Amid all the optimism regarding a soft landing for the economy, the Inside Economics team considers what bothers them most about the economy’s near-term prospects. Cris focuses on GDP vs GDI, Marisa on the soft global economy, and Mark on the internals of the labor market. They remain upbeat about the economy, but….
Amid all the optimism regarding a soft landing for the economy, the Inside Economics team considers what bothers them most about the economy’s near-term prospects. Cris focuses on GDP vs GDI, Marisa on the soft global economy, and Mark on the internals of the labor market. They remain upbeat about the economy, but….
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Marisa DiNatale and Cris deRitis. Hi, everyone.
Marisa DiNatale: Hey, Mark.
Cris deRitis: Hey, Mark.
Mark Zandi: Well, I've had a stressful morning.
Cris deRitis: [Inaudible 00:00:29].
Marisa DiNatale: Yeah, let's hear about it.
Mark Zandi: I lost power. I lost power. Apparently I wasn't paying my bill. I'm down here in Florida and I've mail being diverted from my home in Pennsylvania down here to Philly, but it's been a real nightmare. The post office has been doing a miserable job. I haven't gotten the Florida Power & Light electric bills for now three months. No emails, no phone calls, no nothing. They turned off the power. They turned off the power. And I went into panic mode. Of course, I lost internet in the house, but I had my phone. I googled Florida Power & Light. I get this email site. I call it. And I think it's legit, but they got a lot of information from me and now I'm here worried that, "Oh no, maybe I got scammed." I probably shouldn't worry about that, right?
Marisa DiNatale: How did you know that they shut off your power as opposed to just there being a power outage? Did you think the power just went out?
Mark Zandi: Yeah. At first I thought the power just went out. Then I called my neighbors and I'm thinking, "What's going on?" I wasn't quite sure. And then I called this number and they asked for my account number. Of course, I don't have my account number. Who would have their account number?
Marisa DiNatale: Somebody who gets their bill.
Mark Zandi: Exactly.
Cris deRitis: Ooh, ouch.
Mark Zandi: Exactly. Exactly. Exactly. So that's where they collected a lot of information from me. And I'm thinking, "Man, do I really want to give them that information? Should I give them that information?" But then they were able to... I'm sure it's legit. I'm sure it's legit because it just felt [inaudible 00:02:21]-
Marisa DiNatale: Then your power came on, so that says that's legit.
Mark Zandi: Well, that's not proof positive. Because then I had my wife call through another line. If you go down the Google searches, the first one is the one I called. Go down a couple more, there's another Florida Power & Lights. You call that. You went through the phone buttons and pushing things. And I think that might've put the lights back on. So I'm all stressed out. Let's just put it that way. I am stressed out. I got my power back, we can do the podcast, but oh my gosh. Anyway. You need advice-
Cris deRitis: Hey, Mark, I got a word for you.
Mark Zandi: Yeah?
Cris deRitis: Autopay. Autopay.
Mark Zandi: I know. I thought I auto paid. Really, Chris, I did. I thought I was auto paying.
Cris deRitis: Or it really is this elaborate scam. Someone cut off your power.
Mark Zandi: It had to be really elaborate though, right?
Cris deRitis: I don't know though. Now with the infrastructure, AI.
Marisa DiNatale: It could be a cyber-attack.
Mark Zandi: Thank you, Chris. Thank you.
Cris deRitis: Cyber-attack.
Mark Zandi: I'm really worried.
Cris deRitis: I was keeping a-
Mark Zandi: Any advice? Any advice? You're younger than me. You're more adept at this kind of stuff. Any advice? No?
Marisa DiNatale: Autopay everything.
Mark Zandi: Okay.
Cris deRitis: Yeah.
Mark Zandi: But I'm saying about this potential hack, this potential cybercrime.
Marisa DiNatale: I would call back Florida Power & Light and verify that the person you spoke to this morning is an employee of Florida Power & Light.
Mark Zandi: Yeah. Okay. All right. I kind of sort of did that, but it's hard to... Try getting someone on the phone for Florida Power & Light. And I had to cut it short because I had this podcast I had to do.
Cris deRitis: Well, you got your priorities straight. Podcast first, bills second.
Mark Zandi: [Inaudible 00:04:05]. Okay. Okay. Fair enough.
Marisa DiNatale: Willing to risk identity theft for.
Mark Zandi: Oh geez, I'm risking identity theft for you guys.
Marisa DiNatale: Yeah. Thank you.
Mark Zandi: No one's more dedicated than I am. Anyway. Okay, so we don't have a guest this week. I thought the way we had this conversation is let's talk about the data that came out this past week, and it was data filled, and we'll do that. I think we'll just have a little bit of fun upfront. I need a little bit of relief. We'll play the statistics game just upfront and then we'll turn to... I thought we play kind of a game, What's Bugging You? There's a lot of things bugging me in the data. I mean, I look at lots of pieces of information and data. And the way I think about it is I look at data and if it doesn't exactly fit into my thinking, then my thinking starts to evolve and change.
And I'm getting lots of things out there that are making me a little nervous, and I want to talk about that and see what's bugging you guys. Then we'll end with... We've got a number of questions from the listeners, I understand around deficits and debt in particular. That's a good topic to end on and we will call it a podcast. Sound like a good game plan?
Cris deRitis: Perfect.
Marisa DiNatale: [Inaudibile 00:05:17] to me.
Mark Zandi: Okay, good. All right, so let's start with the game. I think it's rare we ever start with a... Have we ever started a podcast with a stats game? I don't think...
Cris deRitis: I don't think so.
Marisa DiNatale: Not since I've been on, I don't think.
Mark Zandi: Yeah, I don't think we ever have. Okay, this is a first. Okay, let's play the stats game. The game is we each come up with a stat. And the best stat... Oh, and the rest of the group tries to figure that out through questions and clues, deductive reasoning. The best stat is one that's not so easy we get it immediately, although that's getting hard to do, but not so hard we'll never get it. In this case, let's try to keep the stat to something that came out this week so we can talk about the weekly data. And with that as a preface, Marisa, you're up.
Marisa DiNatale: Okay. The stat is minus 1.03 percentage points.
Mark Zandi: Minus 1.03 percentage points.
Marisa DiNatale: So it's a calculation.
Mark Zandi: Right. Does it have anything... I'm just going to [inaudible 00:06:18]-
Cris deRitis: Oh.
Mark Zandi: Oh, you know.
Marisa DiNatale: Oh boy, what?
Mark Zandi: Oh boy.
Cris deRitis: The spread, the difference between CPI and PCE.
Mark Zandi: Wow.
Marisa DiNatale: Yeah. It's the difference between-
Mark Zandi: Wow.
Marisa DiNatale: ... the core PCE and core CPI.
Cris deRitis: Yeah, core.
Mark Zandi: Oh my gosh, that was definitive.
Marisa DiNatale: Wow. I thought that was going to be hard for you to get. Guess not.
Mark Zandi: For me, I don't know why I haven't gotten it.
Cris deRitis: That's a good one.
Mark Zandi: Yeah. That's damn good.
Cris deRitis: Thank you.
Mark Zandi: Yeah. Give a little bit of your thought process. How'd you get there so fast?
Cris deRitis: Well, I don't want to [inaudible 00:06:54]-
Mark Zandi: What's on your mind?
Cris deRitis: In my head it's large.
Marisa DiNatale: Yeah.
Cris deRitis: It's large.
Mark Zandi: It's large. Yeah.
Cris deRitis: It's a very large difference.
Mark Zandi: Is that one of those things that's bugging you, that large difference? Not necessarily.
Cris deRitis: Well, yeah, it is. It's a discrepancy. It's one of the many discrepancies in the data at the moment, that makes you think about what's the truth, what's the underlying direction of inflation here? But I don't want to steal Marisa's thunder, so I'll let her-
Mark Zandi: Yeah, yeah, fire away, Marisa.
Marisa DiNatale: Well, I think you already did, Chris.
Cris deRitis: Oh.
Mark Zandi: Yeah.
