The team gives their impressions of Thursday night’s Presidential debate (hint: it involves existential dread). Then, the focus switches to the latest inflation data. Matt Colyar joins to give an overview of May’s encouraging PCE deflator report and what it implies for Fed policy. The episode closes with a roundtable discussion about the long and variable lags in which Fed policy effects the economy, and whether that means the central bank should start loosening policy now.
The team gives their impressions of Thursday night’s Presidential debate (hint: it involves existential dread). Then, the focus switches to the latest inflation data. Matt Colyar joins to give an overview of May’s encouraging PCE deflator report and what it implies for Fed policy. The episode closes with a roundtable discussion about the long and variable lags in which Fed policy effects the economy, and whether that means the central bank should start loosening policy now.
Guest Hosts: Matt Colyar - Assistant Director, Moody's Analytics
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
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, Cris deRitis and Marisa DiNatale. Hi, guys.
Cris deRitis: Hi, Mark.
Marisa DiNatale: Hi, Mark.
Mark Zandi: And let me introduce our other colleague who's become a regular, Matt Colyar. Matt.
Matt Colyar: Happy to be here. Hey, everybody.
Mark Zandi: How did I do? Did I pronounce it right?
Matt Colyar: That was good. That was good.
Mark Zandi: I had to pause there but I got it right. I nailed it.
Matt Colyar: Yeah, appreciate the thought.
Mark Zandi: Appreciate it. Yes. The least I could do, Matt. The least I could do for you is pronounce your name right.
Marisa DiNatale: Literally the least he can do.
Matt Colyar: After five years that we've been working together. But ...
Mark Zandi: How long have we been working together?
Matt Colyar: That's pretty close, right before the pandemic's hit. I started January 2020. Yeah.
Mark Zandi: Right. Yeah. Well, I finally got it right.
Matt Colyar: Yeah.
Mark Zandi: We got a lot of data, but I hesitate with this question, but I'm going to just throw it out there. This is Friday, June 28th, the day after the Presidential debate. Any comments? What do you guys think of that debate?
I'll call on you because you won't answer otherwise. Cris, what do you think? Oh, you didn't even watch it.
Cris deRitis: I did not watch it.
Mark Zandi: I forgot. Yeah. You were at a client meeting.
Cris deRitis: I saw the excerpts. Yeah. It doesn't sound like I missed much.
Mark Zandi: Probably good decision. Yeah.
Cris deRitis: I didn't hear a lot of economics or I didn't see a lot of economics in what I read about.
Mark Zandi: Yeah. Marisa, did you watch?
Marisa DiNatale: I did, yeah.
Mark Zandi: What did you think?
Cris deRitis: It was a somber tone.
Marisa DiNatale: Yeah, I'm sad today.
Mark Zandi: You're sad. And you know what, guys? That's a big deal because she's never sad.
Marisa DiNatale: I have a deep sense of existential dread now.
Mark Zandi: Right, right. Well, any comment on the economic commentary in the debate? I mean ...
Marisa DiNatale: I mean, there were only two parts where they discussed anything related to the economy. At the very beginning when Donald Trump said that inflation was Joe Biden's fault. And they argued over that for a while.
And then there were a number of policy questions that could be related to economics, but were never answered. Yeah, not much. Very light on the policy front overall and not much on economics at all.
Mark Zandi: I like that. Well, I find it interesting, the turn of phrase, existential dread. Existential dread, I guess characterizes it. Hey, but actually that's an interesting question.
Who's to blame for the inflation? Is it President Trump? Is it President Biden? Is it something else? Actually, I have a view on that, but do you have a view, Marisa?
Marisa DiNatale: Yeah, I mean, I think we kind of spoke a little bit about this when we talked with Brendan and Justin the other day. Right? In light of the election model and the paper that you guys wrote on Trump's policies versus Biden's and ...
Mark Zandi: And FYI, we just recorded a so-called bonus episode a couple of days ago that will, I guess, play next week, where we went over our white paper, our study on the macroeconomic consequences of Biden V. Trump. That's what you're referring to.
Marisa DiNatale: Yes. Right.
And it's always this knee-jerk reaction to either blame or give credit to the person who's in office when things happen, events happen, or economic events happen. But a lot of these things are a long time in the making. Right?
I mean, you had the pandemic, inflation was below the Fed's target up until the pandemic. And then inflation, obviously, during the teeth of the pandemic, those few months, fell. And then you had the bounce back from the pandemic, which started to ramp up inflation again.
Donald Trump was President through all of 2020. Joe Biden was in office only, what, a month before Russia invaded Ukraine.
Mark Zandi: No, no, no, no.
Marisa DiNatale: Oh, 2022. Sorry.
Mark Zandi: It's a year later.
Marisa DiNatale: A year. A year later. Right. There was some talk last night about how that was Joe Biden's fault. Trump put that on Joe Biden, the invasion, the Russian invasion of Ukraine. If you believe that, then that's what really sparked ... That's what really kicked inflation into a higher gear after February 2022. Right.
Inflation was headed up prior to that, but it was after that invasion that we saw gas prices, commodity prices spike, supply chain got even more gummed up. I don't think it was either one of their faults. I think it was these exogenous forces, both the pandemic, and then you have geopolitical things happen that contributed to inflation that was already well on its way up.
Mark Zandi: Yeah, that's where I would land. I don't think it's either of their faults. I think it's the pandemic and all the disruptions that caused supply chains and labor markets. And that bled into ... Began in 2020, but it really went into full swing in 2021 when we saw the shut-down of the vehicle industry, the chip industry, lots of other things. And that goes right to the pandemic. Hard to blame that on anybody.
