Diane Swonk, chief economist of KPMG returns to discuss fragilities in the financial system and the impact on credit availability and the economy. She shared her view that a meaningful recession is dead ahead. We also discuss the Fed's meeting earlier this week and their decision to not pause rates given the banking system turmoil.
Diane Swonk, chief economist of KPMG returns to discuss fragilities in the financial system and the impact on credit availability and the economy. She shares her view that a meaningful recession is dead ahead. We also discuss the Fed’s meeting earlier this week and their decision to not pause rates given the banking system turmoil.
For more on Diane Swonk, 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 two co-hosts, my two trusty co-hosts, Cris deRitis and Marisa DiNatale. Hi, guys.
Cris deRitis: Hey, Mark.
Marisa DiNatale: Hi, Mark. Hi, Cris.
Mark Zandi: Another busy week. Just when you thought the banking crisis was over, well, I don't know.
Cris deRitis: Did you think it was over?
Mark Zandi: Maybe fingers crossed.
Cris deRitis: You were hoping it was over.
Mark Zandi: I was hoping it was over, and still am, still am, but we'll see how that goes.
Cris deRitis: But we got a Fed meeting in there as well to spice it up some.
Mark Zandi: Yeah, which we've definitely got to talk about. We've got a great guest to talk about all of this with, and that's Diane Swonk. Hi, Diane.
Diane Swonk: Hey, great to be here, Mark.
Mark Zandi: Good to have you back. I can't remember, do you remember the last time you were on? It was probably about a year ago, I think.
Diane Swonk: A little over a year ago, yeah.
Mark Zandi: At that time, you were chief economist at Grant Thornton, and now you're over at KPMG, congratulations.
Diane Swonk: I am, yeah, with my old team over at KPMG.
Mark Zandi: Oh, did you bring your whole team over?
Diane Swonk: Oh, of course.
Mark Zandi: Oh, excellent. Fantastic. Are you guys remote or is there a HQ?
Diane Swonk: A lot of the team was hired apparently during the pandemic. My team was in Chicago and so there's a lot of teams scrambled all over the country, but we're all going in for the NABE Conference, the National Association for Business Economics, and so we get to meet in person there. We've not been together enough, but we do get together, because it's so much more productive when you can all see each other in-person.
Mark Zandi: I guess we haven't seen each other either, have we? I haven't seen Marisa... Oh yes, I have-
Marisa DiNatale: Yeah, we just saw each other.
Mark Zandi: Oh, in Phoenix, we saw each other, of course.
Marisa DiNatale: Yes, right.
Mark Zandi: It's all a blur to me. I can't distinguish between Zoom and person, but-
Diane Swonk: Oh, I can distinguish in-person.
Mark Zandi: You can. When did you make that move from Grant?
Diane Swonk: July 18th.
Mark Zandi: July 18th, very good. KPMG, their headquarters, physical headquarters, where is that? Is that in New York or where is that?
Diane Swonk: Yeah.
Mark Zandi: It's in New York.
Diane Swonk: Yeah. But we have a big office in Chicago, AM building, beautiful. It's lovely. You can see the lake and all that kind of stuff, really nice.
Mark Zandi: That's nice. You're in Chicago now, that's home?
Diane Swonk: Yeah. I just keep staying in Chicago, it's just the firms that I work for change.
Mark Zandi: Well, it's a good spot.
Diane Swonk: Yeah, I like it.
Mark Zandi: Nice, centrally located, easy to get to places.
Diane Swonk: I'm a Midwesterner through and through, Mark, and I always have been, always have been.
Mark Zandi: You're not moving to Florida like the other half of Chicago?
Diane Swonk: No, and not like you. No, no, I don't dip out. No, I'm not moving to Florida anytime soon, I can assure you of that.
Mark Zandi: Citadel, right? What's that guy's name? Ken Griffin.
Diane Swonk: Yes. Yes.
Mark Zandi: He made the high-profile move and bought, what, a $580 million mansion? I don't know, I'm making that up, but it was a pretty big place down in Florida. Well, very good. There's a lot of ground to cover, the banking situation and, of course, the Fed did meet and raised interest rates again to end the recession, and we're going to do the statistics game, as well. Maybe we can start with the banking situation, and let me ask you, Diane, how big a deal do you think this is for the economy?
Diane Swonk: Actually, I think it's a really big deal, because of where I think the credit tightening's going to hit the economy the most, and that's because we've done an awful lot of work that we have been doing about the resilience of the US labor market and how resilient it was. The main reason for the resilience was in firms with 250 employees or less, and that's where you're going to feel the credit tightening the most. We also did a lot of work on the new business formations, those high-propensity business formations, and we found about half of the excessive increase in new job openings that we've seen since February 2020, which was around 7 million, they were running at 10.8 million in January 31st, 2023, so 50% increase in new job openings.
