Listen On:
Moody's Talks - Inside Economics
Perfect PCE, Problematic Politics
Mark, Cris and Marisa (yes, she is back) welcome Matt Robison of the Beyond Politics podcast to talk policy and politics. The discussion ranges from the risk of a government shutdown and Bidenomics to a consideration of whether the nation’s politics are as fractured as they seem and who is going to be the next President. It goes without saying there was also a fulsome conversation about this past week’s economic data - could the numbers have been any better? Even “supercore” inflation was up just 0.2% month over month and 4.2% year over year in June.
For more from Matt Robison, click here
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 Marisa, you're back.
Marisa DiNatale: I am. I'm back.
Mark Zandi: You look very rested.
Marisa DiNatale: Thank you, and-
Mark Zandi: Yeah.
Marisa DiNatale: ... more tan than when I left.
Mark Zandi: Oh yeah, you were in Kauai?
Marisa DiNatale: I was, yeah. 10 days in Kauai.
Mark Zandi: Ooh, that sounds cool. I've never been there.
Marisa DiNatale: Wonderful. It's so beautiful.
Mark Zandi: Recommend? Yeah?
Marisa DiNatale: Oh yeah, it's absolutely gorgeous.
Mark Zandi: Yeah. Have you been to Maui?
Marisa DiNatale: No, I have not. I've only-
Mark Zandi: Oh, okay.
Marisa DiNatale: ... been to Kauai and the Big Island.
Mark Zandi: Oh, oh.
Marisa DiNatale: I went [inaudible 00:00:47] little year ago, so-
Mark Zandi: Yeah, I'd like to visit. Yeah. Cris-
Marisa DiNatale: It's awesome [inaudible 00:00:48].
Mark Zandi: ... have you ever been? Of course, we've got Marisa-
Cris deRitis: No.
Mark Zandi: ... DiNatale and Cris deRitis. I should have introduced you, but everyone knows that. Cris, have you been to Hawaii?
Cris deRitis: I have not.
Mark Zandi: Oh
Cris deRitis: Yeah.
Mark Zandi: Marisa, let me ask you this. You live in California, so it's only like a five-hour flight-
Marisa DiNatale: Yeah.
Mark Zandi: ... to there. If you're out on the East Coast, is it worse, do you think, taking the 10, what it is, 10, 12-hour flight to get out to Hawaii? Or would you just go to the Caribbean if you-
Marisa DiNatale: I would go to Hawaii, yeah.
Mark Zandi: You would? You would?
Cris deRitis: Oh.
Marisa DiNatale: Yeah.
Mark Zandi: Okay.
Marisa DiNatale: You know what's interesting is because, obviously, I'm from the East Coast, grew up there. I've only been in California for eight years, but I was shocked when I moved here how everybody in Southern California goes to Hawaii regularly. It is such a-
Cris deRitis: Really?
Marisa DiNatale: ... strong linkage between-
Mark Zandi: Yeah.
Marisa DiNatale: ... yeah. I know people that have houses there that go there every year, and it's just so strange coming from the East Coast because growing up I didn't know anyone that ever went to Hawaii, right?
Mark Zandi: Right, right.
Marisa DiNatale: People would look at me like I had three heads because I'd never been to Hawaii, but yeah, it's such a long trip from the East Coast. You usually have to layover in L.A. or San Francisco-
Mark Zandi: Francisco.
Marisa DiNatale: ... spend a night and then go, but from here it's five hours, so-
Mark Zandi: Yeah.
Marisa DiNatale: ... yeah, but I would. It's different. It's definitely different from the Caribbean, so-
Mark Zandi: Oh yeah.
Marisa DiNatale: ... it's worth it all.
Mark Zandi: Yeah, interesting.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah. Very good. Well, it's good to have you back and good to have Cris-
Marisa DiNatale: Thank you.
Mark Zandi: ... back. He was off in the-
Marisa DiNatale: Yeah-
Mark Zandi: ... the-
Marisa DiNatale: ... the other-
Mark Zandi: ... hills of Italy-
Marisa DiNatale: ... the other direction.
Mark Zandi: ... so yeah, the other direction.
Cris deRitis: Yeah, yeah.
Mark Zandi: We got a great podcast. We're going to turn to Matt Robison of Beyond Politics here in a few minutes, but before we do, I want to talk about this week's economic data and the Fed meeting. A lot to talk about there, a lot to digest, and I'm not sure what you guys are focused on, but maybe Marisa, I'll start with you. Of all the things that happened this past week on the economic front, what would you call out?
Marisa DiNatale: Well, there's a lot of data to talk about.
Mark Zandi: Yeah. Uh-huh.
Marisa DiNatale: I don't want to steal anybody's statistic, but we got readings on two readings on consumer confidence, wages, the housing market. We got a lot of data and nearly all of it good. Quite good, I think, which-
Mark Zandi: Maybe too good?
Marisa DiNatale: ... perhaps isn't the [inaudible 00:03:07].
Mark Zandi: Too good, well, we'll have to come back to that. I want to know what that means.
Marisa DiNatale: GDP, right, GDP growing 2.4%, so all good data. The Fed had a meeting. They did what we expected them to do, raise rates by a quarter point. The communication, I think, was not surprising around that. They certainly left it open to more rate hikes. They're looking at the data. They're focused on inflation and weight. They kept hammering. One thing in the Fed statement I was noting was how many times they said 2% inflation target because one thing people are asking me a lot when I go out is, "Do you think they'll really stick to 2%?"
Mark Zandi: Yeah.
Marisa DiNatale: "Would they be happy with something like 2.5, 3%?" I think in the first two paragraphs of that statement, they mentioned the 2% target like three or four times, so yeah.
Mark Zandi: Trying to make hammer the point-
Marisa DiNatale: Yeah.
Mark Zandi: ... that we're focused on too. Yeah.
Marisa DiNatale: Sure, and brought up inflation expectations specifically as one that they're watching, so-
Mark Zandi: Mm-hmm. All right. Let me ask it this way. Of all the data that came out this week, and you mentioned GDP, the Employment Cost Index, which measure wages, we got data on consumer spending income, and, of course, inflation. The consumer expenditure deflator, that's the measure of inflation. The Fed is targeting the core ex-food and energy, PCE Deflator. You got housing statistics, our own Moody's Analytics repeat sales. House Price Index came out this week. I mean, a gazillion things.
Anything that wasn't good from a perspective of I want inflation to come in so that it stops the Fed from raising rates and the economy is continuing to grow and avoiding recession? Any statistic that... We got durable goods, we got trade, we got all kinds of stuff. Anything in there that, and the answer could be no, I'm just asking.
Marisa DiNatale: I think if you dig into some of the detail of some of these things you could point, like for example, in the GDP report, corporate profits fell again in the latest quarter. There's been three or four quarters of declines in corporate profits, but-
Mark Zandi: No, no, wait. They didn't release corporate profits for Q2-
Marisa DiNatale: No-
Mark Zandi: ... [inaudible 00:05:32].
Marisa DiNatale: ... no.
Mark Zandi: They revised-
Marisa DiNatale: Right.
Mark Zandi: ... Q1.
Marisa DiNatale: They revised-
Mark Zandi: Right-
Marisa DiNatale: ... yes, yes.
Mark Zandi: ... because the profits come out next month. It's lagged one month, you know?
Marisa DiNatale: Yeah-
Mark Zandi: Right?
Marisa DiNatale: ... yeah.
Mark Zandi: Okay.
Marisa DiNatale: There's been three quarters, I think, of... You're right, it wasn't for the current quarter-
Mark Zandi: Yeah.
Marisa DiNatale: ... but-
Mark Zandi: Oh, so you're really-
Marisa DiNatale: ... [inaudible 00:05:46].
Mark Zandi: ... digging.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah.
Marisa DiNatale: Jobless claims are falling back from where they were, too.
Mark Zandi: Jobless-
Marisa DiNatale: They're-
Mark Zandi: ... claims being-
Marisa DiNatale: ... I'm sure-
Mark Zandi: ... a window on layoffs and they're back-
Marisa DiNatale: ... yeah.
Mark Zandi: ... down again. Yeah,
Marisa DiNatale: Yeah.
Mark Zandi: Okay. All right.
Cris deRitis: So is [inaudible 00:06:04]-
Marisa DiNatale: I'm sure Cris can name five things that are bad.
Mark Zandi: Is that-
Cris deRitis: Yeah.
Mark Zandi: ... too good? The jobless claims, is that too good? Right? Is the Fed going to look at that and say, "Well, this is not a cooling economy, there's still risk here?"
Marisa DiNatale: I don't know because wage growth is clearly coming in from the ECI report.
Mark Zandi: Is it good enough, though? Right? We had the Employment Cost Index. That's the one I would-
Marisa DiNatale: Yeah.
Mark Zandi: ... pick out. 4.5% year over year. Yeah, it's coming in. Is it coming in fast enough, strong enough to sway their opinion? Yeah.
Marisa DiNatale: I don't know. It's consistent with PC deflators coming down. Pretty much every measure of inflation is heading in the correct direction.
Mark Zandi: Well, Cris, let me ask you.
Cris deRitis: Yeah.
Mark Zandi: Give me your... All this data, what's your interpretation of what it said and what it means?
Cris deRitis: All good numbers, right?
Mark Zandi: Yeah.
Cris deRitis: Things are... Hard to say that anything is going off the rails here by any means, but again, I come to this question I think that the Fed is going to try to address, which is, is it good enough? Is it fast enough?
Mark Zandi: Right.
Cris deRitis: Yeah, sure, it's going in the right direction. We know that the first part of getting inflation down was going to be relatively easy. Now, we're going to start to go into that, I guess, seventh inning where it becomes much more difficult. You see oil prices stabilizing, actually coming up a little bit, so risks of another shock are still out there. You can't fall back on some of the other deflationary forces that we had in play like the supply chains getting worked out. That's done, so now we're going to-
Mark Zandi: Not really.
Cris deRitis: ... now the real work begins.
Mark Zandi: I'd push back on that. I mean, still we got vehicle prices that are going to decline. That's supply chain-related, right? We got-
Cris deRitis: Yeah.