Marisa DiNatale: Yeah, it is a large difference. So the core PCE is over a percentage point less on a year-over-year basis now than the core CPI. This is the largest difference. There were a couple months back in '02, during the summer of '02 when inflation really started to take off, where the difference was similar to this. It was about a percentage point. But you have to go back to the financial crisis to get this big of a difference on a consistent basis between the two measures of inflation. I think what this reflects is the much larger weight that the CPI puts on housing in the CPI basket than PCE.
So in the CPI, Consumer Price Index, housing makes up about a third of the basket of goods that they're measuring. In the PCE, it's only about 16%. So we're talking about double the concentration of housing in the CPI versus the PCE. As we know, the cost of housing is high, it is rising. It is been rising quickly, more quickly than we would like. And so, that likely is skewing the CPI higher in terms of measured inflation in the PCE.
Mark Zandi: Yeah, I think, and this is from memory, but the year-over-year... And you're talking about... Is a percentage point in terms of year-over-year growth the core PCE [inaudible 00:08:56]-
Marisa DiNatale: Yes, in January.
Cris deRitis: Year over year.
Marisa DiNatale: Year-over-year growth in January. That's right.
Mark Zandi: So core PCE was 2.8, and I guess core CPI is 3.8? Something like that.
Marisa DiNatale: Yeah, they're both 2.9 and 3.9 basically.
Mark Zandi: Oh, is that what it is?
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Yeah. Again, from memory, but I think the year-over-year growth and the cost of housing services is about 6%, right?
Marisa DiNatale: Yes.
Mark Zandi: So take 6%, multiply by 0.15. That's the difference between the 0.3 share in the CPI and the 0.15 share in the core PCE. I think that comes to 0.9, right? Something like that. 0.9, right? That would be six times 0.15 is 0.9, I think. There you go. That's the difference, I think, the bulk of the difference. Does that sound right? You look perplexed, Marisa.
Marisa DiNatale: Yeah, no, that sounds right. Yep, [inaudible 00:09:54]-
Mark Zandi: That sounds right, okay.
Marisa DiNatale: [Inaudible 00:09:55]-
Mark Zandi: That wasn't your perplexed look.
Marisa DiNatale: No, it was my... I'm concerned.
Mark Zandi: [Inaudible 00:10:01] everyone knows that, Mark. Yeah, yeah, look. I thought I was providing some insight. Well, give us a little bit more on core PCE. Give us more context there. I'm curious in your view on what that means in terms of the quest to get back to the Federal Reserve's 2% inflation target, which is on the core PCE.
Marisa DiNatale: Yeah. I mean, as I said, the core PCE is rising 2.8% year over year. That has been pretty steadily coming in since early 2023. The change over the month in the core PCE was 0.4% in January, which was large, but we were expecting that. We saw a big increase in the CPI over the month as well, so it's consistent with that. A lot of the inputs into the way that the BEA measures the PCE is the CPI. So in theory, they shouldn't be telling wildly different stories. But the mix of things in each basket is a bit different in terms of how they weight the different components of inflation. So on core PCE 2.8, we're certainly, as you would say, Mark, in spitting distance of the Fed's target here. We're firmly under 3% and heading lower it seems. I mean, January I think will prove to be an outlier in terms of the uptick in inflation over the month.
So we should see things move lower here. Part of the uptick over the month in the PCE was services inflation. Housing did have a larger uptick, so measured housing and utilities costs rose 0.6%. That was up from 0.4% in December. So we do see housing price growth strong in the PCE as well. Again, it's just how much the BEA weights housing versus how much the BLS weights housing in the CPI. I don't think it changes... This doesn't, for me at least, change the inflation outlook picture at all. It's consistent with what we saw in the CPI. It's not going to be linear. We've been saying that for a long time. You're going to have months where this accelerates, decelerates back and forth. But we're clearly on a downward trajectory here in terms of inflation.
Mark Zandi: I got a bit distracted.
Cris deRitis: Downward [inaudible 00:12:31]-
Mark Zandi: Oh, sorry. Go ahead, Chris.
Cris deRitis: I was going to say downward trajectory. But do you think it's more stubborn now than what you were thinking a month or two ago?
Marisa DiNatale: Well, I think last podcast, we spent a lot of time talking about housing inflation because we had gotten the CPI report, and that certainly has been more stubborn than I think any of us thought. And a lot of that is the way that the government imputes owner's equivalent rent using market rents to impute that. I mean, it's not coming in as quickly as I would've thought or would've liked, but it does seem like it... It will happen, it's just not happening as quickly as we thought. And I think the Fed knows this. The Fed knows the ins and outs of the data just probably, hopefully better than we do. They're making monetary policy decisions based on this data, so they're aware of the lags in the way some of these components are measured, and are hopefully taking that into account when they're thinking about the trajectory of monetary policy.
Mark Zandi: Yeah. I got a bit distracted, and you may have said this, but just in case you didn't. So the year-over-year core consumer expenditure [inaudible 00:13:43] is two... You said 2.9. Okay.
Marisa DiNatale: Yeah, it's like 2.85 or something.
Mark Zandi: It's 2.85?
Marisa DiNatale: Yeah.
Mark Zandi: Okay. Could have rounded up to 2.9.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. I think on a three-month annualized basis, it's like 2.6 or something, 2.7. And then on a six-month annualized basis, it's even lower than that. I think it's like 2.5, if I got the right...
Marisa DiNatale: Yeah, that sounds right. I didn't look, but-
Mark Zandi: It sounds right.
Marisa DiNatale: ... that sounds about right.
Mark Zandi: So the way I characterize it is that underlying inflation abstracting from the vagaries of the data, including the problematic seasonals in January. And they're definitely there. You can see that last January we had the same kind of bump up, one-month bump up in inflation. So it feels like January is just a difficult month to seasonally adjust. Underlying inflation is about 2.5%, and the target is two. It just feels like we're at 2.5% pretty solidly. And on top of that, to your point, the growth and the cost of housing services feels like, almost by construction, that that's going to continue to moderate here going forward. Is that fair? Does that sound [inaudible 00:14:50]-
Marisa DiNatale: Yes.
Mark Zandi: Okay. Chris, seem fair to you?
Cris deRitis: Fair. I guess any concern about other components, so the PC I think puts more weight on the healthcare expenditure than the CPI because CPI is out of pocket versus overall. I didn't take a close look at healthcare. Do you have any-
Marisa DiNatale: It did accelerate over the month, slightly, so it went from 0.2% in December to 0.3% in January. I mean, it's been higher back in the fall. It was growing at half a percentage point. I mean, that is obviously a large component of services spending getting larger, just demographically for much of the country, becoming a larger outlay for many households. So yeah, that is something that is a difference between the CPI and the PC too as well. Just like in the CPI, we're seeing goods prices fall in the PCE, so that's across durables and non-durables. There's still deflation in goods. So this really is coming from the service sector in both measures of inflation.
Mark Zandi: Good. That was a great statistic. That was a really... And Chris, boy, that was impressive.
Marisa DiNatale: I can't stump you guys anymore.
Mark Zandi: I would never have gotten that. We would've been here all day. Chris, you're up. What's your stat?
Cris deRitis: All right. Minus 0.3%.
Mark Zandi: Minus 0.3%. A government stat?
Cris deRitis: Yep.
Mark Zandi: Came out this week?
Cris deRitis: Yes.
Mark Zandi: Construction spending?
Marisa DiNatale: Is it in the PCE?
Mark Zandi: [Inaudible 00:16:37]-
Cris deRitis: Neither.
Mark Zandi: Neither?
Cris deRitis: Not in the PCE.
Mark Zandi: Neither. Neither, neither.
Marisa DiNatale: Is it in the GDP?
Cris deRitis: Nope.
Marisa DiNatale: Oh, spending income?
Cris deRitis: No. There's probably a 0.3% somewhere in there, but no.
Mark Zandi: Somewhere in there, yeah. It's not in that report on income spending inflation. It's not in that report from the Bureau of Economic Analysis? No.
Cris deRitis: No.
Mark Zandi: It's a government stat though that came out this week.