Marisa DiNatale: Right.
Mark Zandi: You can't. And then the Russian war in Ukraine, that wasn't even on the radar screen. Hard to blame that on anybody. If those are the two main causes of the inflation, that the acceleration in inflation that we experienced in second half of '21, '22 into '23, hard to blame that on anyone.
If anyone's got some blame here, and even here, I hesitate, but I'll just say it. It's the Fed. Right? Because they're the stewards of low and stable inflation, and they botched it. I mean, I don't want to cast aspersions because pretty difficult to manage policy in the context of the pandemic. And at the time, the Fed was reasonably concerned that the pandemic was still playing out. And policy 101 says if you're uncertain about something, you err on the side of doing too much. And they did. But at the end of the day, they did too much.
They waited too long to start raising interest rates, and that exacerbated the inflationary pressures that developed in 2022. But Trump and Biden, I would not pin the inflation on either of them. And to just reinforce the point that it was the pandemic and Russian war. This inflation problem is not a U.S. problem, it's a global problem. It's all over the planet. It's everywhere.
And actually the moderation inflation as the pandemic and Russian war effects have faded, has been the same across the globe. What's going on in Europe or Canada or Australia, very same things happening here in the U.S. The only differences are due to measurement differences. But that's just testimonial that the inflation has nothing to do with policy. It has to do everything with those two shocks.
Cris, concur? Any nuance?
Cris deRitis: I was going to go there in terms of ...
Mark Zandi: You were going to go there? Yeah.
Cris deRitis: Yeah. If it truly was policy, you wouldn't see it in Europe and other countries around the globe. Right? It is a global phenomenon. Right? Ergo it must be due to some other factor here. The external shocks you mentioned.
Mark Zandi: Right. Matt, any ... Sorry, go ahead.
Marisa DiNatale: I was just going to say that Trump did insinuate that all of the stimulus put out under Biden contributed to that as well, or exacerbated it.
Mark Zandi: Yeah, I mean, I don't buy into that either. I mean, clearly the American Rescue Plan, which was passed in March of 2021, a couple three months into Biden's term, that was large, it was deficit financed. It was COVID relief, $2 trillion, roughly speaking. And that did support demand.
I mean, consumer spending came right back. The economy came roaring back, and inflation did pick up at that point in time. But as you pointed out, that as after a period when prices were very weak and falling and suboptimal, the Fed was for a decade trying to get inflation back up. And here it was, it was back up. And it is hard to remember back in that point in time.
But at that time, that inflation that we were getting was deemed to be good inflation because we were riding the ship on inflation because inflation had been too low for such a long period of time. No one was complaining about that inflation. It was only when the Russian war kicked in early 2022 and oil prices, natural gas, agricultural food prices all jumped, and when it became a real problem.
In my view, the American Rescue Plan is neither here nor there, certainly not playing any role in the last couple three years at all in terms of inflation.
Matt, any views on any of this?
Matt Colyar: I'm in agreement. I think if we need a villain, the fact that the Fed is still buying long-term securities in early 2022, I think in retrospect is, inexcusable, might be too strong. But that's a real mistake that kept financial conditions looser than they very obviously needed to be.
But the thing they say about NFL quarterbacks too, they get too much blame and too much credit or presidents and gas prices, inflation economy. I think that's all very consistent.
Mark Zandi: Well, that's a whole other podcast. I'm not sure that I agree with that statement. I think QBs matter a lot.
Matt Colyar: Sure do. But if the defense is just letting ... It's just Swiss cheese, I mean, it's good commentary. It's easy, but I think it's overstated a lot. And presidents are similar.
Mark Zandi: Okay. Any other tidbits? Matt, you watched the debate?
Matt Colyar: I wish I didn't.
Mark Zandi: Anything else that you want to bring up, particularly from the context of the economy?
Matt Colyar: No, but I was thinking, because if you recall four years ago, some of our work, yours and Bernard's was cited explicitly on the stage for the Vice Presidential Debate. And one of the first few questions about tariffs and Trump's policy proposals. I thought we might get another nod there, but it was not to be.
Mark Zandi: No. There was reference to the 16 Nobel laureates that signed onto a letter stating that Trump's policies would be inflationary. I think that came up a couple three times.
Marisa DiNatale: It did.
Mark Zandi: Yeah.
Marisa DiNatale: And Trump said that Joe Biden made that letter up.
Mark Zandi: Oh, did he? I missed that. I don't know what I was doing. Head down though.
Marisa DiNatale: Probably crying. What did you think about it?
Matt Colyar: Yeah, what's your take on it?
Mark Zandi: I thought it was a train wreck. Very disappointed and disheartened. I don't have existential dread, I'm just inherently, I just don't go there. I am inherently optimistic because I think we've, as American people, have overcome so much over our history, and I don't see any reason why that won't continue because there's so much good about what our system is about.
But I have to say, I was very disheartened. Very, very disappointing. But anyway, and again, just to reiterate, we did produce a study, different scenarios around who's President and the makeup of Congress and what it means for policy and ultimately what it means for the economy. That white paper is out there in the public domain. And we had a podcast, a bonus podcast that will air, I think, on Monday or Tuesday next week. I think listeners will appreciate that.
But let's go to the good news. And that's the economic data. My goodness, Matt Colyar. Matt Colyar. I tell you guys, you got to forgive me here because I think I have a condition. I don't know if anyone else has this condition. I have a name dyslexia. I literally do. I really have this problem. Sometimes I can't even pronounce my own kids' names right. It's like, I don't know what that is. And I had a real problem with Reg and Craig. I don't know. Am I alone in the world with this problem?
Cris deRitis: No.
Mark Zandi: No.