Mark Zandi: ... a lot of multifamily homes coming to completion that they got all bottled up because of supply chain issues, so I'm not-
Cris deRitis: Sure, I-
Mark Zandi: ... the house prices, to your point, they're back up again, right? So-
Cris deRitis: Yeah, right.
Mark Zandi: ... sorry, I shouldn't have stopped you. I shouldn't-
Cris deRitis: No, no.
Mark Zandi: ... have stopped you.
Cris deRitis: No, no.
Mark Zandi: Yeah, so I think you still-
Cris deRitis: All right, let me-
Mark Zandi: ... I think it's too early to unfurl the mission accomplished banner, right? That's-
Cris deRitis: Oh, of course, of course.
Mark Zandi: ... that's my point.
Cris deRitis: Yeah.
Mark Zandi: Well, yeah. No, it's-
Cris deRitis: You look at this data for sure.
Mark Zandi: Yeah, but okay, let me ask you this. Of all the statistics, which one would you point to as being the most worrisome for you?
Cris deRitis: I think it... Employment costs. I think it's the-
Mark Zandi: Really?
Cris deRitis: ... now it's wages that we're going to be laser-focused on, right?
Mark Zandi: Yeah. Right. All right. I can't take it anymore. It's unambiguously good data. Come on. It's unambiguously good. Yeah, is it where you want it to be... Is it right on target? No, but it's screaming. Everything is heading back to the Fed's target in a reasonably graceful way. The Employment Cost Index is year over year 4.5, down from 5.5 to 6. It's clearly decelerating and you need to get it back to 3.5. If we get that in the next year, is that... What's wrong with that?
That feels pretty good to me. Inflation is coming in. The Core Consumer Expenditure Inflator is coming in. It's 4.1 now year over year, and I'm not going to go into too many more statistics because I don't want... We're going to play the statistics game in a second, but it's clearly coming in. Got consumer confidence is improved, so that suggests consumers are going to hang tough. The consumer spending data that came out, that looked really good. The saving rate is stable. We still-
Cris deRitis: Down just a little bit.
Mark Zandi: ... so... Was it down a little bit?
Cris deRitis: 4.3, 4.3. I... Oh, I don't want to take too many statistics.
Mark Zandi: Oh, no, but that feels like it's in the 4 to 4.5% range.
Cris deRitis: That's right.
Mark Zandi: It's bouncing around somewhere in there. The GDP number, it's like, "Okay, it's right with the economy's potential year over year. Its a little bit below the economy's potential. Gosh, it just... Everything, everything was... Durable good, I mean, businesses are investing. They're not pulling back, and we want them to invest because that goes to-
Cris deRitis: Sure.
Mark Zandi: ... long run productivity growth. The trade numbers look pretty good. I mean, it looks like the trade balance is stabilized. Inventories no longer adding to growth or subtracting growth. It feels like inventories are back to where they need to be. That week of data that we got, it was like, "Oh, could you have literally asked for a better set of data?" I don't... Given the environment that we're in, it's very hard to do that, in my view. It felt very good. It felt pretty good. You want to push back on anything I just said?
Cris deRitis: No-
Mark Zandi: Except that-
Cris deRitis: ... [inaudible 00:11:01]-
Mark Zandi: ... the script is still being written. I agree.
Cris deRitis: Yeah, exactly.
Mark Zandi: It's the current situation-
Cris deRitis: Yeah.
Mark Zandi: ... backward-looking data that-
Cris deRitis: Right, right. Okay.
Mark Zandi: ... I'm just still... I hope I'm-
Cris deRitis: Yeah. You paint me as the bear, but I don't want to be the bear.
Mark Zandi: Yeah, yeah.
Cris deRitis: I'm just saying that the risks are out there and, yeah, 4.41% core, great, bust still very far from 2, right? So-
Mark Zandi: Okay, okay. All right, fair enough. On the Fed, we have no more rate increases in our forecast and our baseline of forecast in the middle of the distribution of possible outcomes that this last rate hike is the end of the story. The so-called "terminal rate," the highest rate, 5.25 to 5.5%. We don't have rates coming in until this time next year really because I don't think... the bar is pretty high for them to actually cut rates. I think they need to get inflation all the way back into their target before they do that, and by our forecast, it takes about a year to get there.
I think our forecast now is consistent with market expectations. That's a question if you guys know the answer to it, and the other question is, does that sound right to you? I mean, do you think that outlook for the Fed make... Is that consistent with your own expectations for monetary policy? Marisa, I'll turn to you first.
Marisa DiNatale: I think we could get another rate hike later on this year. I think it really just depends on which way the data go. Inflation is coming in, but I don't expect that it's going to be completely linear. I think we are going to have some months where inflation accelerates here, and particularly if that's core and it looks like it's coming from the service sector, and if the job market stays the way it is, I think we could get another quarter point rate hike later this year.
Mark Zandi: Mm-hmm. Mm-hmm. Cris, what do you think? Well, oh, first of all-
Cris deRitis: Yeah.
Mark Zandi: ... do you know what the market is saying? I think the market is consistent with what I just said.
Cris deRitis: Pretty much.
Mark Zandi: Roughly so.
Cris deRitis: Yeah, I think right now it looks like for September it's 80% chance we stay firm, 20% chance of a hike, quarter-
Mark Zandi: Oh, is that right? Only 20%?
Cris deRitis: Yeah, it's pretty low-
Mark Zandi: At the September meeting?
Cris deRitis: ... and I-
Mark Zandi: Okay.
Cris deRitis: ... yeah. November I think is pretty similar to that, maybe a little bit higher-
Mark Zandi: Okay.
Cris deRitis: ... just given some of the uncertainty.
Mark Zandi: Right.
Cris deRitis: I think Marisa nailed the point that there's likely to be some noise in the data here at minimum, and we could see inflation pick up, tick up a little bit before it comes back down. I'm increasingly of the opinion that the Fed will hike one more time sometime in the fall as I think about the political cycle, and I think that's a good time for-
Mark Zandi: Just to get it out of-
Cris deRitis: ... [inaudible 00:13:46].
Mark Zandi: ... the way before you get into the politics-
Cris deRitis: Yeah, like the presidential election.
Mark Zandi: ... the presidential election. Yeah.
Cris deRitis: Yeah. The last thing they'd want is to pause now and then, let's say, in the spring we get to a 4-4, 4% unemployment, 4% inflation economy. Well, then they have to start hiking again. That's-
Mark Zandi: Tough.
Cris deRitis: ... difficult, so there I think the bias could be to let's hike one more time, even at the cost of increasing recession risk, just to ensure that inflation stays the course here, but... Well, let's see. I mean, Marisa's right about the data. We have to-
Mark Zandi: Yeah, on that point I basically said the same thing on CNBC that they don't want to decide the next election. They prefer or at least not be perceived as deciding who wins the next election. The host fired back with the standard, "The Fed's not political," and I said, "Well, they may not be political, but they don't want to be politicized." That's how I kind of... I think that's how I responded. Do you think that's a fair response?
Cris deRitis: I think so, but-
Mark Zandi: Yeah.
Cris deRitis: ... I reject the notion. Everything is political. Everything is political.
Mark Zandi: You reject that notion out of hand.
Cris deRitis: Out of hand. Any policy you make has some type of theory or underlying bent to it, so-
Mark Zandi: Yeah. Okay, so-
Cris deRitis: ... it may not be overly political-
Mark Zandi: Okay, right.
Cris deRitis: ... but for some political consideration at a minimum.
Mark Zandi: I guess the concern would be that they're not making a decision that's appropriate for the economy for full employment and inflation at target because of politics, do you think?
Cris deRitis: Yeah, yeah.
Mark Zandi: Yeah. I think that's the case, and I think, again, one reason why they would prefer to hike earlier rather than later, I think, is to-
Cris deRitis: Just get that out of the way.
Mark Zandi: ... yeah, just not even create the doubt that they might be politically driven. Marisa, do you think I answered that reasonably well on CNBC? I was worried that maybe it wouldn't come across well. I mean, what do you think?
Marisa DiNatale: I mean-
Mark Zandi: I mean, it is what it is.
Marisa DiNatale: ... everything that happens is politicized now-
Mark Zandi: Okay.
Marisa DiNatale: ... right?
Mark Zandi: Yeah.
Marisa DiNatale: Everything, even though the Fed is not a political body, everything they do is politicized, so to do anything during an election year will be hyperpoliticized, so yeah, I think that's the correct response.
Mark Zandi: Yeah. Okay, and let me ask you one more thing about the Fed. Going back to your point about the 2% target and the Fed obviously working really hard to convince people that they mean 2%, what do you think? Do you think they are steadfast at 2? Or would they be okay with 3 headed to 2? Or how do you think about that?
Marisa DiNatale: I think that... I don't think they're going to keep doing policy action until they get to 2 because they clearly understand, and from the statement, that this takes time to work through, and it works through with a lag. They also mentioned QE or easing, letting the balance sheet continue to run down, so I think that as long as they-
Mark Zandi: QT, they-
Marisa DiNatale: ... [inaudible 00:17:03]-
Mark Zandi: ... I think you said-
Marisa DiNatale: ... [inaudible 00:17:04].
Mark Zandi: ... like maybe quantitative tightening.
Marisa DiNatale: Tightening now, right, right.
Mark Zandi: Let the assets on the balance sheet wind down even if they are not raising rates, or did they take... Even if they're cutting rates, is that... I can't recall.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah?
Marisa DiNatale: Yeah-
Mark Zandi: Okay, right.
Marisa DiNatale: ... so, I don't think that means they're going to continue to hike rates until they get to 2. I think they may stop well before then as long as they're confident that the policy actions they have taken are putting the economy on the trajectory to get there.
Mark Zandi: What do you think, Cris, on that point around how relaxed are they going to be to actually get to the 2% inflation target on core consumer expenditure inflation?
Cris deRitis: I think that's still in the early innings, the mandate, but I think that if it's 2-ish, then they're not quite as aggressive. If the... It obviously depends on the trends. If it's-
Mark Zandi: Right.
