INSIDE ECONOMICS

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two colleagues and co-hosts Cris deRitis. Cris is the Deputy Chief Economist and Ryan Sweet. Ryan's the director of Realtime Economics. Hi, guys. How's everybody?

Ryan Sweet:                      Good. How are you, Mark?

Mark Zandi:                      I'm tired actually. I'm on a global world tour. Number one is in Europe and that's now starting to wind down and I've got the Middle East coming up and then Asia after that.

Ryan Sweet:                      Cris did you notice this, it's like the fourth consecutive podcast he says he's tired?

Mark Zandi:                      Really? Is that true?

Ryan Sweet:                      It's at least two or three, maybe four. I don't know.

Cris deRitis:                       There's no Wawa coffee in Europe.

Ryan Sweet:                      Oh yeah.

Mark Zandi:                      That is definitely a problem. I mean, I'm having these flat whites. Have you ever heard of Flat White? They're-

Ryan Sweet:                      Oh yeah. Oh yeah, yeah.

Mark Zandi:                      They're good. But they're not Wawa. They're not, Wow.

Ryan Sweet:                      Yeah, there's no hazelnut.

Mark Zandi:                      Yeah, there's no hazelnut and they're too small. They give you something like this few ounces. I don't know, maybe that's what it is. Maybe I'm just not getting my coffee.

Ryan Sweet:                      I think so. I think that's it.

Mark Zandi:                      As far [inaudible 00:01:24]

Ryan Sweet:                      I'm surprised you don't pack it.

Mark Zandi:                      That's got to be it.

Ryan Sweet:                      That's my solution to everything.

Mark Zandi:                      Yeah, that's got to be it. Anyway. A lot going on over here in London. If you not noticed, we definitely should talk about that and we'll come back to it. Of course, a lot's going on in the US as well. We had this devastating Hurricane Ian, which by the way came pretty close to my home in Vero. All is okay. A lot of leaves and branches on the ground, but nothing damaging. But it looks like it did a lot of damage. And I know Ryan, you, you've done a lot of work trying to assess the economic consequences of that. So let's talk about that. But before we go to those two things, why don't we chat about, we got a lot of statistics this week, a lot of data. So maybe just an open ended question. Do you, Ryan, what of all that data do you want to talk about? What do you think is most interesting in terms of shedding light on what's going on in the economy and where we're headed?

Ryan Sweet:                      I think we should start with GDP. So this was our third estimate of second quarter GDP, but it also included the annual benchmark revisions. So anything between 2017 and 2022 was subject to revision. So what I took away from the revisions is the level of GDP is now 1% higher than it was previously thought. GDI which we thought GDPs going to get revised towards. GDI was actually the opposite. GDI got revised. Gross domestic income. And it's just two ways of measuring the economy. GDP is the value of all goods and services we produce. And GDI just sums up the income part. So rents, profits, wages and salaries, things like that. And there was a sizable downward revision to GDI. So that difference between GDP and GDI shrink quite significantly. And the other thing that I noticed was inflation got revised up for sure.

Mark Zandi:                      Could you ask on that Ryan? So GDP, since the pandemic got revised up a bit, you said about a percentage point and GDI got revised down and so it now looks like the gap between the two, the difference between two is back to historical norms?

Ryan Sweet:                      Correct. That's right.

Mark Zandi:                      Gotten as wide as it ever been in history. The so-called statistical discrepancy, that's the difference between GDP and GDI. But now that's that discrepancy is back to normal.

Ryan Sweet:                      Yeah, exactly. And this is what happened after the financial crisis. So that statistical discrepancy got really wide, I think if I remember correctly was at the time the widest on record and then after these subsequent revisions gets wiped away. So that's not too surprising, but I was hoping GDP would get revised up more. We still have those two consecutive declines in GDP in the first half of this year. But GDI got revised lower and looking at the components, it was profits, which the government always has a hard time measuring profits in real time, but also wages and salaries and that, the BEA, the Bureau of Economic Analysis their estimate of compensation wages and compensation was getting out of line with the data that we get from the Bureau of Labor statistics. It's the so-called labor income proxy. So there's this gap that was dividing and now that gap is closed. So I was disappointed that we didn't get a bigger upper revision to GDP. I was hoping we'd wipe away at least one of those declines in the first half of the year.

Mark Zandi:                      Well I think the thinking is that the best measure of what's going on is the average of GDP and GDI and I... Do you guys know if you take the average-

Ryan Sweet:                      [inaudible 00:05:09] my stat, I'm going to have to change my stat.

Mark Zandi:                      Oh, sorry about that.

Ryan Sweet:                      Oh it's all right. So the average is now got revised lower and the average of GDP and GDI fell 0.4% annualized in the first quarter and 0.3% annualized in the second quarter. So before both the average had risen, now they're showing a decline.

Mark Zandi:                      Okay. But it's still pretty flat-ish, right? Point four 0.3 you said annualized, so.

Ryan Sweet:                      Correct.

Mark Zandi:                      Okay.

Ryan Sweet:                      And you're still not declaring recession based on that, right?

Mark Zandi:                      No. Well I would you mean?

Ryan Sweet:                      No, no.

Mark Zandi:                      Yeah.

Ryan Sweet:                      But some would right there. Yeah. Again, going back to the textbook. Yeah, little thumb but.

Mark Zandi:                      Well I'd also point out the revisions are only beginning, right? Because this is every year you get five years of revision. So.

Ryan Sweet:                      And then get the big benchmark one that occurs in a few years so that's going to be telling.

Mark Zandi:                      So I don't think the story's actually quite been written here yet. We'll see I'm still-

Ryan Sweet:                      But even if it holds right?

Mark Zandi:                      Yeah.

Ryan Sweet:                      Labor market, other indicators don't confirm recession in the first quarter, at least.