Cris deRitis: No.
Mark Zandi: Okay.
Cris deRitis: I hear you. I hear you.
Marisa DiNatale: If anyone out there is listening and has this problem, please write to us so Mark doesn't feel so alone.
Mark Zandi: Please write to us, I have to know. I got all kinds of weird things going on. I can't smell. I can't smell. I mean, maybe a lot of people can't smell now with the COVID, but I can't smell, and I ...
Matt Colyar: Preaching to the choir, I haven't been able to smell for two, three years now.
Mark Zandi: Right? We'll move on. What was it we were talking about? Oh, the good news. Good news. The economic data. Tell us about ... And we're going to really soak this baby in. Tell us about the inflation number that came out this morning, Matt.
Matt Colyar: Soaking in probably means two, three decimal point type of analysis? Is that what you're thinking?
Mark Zandi: I'd go to eight if you need to be. But yeah.
Matt Colyar: This morning we got May's personal consumption expenditure deflator. It's the second inflation report that comes out each month. It's the one often referred to as the Fed's preferred measure, but comes often with a little less fanfare because we already saw the CPI, we saw PPI. We have a sense of what a given month's inflation or change in prices looked like.
We had a good idea of what happened in May, and the actual data comes in and it was really good. It was better than even expected. If you look into the details, the headline, PCE Deflator was flat from April to May. If we do look at those second, third decimal points, it was actually a slight decline. 0.01% from April.
Mark Zandi: Oh, I didn't know that. There's actually had a negative sign attached to it?
Matt Colyar: Yeah, deflation in May.
Mark Zandi: Okay. Oh, boy.
Matt Colyar: Which comes with its own ... We expected flat growth. That's what the CPI was. They don't always move the same way, but directionally they're often the same. 0% growth for the headline PCE, that lowers the annual rate from 2.7 to 2.6%. Again, in line with expectations. But the real story, and it's the inflation metric that the Fed cares the most about, is the core PCE deflator, which ignores any changes in energy and food prices.
And there, there was a 0.1% increase from April to May. Again, in line with expectations, but also rounded up here, we're at 0.08% on the month and that will ...
Mark Zandi: 0.083 just to be ...
Matt Colyar: 0.083%.
Mark Zandi: ... precise.
Matt Colyar: That is ...
Mark Zandi: I think it was, and I'm making this up, but I think it's right. 0.0827.
Matt Colyar: Okay. 827.
Mark Zandi: Now I'm making it up. 0.0827. No, I don't know what the next ...
Matt Colyar: It was ...
Mark Zandi: You can tell I soaked this baby in.
Matt Colyar: Yeah, there was no existential dread in this report.
Mark Zandi: No existential dread. No.
Matt Colyar: The annual rate lowered for core PCE. The Fed targets 2 to 2.5%. Is the range held out is what the Fed wants to target for their price stability mandate.
Mark Zandi: Wait, you said 2 to 2.5%?
Matt Colyar: That's how I typically reference it. Is that too ambiguous?
Mark Zandi: Well, I didn't think there was a range. I think it's 2.
Matt Colyar: It's 2.
Mark Zandi: Yeah.
Matt Colyar: Well, okay, I can also say 2 to 2.5 range.
Mark Zandi: It's 2 on the top line PCE, I mean at least officially, it's the 2 on the top, I think. Correct me if I'm wrong. But if you go look at the Fed's policy framework, I think circa 2020, it targets 2%.
Well, there they have this whole language around, if inflation has been below the target of two for an extended period, then you need a period of a buff target. Going back to my earlier point about the American Rescue Plan and its inflationary effects. But I think ... Correct me if I'm wrong, Cris, do you know? I'm pretty sure.
Cris deRitis: I think it's 2. [inaudible 00:16:54] range.
Mark Zandi: Matt's making me nervous. Yeah. Okay. It's 2.
Matt Colyar: I often ... Yeah, so maybe I've gotten too fast and loose with that. The annual rate ...
Mark Zandi: Well, let's just go with 2. Let's go with 2.
Marisa DiNatale: It should be 2 to 2.5.
Matt Colyar: Maybe ...
Mark Zandi: It should be 2.5 to 3 in my view, but okay.
Matt Colyar: All right. We're getting towards the range.
Mark Zandi: Yeah.
Matt Colyar: Either way it's a step in the right direction, no matter. 2.8% was the year-over-year growth in April. Now, 2.6% in May. A really healthy step in the right direction, still above the Fed's target and my target. But the improvement is the moderation and price growth there. I mean, that's the story is seeing prices start to moderate within core PC. There's very similar to the consumer price index. There's certain components we look at, okay, what's housing doing? What's healthcare housing similarly? And then a lot of the same methods are used. Shelter prices, housing services, and the PCE deflator rose 0.4%.
Mark Zandi: Matt, if you do the harmonized PCE deflator, harmonized meaning exclude this wacko owner's equivalent rent, the cost of homeownership, the implicit cost of homeownership, what was it? What is it?
Matt Colyar: It would be lower. But all of our kind of nitty-gritty data that goes into that calculation isn't ready yet for me to have that figure.
Mark Zandi: As I recall right now, on a year-over-year basis through April, because we just got the May data, it was around 2, I think it was exactly 2. Wasn't it?
Matt Colyar: Yeah, it was a little bit lower. 0.17 For April. Yeah.
Mark Zandi: Okay, so now with the May data, it's probably going to be still below 2.
Matt Colyar: Yeah, I mean, looking at the core or headline figure, if you take away owner's equivalent rent, which is given less weight in the PCE deflator, but still a significant component that rose faster. Removing it, you can see a swifter deceleration.