Cris deRitis: ... gradually moving down closer and closer to 2 and they let the economy play out. If it stalls out, if it actually starts to tick up meaningfully, then I think they...I don't think they accept even 2.75 or 2.5. I think they'll continue to drive down if that's the case.
Mark Zandi: But is there a [inaudible 00:18:18]-
Marisa DiNatale: [inaudible 00:18:18] the job market is really strong, too.
Cris deRitis: If what?
Marisa DiNatale: Time, particularly if the job market in that scenario-
Cris deRitis: Yeah, right.
Marisa DiNatale: ... continues-
Cris deRitis: Exactly.
Marisa DiNatale: ... to be really strong. Yeah.
Cris deRitis: Right, right.
Mark Zandi: If the inflation rate's 3% and it feels like it's headed into the 2s and the job market's not getting stronger, it feels like it's holding it's own or maybe slowly easing up, you think that would be they'd say, "Fine, I'm not going to raise rates because in that kind of environment?" Or would they still view that they need to raise rates to get that inflation back to 2 faster?
Marisa DiNatale: I think-
Mark Zandi: [inaudible 00:19:00].
Marisa DiNatale: ... well, the timing of that could be interesting, right?
Mark Zandi: Going back to the-
Marisa DiNatale: Going back to-
Mark Zandi: ... presidential election.
Marisa DiNatale: ... what we were just saying.
Mark Zandi: Yeah, right.
Marisa DiNatale: I don't think they want to raise rates in 2024, so I think that maybe they do if this is the scenario we're in at the end of this year.
Mark Zandi: Right. Okay. Okay. Cris, any-
Cris deRitis: Yeah, I'd concur there.
Mark Zandi: ... concur? Yeah, okay. Okay, let's play the statistics game, and the game is we all put forward a statistic. The rest of the group tries to figure it out. By the way, Marisa, I schooled him last week when you were away, I schooled-
Marisa DiNatale: I did listen to the podcast that I missed, missed [inaudible 00:19:38].
Mark Zandi: That was a long podcast. Did you notice?
Marisa DiNatale: Yes.
Mark Zandi: Man, we were... Cris is so chatty. Oh-
Cris deRitis: Okay.
Mark Zandi: ... man, it's like a long conversation.
Cris deRitis: We didn't even get through all our questions.
Mark Zandi: No, we didn't.
Cris deRitis: Yeah.
Mark Zandi: The game is we put forward a statistic. The rest of the group try to figure that out through cues and deductive reasoning and clues. The best statistic is one where it's not so easy we get it immediately, and one that's not so hard that we never get it. If its apropos to the topic at hand, which I'm not sure what that topic is exactly, but there's a lot-
Cris deRitis: Politics?
Mark Zandi: ... of statistics, right? Maybe politics. Yeah, that's a good one. Okay. Oh, oh, that's a hint right there I-
Cris deRitis: Oh.
Mark Zandi: ... I think. Yeah.
Cris deRitis: A little least direct for you, least direct.
Mark Zandi: Okay. Let's begin and the tradition is we begin with Ms. DiNatale.
Marisa DiNatale: Okay, 4.67%.
Mark Zandi: That's ECI year over year. No? Percent change year ago in the Employment Cost Index for [inaudible 00:20:36]-
Marisa DiNatale: It is [inaudible 00:20:37].
Mark Zandi: ... civilian workers?
Marisa DiNatale: No.
Mark Zandi: Wages and salaries? Compensation?
Marisa DiNatale: Yeah, but it's something more [inaudible 00:20:49].
Mark Zandi: Oh, I know, I know. It's... All right. Cris is going to, let me say it. Year-over-year growth in the Employment-
Marisa DiNatale: Yes.
Mark Zandi: ... Cost Index.
Marisa DiNatale: Yes.
Mark Zandi: ... private industry wage and-
Marisa DiNatale: [inaudible 00:20:58].
Mark Zandi: ... salary, ex-incentive pay.
Marisa DiNatale: No, you're really close-
Mark Zandi: Oh geez.
Marisa DiNatale: ... but-
Mark Zandi: Really? Okay-
Marisa DiNatale: ... no cigar.
Mark Zandi: No? Cris, do you want to refer to that?
Cris deRitis: I was going to go with non-union workers.
Mark Zandi: Non-union.
Marisa DiNatale: No.
Cris deRitis: Oh, okay, so-
Mark Zandi: Total comp? That's not right?
Cris deRitis: It's not... Is it wages and salaries?
Marisa DiNatale: It is wages, and it is year-over-year growth and wages and salaries for-
Mark Zandi: Ex-incentive pay-
Marisa DiNatale: ... a particular... no.
Mark Zandi: Oh, it's not?
Cris deRitis: A particular segment.
Mark Zandi: Oh, it's a particular segment, okay. It's not total? It's not-
Marisa DiNatale: No, it's not total.
Mark Zandi: ... the whole shooting [inaudible 00:21:32]?
Marisa DiNatale: No.
Mark Zandi: It's not private industry? It's not civilian? It's-
Marisa DiNatale: No. Something more specific.
Cris deRitis: Hmm. One of the industries?
Mark Zandi: I think it is non-union, but I [inaudible 00:21:44]-
Cris deRitis: [inaudible 00:21:44]-
Marisa DiNatale: It could be-
Mark Zandi: It could be, it could be.
Marisa DiNatale: ... [inaudible 00:21:46] but...
Mark Zandi: Okay, go ahead. What is it?
Cris deRitis: What is it?
Marisa DiNatale: It is year-over-year growth in wages and salaries in the second quarter for service sector workers.
Cris deRitis: Oh, service sector.
Mark Zandi: Oh. Oh, okay. That's a good one. That's a good one. Very relevant.
Cris deRitis: I actually think 4.7 does apply to a lot of different [inaudible 00:22:05]-
Mark Zandi: Yeah [inaudible 00:22:08]-
Marisa DiNatale: It very well-
Mark Zandi: ... ECI, yeah.
Marisa DiNatale: Yeah, it well may, so-
Mark Zandi: Okay.
Cris deRitis: Well, everything was 1% on a month-over-month basis.
Mark Zandi: Yeah, did you notice that?
Cris deRitis: Yeah.
Mark Zandi: It was... By the way, Cris, annualize that for me, please. 1% in a quarter is? Annual?
Cris deRitis: Well, you know, uh-huh, uh-huh-
Mark Zandi: You're forecasting with the-
Cris deRitis: ... uh-huh.
Mark Zandi: ... the ruler here. Uh-huh.
Cris deRitis: That's 4%, and what's the bogey? 3.5.
Mark Zandi: 3.5.
Cris deRitis: Okay, and there's a band of uncertainty around that that's pretty wide I would think, right? On both sides-
Mark Zandi: Exactly, exactly-
Cris deRitis: ... [inaudible 00:22:39] yeah.
Mark Zandi: All right, okay, so Marisa, why did you pick that?
Marisa DiNatale: I picked it because of inflation, right? That... At this point, inflation and service sector wages is something that is really.... As we get past energy and food and supply chains and all these other things that have brought inflation down quickly over the past year, this is one of the sticking points is service sector wages. There's progress here as well. 4.67% is high relative to where it was during the pandemic, which was around 3% in the quarters before the pandemic, but it's been coming down pretty steadily for the past-
Mark Zandi: Year.
Marisa DiNatale: ... year-ish. Yeah, actually year. It peaked at 5.3% back in the second quarter a year ago, so it's been coming in as well. It's the slowest rate of year-on-year growth since the end of 2021, so it's encouraging that here we're making progress as well, although it's slow, but it's there.
Mark Zandi: Yep, yep, and just to make sure everyone understands out there, that ECI, the Employment Cost Index, what you're putting forward here is what we consider to be the gold standard for measuring wages and labor compensation because it controls for the mix of occupations and industries. The other -
Marisa DiNatale: Right.
Mark Zandi: ... measures we have don't do that, so-
Marisa DiNatale: Yeah.
Mark Zandi: ... the problem is it's lagged and we only got 2Q data, but nonetheless, this gold standard is saying wage growth is still high compared to what you think it should be if you have a 2% inflation target, but, and by the way, not if you have a 3% inflation target. If you have a 3% inflation target-
Marisa DiNatale: You're right on.
Mark Zandi: ... job done, job done. Mission accomplished.
Marisa DiNatale: Mission accomplished.
Mark Zandi: Mission accomplished. Yeah, mission accomplished, but okay, that's what the ECI is. Okay, good statistic. Cris, what's your statistic?
Cris deRitis: All right, got two here. 92.4 and 50.9.
Mark Zandi: Okay.
Marisa DiNatale: Are those from... Are they-
Cris deRitis: What?
Marisa DiNatale: ... Are they indexes? Are they from a consumer confidence survey?
Cris deRitis: They are, indeed, from a consumer confidence survey.
Mark Zandi: Is one from the conference board and the other one from the UMich, are they both from the University of Michigan?
Cris deRitis: Yes.
Mark Zandi: Oh, see, I didn't look at that really... When did that come out?
Cris deRitis: They came out this morning.
Mark Zandi: This morning? Yeah, I haven't had a chance to-
Cris deRitis: [inaudible 00:25:18].
Mark Zandi: ... look at that.
Cris deRitis: Yeah, 90-
Marisa DiNatale: It was what? 92?
Cris deRitis: 92.4-
Mark Zandi: 4.
Cris deRitis: ... and 50.9 is one. I'll give you a hint, because he didn't look at it. It's the overall index was 71.6.
Mark Zandi: Okay, so one is current conditions, one is expectations?
Cris deRitis: Nope.
Mark Zandi: Nope?
Cris deRitis: No.
Mark Zandi: Okay. I'm relating it to the topic of politics.
Marisa DiNatale: Oh, is one the perception of Democrats and one the perception of-
Mark Zandi: Oh.
Marisa DiNatale: ... Republicans?
Cris deRitis: You got it, you got it.
Mark Zandi: That's a good one. Yeah, that's a good one. Okay, yeah, explain.
