity. Yeah.
Marisa DiNatale: That's me.
Mark Zandi: Yeah. Yep. Sophia's a very quiet person, but it was really critical to keeping all the trains on the tracks and keeping our work going forward and across the finish line. Fair, but I'd say a pretty reasonably tough task master, you know you need a little bit of grit in the ability to swing some elbows every once in a while to get stuff done, especially with a bunch of economists. She did that with [inaudible 00:01:54], so we'll miss her. It was a very nice dinner, and thank you Sophia, for all you've done for the organization for 28 plus years.
Marisa DiNatale: She's been a great labor market economist too, and I've learned a ton from her.
Mark Zandi: Oh yeah, that's right. Didn't she say last night she covered on Economic View where we cover all the releases, the employment report, or I don't know what, 23 years or something?
Cris deRitis: Something like that.
Marisa DiNatale: Yeah, she told me she's written it for 25 years.
Mark Zandi: Oh, 25. 25 years.
Marisa DiNatale: Yeah, something like that.
Mark Zandi: Yeah. Pretty amazing. Who's going to cover that report now? Do you know?
Marisa DiNatale: Dante.
Mark Zandi: Dante? Dante de Antonio, of course. Yeah. He's always on the podcast on Jobs Friday, so he knows his stuff. So that's good to have Dante.
Cris deRitis: She made us better. Definitely. She was high standards from quality standpoint. She wouldn't let your writing just go through, so she will definitely be missed.
Mark Zandi: Yeah, very, very nice person and key to our success for sure. Thank you, Sophia. Okay, we're going to talk about the 2023 outlook. We're also going to add a new feature to the podcast where we're going to answer listener questions. We've been collecting a few, we get them every week. We've tried to weave answers to the questions in the podcast itself, but I think we're going to see how this works, how this goes. We're going to carve those questions out into a part of the podcast and just go through them and answer people's questions, because if you have a question, it's very likely others have the same one or a similar one. This means the onus is now back on you, dear listener. If you have questions, fire away. What's the best way to reach us? Would it be helpeconomy@moodys.com?
Marisa DiNatale: Yeah.
Mark Zandi: So that's our help site. So helpeconomy, one word, @moodys, M-O-O-D-Y-S.com, helpeconomy@moodys.com. Just fire away, send in anything that's bugging you and we will... Well, when it comes to the economy, I'm sure all kinds of things may be bugging you. When it comes to the economy, financial markets, any of that kind of stuff. Fire away and we'll respond to them in this part of the podcast. I don't think we'll do it every week. When we have guests on, that might be tough to do, listener questions, just given the flow of things. But when we don't have guests on, that would be something we would add to the conversation. So we'll get to that in a little bit. That sounds like a good idea, right?
Cris deRitis: Absolutely. And if you can't remember the email address, you can always just go to economy.com and there's a link to the podcast there. There's also some of our content. Some of our listeners have asked for follow ups or articles. You can just go there and oftentimes you'll find articles that are related to what we're talking about.
Mark Zandi: The other thing, I haven't been begged for reviews in a while. How come people... Give a review that's helpful, good or bad. The feedback is important, so please feel free to do that as well. You can do that on Spotify and Apple Podcast, whatever, you can provide a review and that would be good to have as well. Okay, let's get down to business, the 2023 economic outlook. I thought we just get to the meat of the matter and I'll ask what is the... Because all the debate here is, and it has been on this podcast for some time and in the media and economic circles is, are we going into recession in 2023 and just a level set. A recession would be as defined by the National Bureau of Economic Research, the Business Cycle Dating Committee, a group of academic economists. They meet regularly and identify the start and end dates of recessions and they look at a wide range of data, plethora of data, everything from GDP, jobs, industrial production, incomes, retail, sales, the whole shoot and match.
And then based on their judgment as to whether the economy's experienced a broad base across lots of different industries, decline in economic activity that's persistent, not just for a few months, but for a few quarters, that's a recession. And they would define it. Now, unfortunately... Unlikely they... Even if we had a recession in 2023, they would determine that in 2023, it takes a while to get all the data revisions to come in and the dust to settle, and then they ultimately will tell us, so this may not be ultimately settled into 2024, but when they opine, but barring that practical issue, that's the recession. So with that as backdrop, Cris, what is the probability that the U.S. economy is going to experience a recession beginning at some point in calendar year 2023?
Cris deRitis: It's going to stick with my longstanding prediction of 70%. 70% chance that the MBER will declare a recession.
Mark Zandi: Do you know you are now firmly in the consensus? That is the consensus, I think. I saw a Bloomberg poll, I think it was this morning. I think it was this morning.
Marisa DiNatale: So it's moved up.
Mark Zandi: But it's 70%. It moved up.
Marisa DiNatale: Wow.
Mark Zandi: But it's 70% of economists that were surveyd by Bloomberg. And I only read the headline, so I don't know any details, now say recession in 2023.
Cris deRitis: So they've been coming to me. I haven't been going to them.
Mark Zandi: That's exactly right. Yeah. Well, how does it feel to be in the consensus now?
Cris deRitis: Now I'm a little nervous.
Mark Zandi: I know. I was going to say. It has gone-
Cris deRitis: I like to be the outsider.
Mark Zandi: It has gone up. I think the last time they did the survey, and again, I don't know when that was, I didn't read it carefully, was 66%. So they went from 66 to 70, which means that's presumably the middle of the distribution of responses, so there's got to be a fair number of economists that are 75%, 80%, 85%, 90%, so high degree of certainty.
Cris deRitis: Well, there's one outfit that we know of that has declared 100%.
Mark Zandi: Yeah. Bloomberg itself, I think, right?
Cris deRitis: Yeah.
Mark Zandi: Yeah, I think they think for sure we're going in, which is [inaudible 00:08:33], but making a statement. Hear ya, loud and clear. Yeah. Okay.
Cris deRitis: Yeah.
Mark Zandi: And Marisa, what is your probability of recession in 2023?
Marisa DiNatale: 55%.
Mark Zandi: 55%, okay.
Marisa DiNatale: I'm going in the opposite direction of Cris. I've been coming down.
Cris deRitis: We got to mix it up. It's good. That's good.
Mark Zandi: Yeah, I mean, if you go back when a month ago, maybe two, I'm not sure you-
Marisa DiNatale: A couple months ago I was at around 60, 65.
Mark Zandi: 65, right?
Marisa DiNatale: Yeah.
Mark Zandi: So you've grown a little bit more optimistic?
Marisa DiNatale: I have, yeah.