Mark Zandi:                      That, and that's the most important thing. But just for optics and pure victory, I still, I'm not conceding defeat here. I suspect that data will be revised and at least one of those quarters will go positive. And even by that benchmark, this would not be... Two quarters of consecutive declines would not be, we would not do that. But of course I got to wait a long time for that to happen, at least another year or so. Okay. And then you mentioned inflation. There was also some revisions. The Bureau of Economic Analysis, when they released the GDP revisions also released revisions to their price measures. And so there were some revisions there as well.

Ryan Sweet:                      There was, so the core PC deflator, which is the fed's preferred measure of inflation in the second quarter got revised up from 4.3% annualized to, or 4.4% annualized to 4.7% annualized seems like a small upper revision, but that's going in the wrong direction and just supports the fed's very hawkish tone. It may require a little bit more hiking than what we previously thought.

Mark Zandi:                      Right. Okay.

Ryan Sweet:                      So if you run through our macro model, it takes roughly another 50 basis points in rate hikes to reduce inflation by that 30 basis point revision that we got.

Mark Zandi:                      Really that's what our model says? It takes a half point more on half rate target to reduce inflation by three tenths of a percent.

Ryan Sweet:                      Correct.

Mark Zandi:                      Huh. Core... I guess core underlying inflation.

Ryan Sweet:                      Core underlying inflation.

Mark Zandi:                      Interesting. Okay. And do we know what's the base... Why fundamentally was behind the revisions? Anything in any particular aspect of inflation that caused the revisions?

Ryan Sweet:                      That's a great question. The BEA changed their source data for one of the inputs into the PC deflator from, they were using the PPI for used in new vehicles and they switched over to the CPI. And when we all know that the CPI for new vehicles group gangbusters. So that, I think that my gut is, that's a big source of it.

Mark Zandi:                      I see. Interesting. Okay. Because vehicle prices have gone skyward here, so that alone would make a big difference I would think.

Ryan Sweet:                      Yeah. Yeah. And that's why all these annual revisions, you got to read through all the, I mean we can get in the weed. So you read through these technical notes and they tell you what changes they made and methodology changes and that's why this over the weekend and next week I got to change our high frequency GDP model to reflect these changes in the source data. So to make sure that we get it right.

Mark Zandi:                      Right. Okay. And right now in Q3, based on your tracking estimate, where are we?

Ryan Sweet:                      Positive.

Mark Zandi:                      I think Cris takes all the different monthly data, weekly data that comes in and we have a model that takes that and translates that into what it means for GDP growth in the current quarter, Q3. And where is that right now?

Ryan Sweet:                      Be positive, 1% annualized.

Mark Zandi:                      Okay.

Ryan Sweet:                      So this time last week we're at 0.8% annualized. Now we're up to 1% And the reason that we got nudged up was durable disorders. So they came in stronger than we anticipated in the model anticipated and that kind of nudged up business investment in the third quarter.

Mark Zandi:                      Okay. And it feels like, correct me if I'm wrong, but it feels like business investment not in structures, not in buildings, but in equipment and software, intellectual property that seems to be holding up pretty well.

Ryan Sweet:                      Yeah, it has. Yeah.

Mark Zandi:                      Is that fair to say?

Ryan Sweet:                      Yeah, I think it's fair assessment. I mean there's some signs of weakening ahead like the ISM, new orders that kind of leads core capital, good shipments and that's showing signs of softening over the next few months. But nothing that would use alarm bells.

Mark Zandi:                      Yeah. Okay. Hey Cris, these revisions to the BEA did to GDP and to GDI and to the inflation statistics, does that influence your thinking about where the economy is and where it's headed or pretty consistent with your thinking?

Cris deRitis:                       I would say fairly consistent, but again that's kind Ryan alluded to, our hope was that GDP was going to go towards GDI upward versus the opposite. So it does suggest that the economy certainly is weaker than we might have otherwise had hoped for, but I don't know that it significantly changes the picture. I think we already accepted that it was weakening whether or not it was recession. So I don't know that this really changes things in terms of the outlook or even in terms of the fed's policy. So there's still more script to be written in terms of the inflation measures as well. So I think they'll take those with a grain of salt.

Mark Zandi:                      Yeah. Okay. Any other, I mean I want to play the game, the statistics game, so I don't want to steal too many statistics here. But any other, because it seems like there was a wrap of data that came out this week. Any other of those data you want to call out? I did notice UI claims, unemployment insurance claims, initial unemployment insurance claims, kind of a window into layoffs. They fell to below 200,000 in the week last week. And of course anything between south of 250 would be a pretty strong job market South of 200 feels like Rip Warren. Is there something weird going on with that data that there might be some technical, well maybe the hurricane affected that?

Ryan Sweet:                      oh, the hurricane hit Puerto Rico and Puerto Rico, they're not captured in monthly employment or GDP, but they are captured in UI claims. So unemployment insurance benefits and when you get a hurricane, normally that depresses initial claims for a week or two because when you lose power people can't file. And also they can't be processed for UI benefits. So usually hurricane depress it for one two weeks and then you get this big spike as this backlog of people filing gets worked through. So we're likely going to see claims remain low next week they'll be higher than 193. But then the hurricane Ian's effect on Florida, that's going to show up in a couple weeks.

Mark Zandi:                      Okay. All right. Well maybe that's where we should go now. Let's just go to the hurricane. Obviously that that's doing, that's done a lot of damage to the state of Florida. Here we are, September 30th, 2022 so that it hit Florida yesterday and done a lot of damage. Now it's in South Carolina, I believe. Or headed in that direction.

Ryan Sweet:                      I think it's headed in that direction.

Mark Zandi:                      Yeah headed in that direction. What kind of assessment do you have of that? Because we do this work to assess the economic loss related to natural disasters like hurricanes when they're meaningful, This is clearly meaningful both in terms of the business disruption, how much lost economic activity due to businesses closing and other activities shutting down and then also the physical damage. Do you have any assessment of the economic consequences at this point?