Cris deRitis: Well, so Democrats had 92... so the overall was 71.6 across the entire population. 92.4 for Democrats is quite high. It's actually on par with what it was back in February of 2021. I think we've talked in the past that these sentiment measures are very sensitive to political party and who is in control of the White House. February 21, President Biden takes office and suddenly the Democrats are all optimistic. The 50.9 is Republicans, which is quite low, certainly much lower than the average, as I mentioned. It's off of the bottom, which was 33 last year, but still relative to the cycle that Republicans still view this as a very negative economy, just slightly better than what it was at the depths of the pandemic, not close to where we were prior to the pandemic yet, so just to color-
Mark Zandi: That's a good one.
Cris deRitis: ... the sentiment statistic.
Mark Zandi: Yeah-
Marisa DiNatale: Yeah.
Mark Zandi: ... because we are going to turn to Matt Robison soon and talk about the policy and politics, and that's a really good one because we were going to talk about the fracturing of our politics in that conversation. The overall UMich, University of Michigan survey, it was 72... What was it? 70-
Cris deRitis: 71.6-
Mark Zandi: ... [inaudible 00:27:11].
Cris deRitis: ... which was up a lot up.
Mark Zandi: Up a lot.
Marisa DiNatale: Yeah, it jumped quite a bit.
Cris deRitis: Yeah, 64.4, so up seven points, which is-
Mark Zandi: That's a big deal.
Cris deRitis: ... a big jump, yeah.
Mark Zandi: Yeah, a big deal. Still low by historical standards, but moving, and of course, the conference board survey of confidence, another measure that's also jumped in the month of July, and that is actually quite high by sort of... It's not really high, but it's above average-
Cris deRitis: Right, that was 117-
Mark Zandi: ... that average.
Cris deRitis: ... I think, yeah.
Mark Zandi: Yeah, something like that. Okay. Okay, very good. Okay. You ready for my statistic?
Marisa DiNatale: I'm ready.
Cris deRitis: Let's hear it.
Mark Zandi: It's very easy, straightforward, down the strike zone. 2%.
Cris deRitis: Fed's target for inflation?
Mark Zandi: Well, yes.
Cris deRitis: Okay-
Mark Zandi: That's-
Cris deRitis: ... [inaudible 00:27:57]-
Mark Zandi: ... I knew you were going to say that. It's not because that-
Marisa DiNatale: Is it the PCE over the past six months?
Mark Zandi: No.
Marisa DiNatale: Is it-
Mark Zandi: You're on the right track.
Marisa DiNatale: ... is it the PCE deflator?
Mark Zandi: Well-
Marisa DiNatale: It's from that... it's some-
Mark Zandi: It's from that release.
Marisa DiNatale: ... it's from-
Mark Zandi: Yeah, it's not-
Marisa DiNatale: ... yeah.
Mark Zandi: ... the PCE deflator.
Cris deRitis: It's from that release, okay.
Mark Zandi: It's from that release. What's the-
Marisa DiNatale: That one?
Mark Zandi: ... the most significant, most important inflation statistic for setting monetary policy?
Marisa DiNatale: Core? Is it core PCE?
Mark Zandi: Core PCE in the quarter annualized.
Cris deRitis: Annualized.
Marisa DiNatale: Uh-huh. Mark loves to annualize everything.
Mark Zandi: Wait a second.
Marisa DiNatale: Yeah, yeah.
Mark Zandi: Wait a second. Wait for it. Let me repeat that. The core PCE deflator grew 2% in the month of June, in the month of June. Okay-
Marisa DiNatale: The Fed's done.
Cris deRitis: Yeah, that's-
Mark Zandi: I'm-
Marisa DiNatale: That's what you're saying.
Mark Zandi: ... that was that-
Cris deRitis: I'm just saying.
Mark Zandi: ... in fact, we said mission accomplished a number of times here. I can feel that's going to be part of the title of this-
Cris deRitis: Oh that will-
Mark Zandi: ... podcast.
Cris deRitis: ... that will jinx your fortune.
Mark Zandi: Oh, that'll jinx it. Yeah, you're right. That might jinx it.
Marisa DiNatale: The last time someone said that it didn't go well.
Cris deRitis: Yeah.
Mark Zandi: Oh, that's right.
Cris deRitis: Yeah.
Mark Zandi: Are you referring to President Bush and-
Marisa DiNatale: I am, yeah.
Mark Zandi: ... oh, you are? Yeah, I forgot about all... Maybe we'll skip that. Yeah, we'll skip that. I thought that's pretty cool, huh? Right?
Marisa DiNatale: It is.
Mark Zandi: I mean, because you got to get some annual month-to-month, quarter-to-quarter annualized numbers at your target before you actually get to target, right?
Cris deRitis: Absolutely, yeah.
Mark Zandi: Now, this is along the way, so it felt pretty good. Hey, one question I don't know the answer to, and I don't know if you guys do either, but I'm going to ask this. Super core inflation, that's the PCE deflator for services ex-housing, ex-energy services. This is what Fed Chair Powell is focused on, is saying, "Well, this is the thing the Fed can control." Do you guys know? You know what that number was? I didn't.
Marisa DiNatale: I didn't look at it.
Mark Zandi: Okay. All right. Yeah, no worries.
Marisa DiNatale: Do you know, Cris?
Cris deRitis: No, I don't.
Mark Zandi: Maybe we can find out and we'll put that into the blurb so people-
Cris deRitis: There you go, there you go.
Mark Zandi: ... because they're going to be awfully frustrated if we don't give them that statistic. Okay, very good. Before we move on, probability of recession, just very quickly, what is the probability the economy enters into a National Bureau of Economic Research-defined recession between now and July of next year? Marisa? Oh-
Cris deRitis: Oh.
Mark Zandi: ... really-
Marisa DiNatale: Well-
Mark Zandi: ... thinking about it.
Cris deRitis: Thinking.
Mark Zandi: I feel like-
Marisa DiNatale: ... well, how [inaudible 00:30:47]-
Mark Zandi: ... a cut coming up. It better not be an increase.
Marisa DiNatale: It's not, but now I'm a little worried about a government shutdown, more so than I was before.
Mark Zandi: She's presaging the next conversation.
Marisa DiNatale: I am. Yeah. I can't help it. Sorry.
Mark Zandi: Yeah
Marisa DiNatale: I think it's like a third.
Mark Zandi: A third, okay, and you were at 40%?
Marisa DiNatale: At 40%.
Mark Zandi: In the high... Your highest probability was 45 or 50? You were at 50 I think.
Marisa DiNatale: My highest ever?
Mark Zandi: Yeah. You were even higher-
Marisa DiNatale: Oh, I think I was near-
Cris deRitis: [inaudible 00:31:19]-
Marisa DiNatale: ... like 60.
Cris deRitis: ... like 60.
Mark Zandi: Oh yeah, you were, you were at one-
Marisa DiNatale: Yeah.
Mark Zandi: ... point. Yeah, that's right. Okay, one-third. Okay. Cris, I'm sticking with 50-50.
Cris deRitis: Oh, damn.
Mark Zandi: I can't wait.
Cris deRitis: Yeah.
Mark Zandi: As soon as he cuts it below 50-50, we're going to have to do something. Yeah, I'm at one-third as well. I agree with you, one-third. I feel [inaudible 00:31:39]-
Cris deRitis: Oh, so you didn't move? You didn't move down?
Mark Zandi: No, no, no, no.
Cris deRitis: Despite all this great data?
Mark Zandi: No, because it's consistent with my forecast, Cris. I'm sticking to script.
Cris deRitis: Okay.
Mark Zandi: Sticking to script, baby, and you're right, you can't declare mission accomplished, and you're right, Marisa, there's a lot of potential threats out there. You mentioned the government shutdown and the stresses on the financial system, something could break. We've got student loan payment moratorium coming to an end. Those are the things that we know. It's the unknown unknowns that probably will come and bite us if something's going to bite us, but anything else before we move on, guys?
Marisa DiNatale: I don't think so.
Mark Zandi: Okay. No? Very good. We're going to bring Matt into the conversation and looking forward to that. Let me bring in Matt Robison into the conversation. Hey, Matt. How are you?
Matt Robison: Hey, Mark. I'm good. How are you?
Mark Zandi: I am okay. I have to say, I had a tough travel day yesterday. I was in Milwaukee for a board meeting, and just as I'm leaving for the airport, it was canceled and they moved it to today, 24 hours later. Then, I scrambled, got a car to take me to Chicago, O'Hare, and got on a 9:00 flight last night. Got in around midnight, so I'm a little discombobulated, but I'm here, I'm here. I made it. Have you been lucky enough to avoid those kind of travel problems?
Matt Robison: I have ever since I took my consulting life down to a bare minimum. I travel a lot less, a lot less time on airlines, and I'm not sorry about it.
Mark Zandi: Yeah, you're a-
Matt Robison: It's okay.
Mark Zandi: ... lucky man, a lucky man. Matt, you have this great podcast that you were so kind to have me on. I think a couple times I've been on Beyond Politics, and maybe you can take a minute and just kind of describe the podcast and how you found that long, wind-y road to be running that show. I'd
Matt Robison: Sure.
Mark Zandi: ... like to learn a little bit more about your background.
Matt Robison: Well, sure. The podcast is called Beyond Politics. I host it with my former boss in Congress, former Congressman Paul Hodes of New Hampshire. He was the 2008 National Co-Chair for Barack Obama, two-term member of Congress. I spent about a decade working in Congress. Before that, my background was in economics. I was an economics major at Swarthmore College where my advisor was Fred Pryor. For economic historians, can anyone place that name? Fred Pryor?
Mark Zandi: Aah. Swarthmore is a great school.
Matt Robison: Great school.
Mark Zandi: Of course, we're just down the road here. I'm in Malvern and Westchester, so we're right down the road from Swarthmore. Fred-
Matt Robison: Well-
Mark Zandi: ... Pryor, no, I can't. I can't. Can you guys?
Marisa DiNatale: No-
Cris deRitis: [inaudible 00:34:32] no.
Marisa DiNatale: ... but remember, we've had so many Swarthmore alums.
Mark Zandi: Oh yeah.
Matt Robison: Yeah. We're few but mighty. We-
Mark Zandi: Yeah.