Mark Zandi: Okay, we'll come back and explore that in a little bit more detail. And then I'm still at 50%, 50/50, which I know everyone is saying, "Oh, that's just a cop out." And to some degree it is, but I do have to pick a side, because I have to put pen to paper, have to produce a forecast, an explicit forecast that our clients use that's sitting in our databases that clients use regularly. And in our baseline forecast, there's no recession. The economy's weak in 2023, slow growth, job growth comes to a standstill, unemployment starts to notch higher, but no recession in 2023. Cris, can I ask...
Cris deRitis: If this a recession though, you have a 50 basis point increase in unemployment rate over a year, which has been consistent with recessions in the past, you just get up to that line under the baseline.
Mark Zandi: Oh yeah, yeah. I get mean 50/50, right?
Cris deRitis: Yeah, exactly.
Mark Zandi: Yeah. Yeah. I mean, I won't argue with anyone on either side of it too strongly. I mean, I can see it going either direction here. And of course I think the Fed with the recent meeting, FOMC meeting, where they raised interest rates at another half percentage point, they put out their summary of economic projections, so-called SEP, and I think in that forecast they have the unemployment rate rising by more than half a point over a year.
Cris deRitis: That's right. So the implied recession, I guess, is there.
Mark Zandi: And people think that because every time the unemployment rate has risen by more than half a percentage point over a period of a year, that marks almost to the month, I think, the beginning of recessions.
Cris deRitis: Yeah.
Mark Zandi: Right? So if the Fed has a forecast that has the unemployment rate rising by, I don't know what it was, seven, eight tenths of a percent by the end of '23, that would be, if history is a guide, would suggest recess... They are now collectively... Their collective wisdom is recession. Although right on the edge.
Cris deRitis: Right on the edge. That's right.
Mark Zandi: Right on the edge.
Cris deRitis: Yeah. I don't think we've ever had a recession that stopped exactly, right? Got up to 50 basis points and then didn't go higher, right?
Mark Zandi: Yeah.
Cris deRitis: That's just where it's... Demarcs the...
Mark Zandi: That's demarcation. You keep on going. Well that's the recession, I mean, where unemployment... Yeah, yeah, exactly. Yeah. Let me ask you this, Cris, just because this is a discussion we've been having internally.
Cris deRitis: Yeah.
Mark Zandi: How would you describe the baseline? I mean, in a typical time, you have this distribution of possible economic outcomes and the baseline, the easy way to say it, is it's in the middle of the distribution of possible outcomes. There's an equal probability things are going to be worse than the baseline. And that would include recession scenarios and some pretty dark scenarios. And there's an equal probability things could be better than the baseline. That becomes a little more complicated to say when the economy's at full employment, because at that point you can't push unemployment any lower without generating inflation and ultimately higher rates in the recession. So it gets a little more complicated, but generally that's the way we think about it. In the current context or the distribution, it's not normal, it's not a normal bell shaped... Obviously the risks are skewed. When I say 50/50, the skewed risks are definitely skewed to the downside here. So how would you characterize the baseline in the current context?
Cris deRitis: I'd say our baseline has a growth recession. I know people don't really like that... It's a little squishy term, but I can't come up with anything better. It's right on the edge between a growth recession and a very mild recession. So that's how I would characterize it broadly. I also would point out though that we're talking about the aggregate, right? We're talking about a broad based type of description here, but there clearly are parts of this forecast that are very dark when it comes to say the housing market. There are parts of the economy that are deeply in recession, even with this overall skirting of the recession definitions. So I think it really... The overall definition is interesting, but the components, I think, are even more interesting to different people with different interests, different perspectives, different places where they participate in the economy. So I wouldn't just look at the overall definition and stop there. I'd want to go a little bit deeper.
Mark Zandi: Yeah, that's a good point. I mean, in our baseline forecast, no recession forecast, growth comes to a standstill. GDP growth, I think Q4 to Q4, Q4 of 2022 to Q4 of '23 is less than 1%. So well below the economy's 2% potential. Job growth slows to a trickle. We have some months that are pretty close to zero, maybe slightly positive, and in that kind of environment, that does mean parts of the economy are in recession, by definition.
Cris deRitis: Right.
Mark Zandi: If the aggregate economy is traveling close to zero in terms of growth, something's got to be balling. And housing obviously would be a case in point. Anything housing related, mortgage finance, that would be struggling. Big parts of manufacturing are, I think, if not in recession, pretty close. I guess the exception might be the vehicle industry, just because there's so much pent up demand there. We may not... As supply chains eases and vehicle industry can get more cars to sell, they'll sell them, but manufacturing's in recession. The transportation sector, did you see Federal Express?
Cris deRitis: No.
Mark Zandi: They downgraded their expectations for profitability and going to engage in more cost cutting. Their CEO thinks we're going into a worldwide recession, and no doubt for him, FedEx is in recession, right? Because this time last year we're shipping lots of stuff because people were still buying goods and now they're not and they're struggling. So transportation, distribution, any other sectors, even in the baseline, no recession scenario where we'd see what sectors would be down? I think those were the most notable.
Cris deRitis: I would say construction broadly, if you think about commercial real estate, I don't know if you include that in your...
Mark Zandi: Sure. No, yeah. Commercial real estate.
Cris deRitis: Because we also have the structural issues that are catching up with us as well in terms of office usage, so I think in 2023 we'll start to see some reckoning in terms of office prices really revealing the underlying value or lack of value as firms are refinancing and also trying to understand or plan for future in investments. So I'd say construction, probably the financial industry is going to suffer here as well. If there is a pullback in credit and if we are starting to see some additional losses here, there's certainly weakness, maybe not a full-blown recession for finance, but limited growth at minimum, right?
Mark Zandi: Right. Any others, Marisa? Any other sectors?
Marisa DiNatale: That's a lot.
Mark Zandi: Yeah, that is a lot.
Marisa DiNatale: That's a lot of interest rate sensitive segments of the economy. I mean, the stuff that continues to do really well is education, healthcare, and I don't think we're expecting much of a slowdown there. Yeah, no, I think you covered it all, but you're right, I mean if we're getting barely any job growth on a month to month or quarter to quarter basis, that means there are industries that are outright losing jobs. I think you're right that it's going to be the interest rate sensitive parts of the economy. I mean, we're already starting to see that tech we're seeing now.
Mark Zandi: Tech's the other one, right?
Marisa DiNatale: Everybody else in tech, right? Yeah. Companies that need to finance large investments, that's becoming more difficult in a high interest rate environment, so expect that to continue if the Fed keeps raising rates into next year.
Mark Zandi: Yeah.
Cris deRitis: And then anything discretionary, right? Travel tourism.