Mark Zandi: Can I also ask you, because you do this great work where you try to predict what the number's going to be beforehand based on all the other data. And in the case of a consumer expenditure, deflator, PCE, we do have a lot of data. We have the CPI, we've got PPI, I guess, import prices. And so you've got a pretty good fix on what's going to happen here.
But you were saying it was going to come in at 0.13, and I know I'm parsing the data a lot, but I'm just curious, you said 0.13 and you're very accurate, and it came in at 0.08. What caused that discrepancy? Do you know?
Matt Colyar: Within goods? I haven't isolated it, but we didn't expect goods to fall by the 0.3 or 0.4% that they 0.4% decline from April to May was, I know that was stronger than we anticipated, but haven't gone into, Hey, is it car prices or non-durable goods within goods prices? But that explains the miss.
Mark Zandi: Well, when you figure that out, I'd love to know. I'm just really curious why. It's still 0.1. It's still rounds to 0.1, but instead of rounding down to 0.1, we round it up to 0.1. Encouraging. Okay.
Okay. Anything else on the PCE that we're going to call out on the deflator? I mean, it does lend, oh, I asked the question and I was going to answer through it myself, but that's rude. That's rude. Let me turn it back to you. Go ahead. Answer that question.
Matt Colyar: The only other component I think that's worth watching, and it's the only relatively concerning one, is healthcare prices. Healthcare is a bigger component within the PCE deflator relative to the CPI, and that it rose 0.7% from April to May, which is an acceleration. Strongest growth in quite some time. And labor costs for nurses for other hospital staff.
Famously, those hospitals had a hard time staffing operations in the aftermath of the pandemic. And just the way prices are set in the healthcare world, it means these things are starting to flow through to consumer prices now. It also means that it's not going to happen rapidly. This is slow moving. We don't expect healthcare prices to surge like used cars did in 2022, but it's going to be a stronger source of inflation than it was in 2023. And we'll kind of stymie a little bit of the improvement that we're looking for. But as we see in May, not to the degree that progress will halt.
Mark Zandi: This may be an unfair question, but the weight of housing in the PC deflator is much smaller than the CPI. I think it's like 0.15, 15% of the index. Something like that.
Matt Colyar: I had 14% in my head in that ballpark. Yeah.
Mark Zandi: What's medical care? That's higher in the PC than the CPI?
Matt Colyar: Closer to 20, 21%.
Mark Zandi: 20% a little higher than the housing. As housing inflation continues to moderate, that's a plus. But on the opposite side of that, is this strong and the last month acceleration in medical care inflation?
Okay. Okay. I was going to say, the data we got from May CPI and the PCE deflator, we got this morning, in my mind, and this is a statement, I want to know if you agree with it. In my mind, this is strong evidence, not proof positive, but strong evidence that pick up inflation we saw at the beginning of the year that kind of fill up in inflation in January, particularly to this degree, February and March, that that was probably more measurement issue than anything else. Seasonal adjustment, timing, so forth and so on. Not something like a fundamental acceleration in inflation.
Would you concur with that?
Matt Colyar: I certainly would. Yes.
Mark Zandi: You would? Okay. All the trend lines here now look pretty good in terms of inflation. On the measure that the Federal Reserve is targeting, the consumer expenditure deflator 2% target, we are now at 2.6%. That's where we are. And I think if this memory serves, and here again, I could have it wrong, correct me if I'm wrong. At the peak of inflation back in 2022 when Russia invaded and Ukraine, we got that spike in oil and gas and agriculture prices. We were at 7%, I believe, year-over-year. Right?
We've come a long way, and I would say it's fair to say we're within spitting distance of that target. And if you exclude that crazy OER thing, we're there. Anyone disagree with what I just said? No. Okay. All right. Fair enough.
We're going to come back to the Fed. Oh, we're going to come to the Fed and talk about what the Fed's doing. This higher-for-longer interest rate strategy. We're going to do that after we play the game. But before you play the game very quickly, there's a plethora of data. Oh, maybe this is a good time to play the game. There was a plethora of data. I was going to say, was there any of those data that you want to call out? But maybe you're going to call it out in the context of the game. Why don't we play the game? Everyone on board with that?
Okay, let's play. Let's do it. The stats game, we all put forward a stat. The rest of the group tries to figure it out with clues, deductive reasoning, questions. The best stat is one that's not so hard. We never get it. And I should say we cut out, we played the stats game when we taped the Biden v Trump macro bonus, but that game was so bad. We cut it out. We don't really edit, generally don't edit, but we took it out. They were crazy hard. The stats that people, I mean, they were ridiculously hard. They had Brendan on there talking about data in Canada and ...
Marisa DiNatale: Quarterly Canadian population data.
Mark Zandi: Oh, my gosh. It was like insane. Although, I did get one right off-air. Remember? I did get that one right. But no one heard that, so that was useless. But anyway, we cut that out. We're going to play the game here, and we don't want it be too hard, but we don't want it to be too easy. And we want it be apropos to the topic at hand or consistent with recent data.
Marisa, you're up. What's your stat?
Marisa DiNatale: My stat is 3%.
Mark Zandi: 3% economic statistics that came out this week.
Marisa DiNatale: Yes.
Mark Zandi: In the GDP report?
Marisa DiNatale: No.
Mark Zandi: In the durable goods report?
Marisa DiNatale: No, but I almost went with that.
Mark Zandi: In the inflation report?
Marisa DiNatale: No.
Mark Zandi: Oh, my gosh. All right. Consumer spending numbers that came out today?
Marisa DiNatale: Nope.
Mark Zandi: Income. Income. Okay. We're going to wear her down, baby.
