The fast approaching federal government shutdown is top of mind on this week's podcast. Mark and Cris consider how the shutdown may play out and the economic consequences. Two other colleagues, Steve Cochrane and Stefan Angrick, then join the conversation to assess the all important Chinese and Japanese economies. Are the economic fortunes of these two massive economies flip-flopping?
The fast approaching federal government shutdown is top of mind on this week’s podcast. Mark and Cris consider how the shutdown may play out and the economic consequences. Two other colleagues, Steve Cochrane and Stefan Angrick, then join the conversation to assess the all important Chinese and Japanese economies. Are the economic fortunes of these two massive economies flip-flopping?
For China and Japan: Facing History, a book outlining the strained historical relationship between these two countries, click here
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Cris deRitis. Hey, Cris.
Cris deRitis: Hey, Mark. It's just us.
Mark Zandi: I know. Marissa's AWOL again. I think she's hiking in Japan.
Cris deRitis: Yes. Or cruising.
Mark Zandi: Or cruising? Oh, she's cruising.
Cris deRitis: Somewhere around Japan. I'm not sure exactly.
Mark Zandi: I guess it is an island you can cruise, I guess, from place to place. I'm sure there must be, yeah.
Cris deRitis: I think so.
Mark Zandi: Yeah. Well, we'll miss her. I think she's gone for a couple of weeks, so she's going to miss a lot of the action, but it's good for her to get away and decompress, so that's really good.
Cris deRitis: Is there some action in the economy?
Mark Zandi: Yeah, I know. It's been kind of boring, right?
Cris deRitis: It doesn't seem like there's much going on.
Mark Zandi: There's nothing going on.
Cris deRitis: Yeah, it's crazy.
Mark Zandi: Well, Japan's apropos to the conversation, because we're going to talk about what's going on in Japan, China, Asia Pacific, APAC more broadly. And to help us with that conversation, which we'll get to in a few minutes, but I want to bring in our colleagues that focus on Asia. Steve Cochrane. Steve, how are you doing?
Steve Cochrane: Good morning. I'm fine, thanks, Mark. Good to see you.
Mark Zandi: Steve, I think you told me this. Have you not ever been on Inside Economics? Is that possible? You've been on before.
Steve Cochrane: This is my first time.
Mark Zandi: No way.
Cris deRitis: Really?
Steve Cochrane: Indeed, yeah.
Mark Zandi: No way.
Steve Cochrane: Yeah.
Mark Zandi: I blame that on Cris. That's definitely an oversight. That's definitely an oversight. Because you've made your way back to the United States, but you were over in Singapore for, I don't know, five, six years?
Steve Cochrane: I was there for five years. Just came back three weeks ago. Right, right. I would blame the time zone on not being invited, except that you haven't introduced him yet, but Stefan, my colleague in Tokyo, is on our call today as well.
Mark Zandi: Yeah, but he's a young man. He's willing to get up at all hours, or stay up at all hours. Unlike you, you're a little prima donna. I don't get up at early in the morning or late at night. No, that's actually the exact opposite of the truth.
Steve Cochrane: I don't think that's true at all, Mark.
Mark Zandi: Yeah, that's actually the opposite of the truth. And Steve, you've been with this for, I don't know, since the beginning of time, right? How long have you been with me?
Steve Cochrane: Almost. Yeah. In February it was my 30th anniversary, so it wasn't quite founding days. But what actually became known in Singapore is that I was the seventh hire, and so I was 007.
Mark Zandi: That's good, you're 007. Carl, my brother Paul, my best friend and I started the company, and we were three. Then Celia, she must be...
Steve Cochrane: Celia came just after. There were a couple of other research assistants-
Mark Zandi: Junior people. Yeah.
Steve Cochrane: ... junior people that were on the staff that were helping out. Yeah.
Mark Zandi: Right, yeah. That's so funny. Yeah, number seven. Very cool. I remember I had to work really hard to convince you to come at the time. I think. No?
Steve Cochrane: My memory's a little bit different.
Mark Zandi: Okay. You were excited to come.
Steve Cochrane: I remember having an interview and I was excited to come and you called me, or somebody called me and said, "Oh, we're not quite ready to hire at this time." And I'm like, "Okay."
Mark Zandi: Oh, really? That wasn't me.
Steve Cochrane: Yeah, it must have been Carl. And then about six months later, again, maybe Carl called me back and said, "I think it's time to have a serious talk." And then things worked.
Mark Zandi: And you're PhD regional economists from the University of Pennsylvania, right? Back in those days, there was a program, a regional economics program, right?
Steve Cochrane: That's right. There was a program, the Department of Regional Science, basically-
Mark Zandi: Regional science, right.
Steve Cochrane: It took economic concepts, economic theory to model the spatial distribution of economic activity. And it was a perfect fit for me because my original degree as an undergrad was in urban and regional planning, so I had that mindset of where things go in space. And it was only when I worked overseas after my undergrad, I did a Peace Corps stint in the Philippines and then a consulting stint in Indonesia, and really got interested in development economics. That's when I went back to Penn and did the regional science economics study.
Mark Zandi: Well, we're glad to have you on board. And so sorry about this being the first time. I find that surprising to be on the Inside Economics, but good to have you. Good to have you.
Steve Cochrane: No problem. Indeed. Good to be with you today, Mark.
Mark Zandi: And we got Stefan Angrick. Good to see you, Stefan.
Stefan Angrick: Mark, How are you?
Mark Zandi: I'm good, I'm good. Stefan is hanging out today in Tokyo, I believe.
Stefan Angrick: That's right, yep. Correct.
Mark Zandi: You're a newbie though. How many years have you been with us?
Stefan Angrick: In relative terms, I suppose, yeah. A bit more than two years now, I think.
Mark Zandi: Oh, it feels like longer than that. Is it only two years, really?
Stefan Angrick: I think so, yeah.
Mark Zandi: Okay, very cool. Yeah. Well, you've done a lot in a little over two years.
Stefan Angrick: I've been busy.
Mark Zandi: You're an interesting fellow, because you're of German background. You'll hear that in your accent, but you speak flawless Japanese. And the thing that surprises me every time I visit Japan, and I spend time with you and other Moody's colleagues, and we're visiting clients, everyone is so amazed at your Japanese, how good it is. Am I mischaracterizing things? No?
Stefan Angrick: I think there's probably a good element of people being polite in that as well.
Mark Zandi: No, no, no. You are amazing, yeah. Even the people are... And Japanese is a tough language, right? That's one of the tougher languages out there I believe. No?
Stefan Angrick: I think it's okay. I had more trouble studying French in high school. [inaudible 00:06:15]-
Mark Zandi: Oh, so you knew French too? You know French?
Stefan Angrick: Well, I don't, which goes to the point about how I found that a little bit more difficult. Not [inaudible 00:06:24]-
Cris deRitis: French is already a tough language, right?
Mark Zandi: Yeah. I find German tough too.
Stefan Angrick: Very much so.
Steve Cochrane: But a reminder, Mark, that Stefan also has some Chinese as well.
Mark Zandi: Oh, I forgot about that. Right. You know some Mandarin?
Stefan Angrick: Yeah. I came to Japanese by way of Chinese. I studied China studies in computer science, economics, and undergrad went to China for a year to improve my Chinese. And that was right during the global financial crisis. And I wanted to get a bit more into economics, do a PhD in economics on central banking in East Asia. And I figured, what's the next best place to go? Because I've been to China and figured, okay, Japan seems like a good place to go. So that's how I ended up here then, and picked up Japanese.
Mark Zandi: Very cool.
Stefan Angrick: Yeah.
Mark Zandi: Very cool.
Stefan Angrick: A roundabout way.
Mark Zandi: For an American who can't speak anything but English, and doesn't really do that well either, it's just amazing to me folks like you who can master multiple languages. It's unfathomable to me. It's just amazing. And you do it so gracefully, it's just really fun to watch. But anyway, it's good to have you aboard. And you are a very astute observer of the Japanese economy, so I'm really glad to have you here to talk about this. But we'll come back. We'll come back. We've got a little bit more parochial view here around the US economy, and there's a lot to talk about, as Cris was joking about. And Cris, I guess here we are sitting Friday, September 29th. Does that date mean anything to you? Anything important going on in the next couple days when it comes to the economy? Not your birthday, I don't think it's your birthday or anything.
Cris deRitis: You asked that question, I immediately think the anniversary. My brain already starts to turn on the anxiety switch.