Matt Robison: ... so Fred Pryor, if you've seen the Steven Spielberg movie Bridge of Spies, was the other guy in the exchange for the U2 downed spy plane pilot, Gary Powers. He was an economist studying Eastern European economies. He was part of that swap, and he settled at Swarthmore College. Fun fact for you, Mark. That's only one of the amazing footnotes in his economic career.
Mark Zandi: Hmm.
Matt Robison: He also, and this story is so good that I hope it's true. I've never tried to interrogate it because I like it. He also is the reason that you constantly have traffic on the Blue Route. If anyone's traveled around Pennsylvania-
Mark Zandi: Yeah.
Matt Robison: ... you'll note that the Blue Route, which is a big highway in Pennsylvania, shrinks from three lanes to two, and it's right around Swarthmore College. Why is that? It's because Fred Pryor-
Mark Zandi: Aah.
Matt Robison: ... knew enough about manipulating the federal government, which is also my stock, to file environmental impact statement after environmental impact statement-
Mark Zandi: Oh.
Matt Robison: ... to try and stop the highway. He forced it to narrow to two lanes, which is why there's always a bottleneck there, just because he didn't want it to make so much noise around his house.
Mark Zandi: Man.
Matt Robison: That's why.
Mark Zandi: [inaudible 00:35:48].
Matt Robison: Fred Pryor is an amazing historic figure, and he was my first economics advisor.
Mark Zandi: That's a cool story. When I was a kid, the Blue Route had been, but built because of all these lawsuits, it had not been open, so it was like this highway with nobody on it. We would take our bikes and we would ride along the Blue Route for-
Matt Robison: Really?
Mark Zandi: ... for hours. You're saying that's because of Fred Pryor? At least in part?
Matt Robison: Fred Pryor caused a lot of traffic congestion in the Greater Philadelphia area. He was part of-
Mark Zandi: Oh my gosh.
Matt Robison: ... an historic spy exchange. His father tried to wall off his small town from the Great Depression by printing his own money. Turns out the Secret Service and the Treasury Department do not like that, so he has hundreds of thousands of dollars of fake currency in his attic. He died a few years ago, so-
Mark Zandi: Yeah.
Matt Robison: ... I digress, but the point is, I come from a background-
Mark Zandi: Great story.
Matt Robison: ... in economics, and a friend of mine at Swarthmore said to me, "Why are you going to major in political science? Major in economics. You learn all the same stuff, but better." She was right. I went into economics, but then I found my way back into government and politics, and now I host this podcast.
Mark Zandi: Well, it's great to have you on, and there's a lot to cover, both in terms of policy and politics. Maybe we can start with the policy first and then turn to the politics. Both are pretty fascinating at this point in time, but maybe we should eat our vegetables first and then turn to the dessert. One of the things that kind of increasingly top of mind for us because, obviously, we're looking at this through the prism of what it means for the economy and the economy's vulnerable to anything that can go wrong because it's pretty weak here is... Right now, the thing that's kind of come to the fore is the potential for a government shutdown.
How, and just a little bit of context, the lawmakers, Congress, have to come forward with a budget by the end of the fiscal year, which is the end of September. The new fiscal year starts on October 1, and if they don't pass funding legislation to fund the government, it will shut down. There's a lot of talk now that maybe that might not happen. What's your sense of things there? Is a government shutdown a realistic possibility here?
Matt Robison: Let me give you the bottom line up front. 90%.
Mark Zandi: Ooh.
Cris deRitis: Oh.
Matt Robison: 90% likelihood.
Mark Zandi: Goodness. That's [inaudible 00:38:13].
Matt Robison: I know Cris is usually the bear here, so-
Mark Zandi: Yeah.
Matt Robison: ... I'm just trying to be more negative than he usually is. Look, in 1976, we reformed the way that we do the budgeting in Congress. Since that time, this is what you might call an unsuccessful reform. Since that time, there have been 22 funding gaps in the federal budget, four of which have led to significant, lengthy government shutdowns, 10 of which have led to some number of federal employees being furloughed. The conditions under which you might expect this to happen are not always the same. It tends to be more likely when you have a president and at least one Chamber of Congress of opposing parties, which is the situation we have right here, but my real concern is around incentives.
I mean, Mark, when you were on Beyond Politics, we were talking about the debt ceiling and the likelihood of going over the cliff. My concern at the time was, "Hey, you know what economics teaches us? People respond to incentives." Political memories are really short, especially about economics, and so there was an incentive in my mind for Republicans to want to go over the cliff because by the time the dust settled, all voters would remember is, "Hey, this cratering depression of an economy we're living through, I don't care whose fault it was. I just don't like it. I'm going to vote against the incumbent." Advantage, Republicans. Didn't turn out that way. Kevin McCarthy probably thought it was too much of a gamble, and also probably had some major donors in his hear saying, "Please do not do this, Kevin."
Mark Zandi: Hmm.
Matt Robison: I think the incentives are very different when it comes to a garden variety government shutdown. There's already an inbuilt incentive in that debt ceiling deal where if they don't pass all of the individual funding bills that fund the government, there are 12 of them, if they don't pass all of them, then there's an automatic 1% cut to most government spending. This is something that Republicans want, and in fact, all of their political incentives... I'm not trying to be negative about them, but all... I'm a Democrat, but all of their political incentives line up to not want to vote for spending bills. Spending is bad in the Republican Party. It's not a political advantage for you, so I think they have every reason to hold firm. We're not going to pass the spending bills on time, 90%.
Mark Zandi: Hmm. I was under this kind of economist naïve perspective that 1% sequestration that you mentioned, so as part of the debt limit deal, they said, "Okay, if you don't get this done by," I think it's January 1 of 2024, "there'll be this across the board 1% cut in discretionary spending, non-defense and defense." Of course, Democrats don't want the non-defense, or many don't want the defense, either, but they certainly don't want the non-defense. The Republicans, they may want the non-defense cuts, but they don't want the defense cuts, so at the end of the day, they'll come to terms before January 1. Are you saying that that's not likely? Or...
Matt Robison: Well, the last time we had one of these sequestration, and by the way, no one likes jargon except economists as much as politicians-
Mark Zandi: Yep.
Matt Robison: ... the last time we had one of these sequestration inbuilt deals, we triggered it, you know?
Mark Zandi: Yeah.
Matt Robison: I don't think that that's a strong enough stick in this carrot-
Mark Zandi: Ooh.
Matt Robison: ... and stick approach. Again, I just think that the politics of this lineup in a very bad way, and we have to remember that there's a substantial amount of leverage in a closely divided House of Representatives for small, cohesive groups like the Freedom Caucus. Their perception was that Kevin McCarthy cut a bad deal on the debt ceiling. They thought they got played, they thought they got had, they thought they got rolled. They're not entirely wrong about any of this, and they would love nothing better than to extract the pound of flesh.
Most of these members of Congress, again, they're responding to their own personal political incentives in their districts. The only threat to them politically is someone beating them in a primary, calling them a RINO, or a Republican in Name Only, outflanking them to the right and voting against everything and causing a shutdown and fighting spending and being a burr in Joe Biden's saddle. It's not a bad thing for them.
Mark Zandi: Hmm. Okay, so we come up to the end of September, October 1, you're saying there's no deal, there's no budget. The government shuts down and it's going to stay shut down until the Democrats relent? Or no, it goes all the way up to January 1 and then we get the sequestration and we go forward? Is that kind of sort of what you're saying?
Matt Robison: Well, what usually happens in Washington is, like I said, and I don't want to get into weeds, although your listeners, they're listening to an economics podcast. They're probably comfortable with weeds.
Mark Zandi: Oh, they're deep down. They're about as nerdy as they get, so feel free, go.
Matt Robison: Right, it's like the 76ers GM likes to say, it's like, "You're comfortable being uncomfortable." I mean, basically we split up the discretionary spending of the federal government in Congress into 12 bills. It used to be 13, then we merged some, whatever, 12 bills. Okay, it's like the 12 days of Christmas, except the boring version. You got to pass them all, and it's impossible because no one wants to be on the record voting for these things. We used to have earmarks with little goodies tucked for each like a present under their Christmas tree tucked into each of these bills, little bits of spending in each individual member district. That kind of greased the skids. We have them back. We didn't have them for a while, but even with that, it doesn't unstick things, so what Congress has done is they've crammed everything in together into an omnibus.
Let's do all 12 of these at once. Or what you can do is called a CR, a continuing resolution where you just say, "Remember what we did last time? Let's just do re-up. Let's just do everything same-same." Or you can combine those things into a cromnibus, which sounds like a cruller, but it's a lot less delicious. Could that happen? I mean, the way this usually goes is as the deadline approaches-
Mark Zandi: Yeah.
Matt Robison: ... pressure mounts, and people start to knuckle under, and eventually after a short shutdown, you get there. I'd say the most likely scenario if I were forecasting, if I were being foreword-looking here is we end up with a short enough shutdown till people start to feel the pain, and then they'll work something out that looks mostly like a CR and a little bit like an omnibus, and is a lot less delicious.
Mark Zandi: Okay, and then do we still get that 1% cut at the end of the day?
Matt Robison: Yeah.
Mark Zandi: That's a close one.
Matt Robison: I would say if I were a betting man, I would say yes.
Mark Zandi: Really?
Matt Robison: We love to bet around here. Yeah.
Mark Zandi: Ooh.
Matt Robison: Yeah.
Mark Zandi: I'd say so.
Matt Robison: I'd say yes.
Mark Zandi: It does feel like... Oh, so Cris is probably-
Matt Robison: Strong opinion, lightly held.
Mark Zandi: Yeah, I got it. Got it. Okay, so that's some pretty significant fiscal restraint, then.
Matt Robison: Yep.
Mark Zandi: So-
Matt Robison: Well, can I ask you an economics question?
Mark Zandi: Yeah, fire away.
Matt Robison: All right. I've just given you this input. You guys are the modeling and prediction experts. How are you factoring as you make economic predictions for 2024? How are you factoring the likelihood of government shutdown and the potential macroeconomic shock into your predictions?