Mark Zandi: Well, not in the baseline I would say. I think that if you get into a full blown recession...
Cris deRitis: Oh, okay, sorry. I'm thinking of my...
Mark Zandi: Yeah, this is your forecast.
Cris deRitis: I'm thinking of my recession.
Mark Zandi: You're recession.
Cris deRitis: Of my forecast.
Mark Zandi: Yeah. I mean if we're skirting along bottom, that means there's a fair number of sectors that are growing and doing reasonably okay, and I think in that discretionary might hold up, okay. It's not going to be gangbusters, but just given all the penned up demand for travel and restaurants and ballgames and that kind of thing.
Cris deRitis: Yeah, and definitely at the higher end.
Mark Zandi: At the higher end. Anything catering to high income households where there's resources, financial resources, yeah that makes a lot of sense. So let's go back to the 70% and the 55% and then I'll throw in my three cents as well. That 70% is an important threshold, because in our forecasting in our work, and we've mentioned this a number of times before in the podcast, for us to make a change like this one, a big change in our forecast from no recession to an outright recession... And maybe we should talk a little bit what about what an outright recession means in terms of numbers, typically, but that's a pretty big change. Maybe I'll do it now. In the current context, if we suffer the typical recession, go look at the 12 recession since World War II. Look at the average length, look at the ad average decline in GDP, peak to trough, look at what happens to the jobs and unemployment.
The typical recession lasts 10 months. GDP falls almost 3% peak to trough in the current context, meaning the current size of the labor force, we'd lose almost four million jobs, probably. Four million. And so that's a lot of jobs. You'd see months where you're down three, 400,000 jobs potentially. Something like that. That's a big difference from that in our baseline of zero. Unemployment, we go to 6%. Now doesn't mean the recession that's dead ahead of us is going to be typical, it could be less severe and we should talk about that as well, but that gives context. It's a big deal to go from no recession to recession. And for us to make that change in our forecast, our baseline forecast... And again, we do a bunch of all kinds of scenarios and downside scenarios. So we've got that covered. But if for the baseline, the headline forecast, the middle of the distribution, the mobile forecast, we have to have a very high conviction of that.
That means to put a number on it, over a two-thirds probability that that's going to happen. So you say 70%, that's more than two-thirds. So you are now chief economist and you're running the ship and you're saying, "We got to put a recession in our forecast." That's what you're saying with the 70%. So that's an important number. Given that, characterize that recession for me. How long, how deep, when? Exactly. Because again, you have to put pen to paper. You can't be waving your hand and say, "Oh yeah, sometime in 2023 we're going to see things go bad." Now you could do that, but you also have to say, "Here's the numbers, these are the numbers," so give us the numbers.
Cris deRitis: Yeah, absolutely. So I think it very important to characterize that average distribution. I'm advocating for something milder than that average. So in terms of what this recession looks like, my leading hypothesis is that it is caused by the tightening that we've experienced in the economy, that that does catch up with us in 2023, causes consumers and businesses to pull back, losses on credit cards and other credit instruments start to rise. And that leads to the actual recession, the broader recession. So I'm thinking of something around Q3 in terms of a start. The duration will be shorter than that 10-month average you mentioned. So I don't think it'll last that long. For some of the positive aspects that I'm sure we'll get into in terms of the strength of consumer balance sheets and business balance sheets fundamentally. So there are some reasons why this wouldn't last a particularly long time.
And then the depth, I don't see it as being particularly deep either. So in terms of job losses, I could see a million or two million lost jobs, which well, on the surface is still devastating. That's still a lot of people losing work, but it's not the typical recession. One reason why I'm not at something higher than 70%, is really due to that job market figure. If I'm only suggesting a million or two million job losses, there's a chance the MBER comes along, the committee you mentioned, and says, "Well, that's not broad enough or that's not deep enough to really define a recession." So that's why I vacillate a little bit, because I think we'll be right on the edge of what they might consider a recession. At the end of the day, I think they will, because I do expect it to be fairly broad-based here.
Mark Zandi: So the recession, second half of 2023, less severe than the typical maybe half the length.
Cris deRitis: Yeah, let's call it half. Half the length, half of the severity.
Mark Zandi: So basically second half of the '23 and half the severity, if you measure it in terms of jobs and the unemployment rate doesn't go to six, it might go to five.
Cris deRitis: Five, five. Five and a quarter or something like that.
Mark Zandi: Yeah. Five and a quarter.
Marisa DiNatale: And you get negative quarters of GDP growth in your scenario, Cris?
Cris deRitis: You do, but they're not very deep.
Marisa DiNatale: Fairly negative.
Mark Zandi: And the recession, as you described it, is not caused by any additional shocks or mistakes or... It's baked in the cake, so to speak. That's what it felt like you just said, that given what the Fed has done already, even if the Fed stopped today raising interest rates, so they raised rates a half a point when they met a week or two ago, the funds rate target, which was at zero at the start of 2022, is now four and a quarter to four and a half percent. Given that increase in rates... And of course they're articulating more rate increases to come and the expectation in the marketplace, and it's consistent with our baseline, is another half point to put the funds rate target the so-called terminal rate, the highest the rate we're going to get in the cycle at four and three quarters to five. You're saying even if they don't do that... Or maybe you're saying if they do do that...
Cris deRitis: No, I'm assuming they do do that.
Mark Zandi: Okay, so they follow through and they get to five.
Cris deRitis: Yeah.
Mark Zandi: And that's the end of the story in terms of the rate increases and then that's enough. The die is cast at that point.
Cris deRitis: That's right. Then it takes a quarter or so for that to fully be digest and that's what causes or leads to the last straw, if you will.
Mark Zandi: Right. And it doesn't take anything else happening. Oil prices don't have to go up, the pandemic doesn't have to come back. China doesn't have to shut down again. I'm making stuff up obviously that are top of mind, but...
Cris deRitis: No, if those things... That's right. I think that the scenario I've described here is really, it can be [inaudible 00:25:44].
Mark Zandi: Endogenous. It's endogenous, already built in. It's baked in the cake.
Cris deRitis: If we get some of those other factors, then it argues for a deeper, more severe recession, or maybe faster even, right? Those would be...
Mark Zandi: In fact, that would go to back to the Fed, the market is already expecting five, so that's already built into financial conditions and that's already coursing... The effects of that are already coursing through the economy already. So even if they go to five and stay there, that's effectively being already being brought into the marketplace and affecting the economy.
Cris deRitis: It is. It hasn't been fully realized.
Mark Zandi: Yeah.