Ryan Sweet:                      Yes. So what we did, we look at daily output in the counties that were most significantly affected by the hurricane and I calculations is going to be roughly seven to 10 billion in lost economic output. Now a lot of money is going to flow into the region so that the number sounds small, but federal aid insurance money's going to flow in and then you're going to get a lot of rebuilding. So that kind of offsets some of the loss, the net loss in economic output, but 10 billion still a lot. Damage I think it's estimating 50 to 60 billion. So this is going to be one of the cost guess hurricanes on record.

Mark Zandi:                      So as much as $10 billion in lost economic output, lost electricity, business shut down, can't operate.

Ryan Sweet:                      You're going to have businesses that close, you're going to have the big hit is because of lost power. And I think last time I saw it's like over a million people still don't have power and that's going to disrupt businesses. And the hurricane occurred during the work week and that's when daily economic output is higher. Usually during the weekends it's lower and that's going to, that kind of boosted the hit to those regional economies.

Mark Zandi:                      I see. And then of course insurance money comes in and then some government aid will likely come in for sure. And so that would lift economic activity. So we'll get some of that lost economic And then of course some of the activity that didn't get done will get done. Some of it will never get done. Airplanes won't fly two times as twice as many flights, but we'll get-

Ryan Sweet:                      [inaudible 00:14:57] About restaurants. People are going to go out and eat two or three times because they couldn't during a hurricane.

Cris deRitis:                       Or Disney world. Right.

Ryan Sweet:                      Disney World closed.

Mark Zandi:                      That got affected. And of course this is a script still being written.

Ryan Sweet:                      Yeah, correct.

Mark Zandi:                      Right. Because it has... We'll have to see what it does I'm assuming as it does to the Carolinas and the rest of the eastern seaboard I guess at some point.

Ryan Sweet:                      And the other thing always comes up with hurricanes is the window, the broken window fallacy, does hurricanes really actually net boost the economy And there's a big difference between economic activity and economic welfare. So these people are affected by the hurricane aren't better off, but you're going to see a lot of economic activities rebuilding and the money you mentioned flows into them.

Mark Zandi:                      One thing I've noticed, because we're doing a lot of work in this area around the climate risk and obviously these kind of natural disasters are part of the climate risk that we're facing. Is that in recent decades, I'd say the last three, four decades, if you towed up the lost economic output and the physical damage and then you look at the insurance money, private insurance money and the government aid that comes in, it's almost one for one, it's almost like a government fills the hole in the economy left by private insurance.

                                             So you know, you go to Katrina that less insurance, more government money, you go to super storm Sandy was kind of flipped. There's more private insurance, less government aid. And I... It is kind of a regularity in the response to which I find fascinating. And it does feel like, obviously you take this big hit and then you get this money flowing in economic activity and at the end of all of that you're saying we still don't quite get back. The economy doesn't quite get back the capital stock, the physical stock doesn't quite get back to where it was before the pandemic, before the natural disaster occurred.

Ryan Sweet:                      Correct.

Mark Zandi:                      Yeah. Interesting. What about any damage to oil, natural gas, refining operations, anything like that? This was Florida, so probably.

Ryan Sweet:                      Yeah, yeah. It dodged all the main energy infrastructure and the Gulf by Louisiana and all that. None of that was affected. So.

Mark Zandi:                      Yeah, that's the one nightmare I have that hurricane's going to blow through the Gulf, shut down all those platforms, hit the coast, wipe out a refinery for a few weeks and then got gas prices going back up to $5 a gallon. And given where we are, that would be pretty debilitating economically.

Ryan Sweet:                      That's why Hurricane Katrina was such a larger impact on the macro economy, the US economy. So this one's going to be small, it's going to shave a few tenths percentage point off GDP. But Hurricane Katrina did a lot more damage because gasoline prices Spiked.

Mark Zandi:                      Oh, that's interesting. So you think a Q4 GDP will be... We'll see a bit of a hit there for... Because it's coming at the very end of Q3, so-

Ryan Sweet:                      Yeah, I don't think we'll show up there.

Mark Zandi:                      Will it show up in Q3? Should I guess, right?

Ryan Sweet:                      It should.

Mark Zandi:                      Yeah. Interesting.

Ryan Sweet:                      Yeah.

Mark Zandi:                      And then we get, I don't know. Yeah, we'll see how I'm-

Cris deRitis:                       You get the... You do get the insurance money perhaps flowing, I don't know.

Mark Zandi:                      Yeah.

Cris deRitis:                       Some hit, but you'll get some benefit.

Ryan Sweet:                      Correct.

Mark Zandi:                      Do you know Ryan or Cris, if you line up the economic loss and the physical damage and compare Ian to other storms where it lines up? Is it a big one or is it kind of in the middle? Do we-

Ryan Sweet:                      Yeah, we put it on the website yesterday. I can pull that.

Cris deRitis:                       That. Laura Ratz did a nice article on this and based on that table that she produced, it looked like it was number seven. So Katrina, Harvey, Maria they're much worse. And then, so kind of if you want.

Mark Zandi:                      Today's dollars, Cris?

Cris deRitis:                       Yeah. In inflation adjusted dollars. Right.

Mark Zandi:                      Okay. So that's pretty meaningful then. It's pretty significant.

Cris deRitis:                       Yeah, yeah, yeah. Definitely. This is an initial estimate to your point. It's not over yet. We're not-

Mark Zandi:                      Yeah, right.

Cris deRitis:                       Something could happen.

Ryan Sweet:                      It's the Carolinas, we're going to add that into it.

Cris deRitis:                       That could be significant.

Mark Zandi:                      Yeah. And of course it comes up to East Coast and flooding and all kinds of stuff. Even here when we're in Philadelphia, we got nailed by big storm last year. I can't remember the name of it. Do you remember it?