Cris deRitis: It's put out by the census, if you'd like a clue.
Mark Zandi: Oh, the census. Ooh. We didn't get anything around housing vacancy survey, did we, this week? Was that this week or was that last week? That's not it. Okay.
Cris deRitis: No. I think that was last...
Mark Zandi: That was last week, yeah. Is it an esoteric series? Does it come out every month or does it come out irregularly, or every year?
Cris deRitis: Monthly.
Mark Zandi: It comes out every month. But it's more esoteric?
Cris deRitis: We do cover it on Economic View.
Marisa DiNatale: Is it construction spending?
Cris deRitis: No.
Mark Zandi: Durable goods?
Cris deRitis: Yes.
Marisa DiNatale: Oh.
Mark Zandi: Oh, okay. Was it top line durable goods or down minus 0.3? No, they were down a lot more than that. They were down like six or something.
Cris deRitis: 6.1%.
Marisa DiNatale: Core capital goods.
Mark Zandi: That's probably ex-something.
Marisa DiNatale: Is it core capital goods?
Mark Zandi: Ex-transportation.
Cris deRitis: Ex-transportation.
Mark Zandi: Got it.
Cris deRitis: You got it. You got it. Okay.
Mark Zandi: Very good. You want to explain?
Cris deRitis: Yeah, I was going to choose the 6.1% because it's a big...
Mark Zandi: Big number.
Cris deRitis: ... big number, big miss. But we can explain most of that by the Boeing aircraft orders. Those are volatile, they vary month to month. So looking at excluding transportation's a little bit more stable.
Mark Zandi: And they may be down more, right, because of Boeing's MAX problem? I wonder if that might [inaudible 00:18:27]-
Cris deRitis: Yeah. That's why.
Mark Zandi: Is that why? Okay.
Cris deRitis: Okay. 6.1%, that's a big number, but it might just be some short term noise. But the excluding transportation, that's a bit more meaningful in terms of manufacturing. And that's down, consistent perhaps with some weakness, some of the concerns that you mentioned earlier that we'll get into. So that's why I want to highlight this one. It does show that manufacturers' on edge here. Some weakness overall.
Mark Zandi: Yeah, [inaudible 00:19:00].
Cris deRitis: Oh, go ahead.
Mark Zandi: No, go ahead. Go ahead. Sorry.
Cris deRitis: I think we're seeing some weakness, particularly in the initial stages. It was a primary metal fabrication, these types of manufacturers that could lead to more weakness down the line in coming months. So definitely something to watch.
Mark Zandi: Yeah. I tend to look at the non-defense...
Cris deRitis: The core?
Mark Zandi: The core. What was that? Do you know?
Cris deRitis: That was up 0.1%.
Mark Zandi: So it's up 0.1.
Cris deRitis: So non-defense capital goods, excluding [inaudible 00:19:33]-
Mark Zandi: [Inaudible 00:19:33] capital goods, right? Yeah.
Cris deRitis: 0.1. Okay, that's positive. But still, it's flat, kind of weak.
Mark Zandi: And that's on a nominal basis, presumably. I bet there's some inflation there too. So on a real basis...
Cris deRitis: Yeah, it's even worse.
Mark Zandi: Right. Right. Well, in terms of how that translates into GDP, which is investment spending, this is a window into investment spending. I think the key is shipments, isn't it? I believe it's shipments. Do you know what they did during the month? So shipments of non-defense capital goods, ex-transportation is kind of the best measure for investment spending that goes into GDP.
Cris deRitis: Yeah. So that was up 0.8%.
Mark Zandi: 0.8%, okay. So that might indicate-
Cris deRitis: Well, it is for now.
Mark Zandi: Yeah, right. Orders lead shipments. So you're saying the orders are soft. Shipments may be okay now-
Cris deRitis: Exactly.
Mark Zandi: ... but we've got this weakness that's dead ahead.
Cris deRitis: Yeah, if we're looking ahead, skating to where the puck will be.
Mark Zandi: Yeah, right.
Cris deRitis: Got to look at the orders.
Mark Zandi: Right. And actually, manufacturing in general just feels still flattish. I mean, we got the purchasing manager survey this morning. This is a Friday, March 1, and I think it's-
Marisa DiNatale: Under 50.
Mark Zandi: ... well below 50, isn't it?
Marisa DiNatale: Yeah.
Mark Zandi: Yeah.
Cris deRitis: Yeah, which is the threshold. 16th consecutive month, I believe.
Mark Zandi: Right. So manufacturer's [inaudible 00:21:04] struggling. I guess that's one of those glass half full, glass empty kind of things though, right? It's glass half empty because manufacturing is weak, but it's glass half full that it isn't weaker. Because historically, when you have a high rate environment, when the Fed's on the war path, it undermines first the housing market and then the manufacturing sector. So manufacturing is actually held up pretty well in the context of those higher rates, I guess.
Cris deRitis: And then to use the other Zandi-ism, it's according to script, right? We're [inaudible 00:21:31] trying to get that inflation down. We need to see the softening.
Mark Zandi: I think I should have a Zandi vocabulary [inaudible 00:21:41]-
Marisa DiNatale: You could have a Zandi book of quotes.
Mark Zandi: Zandi book of quotes. Yeah. I've got a bunch of them, don't I?
Marisa DiNatale: Zandi-isms. We do.
Mark Zandi: Boat load. Yeah. So forth and so on. Okay, that was a good one. Okay, I've got one. 3.8... Excuse me. Well, I'm going to give you two numbers. 3.8%, and then I'm going to give you the second number, which is related. It's 3.3%.
Cris deRitis: GDP report?
Mark Zandi: No. Well, it wasn't the GDP report, but... That's not the focus of the GDP report.
Cris deRitis: That's not... Okay. [Inaudible 00:22:30]-
Mark Zandi: It's kind of buried in the GDP report, I think, somewhere.
Cris deRitis: Okay.
Mark Zandi: Actually, let me take that back. It's not in the GDP report.
Cris deRitis: Okay. Definitive.
Mark Zandi: Hope that helps. I'm now totally confusing you now. I'll give you a hint. It came out in the [inaudible 00:22:45], the data, the day after, when we got income and spending and the PCE deflator, all that data. The data that we get from BEA.
Cris deRitis: Was that the dividend income?
Mark Zandi: No, but you're barking up the right tree.
Marisa DiNatale: Oh, it's government transfers, right?
Cris deRitis: Oh, the social security, COLA.
Marisa DiNatale: Yeah. Is it the cost of living adjustment on social security?
Mark Zandi: No, but you're in the vicinity. You're in the vicinity.
Cris deRitis: That was 3.5, I think, right?
Mark Zandi: Yeah, that was 3.5. You're in the vicinity. Yeah. Those things that you just mentioned affect this number. It's a key number. Very important. You got to keep your eye on it every month, and we can definitely cover it on Economic View.
Cris deRitis: It's not the current quarter.
Mark Zandi: No, this is for January. That's why I say it wasn't in GDP. It's the January value. But this number is also in the GDP number on a quarterly basis. It's on the income side of the accounts. Oh boy, what else can I... I can [inaudible 00:23:52]-
Marisa DiNatale: Is it wages?
Mark Zandi: No. 3.8%. You got to tell me when you give, or you want another...
Marisa DiNatale: It's a component of income?
Mark Zandi: It's not a component of income.
Marisa DiNatale: Okay.
Cris deRitis: Oh, okay.
Mark Zandi: It's not a component of income-
Marisa DiNatale: 3.8%.
Mark Zandi: But it's based on income. Income is a-
Cris deRitis: A saving rate.
Mark Zandi: The saving rate, yes. The saving rate. The personal saving rate, 3.8, that's the top line. And then here's the interesting thing. If you exclude the dividend that Costco paid... Costco paid this enormous dividend in the quarter. And if you annualize it, it's even bigger. I think Scott Hoyt, our analyst here calculated 80 billion annualized, or something like that. If you exclude that, which I think is reasonable to do, it's 3.3. 3.3, 3.3%. Of course, then we had a big social security bump up in January. That's when the cost of living adjustment occurs. So if you take that out, then I think... I didn't do the calculation. I think you're in the twos. That's a pretty low saving rate. Now, it was lower, briefly, back when inflation was raging, when inflation hit the peak and gas prices were at their all time high in the summer of 2022.