Marisa DiNatale: You're going to get it eventually if you just name every single release. Yeah.
Mark Zandi: Well, 3% is a pretty common number. Right?
Marisa DiNatale: It is. Yeah.
Mark Zandi: A lot of 3%. I know it's not the personal saving rate. That's 3.9. Yeah.
Marisa DiNatale: I've used this statistic before.
Mark Zandi: Okay. Is it a government stat?
Marisa DiNatale: No.
Mark Zandi: Oh, okay. Well, that helps. Oh, okay. Is it a house price measure?
Marisa DiNatale: No.
Mark Zandi: Okay. Because a lot of house prices came out this week, including our own. Right. And by the way, Vero Beach house prices are doing, I don't know if you noticed, Cris.
Cris deRitis: I did not notice.
Mark Zandi: You should go look. They're still moving North. They're still moving North. Anyway.
Cris deRitis: Did we cover it on EV? Marisa?
Marisa DiNatale: Yes.
Mark Zandi: Yes. 3%.
Cris deRitis: Not the challenge report. Nothing.
Mark Zandi: No, that comes out next week.
Marisa DiNatale: I don't think that that came out this week.
Cris deRitis: That's a Marisa favorite, though.
Mark Zandi: That's Marisa favorite.
Marisa DiNatale: It is inflation related.
Mark Zandi: Okay. Well, no wage growth numbers came out today.
Cris deRitis: Came out this week.
Marisa DiNatale: They did.
Mark Zandi: They did?
Marisa DiNatale: State wages came out, but that's not what it is.
Mark Zandi: Okay. Do you want to give us another hint? I guess we're stymied here. Can't give us another hint. All right, then put us out on our ...
Marisa DiNatale: Why don't I just tell you what it is.
Mark Zandi: Tell us what it is. Yeah.
Marisa DiNatale: It is the one-year ahead inflation expectations measure from the University of Michigan Consumer Sentiment Survey.
Mark Zandi: Of course.
Marisa DiNatale: And the reason I picked this is because this fell pretty dramatically over the month. In May, inflation expectations for a year ahead were 3.3%, and it fell to 3% this month, which is a pretty big decline and puts inflation expectations back to kind of where they were at the start of the year.
Mark Zandi: Can I ask, is that number 3% consistent to where we were pre-pandemic? Or is that still elevated compared to pre-pandemic? Do you know?
Marisa DiNatale: That's a good question. I'll look it up.
Mark Zandi: Okay, I'm curious.
Cris deRitis: Tends to be high. Right?
Mark Zandi: I think it's still a little on the high side.
Marisa DiNatale: I would imagine just because this tends to lag actual inflation. Right? Yeah, I'll look it up.
Mark Zandi: Okay.
Marisa DiNatale: It's a good question.
Mark Zandi: Okay. Matt, you want to go next?
Matt Colyar: Sure. I can't tell. Were you implying that we should make this easier? Is that what you were with the presidential?
Mark Zandi: No, I was just saying how miserable the game was when we tried it. We had it so bad that we cut it out because it was painful to listen to it. I enjoyed it actually, but I don't think the listener would enjoy it.
I actually had a lot of fun. We were making fun of both Brendan and Justin. I mean, Justin's statistic was as equally as wacko as Brendan's.
Matt Colyar: Yeah. It's funny.
Mark Zandi: Yeah. Anyway, go ahead Matt.
Matt Colyar: 0.5%.
Mark Zandi: 0.5. Go ahead, Marisa.
Marisa DiNatale: Personal income growth.
Matt Colyar: Okay, maybe I went too easy. A little more specific.
Marisa DiNatale: Was that right?
Mark Zandi: Compensation?
Matt Colyar: No, Marisa's like there, but there's a few more adjectives, I think.
Mark Zandi: Disposable personal income?
Matt Colyar: Yes. Inflation adjusted, so real disposable income rose.
Mark Zandi: Oh, yeah.
Matt Colyar: 0.45 but 0.5%. Man, that was my hard one.
Mark Zandi: You, you're going with the double digits there. The decimal places today. That's the thing.
Matt Colyar: The strongest growth ...
Mark Zandi: Growth. Why did you pick that one?
Matt Colyar: The Fed's second mandate or the other mandate of all employment, the whole timing of when they're going to cut rates is that it's either going to look bad or good in retrospect based off of how much slack they allow in the labor market, how much pressure they allow businesses and consumers to come under before making a move.
I think that's an encouraging statistic that real disposable income grew as fast in a month as it has since early 2023. Strong job growth. We saw healthy income growth coming, but there's other data points that are suggesting that the labor market is softening, income growth is slowing, wage growth are slowing and people are coming under pressure. But I think that's a welcome contrast there and unlikely to be sustained, but certainly a strong data point.
Mark Zandi: I'll have to say the economic data this week were fabulous right down the fairway. Right? I mean, we talked about the inflation number, but the income number you just mentioned, the inflation expectations numbers back in GDP ... I guess GDP was the one disappointment, but it was just a revision. No big deal there.
Consumer spending. Real consumer spending. I mean, because we're now talking two significant digits, 2.45% year-over-year, real consumer spending growth. That's exactly equal to the growth rate we've been experiencing for eight solid years. Four years since the pandemic, four years prior to the pandemic. It just feels like really good data. The numbers are really, really good.
Anyway, Cris, what's your stat?
Cris deRitis: Let me bring you back to reality.
Mark Zandi: Oh, really?
Matt Colyar: Okay.
Cris deRitis: No, no, no. It's actually, I think of it as a good statistic as well. Yeah, 0.3%. This one's really hard. If you get close, I'll give you points.