Mark Zandi: Well, it's not dissimilar to... You have to make an assumption along how this is all going to play out similar to what you just articulated. In the kind of our baseline view right now, we have a short government shutdown, pressure mounts politically. They come to terms past the CR and then ultimately come to a deal before we get to sequestration and this 1% cut across the board. If that's the deal, if that is what plays out here and it's couple, three, four, five, six-week kind of shutdown, that may shave maybe couple three-tenths of a percent off of GDP growth in Q4, which isn't great because Q4 is probably going to be weak anyway because you got student loan payments kicking back in and got a lot of other stuff happening. It's not the greatest thing in the world, but it's not something that pushes into recession.
If you throw into the mix what you just said and you get this 1% cut and it kicks in at the beginning of next year, that makes me a little more nervous about what the world looks like in Q1, particularly Q1 in next year because that's pretty significant fiscal headwind that we're going to... Fiscal policy goes from being effectively neutral with respect to the economy to kind of a headwind to the economy again at kind of the wrong time. Cris, did I... is that roughly right? Is that-
Cris deRitis: Yeah. I think I just heard you revising up your recession odds, so-
Mark Zandi: Oh, well, no.
Cris deRitis: ... that's what I heard.
Mark Zandi: No, no, but I have to buy into Matt's angst to do that. I haven't done that yet.
Cris deRitis: Oh, okay, okay-
Mark Zandi: I haven't been convinced yet.
Cris deRitis: ... fair enough. All right. Just laying the ground.
Mark Zandi: I hear you, I hear you. That's definitely a risk. Matt, as a betting person, you would say... If you were in our shoes and you had to put pen to paper to produce a forecast, you'd say, "Assume that 1% cut a the beginning of the year?"
Matt Robison: Yeah, I'd say 90% some type of funding gap of some kind-
Mark Zandi: Yeah, okay.
Matt Robison: ... and then maybe 50-50 on triggering the 1%-
Mark Zandi: 50-50, okay.
Matt Robison: ... so I would do a probability weighted like-
Mark Zandi: Your Swarthmore coming in, your Swarthmore-
Matt Robison: ... yeah, yeah.
Mark Zandi: ... yeah.
Matt Robison: Some kind of like econometric something or other.
Mark Zandi: Got it. Got it. Okay.
Matt Robison: Yeah.
Mark Zandi: Okay. Well, let's move on to another policy question that's kind of top of mind, and that is this so-called term "Bidenomics." Curious what you think about that term. I'm not sure it's going to win any marketing awards, but Bidenomics is basically President Biden's economic policy, and there's actually a lot to chew on there because a lot of things got done in the first two years of his term. What do you think of Bidenomics, both in terms of policy and just maybe we can delve into the politics a little bit? What do you think about the politics of Bidenomics?
Matt Robison: I think that you summed it up perfectly. It is, and look, I've great respect for Mike Donlan and Anita Dunn, the communications gurus in the White House who are shopping this term. I'm sure I've had the pollsters who worked for this White House who work on these terms on my show, and I'm sure they've worked with some of the smartest people in the business like them to come up with this term. I question it. I am not running out, I'm not going to put it on any T-shirts, baby. I'm not buying it. That said, I mean, the proof of the pudding is in the eating, and darn, I mean, it's hard to argue with the proposition that maybe there's some luck here. Maybe there's some business cycle here. Maybe there's some good Fed policy here. It's hard to argue with the proposition that things are fundamentally working.
I mean, let's not forget that Donald Trump was the first president since Herbert Hoover in the Depression to actually lose jobs. His net total on the day he left office was a lost of 2.9 million jobs. Yes, a lot of that was because of the pandemic, but our handling of the pandemic is also on his tally, so yeah, I chalk that up to Donald Trump. We were essentially from an economic standpoint in a car on fire careening over a cliff. Over the last two years, among all the leading economies of the world, the G7 economies, the U.S. has had the highest level of economic growth, and over the last year, we've achieved the fastest decline in inflation and now have the lowest absolute level of inflation.
Our bank accounts are between 10 and 15% higher on average. Wages have finally gotten out ahead of prices again, which means our real pay is going up. That's especially true for people at the non-manager level, people lower in the income distribution. Look, I know there's been a lot of interrogation of the figure the fastest one-year job creation tally in American history. There's some question about that, but again, it's hard to argue with the fact that we've added 13 million jobs, almost 800,000 manufacturing jobs. Strongest manufacturing jobs performance in 30 years. I could go on and on about this. The record is incredibly strong. I would love to run on this record-
Mark Zandi: Yet, he's-
Matt Robison: ... but I don't-
Mark Zandi: ... not getting any credit, right?
Matt Robison: Well, and I think that's because, first of all, I'm a fan of the movie Snakes on a Plane from a marketing standpoint. I've never seen it, but I can tell you what it's about. You know what it's about? About snakes on a freaking plane.
Mark Zandi: Good point, good point.
Matt Robison: You know?
Mark Zandi: Right.
Matt Robison: Here's another movie for you. Remember the movie Roxanne with Steve Martin? He's in the bar and someone calls him, "Hey, big nose," and he's like-
Mark Zandi: Oh yeah, yeah, yeah, yeah, I do-
Matt Robison: ... he had to come up with something-
Mark Zandi: ... remember that.
Matt Robison: ... better. I can come up with 20 somethings better. Do you think that the group of us like Marisa, Mark, and Cris, we could come up with 20 somethings better? The Biden Jobs Plan. The Biden Economy-
Mark Zandi: Oh-
Matt Robison: ... Rescue.
Mark Zandi: ... you think-
Marisa DiNatale: [inaudible 00:51:51].
Mark Zandi: ... it's all marketing. You think that's why he's not getting credit?
Matt Robison: I think... Look-
Mark Zandi: You're saying, "I hate Bidenomics." That's... Where did he come up... Well, that's, of course, a play on Reaganomics, but Bidenomics.
Matt Robison: Well, okay, so since you invoked Reagan, I think we're all at an age, maybe not Marisa, I'm not sure where we can remember morning-
Mark Zandi: Definitely not Marisa. That [inaudible 00:52:08]-
Matt Robison: [inaudible 00:52:08]-
Marisa DiNatale: Yeah.
Mark Zandi: Yeah.
Marisa DiNatale: Come on.
Matt Robison: You're so youthful looking.
Mark Zandi: Come on.
Matt Robison: You guys remember, your younger listeners will not remember this, you remember Morning in America?
Mark Zandi: Yeah. Well [inaudible 00:52:19]-
Matt Robison: Marketing. Marketing. What did Mel Brooks call it? Merchandising. Morning in America was... I'm not going to curse on your show, it was BS. It was complete and utter hooey. The Morning in America ad, the most famous-
Mark Zandi: It made me feel good, though, I have to tell you, Matt.
Matt Robison: Of course it made-
Cris deRitis: Well, that's to your point, it's to your point.
Matt Robison: ... it made you feel good.
Cris deRitis: Yeah, yeah.
Matt Robison: Of course it made you feel good. It invoked like, "Don't you feel better than you felt?" Everyone thought, "Oh yeah, I was feeling terrible." You know why people were feeling terrible? It was because they were remembering not the way things were in 1980 when Ronald Reagan won office, they were remembering the 1981-1982 recession. In fact, in 1984 when they ran that ad, unemployment was higher and inflation at absolute price levels were higher than they were when Ronald Reagan took office. Marketing, people, marketing.
Mark Zandi: Marketing. Interesting, so you don't think it's the high inflation rate? Inflation's coming in, no doubt about it. It takes a little bit of time for people to figure that out, and also, even if inflation's coming back in, prices are a lot higher. People are paying a lot more for rent, for food, for pretty much everything today than they were two years ago. You don't think there's a more fundamental reason for why people saying, "I'm not so sure about this thing called Bidenomics?"
Matt Robison: One of the most well-known consultants in Democratic politics is a colorful guy named Mudcat Saunders.
Mark Zandi: Hmm.
Matt Robison: Says, "People don't think in terms of rates. They think in terms of bills, and economists and politicians like to talk in terms of rates." "The rates of inflation are going down. I don't know what that means. I know what my bills are. I know what the price of eggs is." I think you're right that it's going to be a hard sell, and I unfortunately was in the midst of helping to run a Senate campaign in 2010, the worst possible year to be a Democrat. We were in the position the economy was doing much better than-
Mark Zandi: Aah, yeah.
Matt Robison: ... but people didn't feel it, and so we were in the unenviable position of saying to voters, "Who are you going to believe? Me or your lying eyes?" Now, I think that Biden is currently in that position, but I think there is a marketing way to at least do better than Bidenomics.
Mark Zandi: Yeah, okay. Can I ask, do you have... If you were king for the marketing day, would you have a better term for... What would you have said to them? What would... How would you [inaudible 00:54:56]-
Matt Robison: I'm workshopping it.
Mark Zandi: You're workshopping it? Okay.
Matt Robison: I'm workshopping it.
Mark Zandi: Marisa-
Matt Robison: I don't know.
Mark Zandi: ... do you have one? Do you have one?
Marisa DiNatale: No, but I [inaudible 00:55:02]-
Mark Zandi: Are you as critical of Bidenomics as he is?
Marisa DiNatale: ... as nothing?
Mark Zandi: Huh?
Marisa DiNatale: I don't have one, but I-
Mark Zandi: You don't?
Marisa DiNatale: ... agree that Bidenomics, what does that even mean? Right? I mean, is that good? Is that bad? It's-
Mark Zandi: Yeah.
Marisa DiNatale: ... I agree that it's terrible.
Mark Zandi: Right, right. Interesting. Yeah. All right. Well, let me ask you one more policy question before we move on to the politics, and that is kind of longer term, if you look at the nation's fiscal outlook it looks pretty dim I'll have to say. You go Congressional Budget Office, CBO, they're the nonpartisan budgeteers, and they do these long-term projections. Under current policy, assuming no change in policy, which by the way the Trump tax cuts for individuals, high income households and wealthy households, that will expire in 2025, so that by itself, all else being equal, will help the budget outlook. Even assuming that, the outlook looks pretty bad.