Ryan Sweet:                      A lot of flooding

Mark Zandi:                      Ida that did all lot of damage. I can remember Schuylkill Expressway was underwater in the city, the Vine Street where goes on down Vine Street. It was just completely a lake did to, did a lot of damage.

Ryan Sweet:                      And that was the remnants of storm. I can't imagine-

Mark Zandi:                      I know.

Ryan Sweet:                      It being a landfall what that would be.

Cris deRitis:                       Direct hit.

Ryan Sweet:                      What would happen.

Mark Zandi:                      Yeah. Okay. All right. Okay, let's play the game, the statistics game. And as you all know, but I'll just repeat it for those that don't, and by the way, I'm a bit of a podcast proselytizer, I don't know if you guys are as well. So every event I speak at every podcast I do for someone else webinar, I say, you've got to listen to this podcast. And there's always someone in the audience, that huge fan, like here in London, we had an event conference and we had a number of real big fans in the audience, but actually people coming up saying, I love your podcast, but I proselytize.

                                             So there are people who join every week that don't know the statistics game. So we've got to clue them in. And it's very simple. We each put forward a statistic or two, the rest of the group tries to figure out what that is through clues and questions. Deductive reasoning, the best statistic is one that is not so easy that we all get it very quickly. One that's not so hard that we never get it one night. It would be bonus as if it's relevant to the topic at hand. And of course Ryan is really good at this. I have to say I'm maybe better than. Someone's got to keep score. We don't keep score, we haven't kept score for all years. Someone's got to go back and look at the animals here and historicals.

Cris deRitis:                       Got to do that. And we have to bring back the dollar bets too.

Ryan Sweet:                      That's not, oh yeah.

Mark Zandi:                      All I know is I'm going to win the dollar bet on in long term interest rates. You guys really... What we have [inaudible 00:21:35]

Ryan Sweet:                      Well I took bad policy to get to your interest rate forecast.

Mark Zandi:                      Okay. Who wants to go first? Cris, you go first.

Cris deRitis:                       Sure. Negative 0.6%.

Mark Zandi:                      Isn't that GDP in the second quarter? GDP decline minus 0.6% in Q2.

Cris deRitis:                       No, that's not one I'm... That's not the one I'm thinking of.

Mark Zandi:                      But that is the right minus 0.6.

Ryan Sweet:                      Yes, that's the correct number. There could be a lot of minus 0.6.

Cris deRitis:                       That was my... That's my tricky dodge.

Mark Zandi:                      Yeah. Oh, okay. So there wasn't-

Ryan Sweet:                      In the GDP report.

Cris deRitis:                       There were a lot of point threes in this week as well. Just-

Ryan Sweet:                      I know, I know.

Cris deRitis:                       Mix it up. But this is not related to GDP.

Mark Zandi:                      Okay.

Ryan Sweet:                      All right.

Mark Zandi:                      Is it a statistic that came out this week?

Cris deRitis:                       It is.

Ryan Sweet:                      Oh, I know what it is. It's house prices. They fell 6.6% month over month.

Cris deRitis:                       Oh, where's my bell?

Mark Zandi:                      Oh, very good.

Ryan Sweet:                      It's all right Mark you're jet lagged.

Mark Zandi:                      Although let's ask... To be... We got to make sure he knows what he's really talking about. Which index? Because there's a two indices that came out this week if I'm not mistaken.

Ryan Sweet:                      Oh.

Cris deRitis:                       The one was 0.6. The other one was not.

Ryan Sweet:                      [inaudible 00:22:43] sure, right.

Mark Zandi:                      Oh.

Cris deRitis:                       [inaudible 00:22:47] FHFA purchase only monthly.

Mark Zandi:                      So that is definitely a blemish, right?

Ryan Sweet:                      That's a blemish. It's fine.

Cris deRitis:                       How do I take back the cowbell?

Ryan Sweet:                      Yeah, no, you can't take it back.

Mark Zandi:                      So that was the FHFA house price series. The monthly house price series fell minus 0.6 in the month of July, I believe, right?

Cris deRitis:                       Yes, that's right.

Mark Zandi:                      Yeah.

Cris deRitis:                       And that is significant. That's a large decline. You have to go back to 2007 start of the housing crisis to get that type of a monthly decline.

Mark Zandi:                      I mean that's pretty significant. And they do... Did you look at it regionally? Did you have a-

Cris deRitis:                       I did.

Mark Zandi:                      Okay.

Cris deRitis:                       I did it. So, all right, so bonus question, which is... There was only one region that actually showed any growth.

Mark Zandi:                      East or central.

Cris deRitis:                       Oh wow. You really [inaudible 00:23:40]

Mark Zandi:                      Now Ryan.

Ryan Sweet:                      That's impressive.

Cris deRitis:                       That is impressive.

Ryan Sweet:                      That's impressive.

Mark Zandi:                      Okay. Now here, here's the bonus. [inaudible 00:23:45]

Cris deRitis:                       [inaudible 00:23:46] The number.

Mark Zandi:                      You guys, which states are in the east north central region? Do you guys know?

Cris deRitis:                       Oh, oh.

Ryan Sweet:                      Oh my gosh. Oh come on.

Cris deRitis:                       East north central. To be honest, I didn't even know that was a region.

Mark Zandi:                      Oh, oh well I think I got this right. Someone's going to correct me if I've got it wrong. But that includes Michigan, Ohio, Indiana, Illinois in Wisconsin. Am I right?

Ryan Sweet:                      I'm looking up.

Mark Zandi:                      Yeah.

Cris deRitis:                       Illinois. Indiana, Michigan.

Ryan Sweet:                      Yep.

Cris deRitis:                       Wisconsin.

Ryan Sweet:                      You mentioned Wisconsin.