Saving rates got down into the mid-twos briefly. But here we are, back again. So consumers have some excess saving in the high income households, high net worth households, and they're drawing that down. And that's causing the saving rate to come in. The other factor is the, so-called wealth effect. Stock prices are taking off, housing values are rising, so people are a lot wealthier than they were four years ago when the pandemic hit. So you feel wealthier, you tend to save less. You spend more out of current income, especially if you're a high income household with those assets. And that appears to be what's happening. Interestingly enough, the decline in the saving rate and draw down of excess saving here in the United States, again, the excess saving is the extra saving we did during the pandemic. Particularly high income, high middle income households, because they couldn't spend the money.
They were sheltering in place. And there's still a lot of cash sitting in people's... A lot of debate around this. But by our calculation, there's still plenty of excess saving out there. And they're drawing that down. The reason very different behavior here in the United States than overseas and other parts of the world. If you go Europe, Canada, Australia, China, wherever you go, consumers did build up excess saving because they couldn't spend. But they're not spending that excess saving down now. The American consumer is very different in their behavior. They're willing to draw down those excess savings to supplement their income. And I think the reason is the wealth effect. Share ownership... Equity holdings are much broader based here. Housing wealth is deeper here and people are just... And also, I guess the other factor is American consumers just feel, I think, less nervous, worried, cautious.
I mean, you go to China, because of the very vexed way they handled COVID and kept it locked down for so long, people are really nervous about something happening. So they're very cautious. Precautionary saving is a lot higher, but not so here in the United States. And that's [inaudible 00:27:21] the American consumer to kind of power forward. But having said all of that, that's one of those niggly things that makes me a little bit nervous. I mean, saving rates are pretty low. Are consumer's going to continue to do their thing? I think so, but a bit of nervousness there. So what do you think? That was a pretty good statistic, right?
Marisa DiNatale: Yeah, that was good.
Cris deRitis: Yeah, [inaudible 00:27:43]-
Marisa DiNatale: I can't believe it took us that long.
Mark Zandi: Very good. Okay, so before we move on, any other statistic you want to call out during the week? What were your initial claims for unemployment insurance? We always look at that as a broad [inaudible 00:27:56]-
Marisa DiNatale: They were up a little bit, but they're still really low.
Mark Zandi: Still very low. Just north of 200,000?
Marisa DiNatale: Yeah, their-
Mark Zandi: Something like that? Okay. All right.
Marisa DiNatale: 215.
Mark Zandi: 215, okay. Anything else out there in the past week you want to call out? No? Okay. All right.
Marisa DiNatale: The revision to fourth quarter GDP was negligible.
Mark Zandi: Yeah. Right. Okay.
Marisa DiNatale: University of Michigan was up.
Mark Zandi: Although, I think it was in February. I mean, wasn't it [inaudible 00:28:24]-
Marisa DiNatale: Oh, no, I'm sorry. It was down.
Mark Zandi: Down, right. Down. [Inaudible 00:28:27]-
Marisa DiNatale: No, it was down.
Mark Zandi: Yeah. Right. You have this problem with pluses and minuses. Have you noticed?
Marisa DiNatale: Okay.
Mark Zandi: I jest, I jest. We all have our problems. I don't pay my bills on time.
Marisa DiNatale: Right. Right.
Mark Zandi: That's a big problem.
Marisa DiNatale: At least I have power.
Mark Zandi: Yeah. At least you have power. Okay, let's turn to part two of the conversation, and that is what's bugging you? The catalyst for this is everyone out there, the general consensus view now is, "Okay, no recession, everything is fine." It just feels like most everyone has bought into the soft landing scenario for the economy. And once that happens, I start to get very nervous. I don't know if I said this last week on the podcast, but in my speaking engagements, I often ask the audience what's bothering them. Because I want to collect things that they're worried about and I should focus on in my talk. And I'm finding that people are invariably coming up with geopolitical risk at the top of the list of concerns. You often say that, Marisa, if I asked you that, geopolitical concern. When I hear that, I go, "Oh, they can't think of anything else."
Generally, you only say geopolitical because you can't think of something else that's more pressing. So that may be even another reason for some optimism. But nonetheless, there's this general angst out there that people are expressing. And I'm getting a little nervous because of the general optimism. So why don't we go around the group and we'll do this maybe one or two times, depending on the time this takes. Let me ask you what's bugging you? And you can't say geopolitical risk. You can't say that. It's got to be specific, something very specific. Some data you're watching, something that you're observing. Something out there that just doesn't quite fit into the worldview we have of an economy that's going to continue to perform well. Does that sound reasonable? Does that make sense? Does that sound like-
Marisa DiNatale: Yeah.
Cris deRitis: Yep.
Mark Zandi: Okay. All right. So this time, let's begin with you, Chris. What's the thing at the top of your list of concerns? What's bugging you?
Cris deRitis: I guess, in general, what's bugging me are some of these mixed signals in the data overall. If I have to identify one, it's the difference between economic growth as measured by gross domestic product, GDP, and gross domestic income. So in theory, these are two measures that should tell the same story in terms of economic output. At the moment, GDP remains quite strong. We've been talking about that. It's cause, or at the root of some of the optimism here is that we still have this very robust resilient economy. But if you look at the other way to calculate things, the GDI, that's showing certainly a much weaker growth. Still positive growth, but certainly not at the same level as what we see with GDP. So my fear is that, well, maybe we're not getting the complete picture. Maybe the GDP is overstated. We know there are estimates going into that measure. And perhaps the underlying economy is... while still growing, may not be quite as robust as what we're thinking, and therefore more susceptible to some type of shock. [Inaudible 00:32:00], what do you think?
Marisa DiNatale: Maybe, Chris, it might be helpful to explain the difference between GDP and GDI? What could explain those differences?
Cris deRitis: Yeah, so just at a simple level, the GDP is more... So both concepts are trying to measure the output of the economy. The GDP is going about this task by looking at expenditures. So we look at consumption, what's been spent in consumption investment, government services, net exports. Sum that all together. Obviously we have this large complex economy, so there are some estimates that go on in those calculations. But that's the process. The idea is to just sum up all these expenditures, collect data, and sum them up. The other way to approach this problem is to look at the income side of the economy, someone's expenditure, someone else's income. So we can try to measure economic output by tallying up all these sources of income that we see throughout the economy. Again, in theory and over the long term, these two measures should be equivalent. But certainly in the short term, when we're dealing with some estimates, some data that might be lagged or subject to revision, there can be discrepancies. And that's what we're seeing right now. Right now, I think it's a particularly large discrepancy between the two.
Mark Zandi: I think that it's as wide as it's ever been, or close to.
Cris deRitis: [Inaudible 00:33:27] right?
Mark Zandi: They call it the statistical... BEA, Bureau of Economic Analysis calls it statistical discrepancy. And I think if it's not the largest it's ever been, it's pretty damn close.
Cris deRitis: It's close, yeah.
Mark Zandi: It's very close. We got Q4 GDP.
Cris deRitis: GDP.
Mark Zandi: We haven't gotten Q4 GDI yet.
Cris deRitis: That's right.
Mark Zandi: And we get that next month, because it's lagged one month.
Cris deRitis: Yes.
Mark Zandi: That'd be very interesting. So GDP in the fourth quarter was 3.2%.
Cris deRitis: That's right.
Mark Zandi: I think that's what it was revised to. And we'll wait and see what GDI is. What you're saying is that in the last year or so, maybe even longer, GDI has been growing much-
Cris deRitis: Barely.
Mark Zandi: ... weaker than GDP growth.
Cris deRitis: That's right. We even had some negative, pretty significant negative prints.
Mark Zandi: Yeah. There is some research that came out of the Council of Economic Advisors under Obama that said the best measure of how the economy is doing is not GDP by itself or GDI by itself, but the equally weighted average of the two, looking at them both. And that would suggest an economy... It's not growing three, probably not growing one, but probably growing closer to two.