The nation's debt-to-GDP ratio is close to a hundred percent already. 10 years from now it's going to be 120% close to, and then we're off to the races. The debt-to-GDP ratio looks unsustainable. Any prospect at all that we're going to address that? It feels like we got to at some point, but any prospect that we're going to do this in a reasonably graceful way or not? It's going to take some kind of crisis for us to do this?
Matt Robison: Oh, you had me on the first part of that sentence up until you said reasonably graceful way.
Mark Zandi: Reasonably graceful. Yeah.
Matt Robison: No, no, there's no prospect.
Mark Zandi: No prospect.
Matt Robison: I'm going to argue to you that that's a good thing. I mean, look, we can barely agree to deals like the debt ceiling, and we face something... We all know in this group that the real problem here is the so-called "entitlement programs." I know that's not a politically palatable term, but we're talking basically Social Security, Medicare to some extent, Medicaid obligations. Very little of this comes from discretionary spending, especially non-defense discretionary spending.
When it comes to Medicare and Social Security, we face something on the order of $104 trillion 30-year shortfall. About 70% of that is on the Medicare side, and look what happened when Florida Senator Rick Scott proposed, "Hey, let's just sunset everything after five years," while the Democrats took about 0.2 seconds, stuff like... I'm like the complete reformed part of a Congressional and political staffer. The larval form of me took about 0.2 seconds to look at that and say, "Great, you ought to cut Medicare, and you're from Florida. Great, genius, thanks."
They jumped all over that, and he had to walk that back pretty darn [inaudible 00:57:53]. The politics of this are brutal, and I think what it comes down to is the BS asymmetry principle, which is known online as Brandolini's law, which is the amount of effort and energy expended to dispense BS is far less than the amount of energy and effort expended to try to rein it in. It's just so easy, so easy.
Mark Zandi: It's called what law? Brendan-
Matt Robison: Brandolini's law. I don't know who Brandolini-
Mark Zandi: Brandolini. Oh, this... Does everyone know this? I've never heard this before, Brandolini's law.
Matt Robison: This is a fun Google.
Mark Zandi: Oh.
Matt Robison: Yeah [inaudible 00:58:30]-
Mark Zandi: Oh, okay.
Matt Robison: ... this is a fun Google for you. [inaudible 00:58:31]-
Mark Zandi: Sounds like a ChatGPT to me, but-
Matt Robison: ... I mean, in economics terms, I'll probably screw this up because it's been 30 years since I was an econ major, but the marginal cost of spreading demagoguery-
Mark Zandi: Yeah, sure.
Matt Robison: ... is zero, right?
Mark Zandi: Yeah, yeah.
Matt Robison: The marginal cost is zero, and it's what the legal scholar Rick Hasen, another guest on my show like you, calls cheap speech, he wrote, so the BS, the attacks, are cheap speech. The explanations and the defense of a solution are very expensive speech. That's the basic problem. By the way, this is the basic problem of my party, the Democratic Party, everything we say takes a lot of words, a lot of explanation, and we're always doing things like trying to explain quintile disparity.
Republicans just get to say things like four legs good, two legs bad when the economy, like it's really not that hard. They just have this inherent asymmetric advantage built in, and I like to rib them about this. It's just it's an easier movement. The shorter answer to that is, look, the OASI Trust Fund can pay full benefits until 2033, and Medicare's Hospital Insurance Trust Fund, if I remember correctly, can pay a hundred percent of benefits until 2031. I would expect some action on this circa 2030-
Mark Zandi: Got it.
Matt Robison: ... all things being equal.
Cris deRitis: We got to be right up against the cliff and that-
Matt Robison: Right. You've got-
Cris deRitis: ... [inaudible 01:00:10] something.
Matt Robison: ... to be able to run ads showing Sandra, a senior citizen who's about to lose her Social Security and say, "Unless Senator Zandi and Senator DiNatale do something about this, then Sandra loses her Social Security." You have to have something that you can fight political fire with fire with-
Mark Zandi: Yeah.
Matt Robison: ... so I think there's no way until the crisis is on our doorstep.
Mark Zandi: Yeah. I'm very sympathetic to that. I'm even wondering if that's the real crisis, though, because at the end of the day, the federal government, those trust funds are kind of faux cliffs, right? I mean, the federal government can redirect funds from anywhere and make sure that people get paid their Social Security and their Medicare and their Medicaid. It's almost like you got to come to a point where interest rates are rising rapidly. Those bond market vigilantes back in the day in the '90s were the last time we did something significant in terms of our long-term fiscal situation was under Clinton, Rubin and Gingrich, I think.
That's because the bond market vigilantes were out every time it looked like the fiscal situation was going off the rails. Long-term interest rates rose and Rubin could say, "Hey, look, Mr. President, if we don't do something, people can't afford mortgages. They can't afford a car loan." I can connect the dots politically, and then they came up with an agreement on welfare reform at the time and the fiscal situation looked a lot better after that. There were a lot of reasons for that, but I think that deal was a very positive deal. It almost feels like we got to come back to that before we... interest rates are rising, the economy looks like it's going to crack before we actually cut a deal.
Matt Robison: Well, first of all, I think the four of us should form a rock band called Bond Market Vigilantes. I think we would sell, I think it would be great-
Cris deRitis: There you go. Good marketing.
Matt Robison: ... because we have a very narrow listenership.
Mark Zandi: Yeah.
Matt Robison: It's interesting that you invoke that because there was in Democratic Party circles a real debate between the Bob Rubin school, which was the bond market vigilantes, and the Bob Reich school. It was the Battle of the Bobs, which was much more, "Let's invest in the durable infrastructure," which is sort of what we leave to the next generation that creates long-term economic growth. You were talking about Bidenomics before, and one of the aspects of Bidenomics that I'm curious for y'all's perspective on is it seems to be a little bit more of a throwback to the Bob Reich school of, I mean, look at what he's done.
It's investment in infrastructure. It's sort of a semi-industrial policy comeback with the CHIPS bill and some of the targeted Inflation Reduction Act investments in high tech and manufacturing. It seems to be his working thesis that that kind of approach is the better one. It seems like the Reich school is ascendant. Is that how you guys see it from an economics perspective? Do you think that that approach actually holds water?
Mark Zandi: Oh, well, I'll take a crack at that and let Marisa and Cris weigh in. I think it's kind of splitting the difference between the Bob Reich and the Bob Rubin. It feels Bob Reich-ish in that these are pretty big pieces of legislation with lots of moving parts. The infrastructure, the CHIPS Act, the Inflation Reduction Act, lot going on, but roughly speaking, they're paid for. You at the... Here's the money that we're going to use to pay for these things, and there's a lot of debate as to whether they're actually raising as much money as they think they're raising with the funding the IRS, for example, to the make sure that people pay their taxes. Or what's the take-up on the tax subsidies and incentives in the IRA. It feels like that might be a lot larger than the CBO thought it was when they scored the bill.
Abstracting from those issues, I think the objective of the Administration was we're going to pay for these things, roughly speaking. The other kind of nuance here is maybe it doesn't exactly happen in the next 10 years, but if you go over the next 20 years, these are paid for, these are already paid for. It's not exact. It's splitting the difference. That's kind of how I think about it. Cris, Marisa, any other perspectives on that? Cris? No?
Cris deRitis: No. Yeah, I think that's about right. I guess my question would be, what benefit do they actually get in terms of credit with the voters? I think we've been talking along those lines. These are very long-term plans. I don't know that the average voter really sees a whole lot of benefit when they are looking at these infrastructure bills and seeing what it means to them.
Mark Zandi: Right, right. Right. Well, I mean, that's a tough one because these things play out over a long period of time, but I think on the infrastructure that there the politics can play pretty well. The Administration's kind of using that as a hammer because every senator or congressman who voted against the infrastructure law who's now out saying, "Oh, I'm in favor of that particular project that's helping my state or my district." The Administration is already kind of pounding the pavement saying, "Hey, look, this was pretty disingenuous," but Matt, I agree with you. I think it's going to take pressure, some kind of crisis before we actually kind of hold hands and decide to rein in spending and raise taxes at the same time.
Let's turn to politics, which are obviously pretty interesting, and let me ask you kind of a broader political around our fractured politics. It's pretty obvious that we've got tribes here, Republicans, Democrats, and I want to come back to No Labels and talk a little bit about that. That might be new tribe. I guess the question I have is, is this as bad as it feels? Or the other way of thinking about this is this nation, our country's been kind of in this pitch battle since the beginning of time. You go back to Tom Jefferson and Alexander Hamilton, those guys, if you go back and read Chernow's book on Hamilton, the amazing thing is these guys were going at it, really going at it back then in the way using the media at the time. Is this really different now? Or is this just kind of standard affair for what we've been through historically?
Matt Robison: If you take the historical comparison that you were just making, you know, Lincoln's team of rivals, Hamilton-Burr, in kind it is not different. It's the same set of themes, but it's a little bit like the difference between if your kids ever get into a fist fight and it's like no real damage is done here, and then if they grow up and like Mike Tyson is going at Evander Holyfield, a lot of damage can be done here. I think the tools that are at the parties' and the factions' disposal have just become that much more powerful. That's why we're seeing the fracturing, and there are data-driven signs that the fracture is very real and it is very wide. We have 3,143 counties in this country, and we can measure the number of counties in which a presidential candidate wins by a super landslide. That's at least 80% of the vote. That proportion has jumped from 6% in 2004 to 22% in 2020. Almost a quarter of counties-
Mark Zandi: Say that again? What were the [inaudible 01:08:31]-
Matt Robison: 22%, it's an almost fourfold increase.
Mark Zandi: Huh.
Matt Robison: 6% of counties, just a very, very small percent. One in 20 counties in the US were super landslide. They were totally red or totally blue. Now, it's almost a quarter of the counties in the US are totally red or totally blue. Another way to say this, this is one of my favorite statistics, is that in 2020, Joe Biden won 85% of the counties that had a Whole Foods and only 32% of the counties with a Cracker Barrel, so put that in your econometric model and model it.
Mark Zandi: Yeah, that's pretty cool.