Cris deRitis:                       Got it.

Mark Zandi:                      Yeah. Wisconsin.

Ryan Sweet:                      That's impressive.

Mark Zandi:                      Okay. All right. Now how about you want to know the capitals of each of those states? No, I'm just kidding.

Cris deRitis:                       I want to know all the metropolitan areas in this.

Ryan Sweet:                      Well, our party knows the metros.

Mark Zandi:                      Oh yeah. Well those are those. I know that stuff because back in the day that we really focused on a lot of regional issues. East north, central. Bread and butter. OK, which-

Cris deRitis:                       Let.. Sorry.

Mark Zandi:                      Go ahead. No, go ahead. Go ahead.

Cris deRitis:                       Well let's keep going that, which of the divisions actually experienced the fastest growth over the last year?

Ryan Sweet:                      Over the last year?

Cris deRitis:                       Yeah.

Ryan Sweet:                      Ooh, that's interesting. Is it the mountain region?

Cris deRitis:                       Nope.

Mark Zandi:                      South.

Cris deRitis:                       I would've thought so too. South Atlantic. South. South. South. Atlantic South. Very good. Ah, very good.

Mark Zandi:                      South Atlantic.

Cris deRitis:                       And the weakest?

Mark Zandi:                      Northeast. Over the past year?

Cris deRitis:                       Yep.

Mark Zandi:                      Oh, over the past year, I would have to say-

Cris deRitis:                       Think of a big state.

Ryan Sweet:                      The Mid Atlantic?

Cris deRitis:                       Nope.

Mark Zandi:                      North New England?

Cris deRitis:                       No.

Mark Zandi:                      Oh, is it California?

Cris deRitis:                       [inaudible 00:25:34] Pacific, yeah.

Mark Zandi:                      Oh really? Already on a year over year. Because I know is experiencing pretty big declines now. The biggest I think.

Cris deRitis:                       It is. Now and then over the last year as well.

Mark Zandi:                      Oh, is that right? It's come down that much. Wow.

Cris deRitis:                       It Only grew... It only grew 10% over the last year.

Mark Zandi:                      Can I ask you a question about that?

Cris deRitis:                       Yeah.

Mark Zandi:                      Because in my stylized fact and I'm not, tell me if I got the fact right and then what's going on. The most significant price decline so far have been in California. Really Bay area, LA, San Diego gotten creamed in the strongest market, big market, not small market, big market has really been Florida. Florida's held up much better. I think in that data Miami still seeing price gains.

Cris deRitis:                       Gains. Yeah.

Mark Zandi:                      This is an example. How do you explain that? What do you think's going on there, that regional difference? I don't expect that to continue forever. I think Florida prices are going to go down. But why that difference do you think?

Cris deRitis:                       So a couple sort of the tech industry, right? Certainly facing some layoffs.

Mark Zandi:                      Okay. Yeah, right.

Cris deRitis:                       Some weakness there. And if we think about the Bay, California's also always expensive. So it's, you're starting from a very expensive proposition. So any weakness can kind of multiply. So that would be my working hypothesis.

Mark Zandi:                      Or maybe, I guess the way I would, That's a good reason I would've thought it. My intuition was same thing, but it would be affordability. The price is high.

Cris deRitis:                       That's right.

Mark Zandi:                      And the mortgage rate rises and the mortgage payment becomes prohibitive in place.

Cris deRitis:                       Exactly. That's what I meant. Yeah.

Mark Zandi:                      Oh that's what you meant.

Cris deRitis:                       But they feel because it's already unaffordable, so unaffordable, any little additional cost is going to drive out demand significantly.

Mark Zandi:                      Right. And then Florida, what do you think's going on there, why is that held up better?

Cris deRitis:                       So Florida far, so Florida's interesting because you had a lot of migration into Florida. Naples actually by our house price index. Naples, Florida was the fastest growing metro over the past two years. So lots of increase there, but it's not at the top of our list in terms of overvaluation risk because you also had a lot of wealth, a lot of higher income individuals moving there. So I think that provides some ballast to those markets so people aren't perhaps forced to sell or don't need to sell.

Mark Zandi:                      Yeah, makes sense.

Cris deRitis:                       That provides some-

Mark Zandi:                      Yeah. Now have you noticed mortgage rates? I mean...

Ryan Sweet:                      Yeah, they've come down a little bit.

Mark Zandi:                      Down to what, like six and a half or?

Ryan Sweet:                      No, not that much. They're below seven. Cris can probably tell you exactly what they are.

Mark Zandi:                      Yeah, I mean they're high.

Ryan Sweet:                      They're very high.

Mark Zandi:                      I mean that's higher than, definitely higher than we expected. Nick partly goes to the higher treasury yields interest rates across the border.

Cris deRitis:                       But the spread.

Mark Zandi:                      But the biggest... The spread, yeah,

Cris deRitis:                       That's been persistently high.

Mark Zandi:                      That's the mortgage rate... The difference between the mortgage rate and the 10 year yield, which captures lots of stuff like prepayment risk, credit risk, the cost of origination, the cost of servicing, all those things are in there. But typically the difference between a 30 year fixed and a 10 year treasury yield's like 150 basis points. Right?

Cris deRitis:                       180.

Mark Zandi:                      5 percentage points. And now it's double that. It's just double up. And that's a real problem. I mean if it was a normal spread, the 30 year fix would be going for five and a half, not seven. And that would be much more manageable and that's more consistent with what our forecast was. We didn't expect this gaping out of the mortgage spread unless the mortgage rate. So what do you suppose is going on there? Why is that spread so wide?

Cris deRitis:                       I guess it comes down in essence to back always to supply and demand on the MBS side. So some lack of liquidity or you have investors worried about prepayment risk, putting in some additional premium. [inaudible 00:29:52] Yield curve. Those strange things to expectations of how borrowers are going to perform in the future.