Mark Zandi: It's day The Beatles broke up in 1969. No, no, not what I'm thinking about. No. What's going on-
Cris deRitis: It's government shutdown.
Mark Zandi: Government shutdown. October one. I think that would be, what? Midnight [inaudible 00:08:35] Saturday?
Cris deRitis: Oh, in Japan.
Mark Zandi: In Japan. No. Isn't it October 1st Sunday? Is it?
Cris deRitis: Yes, it is.
Mark Zandi: Oh, okay, fine. Okay, very good. We've been doing a lot of thinking around the government shutdown. Maybe, I'll let you go first. What's your sense of what's going on and how it might play out, and what kind of economic impact it might have? I've got some pretty strong views, I'll interject, but maybe I'll let you just go first. If you have a view, if you have a strong view.
Cris deRitis: I always have a view.
Mark Zandi: I knew you do. Of course.
Cris deRitis: Nothing good. This is just another unfortunate series of events here, just like the debt ceiling earlier this year. Here we go again with a US Congress that is showing an inability to govern even. These are the basics. I just worry about the image we're projecting around the globe. I'd love to hear what Stefan thinks of all this, everything that's going on here. But in terms of domestically, this is not helpful. Even if it lasts just a brief period, we can come to some agreement in short order here, it's still disruptive. It might not have a direct economic... It might not cause a recession if it resolves very quickly. But people depend on these services. And we can go through the wide range of effects here. And I am failing to see what the benefit is, or what the other side is trying to accomplish.
Mark Zandi: Yeah. There's been, I think 22, maybe 23 shutdowns since shutdowns became a thing. And they actually, interestingly enough, they became a thing based on a 1980 court ruling that said that the government had to shut down if they didn't have funding for the operations of the government. And of those 22/3 shutdowns, I think 10 or even 11 have involved furloughs of government employees. That's the most immediate casualty of a shutdown. The government employees that are non-deemed non-essential go on furlough. And they're not paid. They will ultimately be paid retroactively when the government reopens, but they're not paid.
And historically the shutdowns are short, they tend to be a week, two or three, because the political pressures intensify pretty rapidly. People think just the way you talk that, what are you guys doing? This makes no sense whatsoever. Really, you're going to shut the government down over some political statement? That makes no sense whatsoever. So the pressure is so intense that lawmakers back down and they come to terms and we move forward. The longest shutdown was back in 2018/19 under President Trump. And that lasted 35 days. You may remember, that was over the border wall. And someone reminded me that one of the key reasons why the president ultimately relented and the government reopened was that air traffic control workers, who are essential, who have to go to work, were threatening that they, well, we're not going to work. We're not being paid. We got bills to pay. And so you're going to have to figure this out. And as soon as that happened, I think President Trump realized, well, this was not going to work out, and backed down. And the government reopened.
Cris deRitis: Yeah. I think they were calling in sick, right? That [inaudible 00:12:27]-
Mark Zandi: Yeah. I think TSA workers were already calling in sick. I don't know if the air traffic... They were getting close, if they hadn't already started to do it. They tend to be shortened, so the economic consequence, the macro consequence tends to be small. But I have to say, I've seen a lot of shutdowns. And in previous shutdowns, when you talk to folks in Washington, they have a clear path towards how the thing will get resolved. This go around, not so much. There seems to be complete confusion as to how this might get resolved. So therefore, feels like this could go on for a while, more than a few weeks. Is that your sense of things?
Cris deRitis: Yeah, that's my view too.
Mark Zandi: And in terms of the economic consequence, a couple, three weeks, maybe even a month, not great. And obviously for the furloughed government employees, it's really very painful. But for the macro economy, not a big deal. But much beyond that, it feels like lots of things could start to break.
Cris deRitis: Yeah. Especially as we've spoken about before, there are just a number of headwinds. This is not the only thing we're confronting. You layer this on top of the higher oil prices, student loan repayment, all the risk factors, and this-
Mark Zandi: All the things we talked about last week on the podcast. Right.
Cris deRitis: Exactly.
Mark Zandi: The looney things, oil prices, higher interest rates, student loan, moratorium ending, debt payment moratorium ending, UAW strike. Yeah.
Cris deRitis: Yeah. And this does have real consequence. If you can't get your business application through or you're waiting on inspections, there is fallout. That goes beyond just the direct government worker not getting paid. And there are economic consequences that will start to build more and more as this drags on.
Mark Zandi: Yeah. Two things on that point. One is, the thing that from... This is a very parochial perspective, no economic data. The Bureau of Labor Statistics, the Bureau of Economic Analysis, census, they're not essential, they don't go to work. So we don't get the employment report, we don't get the inflation report. Which you might say, well, what's the big deal? We could live without the data for a while. I guess the answer is, maybe.
Cris deRitis: Well, now you have a data dependent Fed.
Mark Zandi: Yeah, okay.
Cris deRitis: Right? Maybe in the past we had theory, we're theory dependent, and now it's data dependent. So it matters more perhaps now than before. You're right.
Mark Zandi: Not perhaps, it matters more, doesn't it?
Cris deRitis: Absolutely. Absolutely.
Mark Zandi: Right. Because the Fed's sitting here, should I raise rates one more time or not, in the month of November when they meet again at the FOMC? And they base those decisions on data, they're data dependent. The key data point is the employment report they get every month at the beginning of the month. And then the CPI report, the consumer price inflation report, they get in the middle of the month. They don't get those data points and all the other data points, then they're already flying in a fog because the data is not precise. It's based on surveys, and as we've talked about, there's all kinds of issues with that. But now they're flying with no data, so the potential for mistake here seems to be elevated. High. Something to watch.
Cris deRitis: Yeah, definitely agree with that.
Mark Zandi: Yeah. That's a big deal. Oh, here's the other thing I wanted to say about that. I wonder, we all have certain things we can point to that might not get done if the government shut down. You mentioned a few things like EPA not being able to certify. EPA, Environmental Protecting Agency, certify a chemical plant or a utility, and it disrupts a production. Or Food and Drug Administration, FDA can't inspect a food processing facility or a pharmaceutical plant, and they get disrupted. The SEC, the Securities Exchange Commission, I wonder they can't get their work done. So if a privately held company wants to go public, that might get delayed. But here's the thing, I suspect there's stuff out there, things that happen that rely on the government. Ultimately, we just can't even fathom until it actually breaks. It's one of those things, unless you stress something, you don't really know where the stress points are. And we haven't really stressed a shutdown for any length of time. If it goes beyond a month, then we're in uncharted territory and we might see more disruptions than anticipated.
Cris deRitis: Yeah, absolutely. I think that's the largest risk, is that uncertain or the unknown impact of all this.
Mark Zandi: Yeah. Do you have any things that you can... There's little disruptions like the ones I just mentioned. Anything that I didn't mention that you've heard that might become an issue?
Cris deRitis: Well, social security payments will continue. There's always a lot of concern around that. But other related social security matters will stop. So if there are any issues, problems with their checks or whatnot, they may not be able to get a response right away. And I guess one other thing to point out is this concept of who's essential and who's not is nebulous as well. The president actually has some authority here to make that determination. But one thought is just employment verification that the social security office might be providing as well, that may not move forward. If we're talking about labor market impacts, hiring impacts, that certainly could be an issue potentially.
Mark Zandi: Well, needless to say, we're watching this very carefully. We've run different scenarios for folks to use, if they want to get a sense of what's the worst thing that could happen here, we've tried to model that out. Hey Stefan, do folks in Japan pay any attention to this stuff at all, or are they completely oblivious to this? Or they're paying attention?
Stefan Angrick: They're very much paying attention, yes.
Mark Zandi: Very much. Okay. And what do they think, other than the obvious? What are they...
Stefan Angrick: I suppose just general concern around the whole thing. The Japanese economy and the US economy, they're tightly linked with one another. Not only at the real economic level, but certainly also the financial level. So whatever happens with the US government is of great concern, I would say. As you said before, it's not the first time that we're going through this, but the view you laid out earlier about how this time around it might not resolve itself as quickly as it used to in the past, that's something I've heard before as well. That certainly factors into the general sense of concern and the risk around that whole scenario.
Mark Zandi: Yeah, I guess in China, I don't know, maybe there's a bit of schadenfreude there, I'm not sure.
Cris deRitis: Oh, good German word, right?
Stefan Angrick: Schadenfreude [Inaudible 00:19:49].
Mark Zandi: Oh, schadenfreude. Yeah. How do you pronounce it, Cris? Do you say schadenfreude or do you say schadenfreude?