Nearly four or five of those, and actually a little more now in January, were due to these smaller businesses and they were more than absorbing some of these high-profile layoffs that we've seen. We even saw, we did some work looking by sector in November, the quit rate in places like tech before they had some... As you're starting to get rumblings in tech that all of a sudden they had maybe overshot a bit on some of their hiring, one major firm alone hired, between 2019 fourth quarter and 2022 fourth quarter, almost 900,000 people, one firm. I don't use names of firms, I can't do that.
Mark Zandi: I think we can guess.
Diane Swonk: You think about that large hiring in that one firm and then they had their largest layoffs in history, the first one was 18,000 and the second one was 8,000. You put it in the context of that and you're like, "Well, that's not very much."
Mark Zandi: This feels like the statistics game. Can anyone guess?
Diane Swonk: Yeah, exactly. Exactly. But it is really interesting to know how we saw the quit rate in tech picked up dramatically in November and December, it stayed at elevated levels. That was because people were jumping and hopping chips, sort of adverse selection here, because they could, because those skills were still very highly demanded. Now, job openings on the more high-frequency data and places like Indeed and stuff like that, they're starting to slow down and things like computer software engineers and things like that.
It's still from a very high level, but we are very worried about where the heart of the credit tightening will hit in commercial and industrial loans, what's going to happen in commercial real estate, and more broadly, the backbone of what we see the resilience in the US economy, these smaller businesses that have been able to absorb. And new businesses and startups. This has been a highly unusual period for not only startups, but the speed with which firms that made the petition to say, "Hey, I'm applying for a new company that I'm starting here and I intend to hire," and those are running still 40% above the 2010 levels in January.
Mark Zandi: That's the IRS data, the EIN, Employee Identification Number, data.
Diane Swonk: The compression from two years before from an application prepandemic to actually hiring people went from three to nine months instead of two years, so one to three quarters. You really saw by the middle of 2021, it was adding about a million new jobs per quarter just from that alone. That's a lot to all of a sudden start going in reverse on and that's where I'm concerned that a combination of factors, I'm sure PPP loans played a role in all this, as well, but at the end of the day, a combination of all these factors is going to hit the backbone of the resilience we've seen in the labor market that is not a cliff event like 2008 or Lehman, but a slow-moving squeeze that really could have a more of a credit tightening effect than I think the Fed had hoped to cool.
Mark Zandi: The key channel you're identifying between what's going on in the banking system and, I call it a crisis, I don't know that's the word you're using, but-
Diane Swonk: It certainly is not, it's not a crisis.
Mark Zandi: It doesn't feel like a, event doesn't-
Diane Swonk: It's hard because our thresholds have gotten really high on crisises, so there was-
Mark Zandi: The bar is higher because we've definitely been through a few crises.
Diane Swonk: Those are really bad crisises. The S&L crisis was a crisis that created a lot of headwinds for the economy, which I think are useful in thinking about now. We remember that, Mark, that was in our early part of our career.
Mark Zandi: That was the first crisis I really went through as a professional economist was the S&L, the savings and loan crisis.
Diane Swonk: Exactly.
Mark Zandi: Absolutely.
Diane Swonk: Well, and Bloody Monday.
Mark Zandi: Oh yeah.
Diane Swonk: October 19, 19-
Mark Zandi: You were in a big bank, you were in First Chicago.
Diane Swonk: I was at a money center bank, oh yeah.
Mark Zandi: You were in a money center bank at the time.
Diane Swonk: At the time, I worked for Bill McDonough, who was the vice chair of the bank who later became the president of New York Fed, and our analysis said, "This isn't the Great Depression," because of what the Fed did at that point in time in terms of infusing liquidity into the system and stabilizing the system that this would not be the Great Depression. Actually, Bill McDonough went down and took over, it was my early years starting as an economist, and Bill McDonough, who was the vice chairman of the bank and was our boss and head of strategy, took over the training floor to stop the panic on the training floor, because he didn't want them to lose all the positions that if they just waited it out, we would be in better shape, which we were right and he was right.
Mark Zandi: This is a crisis, or it's not not a crisis-
Diane Swonk: This is a crisis. It's not as bad as 2008 and it's not as bad as March of 2020.
Mark Zandi: The key link in your mind between what's going on here in the banking system and the economy is the availability of credit, particularly to small business, and you've identified small business as the-
Diane Swonk: And medium-size businesses and commercial real estate. The banking sector, well, Mark, the banking sector isn't as big as it is in Europe, in terms of providing credit to the US economy, but we've already got stresses in large firms that are starting to pull back a bit, and then you add some stresses in firms that had been the engine of growth and been able to absorb that and it happens to be where they get the most of their credit, and I think you start to get a much more tenuous situation that's more of a slow-moving crunch that is probably not as contained as the Fed would like.