Mark Zandi:                      One bond trader I talked to, and I think he's right, was pointing out that you have extraordinary interest rate volatility. Rates are jumping all over the place. And when that happens, the option, the [inaudible 00:30:16] option is the value of that is a lot higher because... So that the compensation investors need to taking that risk is higher and that gets built into the spread and that goes to what's going on over here in London and the UK which will come back to, but also fed policy as long as the feds on the war path. And people don't really know when that's going to come to an end and at what rate is they're going to stop and when it all means you could get this significant up and back and all around on rates and that's creating this higher prepayment risk and this adding to the mortgage rate. Does that sound right to you?

Cris deRitis:                       Yeah. The other point that you've just made is the Fed of course, right? They are no longer a buyer of MBS security, so you-

Mark Zandi:                      Yeah, good point.

Cris deRitis:                       Pretty significant buyer. And although it's unlikely that they will sell that portfolio, it's not out of the realm of possibility as well. So there could be some additional supply that comes online that could take up the prices too.

Mark Zandi:                      Well hopefully that spread normalizes it at some point. Because if it doesn't it... We're going to change our forecast on housing too. If it stays around six point half 7%, that means 40 million for demands going to be worth, sales are going to be lower and house price declines, which we're expecting are going to be more severe. So.

Cris deRitis:                       That's right. Yeah. And this decline to your point, 0.6% was in July. So we're still-

Mark Zandi:                      In July?

Cris deRitis:                       Looking here, it's not even fully capturing.

Mark Zandi:                      What was the mortgage rate in July? It was like five, five and a half percent maybe.

Cris deRitis:                       Yeah, I think six maybe.

Mark Zandi:                      Did it get that high? Okay.

Cris deRitis:                       At the highest, I think.

Ryan Sweet:                      Pending home sales are tanking and pending home sales lead existing homes by one to two months. And pending home sales are down 24% year over year.

Mark Zandi:                      Did we get another data point on that this week? I missed it.

Cris deRitis:                       We did. Yeah.

Ryan Sweet:                      That's dated for August. So now we're looking at sales in September and October for existing and it doesn't look good.

Mark Zandi:                      Oh boy.

Cris deRitis:                       I don't think it was much worse than July if that.

Ryan Sweet:                      No, no. But it's just [inaudible 00:32:24] Dropping.

Cris deRitis:                       Plummeting. But.

Mark Zandi:                      Yeah.

Cris deRitis:                       It's very low. [inaudible 00:32:28] traffic. All the metrics are down. Yep.

Mark Zandi:                      What about you Ryan? What's your statistic of the week?

Ryan Sweet:                      How about you go? Because mine's going to lead into the last thing we got to talk about.

Mark Zandi:                      Oh, okay, fine. And we're talking about, oh, London, UK, the British and what's going on here? Yeah, it hit chaos. 3.5%. 3.5%.

Ryan Sweet:                      This a long term interest rate?

Mark Zandi:                      It is not. It's a statistic that was released this week. It's an important statistic.

Ryan Sweet:                      First to the US?

Mark Zandi:                      Yes indeed. It refers to the American household.

Ryan Sweet:                      Oh, the savings rate?

Mark Zandi:                      The savings rate.

Ryan Sweet:                      Yes.

Mark Zandi:                      There you go. There you go. Personal savings rate, 3.5%. Yeah, way to go Ryan. That was the saving rate in the month of August. 3.5. And that is pretty low by the standards of recent history. Go back pre pandemic, the saving rate was north of 7%. In fact that got revised higher. The saving rate got revised sustainably higher coming into the pandemic, but it was well over 7%. And so now it was half of what it was. And we calculate what we call excess saving, extra saving. That's the savings that household did above which they would've typically done during the pandemic, if not for the pandemic. So that goes to household sheltering in place, not spending, but generally high income households and also government support that went to a lot of middle and lower income households. And that excess saving built dramatically during the pandemic. In fact, it peaked it by our calculation in December of 2021. So at the end of last year at $2.7 trillion. So that's over 10% of GDP. It's been coming down ever since because the saving rate's been below that 7% threshold that was established before the pandemic.

                                             It's down 400 billion and we're now sitting at 2.2 trillion. Still a lot of excess extra savings, but it's coming in pretty quickly. And one other thing we've been learning, looking at other data from the Federal Reserve is that households and the bottom part of the income distribution, the bottom quintile, the bottom 20% of the income distribution actually blown through their excess saving or appears to that they've blown through and they have less cash in their checking accounts and in deposit accounts than they did prior to the sort pandemic. So this hit to the economy from higher inflation, higher oil, gasoline prices, food prices, rent. Consumers have cushioned the blow by allowing their savings to come down and draw down the excess saving have in their bank accounts. Also, they've started to borrow a bit more, particularly again those lower income households that are most stressed and have blown through their savings more quickly.

                                             They seem to be using their credit cards and taking on personal loans more aggressively to help supplement their income. So this has been a pretty significant cushion to the economy during this period. But still a reason to be, It depends on how your prism here, but the reason for optimism, right? Because it means that consumers have a lot of fire power there that they can use a cushion that they can call upon if they need to supplement their incomes to keep on spending. And hopefully that keeps the economy out of recession. But the other way of looking at it is, well it doesn't, if it keeps consumers from not becoming more cautious in their spending and the economy doesn't slow sufficiently, then the fed's going to have to because of the high inflation step on the brakes even harder. So now those two interpretations, which do you think is, or maybe there's another one interpretation, which one do you think is most relevant? Cris, do you have a perspective? I go, as you could tell, I go for the optimistic perspective that this is a cushion, but curious how you view it.

Cris deRitis:                       It is a cushion I agree with. But again to your point, the demographics are quite different in terms of the impact.

Mark Zandi:                      But most of the spending is done by folks in the top part of the distribution. So not to... There's a lot of... In terms of the macro consequences.