Cris deRitis: So banks are certainly tightening their standards, reacting, anticipating that path, but it won't... Until business really have to go refinance their loans or households really have to pay their bills. The real effects on the economy won't appear, right?
Mark Zandi: Yeah.
Cris deRitis: That's a part of the lag here.
Mark Zandi: Yeah. By the way, this is an adjustment in the way you described things, right? Because we had a bit of a... I'd say it's an economist tiff back a few weeks ago around what would cause the recession and you went back on, "Oh, there's going to be some other things that go wrong and because the economy's so fragile, that would be enough to push us in." But what I'm hearing you now say is we don't even need that. It's baked. It's happening, regardless of whatever happens out there. Even if everything sticks to script, there's no shocks, no nothing. We're going in. That's what I'm hearing.
Cris deRitis: Yes, yes. Although the caveat here is how I've described the severity. So again, those other shocks would... Then I think there's no question. If we get some other shock here, then I think there's no real question for MBER.
Mark Zandi: Depends on the shock, obviously. I mean, no one would argue with that. I mean, I wouldn't argue with that.
Cris deRitis: But then we're getting three, 4 million job losses, then I think there's no debate, right? The MBER would come in and say, "Yes, that is a recite," right? Broad based, I think there's no real question there, and what I've described today, this milder version, that's where I think there's that room for discussion or debate.
Mark Zandi: I don't think I'm going on a limb here. If we lose one to 2 million jobs, I'd be shocked if the MBER doesn't... Because if you lose one, 2 million jobs, unemployment is... That's closing it on five. I would be pretty surprised if they don't label that a recession. I'd be pretty surprised.
Cris deRitis: Yeah, but if it's concentrated you can argue, well, if it's all in the tech sector or just in certain areas, just in housing...
Mark Zandi: But a million or two, you're losing jobs in lots of places, I think.
Marisa DiNatale: Yeah, that doesn't typically happen.
Mark Zandi: Yeah, that doesn't typically happen.
Cris deRitis: It doesn't typically happen, right?
Mark Zandi: Yeah. Okay. All right. Okay. You see, somehow I feel like he's finding a way out.
Cris deRitis: No, no.
Mark Zandi: He's trying to... I haven't quite figured it out yet, but he's trying to find a way out of this thing.
Cris deRitis: No, no.
Mark Zandi: I hear you though.
Cris deRitis: No, no.
Mark Zandi: Okay, okay.
Cris deRitis: We'll make the dollar bet at the end and yeah.
Mark Zandi: I hate these dollar bets. I do lose the dollar bets. That's why I haven't made a dollar bet on this one, because I always lose the dollar bets. I'm too cavalier with a dollar. Make it a million.
Cris deRitis: Well...
Mark Zandi: And then we're going to really know.
Cris deRitis: Then we'll all know.
Mark Zandi: Of course no one is going to pay that. Yeah, then we'll know. Then we'll know. So Marisa, you're at 55%, so you would hold on to the baseline. You would not change the baseline.
Marisa DiNatale: Yeah. So I think Cris is on one edge of the baseline and I'm on the opposite edge. So I think that we're going to avoid this. I agree, so obviously financial market conditions are tightening, but I think the Fed has done a good job of transmitting this well in advance. They may have been on the late side starting to raise rates, but at the end of '21 they telegraphed that they were going to go from quantitative easing to quantitative tightening. They've been talking quite a bit. I think market expectations have been very well anchored through most of this whole thing, except with a blip during the Russian invasion of Ukraine. And I think as you said, two, maybe three more rate hikes are baked in now to market expectations, and the Fed has, at their last meeting with their dot plots, they've pretty much said we're expecting a terminal fed funds rate now of just over 5%. I think that that's been so far well tolerated by financial markets.
Sure things are tightening. We do see tightening in lending standards for things like credit cards, a little bit for autos, mortgages a tiny bit. Interest rate sensitive segments of the economy are slowing, but I do think households have maybe never been in a better position than they are now coming into this in terms of excess saving that they have, the labor market has held up. Sure there's evidence that it's cooling off, but so far we see that in employers pulling back on hiring or canceling open job positions, but not really laying people off with the exception of these announcements in the tech sector that have made headlines, but we're not really seeing that in other parts of the economy.
And business balance sheets are also very, very healthy. Households are on the whole locked into fixed rate, low interest rate loans and mortgages. So if you're going to see pullback among households, it might be in things like credit cards, things that are variable rate and can change over time and maybe we'll see some pullback in spending there, but it just feels like... My assumption is that all the things that'll happen that Cris just laid out, will happen, but on the other side, we'll get through it without a recession. I think the job market's going to slow. I think job openings are going to come down. We're already seeing that, but I don't think there's going to be massive layoffs throughout the economy.
Mark Zandi: Yeah, so that all makes sense to me and that's how I think about it while I'm still at 50% that the... I just don't see the underlying weaknesses in the economy that typically prevail before recession. And the thing that would suggest that doesn't matter at all, don't worry about the fundamentals, is if the inflation remained more persistent and the Fed had to raise rates more than what we're expecting, from what markets are expecting. At this point, given the better inflation statistics, I'm increasingly confident that a 5% funds rate target is going to be sufficient to slow things down so that inflation comes in a reasonably orderly way, and that's not going to be the problem. If you asked me, "Mark, if you're wrong, what would it take for you to think that a recession's going to occur," I would say that inflation is just going to be more persistent than anticipated.
But I feel increasingly more confident that inflation is going to come in. And we can talk about that. But the fundamentals are pretty darn good. And you mentioned consumers, they're in pretty good financial health. Again, we should all say we're painting with a broad brush here. I mean there's a lot of things underneath that. I mean low income households are struggling, but middle income and particularly high income households are doing just fine, thank you. They've got plenty of cash sitting in their checking accounts built up during the pandemic and they're using that. Businesses are in good shape. Debt... The GDP is stable. Businesses have done great job locking in the low rates like households have. The financial system feels like it's pretty good. I mean there have been some cracks here and there. The biggest one was overseas in the UK with their pension plan, but that was a foot fault of a mistaken policy.
Banking system's highly capitalized, very liquid post-financial crisis. Just feels like the system's in a good spot. You talked about real estate markets. I mean housing is under built. Vacancy rates are pretty close to record lows, at least in the home ownership market. Yeah, office, but that's small in the grand scheme of things. I don't think that... And it's not like vacancy rates are high in office because of construction. It's just because of the shift in preferences to remote work and decline.