Cris deRitis: Two, yeah.
Mark Zandi: And that would be consistent with estimates of economy's potential growth, which we've along said has been 2%. That all works because the unemployment rate has been stable at just below 4%. And that's consistent with an economy that's growing close to its potential, which feels like it's closer to two than closer to three. That tends to make sense. It's interesting. As you know, and the listeners know, we have this tracking estimate for GDP for the current quarter that we put together based on all the incoming monthly data that's coming in. And right now, that's tracking in the twos. We'll see if that holds up, given today's data. I suspect it's going to be revised a little bit lower, but we'll watch that. But we do a survey of other economists that do tracking estimates, and one of the survey respondents is this fellow. People won't know him, but he's a great economist, Yuzo Kumasaka. He was one of my first clients. He was educated at Penn, University of Pennsylvania, my alma mater. Larry Klein was his PhD thesis advisor, as Klein was my advisor. So I got to know him pretty well.
What he does for a living, he's probably in his seventies now, but he really is into the data and he puts these tracking estimates together. And unlike what we do and others do, he does the tracking estimate for GDP and GDI. He has an estimate for GDI and GDP. His tracking estimate for Q1 2024 GDP is kind of sort of like ours, around 2%, maybe a little higher. But GDI, and this was before yesterday's numbers, negative. Another negative quarter. And if you take the average of the two, it's closer to zero in the first quarter of this year. So I don't know. I agree with you. I think that's a really good one. That's a really good one to watch. I think that's a matter of some concern. Now, the one thing I will say is all this data gets revised, right? Often these discrepancies in the data are just measurement issues.
I know that there are some measurement issues here that probably explain some of the discrepancy. And there will be some revisions to the underlying income data and that, generally, income gets revised up. Not always, but generally. So I think we will see some resolution to this. But I think there's noise here, but I think there's some real signal here too, and good reason for some nervousness. That's a really good one. Good one. Marisa, what's bugging you?
Marisa DiNatale: It's hard to pick one thing, isn't it? It's bleak out there.
Mark Zandi: Oh geez.
Cris deRitis: Wow.
Mark Zandi: Wow.
Cris deRitis: Right down the hole.
Mark Zandi: No, no, it's not bleak. It's not bleak. Everyone's happy. The economy's doing well. No? Even you are optimistic, right?
Marisa DiNatale: I am, yeah.
Mark Zandi: In a broad sense. Okay. All right.
Marisa DiNatale: Yeah, I am.
Mark Zandi: So we're saying we're generally optimistic. The economy's doing okay, performing well. We avoided recession, we're growing, everything seems to be okay. But there are things that are bugging us. So let me ask you again, what's bugging you?
Marisa DiNatale: What's not?
Mark Zandi: What's not?
Marisa DiNatale: Okay. So I can't say geopolitical risk, so I'm going to make it a little more nuanced.
Mark Zandi: You cannot say that, this amorphous thing. I don't know what that means. Yeah.
Marisa DiNatale: All right. So I would say that there are several large economies around the globe that are not doing very well. And some of these economies are our largest trading partners. We've talked before about China. Growth has been slow by Chinese standards. It is now in deflation. Chinese consumers aren't spending. The real estate market's in turmoil. They're not traveling, they're not coming abroad to go to school. The Japanese economy is very close to recession. I mean, it's technically in recession. It's had two quarters of negative growth. We got data on Canada this week. Canadian economy is barely staying out of recession. Bank of Canada hasn't started cutting rates yet, which is a little concerning.
I'm sure we will talk about the Fed, here, waiting to cut rates and whether that's wise. But same could be said there as well, because the economy looks weak, investment is weak. Job market is kind of teetering. So I look around the world and I see... Parts of Europe too. I mean, Germany's economy has been sort of iffy as well. So when I look around the world, I see a lot of weakness in very, very large economies that could and will eventually have implications for the US economy. These are some of our biggest trading partners. So if they're not going to buy our goods, this could end up affecting our rate of growth as well.
Mark Zandi: That's a great point. That is a great point. So in my mind's eye, the US is the largest economy on the planet and 20%, 25% of global GDP. We're doing okay. The next largest is China. They're not in recession, I don't think.
Marisa DiNatale: No.
Mark Zandi: But they're struggling to maintain their growth rates. And then you go down... The next, is it Japan? I'm speaking from memory, but I think it's Japan.
Marisa DiNatale: Yes, I think it is. Yeah, I think it's... Yeah.
Mark Zandi: Japan is kind of struggling too. Japan's always hovering growth around zero. So a negative number doesn't necessarily mean so-called recession, because the underlying potential growth is near zero. And then Germany, they're second wind. I think they're the next largest economy, if I'm not mistaken. Or maybe it's India. I guess India is the one... You mentioned Canada, the UK. They're all weak. I guess India, Australia, New Zealand are doing okay, but those are much smaller economies. That's a really wonderful point. Really good point.
Marisa DiNatale: We put together this business cycle status map every month, where we have all of our economists that cover a country look at their country and say where are they in the business cycle? Are they in expansion, recession, at risk of recession? Are they in a recovery? And when you look at this map globally, it's at risk almost everywhere. North America, almost all of Europe, much of Asia is in this at risk of recession category. Now, some that is just... Having come out of the pandemic, some economies have not fully recovered from this yet. They're still fragile. But nevertheless, when you look across the globe at the data, it's kind of teetering in many of these places. So that makes me nervous.
Mark Zandi: Yeah. I guess if these economies are flattish and not actually contracting, you might make the case that that is a feature, not a bug, in the sense that that's one reason why inflation has come in.
Marisa DiNatale: Yes, that's right.
Mark Zandi: You mentioned goods prices are declining. And one reason why goods prices are declining is the dollar is strong. And we're seeing in China, in particular, outright deflation I think in total. Because the rest of the global economy is kind of on the flattish, softest side, that's taking a little bit of steam out of goods prices and inflation more broadly. So that's a plus, right, in the sense that-
Marisa DiNatale: Yeah, that is a silver lining of this, is that it's helping the inflation picture here.
Mark Zandi: Right. And the other link back to us would be through things like oil and commodity prices. Oil's up a little bit. I think it's around eight bucks a barrel, but still low enough to digest. And on trade, the other way it could affect us is through the trade balance, if that were to continue to erode. But that doesn't seem like that's happening. It feels like the trade balance has stabilized. Maybe this sounds weird, but maybe the concern here is this can't be the status quo. Either these economies improve or they're going to go down into a black hole. And that's the concern. But in the current context with inflation as a concern, if it's just kind of flattish, that may not be too bad.
Marisa DiNatale: Yeah. I'm more worried about this in the medium term, next few years. Once we've gotten inflation to where we want it and we're beyond this cycle and we can firmly say, "Okay, the economy did the soft landing," or however we want to talk about it, then we want to look forward to where's the growth going to come from. We expect domestic consumer growth to slow. We're expecting a slow-down in the job market and wage growth. We've seen the usage of credit come down a bit from its peak. So if US consumers aren't going to be buying things at the pace they are now, presumably we want some of that growth to come from abroad. And if that's not going to happen, then we could start to worry about where that growth is going to come from.
Mark Zandi: Right. Okay. That's a good one. That's a good one. Okay, let me give you mine. The labor market. The job market. I know that sounds weird. You're saying, "Job market. What's he talking about?" The economy's creating, on average, 250,000 jobs per month. I think that's the three-month average monthly job gain. Roughly that for all of 2023. By itself, that feels pretty good. That's a lot of jobs. I mean, I think our estimate for underlying job growth, when we're not getting labor force juiced up by immigration and other things, is probably closer to a 100K at most. So that feels pretty good. But what worries me is the internals of the labor market, how you get those 250,000 jobs. Because hiring is way off. If you look at hiring rates, they're now, I think, down to even below what they were pre-pandemic.