Matt Robison: You can see it in congressional districts as well. You have these split districts where they vote for a congressional member of one party and a presidential candidate of the other party. It was 86 districts in the year 2004, and by 2022 was down to 23 districts. I can throw numbers at you. It's real. It's very, very real that we're this fractured, we're this far apart, but what's interesting is I had the Princeton political scientist Frances Lee on my show a little ways back and she made a really compelling case that in terms of the functioning of our institutions like Congress, we're still kind of getting stuff done. We're still holding it together.
Look, the first two years of Biden's presidency, we had in my view the most successful and productive Congress in a hundred years, almost a hundred years. Maybe the Great Society Congress of the mid-'60s, maybe that would rival it. I think we're fractured, but we're still functional. Look, at the end of the day, despite your skepticism and my skepticism, Kevin McCarthy brokered the debt ceiling deal.
Mark Zandi: Yeah.
Matt Robison: We're holding it-
Mark Zandi: Exactly.
Matt Robison: ... together.
Mark Zandi: Yeah, yeah, good point. Fundamentally, what do you think is behind this increased fracturing that you've observed? Is there one or two things you can put your finger on?
Matt Robison: There are three things, and I will tell you in a nutshell my pet theory about this, which I intend to turn into a book-
Mark Zandi: Uh-huh.
Matt Robison: ... and so I'm glad I'm saying it out loud on your show now-
Mark Zandi: Get it out there.
Matt Robison: ... so that... yeah, right, so copyright. No one's going to want to steal this. This is like really weed-y. Look, in the 1980s, there was this concept of the Iron Triangle, which was a set of forces that locked out the people that were sort of a self-reinforcing set of power structures among defense and members of Congress. I think there's a new Iron Triangle that has evolved in America of three forces that I call dark media, dark money, and dark psychology. In a nutshell, and they're all mutually reinforcing, and in a nutshell, what we've seen is a massive influx of dark money, of money from sources that we can't track that are not aligned with the views of the majority of Americans.
Think about Harlan Crow giving millions of dollars to Clarence Thomas. Think about all of the dark money ads that we see. There's dark media, which is media that unlike kind of the media that most of us grew up with, three channels, their incentive structure is built entirely around catering to a small sliver of America. Then, there's dark psychology. This is a change that I saw in the midst of my own politics career. When I started in politics, if I was in a meeting, let's say the croup of us were political operatives and Marisa said, "Hey, we need to beat our rival Cris. He's a bear. We're against him. We need to take him down." I said, "All right. Let's run an evil ad where we say, 'Evil Cris deRitis,' some kind of a deep-voiced ad, 'He,'" I don't know. I don't want to say out loud what the charge would be. "He stole Gummy Bears from a candy store," or whatever it is, and-
Mark Zandi: That sounds like Cris, by the way.
Cris deRitis: [inaudible 01:12:47].
Matt Robison: Right, sure. Whatever it is. Well, Marisa would come in and say, "No, Matt, you can't do that because there'll be a backlash. The voters don't like that kind of thing. It'll actually hurt us." I've been in consulting meetings where I was the one saying like, "Oh, let's say something terrible," and the consultants were like, "No, no, no, Matt, you idiot. Don't do that. That's very bad." No one says that anymore.
Mark Zandi: Oh, that's interesting.
Matt Robison: There is no floor that you can-
Mark Zandi: That's interesting.
Matt Robison: ... sink below. I think that that's really what's going on is that we have these mutually reinforcing forces that are pushing us toward the fracture.
Mark Zandi: Right. Yeah, that's a great book. That's going to be a great book.
Cris deRitis: Yes.
Mark Zandi: Do you have a title for the book? We can... Let's critique it now.
Matt Robison: Oh crap. I do. I have a-
Mark Zandi: Are you-
Matt Robison: ... working title.
Mark Zandi: ... okay.
Matt Robison: I haven't pitched the book yet. I haven't pitched the book. Hold on.
Mark Zandi: Yeah.
Matt Robison: Oh, here it is. The New Iron Triangle: How Three Startling Forces Are Crushing American Politics.
Mark Zandi: I think that's great. I love that.
Cris deRitis: There it is.
Mark Zandi: Yeah, I'll definitely buy it. Yeah.
Matt Robison: I'm just getting my... laying down my marker for-
Mark Zandi: I didn't say what-
Matt Robison: ... what possibly useful idea-
Mark Zandi: ... I didn't say how much I'd pay for it, but I'd definitely... No, only kidding.
Matt Robison: It's a free eBook, self-published.
Mark Zandi: I'm lying. I'm kidding. You can... I've written a couple books that are a nickel on eBay, but now let's... The conversation's going in lots of different directions that are really great but I want to end with this election that's coming up because this one feels, and I say this with every election it seems like, but this one really feels like a big deal. Things can go in two very different directions depending on how this plays out. I want to get your sense of, broadly speaking, the contours of this. Is it going to be Biden v. Trump? Do you think that's what's going to play out here? Or could that be different? Could there be different people running for the presidency? Yeah, if you have a sense of who's going to be the victor at the end, love to hear that, too, but any color you can provide, that would be very valuable.
Matt Robison: If I didn't have children, I would find this to be a deliciously enticing modeling exercise in like-
Mark Zandi: Which we have done.
Matt Robison: ... a fantastic problem. Yes.
Mark Zandi: Which we have done.
Matt Robison: Right, so because the problem is that the bad outcomes are genuinely bad, and I don't want to offend any Republican listeners, I'm sure wonderful Americans. I just happen to think that if Donald Trump is the next president, he will be the last president, that that's an extinction-level event for America. That's my own personal political view. Certainly, though, I will credit the other side, which is they probably feel the same way about Joe Biden. The stakes are pretty darn high here, and there are a lot of factors. Your first question, is it going to be Biden versus Trump? That's overwhelmingly likely at this point. There is not a realistic prospect of Joe Biden failing to emerge as the Democratic nominee. Cornell West is going to be a little bit of a problem, but there is no realistic prospect there.
Donald Trump, he is lapping the field. Ron DeSantis is on a steady downward trajectory since his formal announcement on May 24th. His polling numbers have gone steadily down and in inverse proportion, probably totally inversely correlated, Donald Trump's numbers have gone up. I don't see at this point an exogenous event that would change that. That said, I would not have foreseen COVID, so things can change. Also, demographically, these two gentlemen are not the springiest of chickens, so there are kind of realities to deal with there. In terms of what's going to happen, I will say this. Democrats are the masters of the circular firing squad. We love to get down on ourselves. We are inherently bearish on everything. Cris, we will outdo you at every turn, and so we don't like to take good news for an answer.
The best polling that's available right now has Biden out ahead by about seven points in a head-to-head matchup with Donald Trump, and he won by 7 million votes last time. There is nothing that Trump has done that shows me where he's going to make up those votes. That's the good news proposition. The bad news proposition is that in 2020, the difference in the election was 44,000 total votes in Georgia, Arizona, and Wisconsin. Margins of 0.3%, 0.4%, and 0.6% in those three states respectively. Those margins are far less than what Gary Johnson got in 2016, the last time two historically unpopular nominees were facing off for the presidency. He got 3.1%. Jill Stein got about one percentage point.
There are factors. No Labels could be a factor. Exogenous events could be a factor. A recession could be a factor. A shutdown leading to a recession could be a factor. I would not feel any confidence in an outcome prediction at this point, but if I had to play with... If we were in a poker hand and I had to choose a hand to play, I'd rather be playing Joe Biden's hand as of today.
Mark Zandi: Got it. Got it. You mentioned No Labels, just very quickly, I think they don't call themselves a party, but it's kind of a movement. That's the Joe Manchin, Joe Lieberman, there's Republicans and Democrats, more centrist, or at least that's kind of the way they try to position themselves. How big a deal of a movement is that? Is that a big deal or something we should be watching carefully?
Matt Robison: Potentially as the president would say a BFD because of the factors of those margins. I mean, remember, American elections are won in the States. They are not a national polling outcome, and so, boy, talk about stochastic outcomes. You've got these 50 little modeling propositions to deal with with very slim margins. Look, part of the reason that we have Donald Trump as president today is Jill Stein. Jill Stein's margin of victory was the reason that Hillary Clinton didn't win Wisconsin, or it was maybe about half of Michigan, not as clear in Pennsylvania, but there is a very good case to be made that without the third party candidates garnering such a strong support in 2016, we would've had a President Hillary Clinton. Yes, they are potentially a huge factor here. That said, it could be the kind of thing that doesn't work against President Biden. There could be candidates that would hurt Trump more, but as of today, right now, Democrats are the group that is more worried about a No Labels factor and they should be.
Mark Zandi: Hmm. Well, you should now we have an presidential election model at the Electoral College. We do model it-
Matt Robison: You do?
Mark Zandi: ... we do. We do, actually. We've been running it for I don't know how many elections. We usually get it right. We got the Clinton-Trump one wrong. That we missed, and the last election, the Biden-Trump, we felt pretty good about that in terms of we picked states. I don't think we got Georgia, but we got Arizona. I can't quite remember, but obviously as you can imagine, we're economists and everything feels like the economy to us, so it's based on economic factors.
At the end of the day, I do think how the economy performance over the next six, nine, obviously 12 months is going to be pretty important to how this all plays out. Matt, I really want to thank you for taking the time with us. There's a lot of time between now and the next election, a lot of things are going to happen. Can we have you back on?
Matt Robison: I'd be delighted to come back on, especially if I managed to roll out a book.
Mark Zandi: Oh-
Matt Robison: Let's-
Mark Zandi: ... absolutely.
Matt Robison: ... talk about predictions. Let's put that at under 25%.
Mark Zandi: Yeah.
Matt Robison: I'm pretty gummed up with doing podcasts.
Mark Zandi: I'm all in on that book. That sounds like it'll be a fantastic [inaudible 01:22:03].
Matt Robison: I love it, a pre-endorsement. You know what? I'm going to have you write the blurb. Would you write the blurb?
Mark Zandi: Absolutely. You count me in.
Matt Robison: Yes.
Mark Zandi: Count me in.
Matt Robison: All right.
Mark Zandi: Count me in. I love... I'll be very happy to do that. Thanks, Matt, and I will catch up with you soon down the road here. Take care now.