[inaudible 00:34:55] local governments are flush. They raked in a lot of tax revenue and they got a boatload of cash from the American rescue plan that they can spend out through 2026. And then here's the other thing, fiscal policy, federal fiscal policy, hard to believe this, but it was a major headwind to growth in 2022, because we had all that juice with all the support during the pandemic, ending with the American rescue plan in March of '21. That provided tremendous fiscal tailwinds in growth in 2022. But by... Excuse me, in 2021, but now by the second half of 2022, that's turned into a bit of a headwind and that that's not going to be... That's going to be now increasingly turning back into a bit of a tailwind is the other pieces of legislation passing the Biden administration are going to kick in. The most obvious being the infrastructure bill. That's going to start adding to growth in the second half of '23 going into 2024. Just when you think the recession's going to hit Cris.
Cris deRitis: Not a lot though, right?
Mark Zandi: Not a lot. Not a lot.
Cris deRitis: But still [inaudible 00:36:02].
Mark Zandi: Yeah, that's in my litany of reasons.
Cris deRitis: Yeah, yeah. I hear you.
Mark Zandi: My litany of reasons.
Cris deRitis: I hear you.
Mark Zandi: So I look at those things and I say, "Really, this doesn't feel like the fodder is in place for an economic downturn." So Marisa, back to you, I mean, did I miss anything in that litany?
Marisa DiNatale: I just want to say two more things that I thought of while you were talking. One on the housing market, we've been saying the housing market's in recession, but from a household perspective and a wealth effect perspective really, unless you bought a house and probably overpaid for it in 2020 or 2021, even unlike in the financial crisis, even if house prices fell 10%, for most people that's still going to put them above board on what they owe on their home. So if you bought a house in 2018, 2019 and you lose five to 10% of value in that house in most of the major housing markets in this country, you're still up from where you started, because house price increases were so astronomical. So unless you bought a house very recently, I think the wealth effect here is not as much of a concern to me in terms of housing.
Mark Zandi: Okay, So just so listeners understand where you're coming from, because you went back.
Marisa DiNatale: I did go back.
Mark Zandi: Yeah, and what you're saying now is, one reason why you might be nervous about a recession is what's going on in housing. Housing's getting crushed because of the run up and mortgage rates and the lack of affordability. House prices now are rolling over and starting to come in and the concern is, well with people losing housing wealth, that the so-called wealth effect will affect their spending and savings decisions. And that is a reason to be concerned. And you're saying, "Well, not so much." That's the point of what you're just saying right now.
Marisa DiNatale: Yeah, I'm saying for the majority of households, even if the value of my house falls 5%, I'm still in a pretty good position.
Mark Zandi: Okay, now before we go into your second point... You had two points.
Marisa DiNatale: Cris disagrees.
Mark Zandi: Cris wants to say something,
Marisa DiNatale: He wants to say something about housing for sure.
Mark Zandi: Yeah. By the way, he is the expert, Marisa. I'm just saying you are now in his territory.
Marisa DiNatale: I've picked the wrong fight, yes.
Cris deRitis: No, no, all good. I think you're right in terms of the chances of default, people are still in a positive equity position. There's no reason to default. They've locked in these low mortgage rates, they have to live somewhere. But I think there is still a wealth effect there in terms of savings, additional savings versus spending. If I was counting on that appreciation for my retirement, I was cutting back on my saving. Now that has to reverse and I have to start saving again to build up or replace that loss of housing wealth. So I do think that that psychological effect is also at play here in terms of where we go and how the recession play out.
Mark Zandi: I think that's a whole nother podcast to tell you the truth. I've got so many things I'd like to say about that on the housing wealth effects, but that's definitely a podcast. We could get someone to come in and...
Cris deRitis: Definitely.
Mark Zandi: Yeah, definitely a podcast. What's the second thing you were going to say Marisa?
Marisa DiNatale: The other thing I was going to say is the reason I'm at 55 and not at 50 with you, why I've been a little bit higher...
Mark Zandi: Yeah. I was going to ask that.
Marisa DiNatale: Is just that I do think we're in a fragile position and I do think there is a chance that we get some sort of exogenous shock or something happens with supply chains. The COVID situation in China is really bad now. The more I read about it, the more I'm nervous about something emanating from China to really slow down the global economy more than we're expecting. And I just think if something like that happens, if the situation in Ukraine gets worse, Russia does something off the grid here, I just think it's going to be very... And I think we all agree, it would be very difficult for the U.S. economy to avoid a recession in that case, and I guess I'm just a little bit more pessimistic about the possibility of something happening in the rest of the world.
Mark Zandi: I'm actually sympathetic to that argument and I like... That's reasonable to be at 55% with that argument. It's harder to have that argument and be over 66% and change your baseline, because once you change your baseline then you got to define exactly what that shock is. This is back to that tiff that Cris and I had back... Listener, you should go back and listen to that. That was a pretty, I'd say for us, a heated exchange on this issue. That's hard to build in, but I'm sympathetic to that argument. So Cris, back to you.
Marisa DiNatale: Yeah.
Mark Zandi: What would it take... What would have to happen for your probabilities to fall from 70 back below that 66 and let's say all the way back to 50, something like that. Meaningfully lower, let's put it that way, from the 70% that you have today, your baseline would go back to no recession.
Cris deRitis: Yeah, I'd say that certainly those global risks, if we got an upside shock from one of them, that would certainly reduce the odds of the U.S. recession considerably. So if there was some type of ceasefire or resolution of the war in Ukraine, that certainly would help energy markets, would help Europe, would help Asia and would help the U.S. by extension in terms of stabilizing energy prices, getting a little bit more certainty going forward. Chinese... I agree with you Marisa. I think that there's a lot of concern around the Chinese economy right now. So any type of resolution there in terms of COVID, right? My plan is to give all the mRNA vaccines weekend to China to get that population vaccinated as quickly as possible. I think that would be a great outcome not only for the Chinese economy, but for the globe. So certainly getting COVID under control in China would be a significant upside risk. It would help the supply chains, it would help their domestic demand.
It would certainly help to cool some of the social unrest that they're experiencing as well. So I see that as a positive. I do remain quite concerned about Europe. I think I've said this in the past in terms of energy related to Ukraine, but even more broadly, I think they'll get through this winter just fine. But as we get into the spring and summer and they're looking to replenish their gas stocks, that's a downside risk. If there is accelerated movement in terms of LNG or other types of fonts of energy into the European economy, I think that could certainly be a positive factor as well. That could also help, again, bringing those energy prices down, bringing inflation down faster, I guess is at the root of this. Those would be all up upside risks I could see here.