And I was looking quickly and saw that hiring rates are off. It's not only in tech and financial services, which are sectors that we know are soft, but pretty much across the board, hiring has come way in. Hours worked have been cut way back. And typically, businesses cut hours before they cut people. I think in the last jobs report... Curious to see what happens next week when we get the numbers for the month of February. I think they were consistent with recessionary territory, ... where hours get cut to during-
Marisa DiNatale: Yes, they are.
Mark Zandi: Yeah, right? Temp jobs are falling, and they've been falling now for 12, 18 months. Now that can be lots of different things going on there, but typically businesses cut their temp help before they cut their own employees. And that would be an indication of some softness. Quits are way down. Now admittedly, that's coming off a period of very high quits. A lot of people were quitting their jobs back two, three years ago. So maybe it's not surprising we'd see a lull in quitting as people settle into their new jobs. And I think in generally they like them, but something to watch. The only thing that is hanging in there, and we alluded to it earlier when we talked about initial claims for unemployment insurance, is layoffs are low. They remain low by historical standards. So that's the one thing that's kind of keeping the labor market together, allowing the net job growth to remain positive and, frankly, I think to avoid a recession.
But when you go to layoffs and you ask, "Well, why are layoffs so low? Why aren't businesses responding to their weak sales by cutting back on their payrolls?" The explanation that we have, and I think the one that I've heard others expound, is the labor hoarding argument that businesses have been through a long period, even pre-pandemic where they were having a hard time finding workers. And they're very fearful that if they start laying off workers, they'll get trapped and difficult to rehire and to find people. They don't want to get in that situation again, so they're just hoarding labor and just not laying off. They're very reluctant to lay off. And by the way, this is a phenomena in many other parts of the world as well. But that feels like a very tenuous kind of reasoning for businesses not to lay off.
One thing that may be a catalyst for businesses starting to lay off is profit margins, which rose quite a bit during the pandemic, are now rolling over and starting to come in. And while margins are still very high by historical standards, and now I'm going to speak as a business person, you have to defend that margin, even if it's high. Because your target that's set by the shareholders of the company or the owners of the company, they're not saying, "Oh, it's okay if your margin comes in." They're saying, "No, you got to keep raising your margin." If your margin starts to fall, the response may be, "Oh, well, I've cut hours, I've cut hiring. What do I do next?" I got to start laying off workers. And the other thing I'd point out is it feels like there's a little bit of a herd mentality in the business community, like in everything else.
I mean, right now, businesses don't want to lay off and everyone's saying the same thing. But once we start to see one business in an industry start laying off, others could quickly follow and it is kind of a herd. And if we start seeing layoffs and job growth slow, then game over, consumers are going to pack it in and we're going to go into recession. So it just feels like the metaphor is the labor market is the seat of a stool. And if you look at all the legs underpinning the stool and keeping it up, all of them feel pretty creaky except for one. And the question is why? It's hard to explain. That makes me nervous. That makes me nervous. Am I being overly... I'm really worried I gave away too much personal information earlier. Am I being irrational here or what do you think? Chris?
Cris deRitis: No, I think it's a very rational... I think we're at this point in the business cycle where we could be on that soft landing path, and we're just slowly easing into it and it's natural that we have this type of pullback and you see some of that weakening. Or it could be the start of the downdraft, that we don't stop. This is just the first leg of the stool to go and maybe there's another set of layoffs that are to come. And you're right, that if you look at the historic layoff picture, it's not gradual. It's very [inaudible 00:50:21] sharp. Either it's very low. And then once it starts, boom, it goes up. I think companies don't want to be the outlier. It certainly looks bad if you are laying off and nobody else around you is. But once it starts, some of those pent-up layoffs may be released in a short period of time, and that could build on each other. So I think it's a very...
Mark Zandi: Reasonable concern.
Cris deRitis: You're sounding more like me. You're coming to the dark side.
Mark Zandi: No. Well, as I said, I mean now that everyone's over on this side with us, I'm going, "Okay." And the Fed is being very recalcitrant about... I think I used that word properly. Recalcitrant about lowering interest rates. And the longer they wait, the more nervous I get that they've kept their foot on the neck of the economy for too long and they've been manifesting in the labor market with layoffs.
Cris deRitis: Yeah. There's a trap.
Mark Zandi: Marisa, anything you want to add? Pardon me?
Cris deRitis: I was going to say I think the Fed is a bit trapped at this point.
Mark Zandi: They're trapped. Well, they [inaudible 00:51:28] think they're a bit trapped.
Cris deRitis: Or the messaging would have to be very, very precise.
Mark Zandi: What do you mean by that?
Cris deRitis: Well, even if they read through the data, as we've been alluding to that, maybe now is the time that they should start to cut. Still, they have to deal with the fact that the official numbers, the core PCE that we talked about earlier is still well above 2%. So how do they message that? Can they really use the transitory explanation once again, "Just wait, the housing is coming in"?
Mark Zandi: It's easy. They should just hire me to write the FOC minutes or meeting [inaudible 00:52:13]-
Cris deRitis: Well, that's their mistake, I guess.
Mark Zandi: Yeah, come on. You can just say, "Look, we're at 2.5%. Target's two. All the trend lines look good. We're looking at the puck down the road. We're not looking at the puck here. We're going to start lowering rates. By the way, we're not going to lower them fast. We're going to lower them slowly. But we are going to start lowering rates." I don't know. That's not that hard to do. [Inaudible 00:52:33]. Okay. Marisa, I want to ask you, any other theories out there as to why businesses are still reluctant to lay off other than the labor hoarding argument? Or maybe demand is good enough and they don't really need to lay off. They haven't gotten to the point where they actually have to lay off. I mean, they cut hours and cut down jobs.
Marisa DiNatale: Yeah. Your point about hours. So I was looking at this with the jobs report last month. Hours are in recessionary territory. I mean, aside from April 2020, the month after the pandemic started, you have to go back to '09 to see hours, aggregate hours this low, average aggregate hours this low. It's really coming from two industries. It's manufacturing and it's retail where ours have plummeted. Other industries are pretty good, historically speaking. Either hours are rising or they're flat, essentially. So it's those two industries that have really, really cut hours. I worry about layoffs. I worry that we're going to miss it. Like Chris said, when it starts, it's just like the flood gates open.
So it's very hard to predict or forecast when that's going to happen. And the two measures of layoffs that we have are the JOLTS, Job Opening and Labor Turnover Survey that gives us layoffs data. We've talked about this. The survey response rate in JOLTS is abysmal now. I mean, it's in the thirties. So you have to take some of that data with a grain of salt. The other is unemployment insurance benefits, which normally I would say that's what we should look at. But those are concurrent. They're not leading. So you see it and one week it's fine, and then the next week it's not fine. I also think there's reasons why UI may not be as good of a measure of layoffs as it once was.
Mark Zandi: Good point.
Marisa DiNatale: Benefits have become less generous over time, as measured against inflation. The replacement rate, the share of someone's wages that get replaced by UI is low. I mean, it's in the thirties at 40%. So for many workers, especially if they think they could find a new job quickly, or if they're getting some sort of separation benefits from their former employer, they may not even bother filing for unemployment insurance. It may just not be worth it. Also, a lot of states over time have made eligibility for UI more tough. So it's harder to even apply and be eligible to get unemployment insurance benefits. Remember, these are state-run programs.
The federal government kicks some money into these funds, but ultimately it's a state to state decision on how these programs are run. So I don't as good of a real time indicator as it once was of layoffs. And we hear about a lot of layoffs in the news, but we don't really see it reflected. I mean, there's that Challenger, Gray & Christmas layoff report that comes out. We did see there was an enormous increase in the last one, in layoffs relative to the previous few months. But we didn't see it in UI claims, and we didn't see it in the JOLTS data. So I feel like this is one of those things where I'm increasingly nervous that we're missing something with layoffs.