Mark Zandi: Okay. Oh, just point 0.3%?
Cris deRitis: 0.3%. Yeah.
Marisa DiNatale: 0.3.
Cris deRitis: Yes.
Mark Zandi: That's real consumer spending growth month to month. And that is 0.3.
Cris deRitis: Okay, but that's not not ...
Mark Zandi: That's not your 0.3.
Cris deRitis: That's not my 0.3.
Mark Zandi: Is it a government stat?
Cris deRitis: No.
Mark Zandi: Okay. It's a private sector stat.
Cris deRitis: Yes.
Marisa DiNatale: Came out this week.
Cris deRitis: This week.
Mark Zandi: House price related?
Cris deRitis: Oh, yes.
Mark Zandi: RMA, Moody's Analytics HPI increase for the month of May?
Cris deRitis: Nope, that was 0.2, I believe.
Mark Zandi: Oh, 0.2. It's another index, though. FHFA purchase index?
Cris deRitis: No, it's not an index.
Mark Zandi: Oh, it's not. But it's related to house prices.
Cris deRitis: Yes.
Mark Zandi: But it's not a growth rate in the house prices?
Cris deRitis: Nope.
Mark Zandi: No. 0.3.
Marisa DiNatale: Is it ...
Mark Zandi: Is it a new home sale? No, it's not a government stat. It's not new home sales.
Cris deRitis: No.
Mark Zandi: If we get close ...
Cris deRitis: You are so close. I'm just going to give it.
Mark Zandi: Okay, go ahead.
Cris deRitis: Okay, 0.3% is the discount that the typical home buyer is paying relative to the asking price of a home.
Mark Zandi: Oh.
Marisa DiNatale: That sounds like ...
Mark Zandi: Wait, it's 0.3 or 30%?
Cris deRitis: 0.3%. Yeah.
Mark Zandi: 0.3, so there is no ...
Cris deRitis: Well, it is a discount.
Matt Colyar: Below asking?
Cris deRitis: This is the first time it's been a discount since the start of the pandemic. Last year it was flat. People were paying the asking price. Two years ago they were paying 2% on average above the asking price.
This is the first month, the first observation where we actually have a discount. People are actually paying less than the asking price on average. Right? That's an indication of a softening market here. It seems as though prices are turning here.
Mark Zandi: Where do you get that data? I don't know ...
Cris deRitis: It's a Redfin. Redfin statistic.
Mark Zandi: Oh, Redfin data. Oh, I didn't know that. We have a time series of that?
Cris deRitis: We don't. They do.
Mark Zandi: Oh, they do. I mean, yeah, we bank. It's in the public domain though. Right?
Cris deRitis: It's in the public domain. We don't bank it.
Mark Zandi: We don't bank it. Oh, can you send me, I'd just love to see it. Can you send me the link to that?
Cris deRitis: Sure.
Mark Zandi: Okay. Yeah, very curious.
Matt Colyar: Was 2% the peak premium or above asking?
Cris deRitis: Yes, that's right.
Matt Colyar: Yeah.
Cris deRitis: Of course, on average. Right? There's variation.
Mark Zandi: And did they have that across the country or is that just national stat? They do have it across the country.
Cris deRitis: That's national. I think they have it by market as well. I
Matt Colyar: I think they go down to the MSA with that. If we're looking at thinking about the same interface that they have, you can look, it's pretty comprehensive.
Cris deRitis: Yeah. Yeah. I think it's there.
Mark Zandi: Oh, interesting.
Cris deRitis: I guess going kind of in the theme of pricing and some softness here. I view it as a positive that the housing market may be ...
Mark Zandi: Yeah.
Cris deRitis: Cooling off here. Cooling off.
Mark Zandi: Yeah. Well, we came out with the Moody's Analytics Repeat Sales, HPI house price index for the month of May. And that shows similar cooling, doesn't it? In terms of growth.
Cris deRitis: Yeah. That was 0.2% month to month, 5.77%, Matt, for year over year.
Matt Colyar: Feel pretty strong.
Cris deRitis: Yeah, feel pretty strong. But it is decelerating relative to where it was.
Mark Zandi: And I met Matt Walsh, our colleague who puts that together. Of course, we do this for metro areas and lower geographies, and he was looking at it by state. And most of the strength, the strongest house price growth is actually in the Midwest and in the Northeast. What's going on there? Why is that the case?
Cris deRitis: Seems like it's low inventories. Not a lot per sale in those areas relative to the other parts of the country where also in you had some more building, there's more construction. Another statistic that came out this week is that supply of new homes is at a 16-year-high [inaudible 00:35:57] 81,000 homes. In other markets there is growing supply that's keeping prices perhaps from appreciating.
Mark Zandi: Okay, that's a good one. I didn't even know that data existed. Okay, here's mine. I don't think it's too hard. Two numbers, 100.4 and the other is 68.2.
Cris deRitis: Confidence.
Mark Zandi: Okay.
Marisa DiNatale: Conference board in
Cris deRitis: And UMich.
Marisa DiNatale: Michigan?
Mark Zandi: Yeah. Okay. That was too easy. That was too easy. But I have a point, and that is the 100.4 on the conference board survey of consumer sentiment is almost exactly equal to its average over time. And conference board's been doing the survey monthly back into the '80s, so for a long time. And it's been bouncing a little bit above a little bit below, but it's been hanging in there around 100.
The University of Michigan survey, which is they've been doing this even longer than conference board back into the '50s, 68.2 is really low. The average is 85. I did the calculations going back to 1980 to be consistent with conference board. And it's more than a standard deviation below the average, the current.