Cris deRitis: I like Stefan pronounce it for me.
Mark Zandi: Okay. Schadenfreude. If I say that though, it's like my kids, they give me all kinds of grief when I say croissant. They want me to say croissant or something. I don't know. "Dad, croissant." They're so pretentious.
Cris deRitis: Now stick with your Philly accent.
Mark Zandi: I don't have a Philly accent, do I?
Cris deRitis: We had [inaudible 00:20:23] listener write in. You remember a listener wrote in and said you had a nice Philly accent.
Mark Zandi: Really? Gosh, I'm not so sure. Alana has a Philly accent. No, only kidding, Alana. Only kidding, Alana. Steve, what do folks in the rest of APAC think about all this? Silly American thing, or how do they think about it?
Steve Cochrane: Well, not silly American thing, but certainly an unusual American thing. I think there's in many ways a lack of understanding how this can even happen in a country like the US. You mentioned in China, I think they're looking at the US and saying, "You know what? We may have troubles, but if you can't even govern, our troubles may look small." But I think the fundamental economic worry is that if this were to be a primary factor of pushing the US economy into recession, then it's going to be that much longer of a wait for demand for goods and services from the US to feed back into the Asian economy and help keep the Asian economy going. I think this is fundamentally the biggest worry.
Mark Zandi: Yeah. Okay. All right, well, we'll come back to some of these things when we get to Japan and Germany. But before we do that, and of course we're going to play the statistics game at some point in time, I don't quite know when. But we will play it by ear as we move along here. But Cris, turning back to you again in the US. This week has been chockfull of economic data, and we got a lot this morning. Again, this is Friday, September 29th, GDP, GDP revisions, income spending, more inflation statistics, housing, trade, investment spending. It's one of those weeks where chock-full of data. Of all the data series that came out this week, which one would you call out, and why?
Cris deRitis: I suppose it would be the PCE deflator, just because it is important for the Federal Reserve.
Mark Zandi: PCB being?
Cris deRitis: Personal consumption expenditure deflator, the Fed's preferred measure of inflation. Not terribly surprising. I guess good news in the sense that it's where we would expect it to be, core came in at 3.9% year over year, so some improvement there.
Mark Zandi: Wait, 0.1% on a month to month basis.
Cris deRitis: That's right. That's right. So even better than expectations on that front.
Mark Zandi: And I did not have a chance, is there something special going on there? Because that feels like a... Because we had been getting 0.2, 0.2. In the last several months 0.18. Anything special that you're aware of? You may not have had time to digest the data either.
Cris deRitis: I didn't digest it, didn't have time, but I didn't see anything jump out. I think services prices were not as-
Mark Zandi: Strong.
Cris deRitis: ... strong as perhaps expected. Again, I have to take a closer look.
Mark Zandi: But 0.1, you annualize that. No matter how you annualize, it's less than 2% per annum, right? And that's the target, the 2% Fed target. If you just take that month, and that obviously can't do that because that overstates the case. But it is making a case that inflation is moving back towards target.
Cris deRitis: Yes. The only issue as usual is this is looking in the rearview mirror. This is for August, so we know the oil prices, we know they continued to go up, and there's fear that those prices may be filtering their way through other parts of the economy. This was good, the trend that we're on, but we know that the more recent data is troublesome, let's put it that way.
Mark Zandi: More recent data is troublesome? You mean-
Cris deRitis: Yeah, the oil prices have [inaudible 00:24:17]-
Mark Zandi: Oil prices [inaudible 00:24:17]-
Cris deRitis: ... gas prices have been continuing to rise. So that's certainly something that it's going to show up in the headline. Whether or not it's going to continue, it makes its way into the core next month, we'll see how much impact that has.
Mark Zandi: See how it plays out. Yeah, yeah. Okay. And of course, if the oil price hikes bleed into inflation expectations, which then impact wage demands or the willingness ability of businesses to jack up prices for everything, then it causes interest rates to rise. That would be an issue.
Cris deRitis: That's right. That's right.
Mark Zandi: So far that doesn't seem to be happening, but obviously this run-up in oil prices is recent, so we'll have to see.
Cris deRitis: Exactly. Exactly. The report is a good one, but again, it's lagged.
Mark Zandi: Right. What about the GDP revision? We got GDP for Q2, this was the so-called third print, meaning this is the third time that the data for Q2 2023 was released. No revisions there. But it's part of this revision we got these so-called comprehensive revisions, which are revisions that can be quite substantive, at least historically. They happen I think every five years. And the revisions go way back in time, years, even decades back in time. I haven't had really a good opportunity to dig deep, but my sense of it is that nothing really changed all that much. The revisions were modest in the grand scheme of things, compared to other revisions we've had historically. Is that your sense of it as well?
Cris deRitis: Yeah, that's right. I didn't see anything huge. The one factor that did jump out at me was the GDI, gross domestic income. I don't know if you saw that was actually revised up. It had been-
Mark Zandi: Oh, really?
Cris deRitis: There's still a gap between GDP and GDI, but it's not as wide as what we were seeing previously. There had been some concern that the GDP would be actually revised down closer to the GDI. It looks like instead, GDI has been revised up closer to GDP, so positive news there.
Mark Zandi: And just for the listener, G-DP/GDI, what are they?
Cris deRitis: Gross domestic product and gross domestic income, two different ways to measure the economy. One on a production basis, that's the GDP measure. One on an income basis. And in theory, the two measures should be equal to each other. One person's production should be another person's income. They're not, because there are statistical issues, there are lags in how things get measured. But these are two measures that economists have been paying attention to because they had been diverging.
Mark Zandi: And did I see this correctly that did GDP numbers, particularly if you go back pre-pandemic. Because again, these are revisions that go all the way back in time. If I go back pre-pandemic, the GDP growth rates were actually revised up a little bit, I believe, weren't they? Do I have that right?
Cris deRitis: The historical ones?
Mark Zandi: Yeah, historical.
Cris deRitis: I believe so.
Mark Zandi: Yeah, a little bit. Not a lot. Not a lot. But a little bit. And then you're also saying the gross domestic income-
Cris deRitis: More recently.
Mark Zandi: You're more recently, which had been very weak. It's still weak, but it's not nearly as weak as it was.
Cris deRitis: That's right.
Mark Zandi: What you're saying is when you take these revisions in their totality, it seems to suggest the economy might be on a bit firmer ground than we thought in the last couple of years.
Cris deRitis: That's right. That's right.
Mark Zandi: Okay. Okay. Okay. All right. I have one series I'm going to call out, but any other data series this past week you want to call out?
Cris deRitis: I'll save it for the stats game, but go ahead.
Mark Zandi: Oh, you might want to just mention the house price data that we construct... We just got the August house price data based on repeat sales. What did that show?
Cris deRitis: Yep, so that's the Moody's Analytics house price index. It showed strength, house prices continued to rebound here. It was, let me see if I can remember, I believe 0.8% on the month.
Mark Zandi: Oh, really?
Cris deRitis: Month over month. Positive year over year. I can't remember the exact number at the moment. But yeah, showing some renewed strength in house prices. We had been decelerating for a while, but then over the last two, three months we've seen prices firming up and actually rising on a national basis. I guess one interesting statistic I had just calculated is that 47% of the markets that we track, the 400 plus housing markets, hit a new high this last month. We talk about the overall national picture, it shows one thing, but there are plenty of markets where they have not peaked. They continue to rise at a very aggressive rate.
Mark Zandi: I assume, given this recent surge in long-term interest rates, mortgage rates back over 7.5%, that's going to hit demand and presumably house prices.
Cris deRitis: I think it has to.
Mark Zandi: We've [inaudible 00:29:47] been forecasting it. It hasn't hit.
Cris deRitis: We've been surprised so far. There's still quite a bit of underlying demand. There are cash buyers and whatnot, but at some point these higher rates have to bite. And I think that'll be soon.
Mark Zandi: Yep. Okay. One other statistic that came out this morning on trade, and this is a good segue into the conversation around what's going on in Asia. The trade deficit, on a nominal basis, declined pretty substantively in the month of August. Exports declined, imports declined, the whole trade volume declined. And I don't want to read too much into it because some of that's just price because of the disinflation that we're seeing, or deflation in some of these on energy and goods and that kind of thing. I think that was significantly part behind the reduction in trade volumes in the month and over the past year. But even abstracting from that, it feels like the US trade deficit has peaked, at least for a while, and is starting to narrow again. And the deficits narrowing and trade volumes are weakening, and that has implications obviously for Asia. Because Asia, China, Japan, rest of Asia depends pretty heavily on trade. Do I have that right, Steve? I'm just turning to you. Is this an issue for the Asian economy, for the APAC economy?