Mark Zandi: Yeah, I mean that's interesting. You're saying you need a positive shock for your probabilities to come back in. It's not something endogenously determined in the economy that will allow... If I told you, inflation is going to moderate more quickly at this point than is anticipated by most forecasters. And just to level set there, consumer price inflation year over year is about 7%. I think it's seven one to be precise in November, the peak was about nine in June of this year, 2022. We've got it coming down to probably half of what it is today by the end of '23, say 3.5% ish. And then by mid 2024 is back within spitting distance of the federal reserves inflation target, which on CPI consumer price inflation, by our calculations probably about two and a half percent. If inflation came in faster than that, not related to positive supply shock, like an end of Russian aggression, oil prices come in, but it's just coming in faster. It's easier to get service price inflation down than is the case right now.
Cris deRitis: Okay, so wages moderate.
Mark Zandi: Yeah, wages moderate. The wages aren't as sticky as people think that it was all inflation expectations driven with oil prices and gas prices down, inflation expectations come in, wage growth comes in, service price inflation moderates, and we're back to the Fed's target by let's say the end of 2023 going into 2024. You're saying at this point doesn't matter that we're going in. That that's not enough to... It has to be some kind of positive shock.
Cris deRitis: I guess you're saying if my behavioral assumptions are wrong here, that inflation comes in a lot faster than what I am anticipating. Yeah, that would be a cause for me to reevaluate and lower the recession probabilities.
Mark Zandi: But it really shouldn't though, right? Because you're saying the 5%, I'm getting a 5% on the phones rate target by presumably in the next few months. That's the end of the story. And we're going into recession by the second half of the year. Doesn't feel like there's much that can save the day here other than some kind of positive shock. Something that goes right for us as opposed to wrong. It's not something... The diet... I guess the point I'm trying to make is the forecast you're giving, it feels like you're saying that die is cast unless there's some major event that saves the day here.
Cris deRitis: Yeah, but I'm presuming a certain path for inflation. I'm presuming a number of effects here. I could be wrong. I want to be humble. I could be wrong about that. Maybe inflation to your point, maybe it comes in a lot faster than what I'm anticipating and therefore the Fed doesn't need to go to 5% and in fact they can start cutting at the end of the year and give support to the economy just at a time when I'm thinking it's going to be particularly weak. So that would certainly be an upside risk as well that I've... I'm not reading the tea leaves properly or there's some other adjustments that businesses and households make behaviorally that bring in inflation at a much faster pace.
Mark Zandi: Yeah.
Cris deRitis: Maybe there's more exploration of oil in the U.S., more fracking, whatever it is, so that supports energy prices coming in faster.
Mark Zandi: Yep. Okay. Well for me the thing that would drive my odds up, the recession probability up and for us to change our forecast abstracting from... The negative shocks, I agree that the probability, that's high, and we may go into recession, that's why I'm not arguing. I wouldn't argue strongly with anyone who says we're going into recession. I just can't build that into a baseline forecast. I don't know how to do that in a reasonable way at this point. So the thing that would make me ultimately change the forecast to have recession in it would be... The most likely would... Inflation would just have to be more persistent than I'm anticipating, and that the Fed would have to continue to raise rates that they can't... They take it to five. They look around, they see, "Oh my goodness, inflation's not coming in. Wage growth is not moderating. Job growth is not slowing sufficiently to get wage growth moving south."
And also you throw in, if inflation expectations start rising again, then I have no choice here. For me, a necessary condition for a well-functioning economy is, it's not sufficient, but a necessary condition is low and stable inflation. So I'm going to five and a half. I may even go to six, I may go to six and a half and that will break the economy at some point and we'll go into recession. So for me, that's what it would take to change. That we get into next year, and just the inflation statistics just don't look good. We're not getting like we got last month a couple tenths of a percent. By the way, just throwing it out there, the December CPI report that we're going to get, that's look primo, that's going to look really good. Another good CPI number's coming and that should help. But if you get in early next year and we start getting a 0.3, 0.4 on core 0.5, I think at that point I'd say got to pack it in. The funds rate's going higher and we're going into recession by the end of '23, going into 24.
Cris deRitis: And you're really pointing to wage growth as the causal, a major causal factor?
Mark Zandi: Only because that's what the Fed is most focused on. By the way, that's another podcast. I'm not sure why we're so focused on that. I mean, anyway, I don't want to go down that path, but we should talk about that. We should talk about that, but yeah, the Fed is focused on. That's the one thing they can control or at least they think they can control.
Marisa DiNatale: Think they can control.
Mark Zandi: So they're focused on that and if they can't get wage growth down, they'll keep pushing rates up. If they keep pushing rates up by definition, at some point we're going into recession, it's just going to happen. I mean, at some point the rates are going to be too high for too long and something's going to break and we're going in.
Cris deRitis: So if we're seeing that still in February, March, right? Elevated 4.5%, 5% wage growth, then you would contemplate putting the recession [inaudible 00:49:47]?
Mark Zandi: Yeah, I mean first principles is the inflation statistics. I mean if...
Cris deRitis: Okay.
Mark Zandi: Yeah, that's the most important.
Cris deRitis: Of course.
Mark Zandi: If inflation statistics are bad, it doesn't matter. If inflation statistics are good, then I go take a look at the wage growth and if that feels like it's rolled over and coming in, then I feel good about my forecast, the baseline forecast. If it's not coming in, then I'm thinking we're going to have a problem. The problem with wage growth, the reason why I'm hesitating there, is the data sucks. It's just not good. It's very difficult to... At least the timely data, right?
Cris deRitis: Yeah.
Mark Zandi: The average hourly earnings you get every month, it's very hard to interpret, gets revised. It's seasonal adjustment issues, timing...
Cris deRitis: Composition.
Mark Zandi: The survey, composition, it's a mess.
Cris deRitis: Yeah.
Mark Zandi: The employment cost index, which I do trust and the only thing I really trust, that comes out quarterly with a long lag. So you're saying if it comes into February, March, I'm saying, I'm not going to get that data for Q1 until what? May? Something like that. So it's hard to know exactly when I would change in my mind.
Cris deRitis: So that's part of the crux of my thesis then in terms of the Fed and whether... I hate to use the word mistake, because they're just reacting to the data that they have, but that certainly could be a condition for them to continue raising or not to cut, because of those long lags in the reliable data. They only have the hourly earning, so that's the best that they can do when they're making their decision.
Mark Zandi: Okay, that's a great segue into the listener questions.
Cris deRitis: Okay. All right.
Mark Zandi: New feature of Inside Economics. We're going to take a few questions and again, strongly encourage listeners to fire away, helpeconomy, that's one word, helpeconomy@moodys.com, or go to economy.com, the website, and there's a place for you to put your questions in there, or you know how to get us, just send an email.
Cris deRitis: Twitter, LinkedIn.