Mark Zandi: Hey, Cris, you've done a lot of work in this area, too. We had a webinar this past week to discuss with our clients the impact of the banking crisis on the economy, and the key channel you identified was the same one Diane is focused on. Anything you wanted to add to what she just said about that-
Cris deRitis: I certainly share her concern, small business is front and center. They were already struggling to find credit even before this crisis, so banks had already been tightening, small businesses were already complaining about troubles finding credit, so this is only going to exacerbate that. And then the CRE, I'm particularly concerned about that, the commercial real estate market.
Diane Swonk: The commercial real estate component, that's where I sort of get the parallels to a little bit of going back to 1990, '91, that was when Chairman Greenspan first said, and it was actually when I first met him, the 50 mile per headwind. What he did was he was cutting interest rates into the recovery after, it wasn't a bad recession, but it was our first, quote unquote, jobless recovery, which didn't mean that it didn't generate jobs. I think people always get confused about that, but it's like stainless steel, it's not that doesn't stain, it just stains less, there's just fewer jobs. I think it's an interesting dilemma when we think about what does the post world look like, because I actually think we're moving into a more inflation-prone world in general that's more prone to inflation shocks and rate hikes, yet we could have this tail on commercial real estate that might not respond to interest rates coming down as rapidly, as well.
Mark Zandi: Marisa, anything to add on this particular point, on credit availability and the banking-
Marisa DiNatale: No, just that we've been looking at things like the Senior Loan Officer Survey for a while and seeing that tightening is happening pretty much across the board, but in particular, commercial real estate. I think in the first quarter, 70% of banks were saying they were tightening standards on CRE loans and about 55, 60% were tightening lending to small and medium businesses, so certainly now we're in a different world than we were back then and it was already looking very tight. I think, Diane and Cris, that makes sense that this is the main channel to be concerned about to the broader economy.
Mark Zandi: Just to make that clear to the listener, the Senior Loan Officer Survey is a quarterly survey done by the Federal Reserve of senior loan officers at small and mid and large sized bank.
Diane Swonk: All across the board.
Mark Zandi: All across the board. They create these, I guess, these diffusion indices, the kind of net percent of respondents that say that they're tightening underwriting for different types of lending and that's the data they're using, pretty timely data.
Diane Swonk: Mark, that's important, too, because it's something that Chair Powell brought up in his press conference that-
Mark Zandi: Oh, did he? I missed that. Did he bring that up?
Diane Swonk: Well, didn't bring up the Senior Loan Lending Survey, but what he did say was there's other measures of financial market conditions that suggest they're tighter than just the interest rates alone, and I think that was a reference to this. There's also the University of Michigan has, in their sentiment index, has a measure of consumers' view on tightening of credit conditions and that's gone up to the highest level since 2008, although again, high threshold. But I think it's important that we think in terms of holistically and some of these more qualitative measures, as well, rather than just what people spend time on with inversion of the yield curve and stuff like that.
Mark Zandi: Go ahead, Cris.
Cris deRitis: Question, Diane. I was wondering if you had a view on the equivalence of the tightening of, or on credit availability to rate hike, how many basis points? This is something we've been debating.
Diane Swonk: Oh yeah. We've been debating it, too. We've been running scenarios anywhere from an additional half percent to an additional percent and if Fed funds rate tightening, and so-
Mark Zandi: Just to make that clear, the credit tightening because of the banking crisis has the same kind of economic consequence or effect as, you're saying, a half to a full percentage point on the funds rate?
Diane Swonk: Right.
Mark Zandi: Oh, that's very significant.
Diane Swonk: That's very significant. It gives you some interesting scenarios. And then we're shocking the models with more volatility and then higher equity premium, so you get more VIX out of that, more volatility in the markets from that, and that gives more credit tightening across the board, and so you start getting cascading events. It's not a disaster scenario, but it's certainly a much more, we were looking for mild contraction and now, it's much harder to get to that mild contraction, not very high unemployment, relative to our demographics.
Mark Zandi: Oh goodness. Before this mess, you say contraction, but let's just make it clear, you're saying recession, mild recession, and now you're saying a more serious recession.
Diane Swonk: We had unemployment rate rising about a percent and slowly grinding down inflation. It's sort of the Fed's recession, which they don't call it a recession-
Mark Zandi: 3.5 to 4.5 kind of recession.
Diane Swonk: Yeah.
Mark Zandi: Now, you're saying 3.5 to what?
Diane Swonk: Could be as high as 5.5.
Mark Zandi: Oh, so that'd be almost a typical recession, kind of a typical post-World War II recession.
Diane Swonk: More typical, exactly.
Mark Zandi: When does that start, can I ask?
Diane Swonk: Well, so we actually can get it started, because of this more rapid tightening now and the nonlinearity of it, we can get it started in the second quarter, which is, and then-
Mark Zandi: Q2, so now, like next month?
Diane Swonk: Yeah. Next month.
Mark Zandi: Oh my gosh, you are pretty pessimistic.
Diane Swonk: Yeah.