Steve Cochrane: It is an issue for the APAC economy. The entire region to a certain extent is export dependent. And given the weakness in Europe, the slowdown in the US economy, of course the weakness in China, exports have been down in many cases by double digits, so over a year ago, because of the slowdown in global trade. In fact, global trade, not on a value basis, but extracting from price effects peaked last September and continues to fall globally. It's still a waiting game in Asia for global trade to pick up and to really add a little extra juice to the economy. And it's not just Southeast Asia waiting for China, or China waiting for demand from the US, it's the whole system that has slowed down and we're still waiting for it to pick up.
Mark Zandi: How much of this do you think is just simply pandemic effects? During the teeth of the pandemic back in 2020, we all shifted to goods.? We were sheltering in place, we couldn't spend on travel or restaurants or ball games. We were buying stuff. And that's what we're talking about here in terms of global trade, the exports and imports of everything from automobiles to consumer electronics, to techs, to apparel, to furniture, those kinds of things. And since the economy reopened back in '21 and '22, we've stopped buying as much stuff and we're now purchasing services. We're out traveling and doing all those things we couldn't do when we were sheltering in place. And of course when we were buying all that stuff, trade took off, boomed. And one reason why we had all those supply chain issues was because there was a lot of pandemic related impacts on the pandemic, but also the fact that demand was so strong. But now we're on the flip side of that and demand is weak. Is that a big part of the story, do you think?
Steve Cochrane: Oh, I think that's helped develop the way the cycle has gone. We looked at exports pretty closely during the pandemic, and one of the comforting factors of the Asian economy was that exports remained strong. And so regardless of the supply chain issues, the inflation, which actually was more limited in Asia than it was in the US or Europe, as long as exports remain strong, we felt pretty confident that Asia would get through the pandemic related problems pretty well. But then, as you said, the patterns of consumer spending changed both in North America and in Europe, and it could be seen very quickly. And we saw it in the semiconductor cycle of the drop in demand for semiconductors hitting directly South Korea, Taiwan, indirectly other electronics exporters. And that's just beginning to tick up, if you look at the global semiconductor index. It's turned a corner, but it's got a ways to go to actually pick up. But at least it's a signal that there's a little bit of improved demand maybe filtering through from production of goods.
Mark Zandi: So you're sensing that we're getting to the other side of these pandemic effects then?
Steve Cochrane: I think there's a good chance that we are. Yeah, we're not seeing it in the actual IP data. In fact, IP is quite-
Mark Zandi: Industrial production.
Steve Cochrane: Industrial production, exactly. Yeah. Industrial production and trade are two data series across the region that I'm looking at very, very carefully right now.
Mark Zandi: Hey, Stefan, in Japan, same deal? Has trade been off, and is it related to these pandemic effects we were just discussing?
Stefan Angrick: Yeah, I would say so. I don't know when I picked this up, but what I was right is that US consumers are looking for holidays rather than goods to explain why. Aside from a few categories, goods exports are not doing so well, but services exports are doing pretty well. And I think that's similar across the region more broadly. Maybe one other area where you see this is in car exports. You've spoken about this on the podcast before as well, car production, car exports in Japan weren't doing so well for quite some time, mostly on account of the chip shortage, supply disruptions related to semiconductors. That's mostly run its course now, supply has stabilized, and that's brought us a bit of a rebound in car exports in Japan now. But that's about the only category that's doing really well, everything else is mostly going sideways or down a little bit. I think that speaks to these pandemic effects still working their way through the system.
Mark Zandi: Has Japan's auto production gotten back to pre-pandemic typical?
Stefan Angrick: Yeah, I guess it depends on how you measure it. I also look most closely at the industrial production data, and that's still mostly going sideways. I suppose it might look differently when you look at it on a vehicle number basis, et cetera. But a lot of Japanese auto production doesn't really happen in Japan any more anyway. Japan is producing close to the US and Mexico, or in the US itself. Produces in Europe. The companies, right? Part of it certainly gets exported from Japan, but that might not be that informative with regard to how the sector more broadly is doing.
Mark Zandi: Steve, sticking on trade, could another reason for the weak trade be the so-called decoupling between the US and Chinese economies? This is the idea that when China entered into the World Trade Organization in 2001, up until President Trump and the trade wars China boomed. Because of his advantageous cost structure global production moved aggressively into China, and they became a powerhouse. And since President Trump and now with President Biden, there's just a lot of angst around the relationship between US and China. And the US has been, at least from my perch, moving away from China, and China moving away from the US. Do you think that's also playing a role here in terms of the weakening in trade? First of all, did I characterize that right? Do you think that's what's happening? Decoupling, is that the right word, or is there some other way to describe what's going on? And is it resulting in helping to explain the weakening in trade?
Steve Cochrane: Well, I'm not so sure that you can say that decoupling is happening right now. You might say that de-risking, reducing the concentration risk of having all your eggs in one basket in China might be a better way of saying it. But I think it's also a bit too soon to have that as a factor driving the shift in exports. I think it's really more the weakness in global demand. And then there's also a weakness in domestic demand as well that's pulling down just manufacturing activity across the board. If you look at the purchasing managers index for China, it's both total production and export production, they're both down. There is a weakness across the board. I think you can see that also nobody's really leaving China in terms of foreign manufacturers, they're staying put.
There is a slowdown right now in new foreign direct investment into China. You can see that there's this pause right now, and I think that's related a lot to some of the regulatory uncertainty in China of what new investors may face as they move into China and do business in China. Those who are there, well, they're there. There's a big market in China, they continue to manufacture for the Chinese economy. But there is a slowdown in investment. The last numbers that I saw was that foreign direct investment had fallen back recently to about the level it was in 2009, so quite a change. The potential for decoupling is there, and we certainly see some investment moving to other countries. But I don't think you can blame that for the weakness in exports right now. I think the whole downturn in global trade just overwhelms the rest of these other factors.
Mark Zandi: But having said that, and I'm speaking from memory so I may have this dead wrong, but if I look at bilateral trade, goods trade between the US and China, adding up all the I import exports that are going back and forth. And there's all kinds of measurement issues, obviously because the supply chain, the trade is much broader than bilateral trade, it's all the supply chains involved. But just abstracting from that, if I can, if you tell me if I can't, let me know. I think trade is down quite a bit, isn't it? But you're just saying that's demand that has nothing to do with decoupling, or as you put it de-risking.
Steve Cochrane: Yeah. Well, in a sense, when you break out the trade you can see a little bit of a shift in these trade patterns that could indicate the beginning of de-risking or decoupling. And that is that when you look at imports into the US from China of final goods, they're pretty strong. And of course, Americans buy a ton of stuff from China. When you look at intermediate goods, goods that go into the production of other goods in the US, there has been a measurable decline in intermediate inputs. And that goes to the point you're making that there is some evidence of decoupling or de-risking at the moment. And this is more, in a sense, more of the high-tech components, some of those that are being affected by some of the Western sanctions, and also some of the policies to try to attract reshoring of manufacturing. All that's still in the beginning phases of the impact from that.
Mark Zandi: When I say decoupling and you say de-risking, are you just being PC? What's the difference? Bottom line, it just means less investment, trade, travel, data transfer, everything is less. Yes, maybe de-risking, but isn't that decoupling? What's the difference?
Steve Cochrane: Well, maybe there's not much of a difference, and maybe it's that-
Mark Zandi: You've been in Asia too long, that's what's going on.
Steve Cochrane: I know.
Mark Zandi: And you're very PC.
Steve Cochrane: The way I look at-
Mark Zandi: But tell me I'm wrong. Tell me I'm wrong.
Steve Cochrane: I think it's too soon to say that there's going to be an outright decoupling. Of course, I'm not quite sure what outright decoupling even means, but there will certainly be a broader distribution of foreign direct investment [inaudible 00:42:57] around the world.
Mark Zandi: ... economies are less engaged with each other. We're doing less trade, we're investing less in each other, we're traveling... Travel is definitely down. The number of Chinese students that came to US that have been coming to American universities, that's, correct me if I'm wrong, but I think that's way down as well. That feels like we're... Okay, let's pick a neutral word. We're disengaging. How about that?