Cris deRitis:                       In terms of the macro consequences, yes it's a benefit but have to stress that there are certainly households that are already suffering in this environment and that cushion's no longer there. Or even if the cushion exists, certainly diminishing.

Mark Zandi:                      Yeah. Okay. What about the other interpretation that it's too much of a cushion. It's not allowing consumers to pull back enough to allow the economy to moderate efficiently to bring in the wage and price pressures.

Cris deRitis:                       I don't see a lot of evidence that consumers are going crazy even at the high end where there is a lot of excess savings. So I don't know that it's really influencing the behavior to that degree,

Mark Zandi:                      Which is pretty amazing when you think about it. Because it is actually cash sitting in their checking account when they go full money go user debit card, they can see how much cash is sitting there. I mean it's literally right there. They can spend it, but the consumers have not been doing that. They've been drawing it down, but pretty judiciously. And it basically just supplementing their real income, not doing any more than that. They're not spending with any kind of abandon that doesn't appear to be. So...

Cris deRitis:                       I think they're seeing it as wealth and some of that cash is just waiting to be redeployed, the market stabilize. So I don't think the consumers view it as available spending. They [inaudible 00:38:57]

Mark Zandi:                      Don't view it as cash. They view it as-

Cris deRitis:                       They should. But they don't want to spend it with abandon.

Mark Zandi:                      I just don't want to invest in stock market right now.

Cris deRitis:                       Yeah, I don't know what to do. I don't know... I don't see any good investments out there. I'm worried about everything. So I'm just going to park it in cash and wait.

Mark Zandi:                      Yeah. Okay. Ryan, what's your statistic?

Ryan Sweet:                      All right. It's going to be a little... It's, you already got a big clue. Something related to the UK. 130.

Mark Zandi:                      Okay.

Ryan Sweet:                      130. Basis points.

Mark Zandi:                      130? Pardon me.

Ryan Sweet:                      Basis points.

Cris deRitis:                       Basis points.

Ryan Sweet:                      130 basis points.

Mark Zandi:                      Oh, 130 basis points. Is that the increase in the 10 year guilt?

Ryan Sweet:                      Over what period of time?

Mark Zandi:                      Last week? Since they announced the budget they or the new fiscal plan.

Ryan Sweet:                      Over the last month. That's good, Mark. That's impressive.

Cris deRitis:                       That's good. That was good.

Mark Zandi:                      I bet it... Really-

Ryan Sweet:                      Most of it's been over the last few days.

Mark Zandi:                      I'm sure it's over the last few. I'm guessing.

Ryan Sweet:                      The actual increase over the last month is 130 basis points.

Mark Zandi:                      It is 130.

Ryan Sweet:                      Most of that has occurred over the last couple of-

Cris deRitis:                       Last few days.

Ryan Sweet:                      Yeah.

Mark Zandi:                      No cowbell. What's that all about?

Cris deRitis:                       All right, totally.

Mark Zandi:                      Well that's a good one. Yeah. Do you know what the 10 year guilt is today?

Ryan Sweet:                      4.08%.

Mark Zandi:                      4.08. Okay. And I do-

Ryan Sweet:                      For perspective, over the last month, the tenure treasure yield is up 54 basis points.

Mark Zandi:                      Is that right? The 10 year is up, 54 basis points. It is sitting at 3.67 or something like that.

Ryan Sweet:                      3.73.

Mark Zandi:                      3.73. And it had gotten as high as four. And the 10 year guilt, that's the equivalent of the 10 year bond issued by the British government to finance their government. I think it got to 4.8 when I was here.

Ryan Sweet:                      Before the Bank of England has made their U-turn.

Mark Zandi:                      Right when the Bank of England decided that they're going to start, they stopped, no QT, I'm not selling bonds, which they had announced and now they're going to be buying bonds, QE. Buying bonds. [inaudible 00:41:03]. Well I felt like they needed to do something right because it was starting to disrupt the, I think the pension system here because you had a lot of pension of funds that had bought into this scheme that would help them manage their interest rate risk and it kind of got flipped upside down and then they started getting margin calls and had to put more money in. And so they were worried about the pension fund system here. So they felt like they had to do something. Well, let me ask you this. Let me describe what you know is going on here so people have context. And I'm really curious what you guys think about all of this. So what's... There's turmoil here in the UK. As of today it's winding down. It's a Friday afternoon. Markets are calmer because of the Bank of England's decision to come buy to QE to buy bonds.

                                             But it's been a tumultuous week and it was ignited when the new British government, they have a new prime minister Liz Truss. Is it Liz Truss? Elizabeth Truss. Announced a very large fiscal package deficit financed as they would say here, unfunded. So that means they're going to go out and borrow money, take that money and provide really large tax cuts, not targeted large corporations, wealthy households. And then also increased spending. This is now to help with the energy bills. So energy prices are up everywhere. They're up a lot here. More here in Europe because we're closely tied to Russia. And the idea is to cap how much prices will rise. The energy prices will rise. And so that's a spending, government spending. And again that was on targeted. Everyone gets that. Whether you're low income, high income, doesn't matter. And it's a lot of money and it's a lot of juice.

                                             And this economy is... Our economy to the second power. I mean you think we have a tight labor market, they have excruciating like tight labor market, they're unemployment rates close to ours, but their full employment unemployment rates a lot higher than ours. Wage growth is very strong. Unions are stronger here. So the wage price dynamics are a bit more vexed here. Wages are feeding into prices. Prices and the wages. So inflationary pressures are developing. And so investors, global investors seeing all that balked. And said, "What the heck are you doing? This makes no sense whatsoever". And by the way, count me in that camp. This is so off the rails, this policy at this point in time, I keep thinking I must be missing something. What am I missing here? But it turns out everyone agrees with me, this is really bad.