Mark Zandi: I want to come back to the Fed, because-
Diane Swonk: But it doesn't really gain momentum until the summer, the summer's the worst of it and then it tails off. It's hard. It's hard. It's hard. There's a lot of things that are-
Mark Zandi: Can I ask, Diane, that's based on what has happened so far, are you making some forecast about future problems? Do you think the banking crisis is over or is there more coming?
Diane Swonk: I don't think the financial situation we're in is done yet.
Mark Zandi: There's more coming?
Diane Swonk: I would like to be hopeful that we've contained and put a ring around all of the additional tightening that's going to come, besides what the Federal Reserve wanted to do, I'm not confident that that's the case. I think that's really important, because we tend to think of these things in terms of they usually don't play play out entirely within the course of weeks or days, they usually take months. Even thinking back on things like LTCM and the situation with the Russian debt debacle and then the Thai baht crisis, I guess we can benchmark our careers, Mark, by the number of financial crisises we've been through.
Mark Zandi: Well, I'm getting sold now, I can't even remember all of them, like LTCM-
Diane Swonk: Well, I feel like with my dyslexia, that's my only way I can be all right is I can remember the crisises.
Mark Zandi: It used to be the 1984 collapse of Continental Illinois was a huge deal, now no one even remembers that one.
Diane Swonk: I wasn't even in banking yet, but that was a huge deal.
Mark Zandi: That was a huge deal.
Diane Swonk: Interestingly, it was my... I worked for the bank, First Chicago, that absorbed many of those employees, almost like a, at the time, I hate to say this, it was like a gentleman's agreement. Once I joined the bank, that had already happened and it was after I joined that that had happened, but it was a pretty recent thing that had happened. The bank that I joined at the time was First Chicago, it later became JPMorgan, and I worked for Jamie Dimon for four years. What was interesting about it was they had a gentleman's agreement to hire a lot of people that got hit by the Continental Bank failure. That was really more tied to the oil price situation and the oil that they made than the interest rate situation that was... But my children's grandfather, he passed recently, lovely man, he worked his whole career at Continental Bank and that was a very hard thing for him.
Mark Zandi: I bet. I bet.
Diane Swonk: But he did make it all the way through.
Mark Zandi: But I want to circle back, Cris pushed the conversation a little further than I wanted to go at that moment in time, but that's okay, that was very interesting, but I want to come back, I want to come back. We're talking about credit tightening and trying to understand that. The one thing we've identified that is helpful there is the Senior Loan Officer Survey. I'm struggling to find anything, you mentioned Michigan, but that's kind of on the margin.
Diane Swonk: Yeah, it's on the margin.
Mark Zandi: Is there anything else we should be, are you looking at any other indicators?
Diane Swonk: Well, you must be looking at the Treasury market, as well, which we had a lot of short covering that spiked that liquidity back to the lowest level since March 2020.
Mark Zandi: But back to the credit standards, to the direct, that charging market reflects a lot of stuff-
Diane Swonk: Yeah. Well, the other thing we're watching is we've been watching deposit flows, too.
Mark Zandi: Deposit flows.
Diane Swonk: That data's lagged, but it does coincide, I think, with deposit flows that we've seen. Part of the stress that was in the system that many people didn't see is that depositors were fleeing for money market funds, but also just looking for Treasury bonds. All of a sudden, you could get a return parking your money elsewhere than a bank, and a higher return. I think that that's another issue that hasn't really been... That was happening way before for a while, building up, and so you wonder, there's obviously some outliers out there in what's going on, but there's also some consistencies that I think we have to look at more broadly, in terms of where are depositors looking to park their money and how fast?
It's a comment that Jay Powell made, as well, is how fast people can move money now and how fast that is occurring is really something very different than what we had in the past. I'm even thinking, Mark, we were there for flash crashes and there's things that have happened quickly, but this was a very rapid event, however there were signs of it earlier, and I kicked myself and I know you've kicked yourself for how much did we miss?
Mark Zandi: We should have seen this, at least some of it.
Diane Swonk: Yeah. The movement and deposit flows, I should have been looking at that sooner. Now, I'm paying attention to it, but-
Mark Zandi: Well, I saw the deposit flows, but I didn't connect the dots to how much stress that was... We were talking about this at the webinar yesterday, I look at these things from a 30,000-foot level down, maybe I go to 20, maybe I go to 10 and I look, and if I look at the aggregate statistics across the banking system, I expected some deposit outflows, because you saw a surge of deposits during the pandemic for savings or the fact I can't go out and spend, so I'm not surprised by that. But I think you need to look at the distribution across all of the banks in the system, because there's those banks kind of out on the tail, that's where the problems are, and if you're looking from a 10,000 foot level and don't look at the distribution, which I failed to do here, you miss it. I think that's the issue.
Diane Swonk: Well, it gets to the issue where the.... Oh, there's my dog, Bear. Sorry.