Mark Zandi: Okay. Well, when we were preparing for the podcast last night, I was sending some emails around to just say, "Hey, this is what I think we should talk about," I was soliciting things that people are worried about. So I'm just going to read down the list. I don't think we have time. We're going to go on to the questions, but just to... Of course, you said GDP versus GDI. And then we talked about global economic conditions. Some of our major economies are struggling. I said soft market, soft labor market internals, and we just talked about that. Here's the rest of the list. Inverted yield curve. It's still inverted by the way, and that's not a good thing. That's a problem for the financial system. Hey, Fed, yield curve is inverted. That's a problem. Global supply chains and that Suez Canal, Panama Canal, Houthis, lots of things to worry about there. You can see are concerned about the Fed's reticence. Recalcitrant, is that the right word? Am I using that properly, the recalcitrant? I think. Someone can look that up.
Marisa DiNatale: I have to Google it.
Mark Zandi: Here's the other thing. Winding down of quantitative tightening, liquidity in money markets. I actually worry about that because they're going to have to end QT at just the right point. They want enough reserves in the system to make things function properly, but they don't want to take too much out. They don't want to let too much in. So getting that exactly right might be kind of a flash point in the financial system. We mentioned China's deflation. Oh, here's the other thing. Oil prices, obviously. Can US frackers continue to increase production if global demand continues to improve and the Saudis and the Russians don't ramp up their production? And they won't, given sanctions and given the desire for higher prices. Last year, we got bailed out because US frackers could ramp it up, but the way they did that was not sustainable.
It's not allowing them to increase production going forward. I worry about the weak University of Michigan survey in consumer sentiment. Maybe it's something more there that I'm anticipating. And this is Chris's perennial bugaboo, consumer credit quality. Well, I'm less worried about that, but I hear you. The affordable housing crisis. And then this, when we were starting to really depress each other, Marisa threw into the mix, the obvious, dysfunction in Washington. Although a little less dysfunctional, right? Looks like they're going to avoid a government shutdown, which is I guess [inaudible 00:58:50]-
Marisa DiNatale: Yeah.
Cris deRitis: For now.
Mark Zandi: For now, yeah. For now. Anyway, anything else you want to add to that list while we're at it? No, I think it's a pretty good list, right?
Marisa DiNatale: Pretty exhaustive.
Mark Zandi: Pretty exhaustive.
Cris deRitis: Did you mention there's an election coming?
Mark Zandi: Exactly, right.
Marisa DiNatale: Yeah, we didn't mention that.
Mark Zandi: Yeah. Yeah.
Cris deRitis: Not only here, but...
Mark Zandi: Everywhere.
Cris deRitis: Everywhere. And that economic weakness, you mentioned, Marisa. Globally, I worry about that having non-economic consequences, right?
Marisa DiNatale: Political [inaudible 00:59:17] consequences, you mean?
Cris deRitis: Political conflicts. Right.
Mark Zandi: Yeah, very good point. Very good point. Okay, let's turn to a couple of listener questions and then we'll call it a podcast. So Marisa, I know you've been collecting those questions. Anything look interesting to you?
Marisa DiNatale: First, the definition of recalcitrant is having an obstinately uncooperative attitude toward authority or discipline.
Mark Zandi: Okay, there you go. I used it properly, I think, right? They're the authority, but they're... They're very obstinate is the right word. Obstinate. Okay. Anyway, what's the question?
Marisa DiNatale: So there's a couple of questions along the lines of the deficit in the national debt in the US, so I'm going to paraphrase. I guess a broad question is we always hear about it from a political point of view when it's discussed, but how do economists think about the deficit, the debt? When do we get worried? What do we think should be done about it? When we think it's reaching a critical point, how do we think about tax versus spend? It's a broad question, but I think it's a good one.
Mark Zandi: And by the way, that sounds like a podcast to me, doesn't it?
Marisa DiNatale: Yeah.
Mark Zandi: We should get a guest. Can think of a few people right off the top that we can get here to talk about that. That's a really good one. I've got a view on that. Chris, do you want to expound a little bit and I'll fill in more gaps or do you want me to go first and you fill in the gaps? [Inaudible 01:00:50]-
Cris deRitis: [Inaudible 01:00:50]... Go ahead. Go ahead.
Mark Zandi: You want me to go?
Cris deRitis: Yeah.
Mark Zandi: Okay. All right. So just for context, the nation's publicly traded debt to GDP ratio is a hundred percent, give or take. That's more than double what it was, if you go back before the financial crisis. So the financial crisis was very costly. The pandemic was even more costly. And then we've done tax spending policies that have exacerbated our problems. So we've gone from, I'm making this up, but roughly speaking, 40% debt to GDP before the financial crisis to a hundred percent. If you take the Congressional Budget Office forecast, CBO is the nonpartisan government agency that does the budgeting for the government, federal government. If there's no change in policy, if we don't change fiscal policy tax and spending policy, the debt to GDP ratio... And again, I'm making this up, but give you a sense of the magnitude. We'll be at 115, 120% of GDP at 10 years from now, 180% of debt to GDP 30 years from now.
And I think that's when their forecast ends, but you can do your own forecast. The thing continues to rise. The implication is, at least for a while... When I say a while, I don't know exactly how long, but not a year. Probably 5, 10, 15, 20 years. If we stick to that path and we make no changes. And by the way, nothing else happens. There's no other pandemic, there's no other war, there's no big climate event, whatever it is. It will be a corrosive on the economy. It means that every year, underlying long-term interest rates are going to be a little bit higher than the year before. Right now, we think the 10-year treasury yield, roughly speaking, should be around 4%, four, four and a quarter, roughly where it is. But for every percentage point increase in the debt to GDP ratio, by our calculation, and I think it's consistent with CBO estimates, it adds one to two basis points to a long-term interest rate. So do the arithmetic. Say we're at a hundred percent debt to GDP now. 30 years, we're at 180%. That's an 80 percentage point increase.
And let's just say it's a basis point increase in the 10-year yield for every one percentage point increase in the debt to GP ratio. That means the 10-year yield is going to go from four, round four to a round five. Round five. Now, here's the other thing. At some point, the deficits in debt go from being a corrosive on the economy to a clip event. Meaning, at some point, investors are going to say, "Hey, what's going on here?" The debt's continuing to rise. And by the way, it stands to reason, if we don't have the political will to change that forecast, we're doing other stupid things. Like we're shutting the government down on a regular basis. We have all kinds of brinkmanship over the debt limit increase. We may even breach the debt limit. Give that a shot at some point. And then investors are going to say, "I'm out of here." And adding to that scenario is we're not the only country on the planet that's got this problem.
Almost every country in the world has a very high debt to GDP ratio that's rising. There's exceptions. Germany is an exception. China's federal government is an exception, although they got other leverage problems. So you're going to have a very significant increase in sovereign debt around the world. And increasing demand putting strains on the ability of investors and savers to digest that debt without even higher interest rates. So at some point, we'll probably see some kind of crisis, an event that will occur where interest rates spike, the economy gets nailed, and we go into recession. Here's the final thing I'll say, or maybe I'll say two things. One a little dark, one a little bit hopeful, and then I'll stop. On the dark side. It's almost like we need to have that crisis to generate the political will necessary to make the changes that are necessary. So lawmakers have a hard time connecting the dots in the mind of the electorate, "Why do I need to do those cuts?
"Why can't you give me a tax cut? Why can't you do those things? Everything seems fine to me. What are you doing?" And you need the crisis to say, "Hey, Mr. Voter, Ms. Voter, this is why we have to do it." I'm hopeful we don't need to quite get there. Maybe in the past, one catalyst for change was when our interest payments on the debt increased to a level that was greater than the amount we were spending on defense. I don't think that's ever happened, but we're getting pretty close to that now, if we're not there. And then lawmakers can say, "Does this make sense to anybody? We're shelling out more on interest payments to investors, half of whom are overseas. Some of them are Chinese by the way, or Middle Eastern or whomever. We're spending more on that than we are on our own defense. Does that make any sense? Can we make some changes here, please?" But I suspect we may have to have a much deeper crisis for us to address these issues.