If you looked at the University of Michigan survey, you'd say consumers are very pessimistic. I mean it's consistent with sentiment that existed in the financial crisis, the teeth of the pandemic. It's been lower, but it's right in there with those very dark periods. Whereas, if you look at the conference board survey, it's saying consumers aren't feeling that great, but they're not feeling that bad either. They're doing their thing.
In my view, the conference board survey is much more consistent with the reality of what's going on going back to consumer spending. Consumers are doing their thing. They're not spending with abandon, they're not feeling fantastic, but they're not in the doldrums either. It's not like they're cutting back. And so I find the conference board survey useful and the University of Michigan survey not at all useful. It's very counterproductive.
I think there's a couple of things going on. One is that UMich surveys transitioning from a phone-based survey to an online survey. And that's complicating things in the recent months. And the other is that they do ask the respondents whether they're Republican, Democrat or independent. Now they do that after they ask all the other questions. But this is a rotating panel and folks that took the survey before, take it again. And my sense is that they're looking at things through their own political prism.
Because if you look at the UMich data releases, the survey respondents, survey data based on party affiliation. If you're a Republican and you're feeling a lot worse than if you're a Democrat. And that switched as soon as Biden became president, and I'm sure it would switch back if Trump became president. I know people in particularly media is focused a lot on UMich. I wouldn't use it at all. I think it's close to worthless. It's counterproductive in terms of trying to understand what's going on.
Any pushback on what I just said there? I just said a mouthful.
Cris deRitis: Well, conference still well below 2019 levels, right?
Mark Zandi: Yeah. It's below 2019.
Cris deRitis: Yeah. Consumers may be okay relative to history, but relative to where they were prior to the pandemic, they're still feeling pretty ...
Mark Zandi: Yeah, they're not feeling as good as they did prior to the pandemic.
Cris deRitis: Miserable.
Mark Zandi: Miserable is not the word though. It is just typical. They're feeling like they typically do. I mean if average is average across ...
Cris deRitis: Across the span of history. Yeah.
Mark Zandi: And that's the other thing, people, when you look at whole numbers and surveys of voters and what's bugging them, the conventionalism is that consumers are very upset. They feel like the economy's performing very badly and they don't like what's going on.
But if you look at the conference board survey, it's saying it's not great, but it's not bad either. And again, that is consistent with their behavior. Right? With the consumer spending.
Okay. I did want to, and we're going to keep this podcast short because again, we had that bonus podcast for people to avail themselves of, but I did want to go back to the Fed and the Fed's higher for longer strategy. They've been keeping the funds rate target at 5.25 to 5.5% now for I think almost a year. And now it came after a year and a half of very aggressive interest rate hikes.
They went from quantitative easing to quantitative tightening, which they're still doing to this day, letting the securities, treasury, mortgage securities on their balance sheet roll off and prepay. And one of the arguments ... Increasingly, my view is that that's a mistake that they've effectively achieved their target full employment, a 4% unemployment rate. And we talked about inflation, how close that is to target and all the trend lines are pretty convincing that it's going to head back to target in a orderly way, in a timely way.
But then the question becomes, well, okay. I hear you. But why should I cut? The economy is fine. You talked about how good the economy is. What's the rush? Why not keep the funds rate target here for a little longer and make absolutely sure inflation goes in?
And I guess the question to the group is what do you think of that argument and how do you feel about that? Does this give the Fed latitude or is the Fed taking a real risk here and a risk that's increasing over time because these higher rates are weighing on the economy and what are the channels through which it's weighing on the economy? What's going on here?
Cris, do you have a view on that question?
Cris deRitis: Yeah, I do. I think there is a risk. I think it comes down to your view on the presumed long and variable lags in monetary policy. If there are lags takes time for these cuts or hikes to filter or make the way through the economy, then certainly the Fed should be looking ahead, thinking about the policy to come rather than reacting too much to the current conditions.
If they wait too long to really wait for the data to materialize and show the inflation rate that they're targeting, it may very well be too late for the cut that then comes along to actually have a positive effect or a supportive effect on the economy. You may have already sown the seeds of weakness.
I think that's really, and there's been considerable debate about the lags of monetary policy, if they still exist, how long they are. I think that's really where it comes down to the crux of the argument. If you don't believe that there are lags in the monetary policy, then sure you may very well say, what's the rush? Just wait and see what happens.
Mark Zandi: Give us an example of why the monetary policy works with long and variable lags. What's the mechanism through which that happens? Why will the interest rate hikes that the Fed engineered back in '22 going into '23 still have an impact on the economy today and going forward?
Cris deRitis: Yeah, I would say one example would be just the lags in business and consumer behavior, the planning that it's required for certain projects. It could be a house in terms of the consumer, a big expense. It's not as though that is an immediate process. You're going to start looking for a home. There's time to originate a mortgage and whatnot. And so those interest rates that you see today and those that you anticipate are going to affect your behavior, certainly on the business side as well. It's not as though you snap your fingers and generate a lot of investment or move forward with a lot of investment. There certainly are those lags in terms of the planning.
If you're looking at the interest rate environment today and you're seeing that or you're expecting that it's not going to improve all that much in the near term, you may hold off on certain projects. It certainly could impact that type of activity going forward.
Mark Zandi: Got it. Got it. Marisa, what do you think? Are there long and variable lags in that the Fed's taking a risk here, keeping the funds rate as high as it is?
Marisa DiNatale: Yeah, I think that they are taking a risk. I think it's both from the consumer side. I mean we see what's going on in the housing market. The housing market is pretty much frozen because of the high interest rate environment. It's keeping people from moving.
That has implications down the supply of housing for people looking to buy first-time homes that can't find any because people aren't moving to free up those homes. There's a lot of economic activity associated with the housing market. That's a chunk that's taken out of the economy.