Mark Zandi: Oh no, we're dog-friendly. We're dog-friendly. Child-friendly, crazed economist-friendly, we're ecumenical. Hey, can I ask, though, so the other indicator you're looking at is deposits and I think that's a good one because you're saying, "Look, particularly for smaller to mid-sized banks, they need those deposits to be able to go out and make loans. If the deposits are flowing out, if people are pulling their money out, then it's much more difficult for them to find the funding necessary to go out and make a loan, so that's a pretty good indicator that there is some credit tightening"?
Diane Swonk: Of tightening credit conditions in general for the macro economy. Other things that I think are important, as well, is, in addition to that, it really is a more economy-wide thing, flows into money market funds versus other places-
Mark Zandi: Did you see that data, by the way?
Diane Swonk: Pardon me?
Mark Zandi: Did you see the ICI data, the most recent data? Did you see that, another week of pretty significant inflow into the new money farms?
Diane Swonk: Inflow into the money market farms. And then the other issue, of course, the stigma has come off the discount window of the special funding facilities, we know who's using those, but watching the swap lines that the Fed set up in the last week, as well, with other central banks.
Mark Zandi: I haven't been looking at that at all.
Diane Swonk: That gives you a sense of stresses in the overall global banking system, and as I said, this is not just banking, this is financial fragilities. I think I brought up a little earlier, Mark, that the IMF all of a sudden moved, after not moving for a long time, for obvious reasons, with Sri Lanka with a package and now they're moving with Pakistan. As the swap lines were announced, there was dollar appreciation, which then put stress on some of these emerging markets that were already feeling stress.
One of the things from day one, I remember the Jackson Hole meetings and the 2020, 2021, especially in 2021, talking about normalizing rates and where we thought the natural suspects were of fragilities in the financial system were things like sovereign debt and how much sovereign debt we had taken on globally and which countries were at risk as the Fed, in particular, started to raise rates and would that have any sort of cascading effects through the global economy? There was an enormous amount of time spent in terms of thinking about emerging market risk and what was the exposure, was there some kind of major hedge fund blow up out there that had made a major bet or a pension fund that had reached for yield, as yields were so low for so long? All of those things, I think are things that we need to take into account now and so those are things that I'm watching, as well.
Mark Zandi: Just taking it back to the banking crisis, so senior Loan Officer Survey, deposit flows, and they have weekly data from the Fed, the H-8 release, you can see what's going on with deposits and they're flowing out of the system right now. Money market funds, you can see from the, it's called the Investment Company Institute, I believe, they publish data on flows in the money farms, if there's a lot of flow in, too, that's coming out of deposits. Cris, have you looked at the recent data around discount window borrowing in the bank term funding facility? Did you see that recent data coming out of there?
Cris deRitis: Not the most recent one, but-
Diane Swonk: It came out yesterday.
Mark Zandi: Yeah. That showed, this time, a sizable increase in the bank term funding facility. I think it was up to 55 billion, 54 billion, discount window borrowing is still very high. These are ways banks that are having trouble with deposits and liabilities funding can fill that hole, so they're calling upon the Fed to provide that liquidity that they need to meet their deposit outflow. Those are all good weekly things to watch, I guess.
Diane Swonk: Yeah. Well, and what's interesting to me is the stigma that's come off the deposit window.
Mark Zandi: Yeah.
Diane Swonk: To me, that is how the system should work, actually, because we want-
Mark Zandi: Stigma meaning previously, historically, if a bank went to the discount window, everyone said, "Oh my gosh, this bank is in trouble," and then it became self-fulfilling that everyone stopped doing business with them and they were out of business.
Diane Swonk: Right, so you couldn't go to the discount window and you couldn't do what it was meant to do and be a backstop. Now, I do think it is serving more the function. Maybe that's a legacy of 2008, one, nobody wants to be a... I knew a lot of bankers who were not happy about having to be, everyone had to sign up and say, "We're all using the discount window now," so that it wasn't a stigma and they weren't happy about what that meant for them to have to do that. But at the end of the day, that may be one of the positive things from the 2008 crisis that we now have a more functional system that doesn't penalize banks in this kind of situation because they-
Mark Zandi: But the other indicator, I just throw it out there, where there was never a stigma was Federal Home Loan Bank advances. The Federal Home Loan Banks provide loans to banks who put up Treasury and mortgage securities as collateral, kind of served like the bank term funding facility, and those advances have also surged to record highs, also indicative. I think that's weekly data, too, I'm pretty sure we can get weekly data, certainly monthly data, and that's another good indicator of potential stresses in the system and that would translate through in terms of credit availability.
Diane Swonk: Well, and all this we're looking at is part of what you would expect from the Fed tightening.
Mark Zandi: Yeah, absolutely.
Diane Swonk: This is part of normal, this is part of-
Mark Zandi: It's how it works.