Steve Cochrane: I'd go with that. [inaudible 00:43:26] Yeah, that sounds a good term actually. Because the points you make actually are really important in terms of the reduction in trade, which could lead to higher cost longer term because we're not producing in the lowest cost location. And I think there's a huge risk in terms of the point you make of fewer students coming to the US, and the other way around, and sharing research and sharing knowledge and so forth. That's got to slow down the pace of research and knowledge and new products and such. I worry about that quite a bit, actually.
Mark Zandi: Stefan, do you have a view on this whole decoupling, disengagement, de-risking? You probably got another German word you can use.
Stefan Angrick: Good gosh, no.
Mark Zandi: Make one up though.
Stefan Angrick: I agree with Steve, it's just very hard to see evidence of this happening in the data yet because you got all of these bigger effects that have to do with the pandemic, the surge in global inflation that is throwing the nominal trade data one way and the volumes might be going the other. Then you've got these changed consumption patterns, goods and services, certain types of goods. Travel are coming back, roaring back in a couple of places, but still not being quite back in other places. That it just makes it very hard to say what is due to what when you've got these big shifts in global trade like FTAs and whatever. Ideally you have long time series with a well-established trend, and then you can think about a counterfactual. But right now, good luck trying to get that out of the data, right? It's just very hard to say.
I think the investment numbers Steve spoke to, they're perhaps the clearest evidence so far that you have some sort of disengagement happening, investment into China's just down quite a bit. And if that's the way things go, then maybe decoupling isn't a big bang type event that happens suddenly, but might be a little bit more of a slow burn where companies just don't reinvest in China, and then capital depreciates, and then that goes on for some time. And then that way you decouple, or whatever term we want to send on.
Mark Zandi: Hey Cris, you may not have a view on this, but do you?
Cris deRitis: Of course I do. Of course.
Mark Zandi: Fire away. Yeah. Is it consistent with the mine, or with these other two fellows?
Cris deRitis: I'm going with the crowd this time. Fire away. Decoupled, right? I think coupling is too binary. You're either coupled or you're not, it's on or off. You're either together, linked together, or you're not. And that doesn't describe the situation here, we're going to continue to be linked with China to some degree, it's just going to be less than it was in the past.
Mark Zandi: Okay, fair point.
Cris deRitis: I think that's the reason why I think decoupling may not be the right term.
Mark Zandi: Okay. Well, let's take it to the next step. And let me preface this by saying, and I've said this before I believe on the podcast, I do think I am guilty of what is known as home bias. Home bias meaning, you think your economy, where you live is better than everywhere else. It's just better. And I don't think that's universally true, by the way, we've talked about this in the past. Culturally, Americans tend to have more home bias than probably a lot of other cultures. That's just my observation, traveling the world, nothing scientific there. Just a different worldview. I'm sure I'm guilty of it, I'm self-aware of it. I don't know that I correct for it.
But anyway, with that as a preface, my sense is that China's best days are behind it, at least for the foreseeable future. Not forever, I'm not making that kind of grand statement, but for the next decade or two. The last two decades where China have been just meteoric, parabolic kind of growth, and that's over. And the next 10, 20 years are going to be more difficult, much more of a slog. And one of the reasons for that, is in my view the US and China, they'll never decouple, but they are decoupling. That we are moving away from each other. We are definitely reorienting our economies in a pretty rapid way, and that hurts everybody. That's no good for anybody, the US, China, globally. But it hurts China a lot more because China is a much more open economy. China feasted on the globalization of the economy. And with deglobalization, given that their domestic economy is still struggling to figure out how to get going, for lots of fundamental reasons it's going to be a bit of a slog.
And then you've got a range of other issues that just add onto that narrative. The high leverage. China has used a borrowing in the household sector, corporate sector, local government sector to help drive economic growth through tougher times. The poster child for that's the real estate market, which is now vastly overbuilt. Built on a lot of debt, and a lot of that debt is now going bad. You've got issues with a lot of activity being pushed into state owned enterprises, a move away from the efforts by previous Chinese administrations to push it into the private sector. It's now coming back into state owned enterprises, and they tend to be highly bureaucratic and very unproductive, and therefore, it's going to be a problem in terms of generating product innovation, entrepreneurship, and so forth and so on.
You've got a government that is... And then I'll say one more thing and I'll stop, and turn it back to you and get your reaction. You've got a government that is, I think it's fair to say, inclined to autocratic rule. It's one guy running the show. And that, I don't think, is conducive to a well-functioning economy in the long run. And I understand there's reasons for that, but that's where it feels like it's headed. There's the demographics and the decline in the working age population. I can go on and on and on. Okay, I'll stop. Steve, am I completely infected by home bias here, or what? And obviously, acknowledging you're an American as well, but you've been there for a number of years and you've observed a lot, what's going on. How do you feel about all that?
Steve Cochrane: Yeah. All these factors you mentioned there, they're absolutely true. And I think, one, you need to separate the near term imbalances in the economy, if you can call them that, separate those from the longer term trends. There are very, very serious imbalances. And the fact that there are multiple imbalances really weighs on the economy right now. We often talk about when we look at the risks of the US economy going into recession, we look at potential imbalances that need to be righted. And we've often said that, well, there aren't that many imbalances in the US economy at the moment. So even if we fall into recession, it may not be long-lasting.
But I can think of five big imbalances in which there's no certain answer to the outcome right now. And you addressed, I think all of these actually. One is the property sector, and that's probably the biggest imbalance in terms of the huge amount of debt and the lack of demand now for housing. The second is the lack of household spending. China's trying to shift to become more of a domestic consumer-oriented economy, but households continue to save a ton, partly because there's not much of a social safety net in China either in terms of unemployment benefits or in terms of benefits for the elderly, and that's a big impact from the aging of the population in China.
The third is the regulatory uncertainty. I mention that in terms of a factor that's causing foreign investment to falter. But even the technology industries, or it's something as simple as the afterschool education program, which a year ago government came down with a surprise policy that no for-profit company can actually engage in afterschool education. Of course, these are huge. Every kid in China does something after school. And so all of a sudden hundreds of thousands of mostly young people lost their jobs, and that industry was actually an entry point into the labor market for many recent college graduates. So that avenue of getting into the labor market has almost disappeared, at least on the surface.
And then you've got high unemployment. It kind of relates to this factor of recent grads, college grads having difficulty finding jobs. The youth unemployment rate, the ages of 15 to 24 is, we think above 20%, although China has dropped that piece of data from their monthly stream of data, which illustrates the opaqueness now of what's going on in China. And then there's the export weakness, just the broad decline in the economy. So five big weaknesses that need to be righted, and some of these aren't going to happen overnight at all. And indeed, the property sector I think is going to be the most difficult one to set. That means this year, next year, the year after actually could continue to be very modest growth. Perhaps nothing no better than what China's experiencing right now.
But then you look longer term, and I think you laid it out pretty clearly that China has gone through at least three phases of growth during its modern era. You can go back to the first phase was started by Deng Xiaoping, he came into power in 1978. The 1980s were the period of opening up to the global economy that led to ultimately the entry into the WTO, and also more of a market-based economy rather than a centrally driven economy. That was the beginning of the boom. Then the first hiccup was the global financial crisis in 2008, when export demand faltered. So this export model seemed to be at risk, and this is when debt became a primary instrument in terms of continuing to push growth in the economy, and the rapid rise of household debt and the rapid rise of corporate debt to keep the Chinese economy going. And it seemed to work beautifully, of course, until it didn't. And that's the more recent time.
If we look at the trade war, and then the pandemic and the economy slowed, but debt was very high. And this became then an issue in terms of, how is debt serviced? And if debt isn't continued to be issued, how do you keep the economy going? Now we enter this, maybe the post-debt driven era, if you can say that. Although I must say, debt to GDP ratios continue to rise, at least for households and for corporates, so we haven't completely exited that yet. But how do you shift from that to a more self-sustaining economy and an economy that doesn't rely as much on external demand, but relies more on internal demand? How do you do that if households are not willing to reduce their amount of savings? Well, there's got to be-
Mark Zandi: You sound more pessimistic than me. No?
Steve Cochrane: Well, all it means is that we're probably never likely to see economic growth above 5% going forward, unless there's simply a surge or a temporary turnaround. But-
Mark Zandi: It feels like though, right now the consensus view, I guess if there's a consensus, is GDP growth around five. That feels 5% per annum. For context, the US potential growth rate is two, and the 5% just feels to me that's too high. Maybe they get a 5% year, but on average over the next 10, 20. Now to some degree, that's simply because they're a much larger economy, you just can't continue to grow at that pace given the size of the economy. But it feels like more than that, it feels like it's headed to 2%, or something closer to our growth rates here pretty fast. Is that overstating the case?