Mark Zandi: Twitter, LinkedIn, whatever. Twitter @Markzandi, I'm just saying. @Markzandi.
Cris deRitis: Oh its been a while.
Mark Zandi: It's been a while since I've hawked that Twitter, what do they call it? Handle Twitter handle. Is that a Twitter handle? I think it's Twitter handle, yeah. I don't think it's fashionable though, to be doing that these days.
Marisa DiNatale: I was going to say, you backing off the Twitter promotion?
Mark Zandi: I'm not really following this very carefully. I probably should. Okay. First question. How would you rate the Federal Reserve's conduct of monetary policy? Give me a letter grade. That is from a listener and Marisa I'll start with you. How would you rate the Fed's conduct in terms of managing policy?
Marisa DiNatale: We're talking over the past...
Mark Zandi: You define it. That's the question, so you define it. However you want to answer it.
Marisa DiNatale: B minus.
Mark Zandi: Okay. I'm sure the Fed will not take that as an answer. They will want to know why.
Marisa DiNatale: Do you want my notes?
Mark Zandi: Yeah, yeah. Okay. B minus, why not a B? Why not a C plus?
Marisa DiNatale: I think they started too late. I think the reaction on monetary policy was too late, and I worry that it was late enough that it's going to be difficult for them to truly get inflation under control in the timeframe that they want to. Now it looks like that's happening. I mean, certainly looks like the inflation data are rolling over, but that doesn't mean that it's not happening too late just based on the way financial markets are reading it or households are reading it or businesses are reading it. Talking about wage growth and setting wages are very sticky. Setting employee wages for the next year, once you give somebody a raise, you can't really take it back. So I think they've done well in the communication of what they've done over the past year, but I just worry that they got started too late.
Mark Zandi: So you're saying go back the start of 2022, the funds rate target was still at the zero lower bound that they were still buying bonds, quantitative easing, and at that same point in time, given inflation, given how the job market was performing, given financial conditions, the value of the dollar, all the things they look at to engaging the appropriate stance of monetary policy, they should have been raising interest rates much sooner than they actually did. That's what you're saying. And therefore that can't be an A, it can't even be a solid B that's a B minus because of that respect.
Marisa DiNatale: Yeah, I mean, granted in retrospect we'll see how they did.
Mark Zandi: Well what if I pushed back a little bit and said, well... I don't want to be a defender here, but I mean they would say, and I think with some legitimacy, "Hey, did you know about the Russian invasion of Ukraine?" That didn't happen until February of last year. And moreover, and that, that's when inflation expectations really took off. It's when Russia invaded and oil prices spiked and gasoline went north and food prices started to rise because of higher diesel costs. And you saw this untethering of inflation expectations. And that's what ultimately... That's then their reaction function. That's one of the criteria they look at. And they said, "Oh gosh, now we got to go, because..." But that wasn't the case until Russia actually invaded. You could see oil prices started trending higher back in December of last year when it started to go on the radar screen, but there wasn't really on the radar screen any effective way until then. Can I get a B please? No?
Marisa DiNatale: Yeah, but there was evidence even before the invasion that there were inflation issues rearing their head, right? Both in energy markets and caused by supply chains. They knew the job market was really strong. They knew households had all this excess saving from the pandemic. They were at zero, right? I mean, they could have started slowly inching up, I think prior to the invasion. Again, this is all Monday morning quarterbacking here. You're right. I mean certainly if you look at market inflation expectations, they didn't really pop up above that Fed target until the invasion and the acute spike in oil prices. And then the Fed started reacting, but I still think they could have... They should have anticipated some uptick in inflation given what was going on even before that.
Mark Zandi: Okay. All right. B minus, Cris, what's your grade?
Cris deRitis: So I give them a B plus on the Fed funds rate policy, but I give them a D on the quantitative easing.
Mark Zandi: That's interesting.
Cris deRitis: So overall, what is that? C, C plus maybe.
Mark Zandi: C plus. Oh, explain please.
Cris deRitis: Yeah, so I think we give them a hard time in terms of the Fed funds, right? Yeah, the timing you mentioned. Also, if we look back, unemployment was still high, relatively high. It was coming down, but still relatively high in 2021. So what are we talking about in terms of when exactly they would've started? Instead of starting in, what was it, March, they would've started in January or...
Mark Zandi: January.
Marisa DiNatale: January.
Cris deRitis: December. I mean it's a few months. It doesn't really change the contours all that much, I would argue. And there was enough uncertainty that I can't really fault them for those policies, but I do fault them for not ending the quantitative easing sooner. And certainly the MBS purchases went on far too long and I think stoked the housing market, and caused house prices to rise even further than necessary throughout this period. And that, I think does contribute to the inflation where you're still experiencing now those rent increases, those house price increases in the CPI. So I think that was bad policy. I don't see why they felt the need to continue those policies.
Mark Zandi: Yeah, I mean...
Cris deRitis: The funds rate I think again, there's enough uncertainty.
Mark Zandi: Yeah, just a little pushback there. Just a little bit. I mean it would've been difficult, not impossible, but a little difficult to stop the QE without raising the funds rate at the same time. I think the framework for the shift in policy was they should happen at the same time. Maybe I've got that wrong, but it would've just been a little tricky for them to say, "Oh, I'm going to..." Well, maybe you're right.
Cris deRitis: It could've been tapering. I mean, in fact it would've been beneficial to ease into it with a longer horizon. I think that already sends the signal, right? You're still telling the market, "Look, I'm coming. I'm on case here." Especially given what we were seeing in the housing market, right? To Marisa's point, there was data there, there was no lag. We saw prices going up at double digit rates.
Mark Zandi: Yeah, well, I'd give them a solid B, can't get an A because you didn't get it right. I mean, your fault, not your fault. Hard to know. I'm sympathetic to the argument that the Russian invasion wasn't on the radar screen, therefore, how could I gotten this right? [inaudible 00:59:40] data, lag data, all those things make it difficult to conduct policy. But at the end of the day, you're not going to get an A unless you get it right. I mean, you didn't get it right. You got it wrong, but I can't see getting them anything less than a B, because so much was out of their control. And policy 101 says if there's a lot of uncertainty, and at the time there was, hard to remember, but the pandemic was still a big deal. Omicron was still scary.
We were still worried about that and we still are worried about it. We're still talking about it. But back then, still top of mind Zandi family didn't have a Zandi Christmas where we bring in all my brothers and sisters last Christmas, hard to believe because we were fearful of everyone getting sick. In fact, some of us had gotten sick right before Christmas. So Policy 101 says if there's a lot of uncertainty, error on the side of doing too much, not too little to support the economy. And I think they were following the textbook, the monetary conduct. Well, what do I want to say? The conduct of monetary policy, textbook or whatever it is, they were following it. So now having said that, I'm not sure what grade I'd give them for the conduct of policy right now.