Diane Swonk: This is how it works. The hard part is you never know... The word, and actually, I was thrilled that Jay used the word in the press conference, he looked really, it was rough, a rough couple of weeks, 12 days for him. He actually said 12 days, I was expecting him to say 12 days and how many minutes and how many hours. But he used the word nonlinearity and when I'm talking to my audiences, I'm like, I found out only one in four people knows what exponential actually means, so-
Mark Zandi: One in four, is that a official survey?
Diane Swonk: Apparently, that's one in four-
Mark Zandi: One of us in this group does not know what exponential.
Diane Swonk: Well, it's funny, because my son has said, "Well, it's clearly not the people around this table, so who is it?" But nonlinearity, that is hard for people to get their hands around, too, and I'm like, well, you don't want to get to moments where you've got the straws piling up on the camel's back, you don't want to break the camel's back, but it doesn't necessarily mean the back breaks, per se, but the weight goes up more. The nonlinearity of this tightening that we're seeing now, I think it's much less predictable and we're all trying to assess how much, and to Cris's point, how much is this, even Chairman Powell said, "Well, it's a guess on how much tightening this is equivalent to," and I'm having a really hard time getting my arms around the numerical estimates.
Mark Zandi: Well, we came up with two to three quarter-point rate hikes, it's equivalent, the economic consequence, which is a general ballpark-
Diane Swonk: It's not far from where we are, 50 to 100 is-
Mark Zandi: But there is an offset here and I'm just curious how big an offset you think it is, and Cris, you've also done work here, too, is lower interest rates. As you've pointed out, Treasury rates are down a lot. Now, mortgage rates and corporate bond rates haven't come down nearly as much, and in fact, I don't know, Cris, have high-yield corporate bond yields even come down? Maybe they've just-
Diane Swonk: They probably widened out.
Mark Zandi: Did they actually go up, the yields go up? The spreads over Treasury's went up, but did the yield go up? I'm not sure that the yield went up, do you know?
Cris deRitis: Oh, I don't know.
Mark Zandi: I think they're pretty flat.
Diane Swonk: Then the issue, too, is, and the mortgage one is an interesting one because the housing market, we know it's so grossly undersupplied. There people who have got their houses, I'm in a house that's paid off because I've been in it a long time and it's paid off in full, that's, what, 42% of the market, then you've got over 90% in some kind of a fixed rate mortgage and they just don't want to move, and then you've got people tearing down their existing house and rebuilding it to trade up instead of... That's a new thing that's going on.
But on the mortgage side of things, you would expect to see, and this is the part that we're trying to grapple with, as well, is even as rates come down, because we've seen every time rates come down, you've got those buyers that, especially any supply that's out there, there's still bidding wars on the cheaper, entry-level stuff because people want to buy it, that's where the millennials are aging into, and they want to get those homes and there's just not much supply. However, I would counter that I would expect to see even tighter mortgage market conditions in terms of lending standards.
Mark Zandi: But by whom? By the jumbo market, you mean? Because Fannie, Freddie, and FHA aren't going to-
Diane Swonk: Right. They can do that in the jumbo market, in particular. But also, you get to the jumbo market pretty quickly in terms of they do have different jumbo markets for different markets, obviously, because what's considered entry-level in New York is not considered entry-level in a suburb of Chicago, but I do think there's going to be some tightening of lending standards, as well, that are just going to be a little harder for people on the margin to get in. That may not have much of effect because there's just not that many people that can get in, the volume of activity is limited.
Mark Zandi: I think the, at least from memory, the jumbo market's probably a quarter of the origination market, so it's meaningful, but that gives you context. But Cris, mortgage rates have come down, right?
Cris deRitis: Yes.
Diane Swonk: Oh yeah. They've come off their highs.
Cris deRitis: Yes.
Mark Zandi: How far have they come down, do you know?
Cris deRitis: I think they were at 6.5 last time I-
Diane Swonk: 6.5, and they went over 7.
Mark Zandi: They were over 7, we're down about a half a point on fixed mortgage rates. That should help a little bit offset things, no?
Diane Swonk: It should. Well, and the issue is how much activity do we get out of it because of the constraints in the housing market, as well? I would expect a lot of demand and you see people going in with adjustable rate mortgages, which I understand why they want to do that because they think, well, in a year maybe rates will be lower and why lock into a higher rate, get in the door, and buying up whatever comes up, and supply on the new market is a little more supply, although it tends to be skewed very high end. This match between supply and demand, demand is that 350,000, 400,000 and supply in the new market is much more expensive. They're trying to come down, but they had built a lot of more expensive homes, but the supply, anything that comes online, I expect to be snapped up pretty quickly. But most people don't want to sell, so you do get some offset.
Mark Zandi: You get some offset.
Diane Swonk: But I just don't think it's a big enough one that the housing first-in, first-out and all of a sudden, our housing price scenarios look stronger than they would have even in the beginning of the month, because rates now look like they're going to be a little lower. It's been amazing how little a movement in mortgage rates has brought people back in and given affordability.