But here's the hopeful thing. If history is a guide, when push comes to shove... And we've been in periods when the deficits and debt were high and interest payments as a share of GDP and revenues were higher than they are today. We did find the political will to make the changes necessary to ensure that the deficit in debt didn't become the kind of problem I just described. So we have shown an ability to do it when push comes to shove. Although, I guess I can't help myself then on a dark note, those previous times were in a period when our political system and sentiment was seemingly much less fractured than it's today. So this is a big deal. This is a podcast, definitely a podcast. But Chris, anything else you want to add there? Or anything I said, you disagree with?
Cris deRitis: Not fundamentally. It sounds like everybody wants to be Italian. That's the conclusion. We're kind of following that-
Mark Zandi: They're 120% debt to GDP, I think, right?
Cris deRitis: What's that?
Mark Zandi: Are they 120, their debt to GDP ratio?
Cris deRitis: Oh, I think it's higher.
Mark Zandi: Is it higher than that?
Cris deRitis: [Inaudible 01:07:05]. And then, of course, it depends what you include, but...
Mark Zandi: Well, let me ask you. Here's a question that I think is an interesting question, related. If you go look at Japan-
Cris deRitis: Yeah, that's what I was thinking.
Mark Zandi: Japanese debt to GDP is what, 250%?
Cris deRitis: Yeah.
Mark Zandi: So why are they able to manage that and why should that be? Therefore, why should this be a big deal for us, if we're at a hundred going to 180?
Cris deRitis: Well, that's always the question, that you do see other examples where countries kind of limp along. I guess that's the cost, is that the Japanese economy is just limping along. The central bank basically handles the financial plumbing to ensure that these large debts and deficits don't create a lot of economic harm. And same can be said about Italy, right? Other countries with large debt to GDP, it's just limiting in many ways. There are some folks who have a very crisis-oriented view, "Oh, if the US debt to GDP ratio hits whatever, then everything falls apart." I don't know that that's necessary. I think we would just kind of move along. We would put a patch here, a patch there.
Certainly, 10-year treasury bills would experience a higher interest rate. But I don't know that it's a total collapse. I don't know that I buy into that narrative, at least quite yet. Just given this other experience. I guess I'm also colored by my own history. When I was an undergraduate economic student in the '90s, I was assigned this book called Bankruptcy 1999. I don't know if you remember this.
Mark Zandi: No, I don't remember it.
Cris deRitis: I had to write a report on it. So this was in the early... The idea was, "Oh, collapse, calamity coming because of high debt payments." And then soon after, the budget was balanced and the debt ratio continued to climb for a while. But we passed 1999, no problem. In terms of-
Mark Zandi: Well, actually, 2000 was the last year we had a surplus.
Cris deRitis: Yeah. But in terms of the fiscal situation, kind of moved on.
Mark Zandi: But I use that as an example of when I said earlier, when we've been pressed, we've figured it out. In the 1990s, that is a case in point. You go in the early '90s, bond market vigilantes, interest rates were rising. A lot of concern about deficits in debt. That was Gingrich and Clinton and Ruben as treasury secretary. And they did come together and they did make changes, reforms to the welfare system, the so-called welfare system at the time. They made some other budgetary changes. Of course, we got fortunate with the tech boom and all the capital gains. That generated a lot of revenue, and that helped a lot too. But I view that as a time when we actually came to get... There was a lot of brinkmanship. There was a government shutdowns at that point in time and so forth and so on. Then we thought the political system was very fractured. Certainly not as much as it is today, but the thinking then was it was pretty fractured. And we came together at that point.
Cris deRitis: Yeah. I think that's the hopeful view.
Mark Zandi: Hopeful view. Yep.
Cris deRitis: But I don't know that...
Mark Zandi: So you're saying, "Mark, okay, it's not great, but relax. We can digest much higher debt loads."
Cris deRitis: We could.
Mark Zandi: Or maybe a variation on that theme is we can digest them. It's not good because it's going to be problematic in terms of underlying growth rates. We will have higher interest rates. We're just not going to grow. We'll be Japanese-like to some degree.
Cris deRitis: That's right. Perhaps I'm hopeful that we'll see some type of political solution come along, but I'm not very optimistic that that will be the case. More likely that will just... As we've done over the last couple of years here, we go through these debt ceiling brinkmanship periods or another government shutdown. We just kind of patch it along, keep going. But making those big decisions in terms of the true reforms that would be needed to actually turn the tide here, I don't see that happening.
Mark Zandi: Yeah. Marisa, anything you want to add on that?
Marisa DiNatale: Yeah. One of the other questions is, "Do you think that we could ever see a budget surplus again?" I mean, it could, right?
Mark Zandi: Yeah.
Marisa DiNatale: There could be some big... We talk about big productivity boosts or some major shift in the economy, some major innovation, just like the tech boom was in the late '90s, early 2000s.
Mark Zandi: Well, I can construct a scenario. I can. Here's how you do it. You have to grow 3% per annum, not two. And the way you get three is you get immigration reform and you get a lot more immigrants into the country. The immigrants with skills and talents and wealth and kind of Canadian-like immigration. So that's maybe half. And by the way, more immigrants means higher productivity growth because they start companies at a higher rate. And then you get a little juice from AI. Another half point there, you get three. We should do the calculation. But I would think if we go from 2% underlying growth to three, problem solved. Be my guess. Unless we create more problems by cutting taxes or increasing other spending or [inaudible 01:12:49]-
Cris deRitis: Yeah, we'll find a way to spend...
Mark Zandi: We can figure it out, yeah.
Cris deRitis: We're going to find a way to spend that surplus pretty quickly.
Marisa DiNatale: Yeah, I just don't have much faith that...
Mark Zandi: ... we'll do that.
Marisa DiNatale: ... legislators have the will to put that ahead of partisan politics. I mean, it just looks increasingly bleak on that front.
Cris deRitis: Yeah.
Mark Zandi: I didn't really want to end on a down note. I gave us a way to end on a positive note. You just wouldn't take it.
Marisa DiNatale: What was the positivity again?
Mark Zandi: It's actually doable.
Marisa DiNatale: Oh, okay. All right.
Mark Zandi: It's conceivable.
Marisa DiNatale: It's doable.
Mark Zandi: It's conceivable. It's conceivable. I mean, why do we think we need to be boxed in at a 2% rate forever? I mean, that is our forecast, but that doesn't necessarily need to be the case. It doesn't necessarily be the case.
Marisa DiNatale: Yeah. I think this goes to talking about what are the upsides. We always talk about the downside risks, but there could be upside risks now. We've hinted at them in the past. But you could construct rosier narratives around our baseline outlook.
Mark Zandi: Well, let's just pinky... What do we do? Agree.
Cris deRitis: Pinky swear?
Marisa DiNatale: Swear?
Mark Zandi: No, we're not going to pinky swear. We're going to agree, and we're going to have a podcast on this issue and we'll think about... And if listeners got recommendations on who they think would be good to have on the podcast to discuss this issue on fiscal deficits and debt, all ears. But there are some really good choices out there. So we'll try to do that in the future. Anything else, guys, before we call it a podcast?
Cris deRitis: [Inaudible 01:14:20]-
Marisa DiNatale: A listener suggested that we broadcast what our upcoming topics will be so that questions could be submitted in advance. So next Friday is Jobs Friday. So Dante, I am assuming, will be on, and we'll be talking about the jobs report for the month of February.
Mark Zandi: Oh, good. Great. Anything, Chris, before we go?
Cris deRitis: Just wondering, given your comments today, have your recession odds shifted at all here-
Mark Zandi: No.
Cris deRitis: ... or go a little darker? No?
Mark Zandi: No. These are just things that are bugging me. Yeah.
Cris deRitis: Okay.
Mark Zandi: 20%, probably. A little elevated. The unconditional probability is 15, but I say 20. What about you? Have they changed at all?
Cris deRitis: Sticking with 30.
Mark Zandi: 30. [Inaudible 01:15:05]-
Cris deRitis: These geopolitical risks are really bad.
Mark Zandi: Ah, I hate that. Marisa, what's your probability?
Marisa DiNatale: 20, 25, somewhere in there.
Mark Zandi: Yeah. Okay. All right. Okay, very good. Well, thank you, dear listener, and we will talk to you next week. Take care now.