Steve Cochrane: No, actually that's not overstating the case. As we get into the next decade, we could well see a growth of something between two and 3%. We're just below 5% right now for this year, we're just below 5% next year, and that's accounting for a little bit of a turnaround in consumer spending next year.
Mark Zandi: So a cyclical balance, but longer run.
Steve Cochrane: But lasting a year or so. Longer run, then the pace of growth will slow as the economy transforms, in a sense, as it should be from a huge manufacturing economy based on global trade, to a more domestically driven economy. Or maybe a better way to say it is a more balanced economy between domestic demand and foreign demand.
Mark Zandi: Okay. It feels like we're on the same page. Cris, any pushback there? Are you in the same-
Cris deRitis: No, I'm in the same-
Mark Zandi: Camp. Stefan, you too?
Stefan Angrick: Yeah. We discussed this a lot with clients, prospects, webinar attendees, et cetera as well. And the difficulty in coming up with a sensible medium term forecast is always that you could conceive of a scenario where policy does recognize the problem and react in a way that is more forceful than what we anticipate now. Because this is not an unsolvable issue, that lack of demand that you spoke about earlier. That is something that we know that's a problem, and we know that for China to continue growing it would have to have stronger domestic demand. So it could make that happen, but it just doesn't look like that will happen. And to the extent that politics plays into that, that's just harder to call than fundamental economic factors.
Mark Zandi: Good. Okay. All right, let's play the game. We're going to come back to Japan, because Japan feels almost like a flip story. Japan's been in a funk for... Well, I'll go into it in a minute, let's play the game. The SIS game. You guys are going to play, right? I didn't even ask you, are you playing?
Steve Cochrane: Oh yeah, we're ready.
Stefan Angrick: Sure.
Mark Zandi: Stefan, are you playing?
Stefan Angrick: Yeah, absolutely.
Mark Zandi: Do you play fair? I've never played with you. You play fair?
Stefan Angrick: I'm too afraid of this game not to play fair. I was very worried about the statistics game.
Mark Zandi: Okay, very good. The stats game, we put forward a statistic. The rest of the group tries to figure out what that is through cues and deductive reasoning and clues. And the best stat is one that's not so easy, we get it immediately. That's hard to do when Marissa's in town. Maybe it's going to be a little harder. I think that will be okay there, given she's traipsing around Japan somewhere. And not too hard that we never get it. And if it's apropos to the conversation at hand, all the better. Steve, you want to go first?
Steve Cochrane: Sure, I'd be happy to. All right. My number is -38%.
Mark Zandi: That's a big number. Is it related to what's going on in Asia?
Steve Cochrane: Yes.
Cris deRitis: China specifically?
Steve Cochrane: Yes.
Cris deRitis: Okay.
Stefan Angrick: It's a trade related?
Steve Cochrane: No.
Mark Zandi: That has got to be housing starts.
Steve Cochrane: Close.
Mark Zandi: Home sales.
Steve Cochrane: Getting closer.
Mark Zandi: [inaudible 01:00:27] House prices can't be down 38%.
Steve Cochrane: Actually it's close, house prices-
Mark Zandi: It is house prices.
Steve Cochrane: No, it's not house prices, but house prices are down by about 25% right now.
Mark Zandi: Really? I didn't know that they [inaudible 01:00:42] down that much.
Steve Cochrane: Oh yeah, huge.
Mark Zandi: It's not construction, it's not sales, it's not prices.
Steve Cochrane: Well, it's a broad measure. I'll tell you, it's the decline from peak, which was in April of '21 of total real estate investment.
Mark Zandi: Okay, so it's kind of like construction, it's like the value. Yeah. It's not a unit, it's the value-
Steve Cochrane: That is correct.
Mark Zandi: Okay. And is that real or nominal? Do you know?
Steve Cochrane: This is nominal.
Mark Zandi: Nominal dollars. Nominal. Nominal one, I guess.
Steve Cochrane: Yeah.
Mark Zandi: Okay. Oh, interest down 38% from the peak. Okay. Do you want to explain?
Steve Cochrane: Well, and that's when the housing market began to falter back then in 2021, a bit before that was when policy changed, the so-called three red lines were put into place that limited mortgage borrowing number of units that one could buy, that limited second home purchases, third home purchases and so forth. And put some restrictions on property development as well. And so that was the beginning of the downturn in the housing market. That's also about when the equity market began to falter as well. And the equity market, since that time, is down by about 25% in China. And my earlier point, that I think the biggest problem right now in China is at least stabilizing the property development sector in China. It has such an impact broadly across the economy, both in terms of the financial side of the economy and in terms of the real economy, jobs, income, the multiplier effect that we know that construction has everywhere.
Mark Zandi: So there had been some concern that the collapse, I think that's the right word, collapse in the Japanese property markets would reverberate around the global economy. Come back here, haunt us in the US. That hasn't seemed to have happened. Should we be concerned about that?
Steve Cochrane: Well it seems like, at least from a financial point of view, that much of it is contained within China. Much of the financing for housing and real estate development is within China. I don't think that direct effect, unless there's something we don't know, is not so great. But the indirect effect, again, the demand, there's a tremendous amount of import demand for basic commodities that goes into the construction industry, whether it be copper or steel or cement, things like that. And that has an impact, not so much on the US economy, but on the broader Asia economy. Australia in particular, big supplier of commodities for construction purposes in China. There could very well be some indirect effects from the construction industry.
Mark Zandi: But this isn't going to be the thing that does the global or US economy in. [inaudible 01:03:55] That's not what this is. Yeah.
Steve Cochrane: I don't think so.
Mark Zandi: In fact, it could be... I'm just putting words in your mouth, but let's see if you go along with them. That it might actually be a positive thing in the near term because it's slowing things down and taking pressure off global inflation. Is that one way of thinking? Because you mentioned commodities and other less demand, therefore lower prices. Or am I stretching?
Steve Cochrane: Well, it did. And in fact, again, that was one of the more positive things about the Asia Pacific economy. That was inflation didn't go up as high as in the West, and it began coming down. But as Cris was noting, in August... He was noting for the US, in August about half of the Asia Pacific economies had an uptick in inflation, and a measurable uptick in inflation. But it wasn't because of anything going on in China, it was rice prices and fuel prices. So again, hopefully temporary.
Mark Zandi: Okay, Steve... Excuse me. Cris, you're up. What's your statistic?
Cris deRitis: Would you like one that's relevant to the Japan-China discussion?
Mark Zandi: Yeah, go ahead. [inaudible 01:05:00] Let's test these guys out. Steve, did you see how gracefully I got to your statistic? Cris helped a little bit.
Steve Cochrane: You're a great MC, Mark. You manage these really, very, very well.
Mark Zandi: I didn't mean it that way. I was angling for my prowess as the stats game player, not-
Steve Cochrane: Oh, well. We'll see how you do this time around.
Mark Zandi: Okay, very good. Okay, Cris, go ahead. Fire away.
Cris deRitis: I'll throw out two then.
Mark Zandi: Two?
Cris deRitis: Well, Japan and China.
Mark Zandi: Oh, okay. [inaudible 01:05:34]-
Cris deRitis: Oh, I just gave it away. All right. 1.1 trillion and 822 billion.
Mark Zandi: I know what it is.
Cris deRitis: Dollars. Yes.
Mark Zandi: I know exactly what it is.
Cris deRitis: I knew you would.
Mark Zandi: I know immediately.
Cris deRitis: I'm laying it up for you.
Mark Zandi: I'm going to laud it over these two other guys, because they're going to squirm, they're going to try to figure it out. They don't know. Oh, what is it? What is it? I can tell you right away what it is. Come on [inaudible 01:05:59]-
Cris deRitis: Give them a chance. Give them a chance.
Steve Cochrane: Stefan, we are in a hot box here.
Stefan Angrick: Do you want to?
Steve Cochrane: I was going to pass it on to you, man.
Stefan Angrick: Treasury holdings?
Cris deRitis: You got it.
Stefan Angrick: Very good.
Mark Zandi: Very good, Stefan.
Stefan Angrick: Excellent.
Mark Zandi: Very good. He's good. He's good. That's great. [inaudible 01:06:14] That's a good statistic, Cris.
Cris deRitis: Yeah, US treasury holdings of the Japanese 1.1 trillion. Which, they're the leader, the largest holdings across the globe. And China is in second place at 822 billion. Still a very large amount, and I think underscores this lack of deco... We can't fully decouple, right? There's so much exposure between our two economies that it could certainly reduce, but getting to zero, that's not happening.