Mark Zandi: Yeah, it's interesting. We've got this credit tightening, big negative, we've got a little bit of a decline in interest rates, not a whole lot, maybe on the mortgage side, not so much on the corporate side, so maybe a little bit of offset, so a pretty significant offset. Hey, Marisa, are there any other channels that you can identify between this banking crisis and the real economy? There's credit, there's the availability of credit, there's the cost of credit, is there anything else you can identify, any other channels?
Marisa DiNatale: No, I think jobs is the other one that Diane brought up, which goes to credit, it could go directly to the financial services industry, too, so I think those are the main ones.
Mark Zandi: Cris, any other channel?
Cris deRitis: I'd say the elephant in the room is confidence.
Diane Swonk: That gets into when you start hitting the volatility and the risk premium, that's you start getting nonlinearity.
Cris deRitis: Consumers, if they lose faith, even with a cheaper mortgage rate out there, they're going to be cautious and pull back, and if that happens, we're going into recessions.
Mark Zandi: If consumers are spooked by all this, and certainly, judging by my anecdotes in my family and the questions I got around is my money safe, people are pretty nervous, I would say, so the question is are they going to run for the hills or not? That's the key question. So far, we don't have any evidence one way or the other on that one, do we, nothing out there so far?
Marisa DiNatale: I was with a group of CEOs of credit unions yesterday and they were saying just how many calls they're just getting from depositors just, "Is everything okay? Is the bank okay? Am I going to be able to get my money out?" It seems like, just talking to people in the banking industry, everyone is a little bit skittish by this, so I think the confidence channel, you're right, is huge.
Mark Zandi: Diane, here's the key question, given everything we just said and given, obviously, your views that the economy's headed to a recession here quickly, why in the world would the Fed raise interest rates as they did this week? What's going on?
Diane Swonk: Clearly, they wanted to signal their confidence in the banking system, although they rolled it back from just two weeks ago. It seems like an eternity in the economy's case, just two weeks ago, we had the chair, Jay Powell, say 50 basis points the next meeting and a higher terminal rate, and so going to quarter point, they decided that would be a signal in their confidence in the system and where we're at and that basically, from where they were assuming somewhere implicitly about a half percentage point tightening in the overall economy due to the credit tightening we have.
That said, my own view would have been to do a pregnant pause and say, "We'll deliver later if we need to, but let's assess where we're at, given we know there's tightening in the system." What's interesting to me is still, I think the concern at the Fed is one, I think they want to delineate interest rate policy from financial stability, which I'm not sure you can actually fully do that, and two, how do you really derail what looks like it might be a more sticky inflation? Their worst nightmare is if something were to happen and they buoyed the economy enough that they don't derail that inflation and you get something that is a more persistent bout of inflation, and the errors the Fed is trying to avoid, of course, are the 1970s and this more baked-in inflation. But as a risk-hedging institution that the Fed is, I was a little surprised.
Mark Zandi: I don't get it at all. One week, you're setting up a credit facility to provide liquidity to banks so that they can pay depositors and then literally, the next week, raise interest rates that puts pressure on the same banks. There's a whole argument that they're trying to restore confidence, that makes no sense to me, because everyone knows that the banking system's under a lot of pressure and credit's a problem, so who's fooling who?
Diane Swonk: Well, and I have a lot of empathy for your views and it's not just sympathy because I was at the same place. If I was, I'm not sitting at the table, so it doesn't really matter what I would have done, but looking at it from where we were, the fact that the European Central Bank went, I think that was a different issue and I wouldn't have used that as the indicator. I do think one of the things they're worried about is they had 82 to 85% priced in at 25 basis point hike, so the market was expecting it. That said, about over 50%-
Mark Zandi: That's because of what they guided. If they had said one small thing and-
Diane Swonk: But they couldn't, it was a blackout period.
Mark Zandi: Oh, okay. Good point, I hadn't thought about that.
Diane Swonk: Part of what happened was we went from 50 basis points and right after that, we went into the blackout period where the Fed could not speak.
Mark Zandi: Good point. They couldn't guide. But here, let me ask you this question, if they paused, would we have seen red on the screen or green on the screen?
Diane Swonk: It's not clear to me.
Mark Zandi: Not clear.
Diane Swonk: I think that you could have messaged... The messaging is really difficult. What's interesting is a recent study on messaging, one, Chair Powell has more press conferences and has had them through a more volatile period in time than any Fed chairman. On the volatility during the press conferences, more than any other thing, the statement, the action, it's the press conference received the most volatility and so the press conference really does matter. That said, the recent study looked at even taking out prepandemic press conference of Jay Powell versus other press conferences because they're longer and he's more willing to talk about these things in a different way, there's more volatility in financial markets as a result of that. We can say that's good, bad, or indifferent, but I think it's really important because it tells you how much power they have in messaging at the press conference.