                                             And so they've sold bond, they started selling the bonds, the British bonds because they said, "Are you going to be able to pay me back in a timely way? Because you're going to be borrowing so much money". And on top of that, because you're going to juice up the economy in the near term, you're going to fan inflationary pressures. You may create this stagflation environment. And the only way added on that is by really jacking up interest rates. The Bank of England will have to jack up interest to ring that out and that'll end very badly for everybody including the British, because I mean a very, very severe recession, not in an near term. Everything's all juiced up in the near term. So no recession now, but you look out a year from now, a year and a half from now looks like it's going to be a complete mess.

                                             So the only thing that settled all this down, and this is important all over the world because it was reverberating all around the world, affecting bond markets, including our bond market and our interest rates was for the Bank of England to do a U-turn instead of... Because they had announced quantitative tightening along with the Fed and every other central bank to try to slow the economy and quell inflation. And now they're queuing, they're buying bonds again, a lot of bonds. That's the only thing that, and I wonder how long that calm lasts if the new government persists and continues down the road here in trying to implement this policy. So what do you guys think of... Is your perspective on this similar to mine that this is off the rails, that kind of is egregious as a policy step that one could imagine.

Ryan Sweet:                      If you recall from our stagflation podcast, we said one of the causes is bad policy and this fiscal policy is bad policy and the Bank of England has to respond. They have a single mandate, and that's inflation. So any inflation that fiscal policy adds to the economy, the Bank of England has to offset that. So that means very, very aggressive rate hikes are coming.

Cris deRitis:                       So this is the fiscal dominance argument that fiscal authorities can do what they want and the central bank just has to mop it up.

Mark Zandi:                      Well the issue though here might be that they don't do a good job mopping up or they don't mop up quickly.

Cris deRitis:                       Or they don't have the sufficient resources to mop up or.

Mark Zandi:                      I mean, in addition to her, Liz Truss the new Prime minister's new policy, she also came out in and said that she would want to review the Bank of England's framework for setting [inaudible 00:46:57]

Ryan Sweet:                      [inaudible 00:46:59] this is not [inaudible 00:47:00] wrong.

Mark Zandi:                      And then when the Bank of England steps in and buys those bonds, and I hear them saying, I need to do this to save the pension system and market functioning and all that kind of stuff. But on the other hand-

Cris deRitis:                       [inaudible 00:47:13] and it's short term.

Mark Zandi:                      I mean that doesn't... I guess we'll see how aggressive the Bank of England will now be in their efforts to mop up, to take away this growth that is going to be juiced up by the fiscal policy. But at this point it feels like there are credibility under is questionable. Right? And that's another reason to be a bit nervous if you're investor and concerned about stagflation, it's when the central bank doesn't aggressively respond to the inflation. And that feels like that might be an issue here in the UK.

Cris deRitis:                       So right now markets-

Ryan Sweet:                      Government's not backing down. Is there popular support? I mean you're there is...

Mark Zandi:                      No, I think they're 30 points down relative to the labor. They're Tory party, the conservative party, they're down 30, I think last Paul saw this morning, 30 percentage points, 30 relative to the Labor party. So it's not popular. Even though you're cutting taxes and you're cutting, you're capping the energy bill. People are very fearful of it because... Oh, the other thing I didn't mention, the obvious is the pound, the value pound is crater. So people, investors say, I'm not buying British bonds and that's caused the pounds to go down. And we got close to parody and that's... I've been coming to London for 30 years and I went to dinner the other night and got the bill and it just came out of my mouth. I said, this is cheap. Can you imagine that. This is cheap? No one ever says that about London as it's just amazingly cheap.

                                             You, as compared to the US dollar now close to [inaudible 00:49:00] the strongest of dollars ever been, I think ever relative to... Yeah. So that's scaring spooky people, right? Because interestingly enough, in the United States, the thing that plays the most central role in people's thought process around their finances and the economy is the cost of a gallon of gasoline. You know what it is here in the UK?

Ryan Sweet:                      The pound.

Mark Zandi:                      It's the pound. It's the pound. It's like a litmus test for how things are going. And right now it's not going well whatsoever.

Ryan Sweet:                      So what's your call?

Mark Zandi:                      We'll see how it plays out.

Cris deRitis:                       What's your call? Is she going to blink or what's the forecast?

Mark Zandi:                      They said there, the chancellor, the [inaudible 00:49:44], the person who kind of managed this policy came out and said there, there's part two coming. So we'll see what part two looks like. If they double down and there's more fiscal stimulus I think run for the hills, it's going to be a mess if they kind of find a face saving way to kind of do a uey or a semi uey or something like that. I think maybe this works out a little bit better, but we'll see. Either way. I think the UK is, the economy's going to suffer a pretty serious recession on. I think odd's here are very high going in [inaudible 00:50:22]

Cris deRitis:                       We've got Brinksmanship in UK and in Russia now.

Mark Zandi:                      Yeah, I know.

Cris deRitis:                       Makes for a dark scenario. Yeah.

Mark Zandi:                      I'm not even going to ask for recession odds. We did that in a whole podcast. We'll come back to that next week. But yeah, a lot to be worried about here for sure. Okay, anything else before we call this a podcast?

Cris deRitis:                       I think that's it.

Mark Zandi:                      Put a lot of ground. Okay. Okay. Very good. Anything Cris you want to bring up?

Cris deRitis:                       No, I that's good for now.

Mark Zandi:                      All right. We're going to call this a podcast. Actually I think, believe it or not, the next one I do, I'm going to be in Singapore, so yeah, Singapore's going to be quite late at night when we do it.

Cris deRitis:                       Another perspective.

Mark Zandi:                      Because we get the employment report next week, right? On Friday. Yeah. So we'll be doing that. I always look forward to that. We get our call, other colleagues on as well. So with that, we're going to call this a podcast. Thank you everyone. Take care now.