And then businesses, business planning for investment and businesses that have to take out loans, they're looking at higher interest rate environment. They may not need a loan or they may see that they're going to be able to refinance or a loan is going to come due in a year or two years, and now they're facing higher interest rates.
Things don't always happen automatically. Right? It's not like, let's take on the short side like a credit card where your interest rate can adjust very, very quickly month over month that can adjust. Something that's a longer term loan you're not going to realize that adjustment until that loan term is up. A lot of businesses and households face this lag.
I think as they're holding interest rates at a higher level here for longer, then I think businesses will come to realize this higher interest rate environment eventually. And the longer they're keeping them there, the more opportunity there is for businesses, banks, the financial system to start really facing these higher rates head on.
It's just about the volume moving through the system where I think there's this trickle effect as it goes. But now that we're at a year of rates above 5%, the short-term Fed funds rate above 5%, more and more portions of the economy are going to be facing these rates.
Mark Zandi: Kind of the rollover risk that as debt starts to roll over, tourism has to be refinanced or you have to go get new debt. It's rolling over at a much higher interest rate. The longer rates stay up, the more pressure that puts on everyone in terms of trying to shoulder those higher interest rates in the higher debt payments. You can see that most obviously in commercial real estate. And we're starting to see delinquency rates and default rates finally significantly rise for office and multifamily in particular. Right?
Matt, do you have a perspective on this? I mean, the long and variable lags. Do agree that the higher rates here are increasing the risks that something goes off the rails?
Matt Colyar: Certainly. I agree that it's a debt maturity story. The share of debt that was at low locked-in rates was never going to be higher than it was in late 2021, early 2022. That share has only gone down as debt matures, and you have to roll it over at a much higher rate. That's happening every day and that's the long and the variable part.
Also, just to add that, similar to what Cris said, if you wait for a downturn to happen, it's too long, it's too late. For the Fed to wait for a spike in the unemployment rate, a spike in weekly claims for unemployment insurance, the momentum has already been zapped out at the economy and it's a much more dire situation. Especially if you contrast that with what we are saying about business and consumer sentiment.
There's, in my opinion, conference board is one thing. I think there's different elements where we really do see kind of a pessimism to me that I think just suggests a brittleness. Once bad news does happen, I think there's a hunkering down that's going to be pretty dramatic and maybe underappreciated. Moving before that happens I think is really important.
Mark Zandi: Yeah, I totally agree. I think the Fed's playing with fire here and the heat is starting to build with each passing month. The pressure is building and something could go off the rails pretty quickly. I think you can change very quickly.
I mean, one area where you haven't really seen the effects of the long and variable lags is in asset markets. Right? You haven't seen it. Stock prices are at record highs. Credit spreads in the bond market are paper thin. We talked about housing values at record highs, and that's one reason why consumer spending is held up, because the wealth effects that are playing a role here.
People have drawn down their saving rates below what they were pre-pandemic, in part because they feel wealthier. But those markets can move pretty fast. I mean, the stock market, the bond market, they move in an instant. The housing market more slowly, but the financial markets can move pretty fast.
At some point the markets are going to give up on the idea that the Fed's going to cut rates and say, we've got a whole different view here. This isn't going to happen anytime soon. And they could bail and particularly vulnerable now because valuations are so high.
I mean, if you look at any kind of tried and true measure of valuation, price earnings, multiples or credit spreads, these markets are really richly valued. Arguably, you can feel kind of speculation creeping in different ways, kind of GameStop and Donald Trump stock. That's very speculative. Kind of feel it happening. I think that could change quickly, very, very quickly if the Fed's not careful.
And to what end where they've achieved their target. I mean, we're at a 4% unemployment rate at 2.57% core PCE year over year exclude the wacko, I'm going to call it the wacko OER, exclude wacko OER. And we're at below 2%. We're there. We're done. We should move on. Anyway.
Okay, let's end it this way. I kind of threw this in a podcast one or two, three weeks ago was what's the probability of recession again? And I said, my probability has started to move back up again. Probability of just recession in the next year, I had been as low as 20%. Just for context, the unconditional probability of recession is 15. Low of elevated. Now I'm back up to 25%.
Very quickly, Cris, where are you on that probability of recession?
Cris deRitis: I think I was at 33. I'm going to stick with 33.
Mark Zandi: 33. Okay. Matt, what's your probability recession?
Matt Colyar: I'll go right under that, 30%. Just about where I've been for a while for the sake ...
Mark Zandi: This isn't the price is right, or whatever.
Matt Colyar: But I will, the consistency, I think of all those polls we do on our macro meetings. I think I've been 30% for like two years.
Mark Zandi: 30%. Okay. Fair enough. And Marisa?
Marisa DiNatale: I'm at 25.
Mark Zandi: 25. Okay.
Marisa DiNatale: Yeah.
Mark Zandi: All right. We may have to start playing this parlor game again, just given the risks I think are building with this higher for longer strategy and everything else that's going on, including the existential dread created by the election.
Okay. With that, I think we're going to call it a podcast. Guys, any last words? You want to say anything that would cheer anybody up? We're a very lugubrious bunch. That's a good word.
Cris deRitis: I'll say that. I thought the PCE report was unambiguously positive. I'll just go on record.
Mark Zandi: Oh, that's really ...
Cris deRitis: My positive.
Mark Zandi: ... a real stretch on your part, Cris. I'll have to say. All right. Unambiguously. Unambiguous. Unambiguous, unambiguous. Possibly. Okay. With that, everyone have a good 4th of July. We'll talk to you next week. Dear listener, talk to you soon.