My sense is that if I were them, I'd be using two things to gauge the appropriateness of policy. One is inflation expectations. The second is the shape of the curve. Now, I wouldn't be a slave to it, but I would be thinking about it and using it. And if inflation expectations are, and I would use the bond market expectations, the one year, five year forward. I look at them all, but that's the one I would be most focused on because that's the one I can control most clearly. If that's above two and a half percent, probably closer to three, then I'd say, "Okay, I got to keep raising interest rates here and I got to keep signaling to markets I'm going to raise rates. I got to keep financial conditions tight. I got to get those inflation expectations now."
But right now the bond market inflation expectations, no matter how you measure it, is right on the Fed's target. I mean, I just looked at one in your five year forwards that comes out of inflation protected securities and swaps. Two and a quarter percent. I think the five year, five year forward two and a quarter percent. The five year break, evens, I think they're less than that. I think they're two. This is CPI inflation. So that says, "I don't know that I need to be overly worried. I don't need to be hawkish. I don't need to be sending signals. I'm in a pretty good spot. I don't want to give people a sense that I'm not going to go to five. I've told people I'm going to five and that's embedded in those inflation expectations, but I don't think I need to do any more than that." And I'm also now starting to air on the side of doing too much. Going back to the yield curve, when the curve gets as inverted as it is that goes to policy.
The bond market is saying, "Oh, the Fed's really jacking up interest rates and at some point that's going to really weaken the economy. In the case of a curtain version, historically that's a recession. So that'd be a signal that, "Hey guys, that's a little too much." First thing I look at is inflation expectations, whatever that says I'm going to do, but if they're anchored, then I'm going to say, "Look at the yield curve" and then I'm going to say, "Okay, that should be the end of the story." So I think if they go to five and stay there fine, but if they keep on going, I'll get pretty annoyed at that because I think at that point they're doing too much. So for their policy up to this date and point, I give them a B. Still not clear what their ultimate grade will be, but I'd say I'm a little nervous about that at this point. Okay. We just covered a lot of ground. We got a bunch of other questions. I'll ask one more and then we'll call it a podcast. And that is around the value of the dollar.
As you know the dollar has been strong throughout much of the pandemic. Flight to quality in the Fed, of course in 2022, has been raising interest rates through a lot faster than other central banks because of the higher rates here compared to the rest of the world, money's been flowing in and the dollar's been strong. I think if you go back a couple months ago, maybe it's a month ago, the dollar was at its peak. So at one point it was pretty close to parody with the pound. It was beyond parody against the Euro. It was closing in on 150 to the yen. I think it was 150 to the end. It was strong against the Chinese currency.
It's come in now, more recently, you might have seen in the last couple days, the Bank of Japan announced a shift in their policy around the yield curve control. And that's called the... That's somewhat of a tightening in policy, so we've seen the Yen appreciate a bit in value. So the dollars off its peaks, but still very, very high. The question is, where is the dollar headed, broadly speaking, up, down, all around, where do you think it's going? Cris?
Cris deRitis: Depends on the timeline of course. So short term, I think it stays strong because of the relative strength of the U.S. economy compared to other parts of the world. There's a lot of uncertainty, flight to quality. I mean some adjustments here because all central banks are reacting to each other, but I don't see the dollar really losing ground for a while until we get a bit of stabilization here. So I'd say dollar remains the best bet out there and continue to have strength.
Mark Zandi: What about a year from now when we're in recession? In your recession? We're in recession. Well it's got to be easing at that point presumably.
Cris deRitis: Yeah, that's right. So we're in... But again, it's all relative, right? So also the rest of the globe is in recession as well at that point. So even then, right, the dollar is weaker, but it's not... It's still relatively stronger compared to other currencies. I think it's not until after that recession and things stabilize that the dollar actually comes back in, gets closer to its equilibrium.
Mark Zandi: Right. And do you think there's any chance the Fed... Excuse me, the U.S. loses it's or reserve currency status or even the reserve currency status is diminished? You saw... This was another question about the Russian and Chinese are now trying to buy oil. I don't think... It wasn't... Not with dollars, but maybe their own currencies. Yeah, their own currencies. And of course the fact that oil in most commodities in most goods are traded in dollars gives the U.S. dollar a reserve currency status, which is very important, very significant privilege and gives a lot of economic benefit. Do you think there's any chance that that will be significantly diminished anytime in the near future?
Cris deRitis: I don't see it.
Mark Zandi: Yeah.
Cris deRitis: And actually with the crypto currency crisis, I think it even strengthens the dollar's position even more. People, even consumers now, retail investors are thinking about safety of currencies and I think the dollar remains the champion there.
Mark Zandi: Got it. Yep. Marisa, any views on that? Do you have any strong opinions on this question?
Marisa DiNatale: Completely agree with everything he said. I feel like as an economist, we're getting that question about the dollar as the reserve currency for years and years. And it's just still, if you look around the world, one of the least risky places. So yeah, I agree with Cris's assessment.
Mark Zandi: Yeah, I guess that's the answer. I mean, what's the alternative really? The pound?
Marisa DiNatale: Nope.
Mark Zandi: The Yen? The Won, huh? The Euro?
Cris deRitis: We could still screw it up with the debt saving and...
Mark Zandi: Well a lot of this was precipitated by the decision to... When Russia invaded the U.S. froze dollar reserves of Russia. And so that's sent a signal that those dollars are not [inaudible 01:08:11], they can be frozen. And so I think obviously that's one of the reasons why Russia and China want to get off the dollar as fast as they can. But I don't see how that happens.
Cris deRitis: Yeah, it'd be very difficult.
Mark Zandi: Okay, good. So what did you think of this new feature of the podcast? This listener questions?
Marisa DiNatale: That's great.
Mark Zandi: You like it? You do? Okay. All right. Okay. We're going to do this going forward. So listener, you're on, give us this... And try to stump us. Try to stump us. And you should know I did not tell Cris or Marisa the questions beforehand, so these were answers. Maybe you're disappointed I didn't tell them beforehand.
Marisa DiNatale: Maybe we would have given better answers.
Mark Zandi: No, but I think it makes it more interesting, more spontaneously, get people's true feelings I think, if we don't let them think about it. So they got to respond. But please send in your questions. Well, hey guys, this is the end of the podcast. I want to wish you a happy holidays and I'll see you on the other side. Take care now.