Mark Zandi: Yeah, that's a good one. I want to come back to that too, in the context of this run up in interest rates, because there's a lot of chatter that what's going on in Japan around monetary policies at the root of all this. But before we do that, Stefan, you're up. What's your stat? And by the way, great. You played the game great. Yeah.
Stefan Angrick: I wish I had taken the statistics, because I was racking my head earlier, but what sort of [inaudible 01:07:08]-
Mark Zandi: You can type that into Chat GPT or Bard, or any of that kind of stuff. That was-
Stefan Angrick: I should have. Yeah, I should have. The one that I came up with, we haven't quite gotten around to that yet, but let's see if we can get there. It's a number of times something has happened. Okay? The number is 179.
Mark Zandi: 179 times.
Stefan Angrick: Yes.
Mark Zandi: This has happened. In Japan?
Cris deRitis: In Japan.
Stefan Angrick: In Japan. This is out of a total of 391.
Mark Zandi: It has something to do with monetary policy?
Stefan Angrick: Yeah.
Mark Zandi: Is it related to interest rate moves? No.
Stefan Angrick: Indirectly.
Mark Zandi: Indirectly.
Stefan Angrick: Not quite there yet. Yeah.
Mark Zandi: It's not related to the yield curve control in some way, is it? Indirectly.
Stefan Angrick: Given how much the Bank of Japan's mandate has expanded, I suppose everything matters in some way. But it matters very directly to monetary policy, yes. But-
Mark Zandi: Yeah, yeah, yeah. What do you think, Cris? Is it a policy, some kind of policy change?
Stefan Angrick: Not a policy change, no. It's an economic statistic.
Mark Zandi: Oh, it is. Okay.
Stefan Angrick: Related to-
Mark Zandi: Is it the number of months where we saw deflation?
Stefan Angrick: Very, very good. Very close. I'll just tell you, because otherwise we [inaudible 01:08:45] forever. Is the number of times wage growth has turned negative since the early 90s.
Cris deRitis: That is cool.
Mark Zandi: Yeah. Say it again. What is it? How many times has that happened?
Stefan Angrick: If you look at average earnings per worker and you just plot the growth rate in year-on-year terms, it's been negative for 179 of those months. So you get 391 months, so 391 data points. And about half of that, it's been negative. I want to get to that later, because I do think that's the big thing that ties the whole Japan story together. We'll get there, but in any case it [inaudible 01:09:26] illustrates the depth [inaudible 01:09:26]-
Mark Zandi: ... go there right away.
Stefan Angrick: Yeah.
Mark Zandi: Steve, do you see how that was done? I'm just saying. Did you see how that was done?
Cris deRitis: Is there credit for that one?
Steve Cochrane: I was examining every word coming out of your mouth at that point, Mark.
Cris deRitis: Because I was actually thinking it was a basis point change in the 10-year yield, or something like that. Yeah.
Mark Zandi: Pretty good.
Stefan Angrick: [inaudible 01:09:46] 79 would be a bit much.
Mark Zandi: That's pretty good. That's pretty amazing.
Cris deRitis: It'll be a little more I know than what has been the case, so I kept my mouth shut.
Mark Zandi: All right. I just looked at the clock. We've been chatting for quite some time here. It's like, what the heck happened? So we got to get moving. I'm going to skip my statistic for the sake of time, because I know it's late in Tokyo. It's a Friday night.
Stefan Angrick: It's Friday night, yeah.
Mark Zandi: It's Friday night. It's Friday night in Tokyo. Okay, Stefan.
Stefan Angrick: Yes.
Mark Zandi: My thing around Japan is, it's been a mess for a long time. 1990 is in my mind as the point in time where Japan went from being this boom, meteoric rise to basically going nowhere fast. And that's a long time ago. And Japan's been struggling with trying to get out of this, let's call it a funk. Is there a good German word for funk? You know what I'm saying?
Stefan Angrick: Nothing I could think of that would be quite as elegant.
Mark Zandi: Is there a good Japanese word for funk? What do the Japanese call it?
Stefan Angrick: I suppose I would say funk as well. I don't know.
Mark Zandi: Okay. It's a good word actually. It's a really good word.
Stefan Angrick: It's a good word. It's a good word.
Mark Zandi: Good word. Yeah, very good word. Funk. Meaning disinflation, deflation. Obviously the population growth has been declining. Growth has been very slow. You mentioned that great statistic about real wages falling on a consistent basis. It's been really going nowhere fast. But it now feels, somehow, some way, and I'm not saying we're going to go back to the meteoric growth we've had back in the 70s and 80s. But it feels like Japan's broken free from the funk, that black hole. Partly because of the pandemic and the policy response to that pandemic. All the fiscal stimulus, all the monetary stimulus seems to have pushed things forward. We're now starting to see positive wage growth. Consistent, positive wage growth. Inflation feels like it's now back closer to target. The Bank of Japan is now even starting to tighten monetary policy a little bit. I mentioned yield curve control, maybe you could talk about that a little bit.
Do I have this right? The next 10 years, not forever, but the next 10 years of foreseeable future Japan might have a brighter economic outlook. Am I overstating the case, or what do you think?
Stefan Angrick: No, I think there's a lot of what you said is true. Japan is getting a lot of attention at the moment, it's also something I've noticed. Which I think is due to a couple of different things. We've had a pretty solid run of data over the last year, and you spoke to the GDP numbers. The other macro data has been looking pretty good as well. Stock market has done well, and weight and price dynamics are undergoing pretty big shift compared to what happened the last 30 years. I think there's also the recognition out there that Japan has done pretty well over the last 10 to 20 years even. It's very hard to say when the lost decades that you pointed to there, 1990s. Did that stretch into the 200s? When did it start? When did it stop?
It's hard to say, but what I like to look at is per capita GDP growth. And if you plot that from, I think 2000 until now, Japan has basically done about as well as every other G7 economy, which is not something that I think is widely appreciated. Of course, you have those challenging demographics that ruin the aggregate macro numbers, so no one really notices that growth is pretty decent on that level. But I think it speaks the fact-
Mark Zandi: So the funk is really demographic. It's like the declining population is really the funk. Right.
Stefan Angrick: It's a part of it. It's a good part of it. I don't want to overstate the role of demographics, but it does ruin your macro numbers, so there's no debate about that. What I'm a little worried about is whether it's as much about perception as it is about fact, because Japan is a pretty stable place. And you've noticed this when you come here. The stability is, I always say it's a feature, it's not a bug. We used to say, they said in computer science when there was a problem, it's not a bug it's a feature. It's not a place that changes suddenly. So to that extent, all of these things that I would argue are strengths of the Japanese economy, they didn't just appear somewhere out of nowhere. They've been around for some time. I'm a little bit worried that all the attention Japan is getting right now is external, and then might also evaporate very quickly. Yeah, that maybe puts a little bit of on an asterisk onto the whole story. But broadly I agree, I'm pretty positive on the long run in Japan.
Mark Zandi: In this improved picture post-pandemic, do you think... And what you're saying is that may be overstating the case because it really wasn't quite as bad as it seems, looking at the aggregate statistics. Because if you're in a world of declining population, it's going to be pretty hard to get big growth rates. And you're saying that's a feature and not a bug anyway. People, they're okay with steady as you go growth, stable, low unemployment. The unemployment rate in Japan is what, 2.7, 2.8? It's rock solid.
Stefan Angrick: 2.7.
Mark Zandi: Never really rose during the pandemic, on the margin really. And therefore, you're giving up that meteoric growth for this stability in the economy, and that seems like a pretty good trade off, at least for the Japanese people. I don't want to overstate the case, but does it feel like Japan's got a little bit more life here going forward compared to recent decades, or am I... It does. It does feel like that. Okay.
Stefan Angrick: Potentially, yeah. I think the context of course matters. All of that decoupling stuff that we talked about earlier, that does play into how people look at Japan. If you're decoupling, if you're trying to reduce concentration risk and you're trying to find a new place that still makes stuff. Japan is an economy that still has a pretty large manufacturing sector, and of course Japan will be high up on that list. The other things that are changing in Japan, much of that is totally driven as well though. These changes in price and wage dynamics that we spoke about, all of that is coming from abroad. It's due to higher energy and food prices, those are commodities Japan imports, so it's also supply driven and it's not exactly organic. Now, it's possible that that might shake things and Japan lose, and going forward you will have a bit more domestically driven, demand-driven inflation. But I'm not quite convinced it will stick yet. I think you will need more for that to happen. So maybe not a binary question, so to speak, like much of what we discussed today. Yeah, that's how I would look at it.
Mark Zandi: Okay. Again, looking at this from a more global perspective, US perspective, one of the results of this "improving", I use air quotes, so just not quite sure. But seemingly improving economic picture is the Bank of Japan is in fact taking its foot off the accelerator. It's certainly not putting its foot on the brakes, but taking its foot off the accelerator. One way it's doing that is it's easing its so-called YCC, yield curve control. Basically, bottom line, tell me if I'm wrong. But that is the BOJ, the Bank of Japan, it still is targeting long-term interest rates and doing whatever it needs to do to make sure that the long-term interest rates don't rise above a certain level.
They've lifted the caps on those long-term interest rates, and so Japanese long rates have started to rise. And there has been this chatter in the global marketplace, bond market, fixed income markets, that is one of the reasons for why we're seeing global interest rates rise. Why 10 year treasury yields in the United States are now 4.5%. And you go back a month ago, two months ago, they were 3.5%. If you go back three years ago they were below two. Obviously, lots of things going on there, but one of the things going on there is this relaxation of the cap on Japanese long-term interest rates. What do you think of that story? Do you buy into that?
Stefan Angrick: Not quite, I would say. The reason is mostly because the changes on the long end, they're just too small I feel like for that to matter to that extent. Maybe just to step back a little bit, the way you characterize BOJ policy is 100% correct. They have this policy where they pack the 10-year government bond yield within a certain corridor, and they've been increasing the range within which it could fluctuate around that 0% target. They've been saying that they're not really moving away from the policy, they want to maintain, they want to continue to ease. But that's, you're raising interest rates, so you don't make easing more sustainable by raising interest rates. Interest rates are going up, so to that extent they are tightening. That's correct.
The reason I'm not 100% convinced it's having that big of an effect on global markets has to do with everything else that's going on. Interest rates have gone up a little bit, but well, they're now 0.7, 0.8, starting from 0.5. So that's 20, 30 bips, right? Before that they were at 25, so these are pretty modest changes. I think interest rates would have to go up quite a bit more for Japanese investors really to pull out of US markets and then invest more at home. There's other factors as well. Japan has a big external surplus, a big current account surplus, and that generates revenue abroad, which we'll want to get invested somewhere. Last year when Japan reduced holdings of foreign securities, that was also at the time when the current account surplus evaporated because of the commodity price shocks, because trade didn't go anywhere, all of these things.
Unless the world economy changes in a bit more fundamental ways, where that whole decoupling thing or countries turning more inward becomes more extreme, I don't really see these things changing all that drastically. I think the view of bond markets is also a bit simplistic, as always thinking that it's always about interest rates. Capital gains play into all of this as well, right? If you are an insurer, you might hold onto your government bonds because you don't want to realize paper losses. On the other hand, you might move into a market ahead of great cuts to then take capital gains. So if things were really changing, we would see that. We would see that show up in financial market data. And right now if you look at things like swaps, et cetera, they don't really suggest that investor behavior has changed all that fundamentally, they haven't changed all that drastically. That's why I'm a little bit skeptical about the idea that that's really what's moving global markets. Certainly at the margin, but I'm just not convinced that it's that bigger factor, I would say.
Mark Zandi: Is that the consensus in Japan, that it's not really that's on the market? Or is there no consensus, just not a matter of conversation?
Stefan Angrick: I'm not sure that there's a consensus around that sort of thing. Yeah, it's probably a little bit too niche.
Mark Zandi: Yeah, a little bit too... In our own parochial world. One other quick question, again, from the prism of the US. The currency, the yen, it's been weak. Really weak. And what are we? I haven't looked recently. 145 yen to the dollar, something like that?
Stefan Angrick: 149.1 before we start the podcast.
Mark Zandi: Oh, wow. So this is almost back to the lows for the yen. What's going on there, and is that just relative monetary policy? The Japan BOJs, even though it's taking the foot off the brakes, the other countries are putting their foot on the brakes. So that interest rate differential is driving this, is that all that is what's going on here?
Stefan Angrick: That's the dominating story. That's certainly the mainstream view. And I think at this point it's probably hard to argue that it's other things because fundamentals look a whole lot better than they did last year. In Q3 when the end last officiated to 150, so that was October last year. That was also when the external balance was very weak. No exports at all, supply chain disruptions, no travel, profits not looking great. All of that is looking better now, which means right now actually the yen seems a little bit out of whack with fundamentals, a little bit too weak. But it was always like that. This correlation between the yen and long run interest rates that really only started around the COVID pandemic. Before then, it's actually if you plot them on top of one another, it's very hard to actually make out a very strong correlation. And there've been many periods where the interest rate differential widens significantly, but the yen didn't do very much. So short run versus long run, right? Right now there's just a ton of attention on the yield spread.
Mark Zandi: Yeah. Okay. Do I have this right, the US is the largest economy on the planet, China is number two? Japan is number three, right? Isn't it?
Stefan Angrick: Correct.
Mark Zandi: Number three, I think people forget that. It's like a massive economy. It's huge.
Stefan Angrick: Still.
Mark Zandi: I think Germany's number four, isn't it? I believe.
Stefan Angrick: Yeah. And interestingly might overtake Japan soon.
Mark Zandi: Germany might?
Stefan Angrick: Yeah.
Mark Zandi: Oh, I didn't know that. Okay, interesting. Okay.
Stefan Angrick: In nominal terms.
Mark Zandi: In nominal terms, yeah. Okay, one last question. How do the Japanese view the Chinese? I'll ask you, Stefan, first. And then Steve, how did the Chinese view the Japanese? Given all the tensions in the AsiaPac region, it goes beyond economics, there's a lot of geopolitical tension. Answer that however you want, but maybe Stefan first. How do the Japanese view the Chinese?
Stefan Angrick: Gosh, there's so much that could be said about that relationship.
Mark Zandi: It's very complex, I'm sure. [inaudible 01:24:33] History-
Stefan Angrick: History, exactly.
Mark Zandi: ... is very complex. Yeah, for sure. Sorry, I don't mean to go down a rabbit hole, but there's-
Stefan Angrick: That still factors into everything today as well. Modern debate is still very much informed by everything that happened 100 years ago. I would say maybe to keep it in economic terms, I think it's a difficult balancing act, this relationship with China, because Japan is an economy that is also deeply integrated with China. China was one of the first places where Japanese businesses invested in after the domestic economy crumbled, a lot of offshoring that took place in the 1990s. And Japan also benefited from Chinese growth for quite a significant amount of time, exporting capital goods, exporting infrastructure. The train system in China, a lot of that is Japanese technology. The business interests are deeply tied to China. But on the other hand, on the political level, things are not quite as comfortable. You still have territorial conflicts, you have geopolitical tensions. And that's certainly increased in recent years, over the last 10 years or so. A difficult relationship maybe, to sum it up.
Mark Zandi: Right. And Steve, what's the Chinese perspective on the Japanese economy?
Steve Cochrane: I think it's quite similar.
Mark Zandi: Similar, yeah.
Steve Cochrane: Actually, this goes back centuries, the balance of power has shifted one way or another. There is an excellent book I would recommend for anyone to read, by Ezra Vogel, who was a professor at Harvard. And he wrote a book. I think that title was simply, Japan and China, or something like that. And it traced this relationship from the beginning of time. Absolutely fascinating book. And how the two countries have benefited from their relationship, but it's always been a contentious relationship for centuries.
Mark Zandi: Oh, yeah, I got to read that book. We'll put [inaudible 01:26:39] that in the podcast notes so the listener can get to it easily. Well, good. We're long in the tooth here, as they say, and I think we need to call it quits. Let Stefan go get some rest. And I want to thank you guys, the conversation was wonderful, just shows the depth of knowledge that you have. So, thank you. And the fact that you got Cris to agree with you, I don't know if that says a whole lot, but maybe.
Cris deRitis: Hey, what is that?
Steve Cochrane: I like that. I'll [inaudible 01:27:13] take Cris on my side any day.
Mark Zandi: Cris, I'm just teasing, you know that.
Stefan Angrick: Take that as a win.
Mark Zandi: Yeah, take that as a win. Absolutely. Okay. With that, we're going to call this. Unless you guys object. I'm sure you're not going to object. Hearing no objections, we're going to call this a podcast. Take care, everyone.