I actually think you could have walked in and said, "We're going to pause right now, we're keeping all options on the table to go further," and I would have suspended their summary of economic forecast, because given the uncertainty, and we have a precedence for it, March of 2020, but why give a forecast when you just don't know where the economy's going and how much credit tightening is already in the pipeline? My preference would have been that. I think you could have messaged through that saying, "We believe in the stability of the system and we think there's a ring around this, but the bottom line is the Fed's goal was to tighten credit conditions and slow inflation and slow the economy." My view is probably aligned with yours on that, and I'm not sure that you can delineate financial stability and interest rates as much as the Fed would like to argue that you can-
Mark Zandi: Not in this environment, you can't, not when my mother-in-law's asking, "Hey, is my deposit safe? Is my CD safe in the local bank?" You can't divorce the two. But anyway, here we are.
Diane Swonk: It is. You and I would have done it differently, but we're not in that decision. I turned down the ability to be in that decision a couple times, it is what it is. But it was a calculus they made and you could tell that they did... The fact that he admitted that they thought about a pause, I think that was important. But at the end of the day, it was pretty clear that this has been a rough couple of weeks and just seeing Jay Powell's tenor, I think a lot of people forget and I think this is important, Mark, for you and I, too, because we think of this is just not data, this is people's lives.
We're worried about people's lives, the economy is about people's lives. Everyone hates the Fed, I see them as a political pinata all the time, and I don't always agree with them, but that these people internalize this and you can see it in their body language, you can see it in when you deal with them, how concerned they are about getting things right. It's hard to get things right when you've gotten no visibility. In my view, when you got no visibility, you probably shouldn't be doing anything, which is where we're at.
Mark Zandi: Well, it's like Policy 101, if you're unsure, then I think that would argue strongly, you err on the side of accommodation. You don't press on the brakes, just don't press on the accelerator, but take your foot off the brake for a little bit just to see what's going on.
Diane Swonk: Just to take a breath. To me, I've always argued that fighting inflation is a marathon, not a sprint.
Mark Zandi: Yeah, exactly. That's a good way of putting it.
Diane Swonk: You and I are runners and at some points in time, you need to... The hardest mile is where a lot of central banks drop off and they fall short of the finish line, but part of getting through the hardest mile is focusing on overcoming mind and body that wants to stop, but it's also taking a moment and focusing and taking a breath. I think that's a good way to be thinking about this. My colleagues and I, we debated this at length, what do we think's going to happen? We just kept saying, "Given the risks," and the Fed said, "There's downside risks, we're raising rates with downside risks." Again-
Mark Zandi: I hear you. I'd say we're pausing and there's downside risks. Well, anyway, you're right, though-
Diane Swonk: I think we're sort of in a similar place, you and I, in terms of what we think. I understand the inflation concerns, but I didn't see this as... Mohammed Al-Arian is a very good friend of mine and I think the world of him and he's been the Fed's late. I argued the Fed was late, however if the Fed had moved, say, three to six months sooner, court-appoint moves, and they had realized it wasn't transitory a little sooner, we still would have had a very disruptive rate hiking cycle. The counterfactual on this is not that we'd be where we wanted to be and it would have been a nice, smooth transition. I think that's a little disingenuous, too. Just to raise rates because you'd want to look strong on inflation, I don't think the trade-off is between financial stability and inflation.
Mark Zandi: I'm not at all critical of what the Fed did a year ago, there was the pandemic, there was Russian invasion. It was a mistake, obviously, but I don't think it's appropriate to be critical of them. But this move is on them, this is on them.
Diane Swonk: This is harder. This is harder. I added out there a pregnant pause, be ready to deliver if you need to, otherwise. They came to a consensus, I think they had to come to a consensus, but the fact that you also look at the dots and that someone was close to 6%, you know where there was pushback, too.
Mark Zandi: For sure. Hey, let's play the game, the statistics game.
Diane Swonk: Yes, yes.
Mark Zandi: Let's do that before we run out of time. Just to remind the folks, the game is we each put forward a statistic, the rest of the group tries to figure that out with questions and clues and deductive reasoning. The best statistic is one that's not so easy we all get it immediately and one that's not so hard, we never get it, and if it's apropos to the topic at hand, plus. It's tradition to begin with Marisa. Marisa, what's your statistic?
Marisa DiNatale: It is 14.4%.
Mark Zandi: I know what it is. I want everyone-
Cris deRitis: Me too. Me too.
Mark Zandi: Oh, everybody knows what that is.
Marisa DiNatale: God, I didn't think it was going to be this easy.
Mark Zandi: It was a light statistics week, I think.
Marisa DiNatale: That's true, it kind of was.
Mark Zandi: Diane, do you have it-
Diane Swonk: It's in the housing market.
Cris deRitis: On the count of three, we both say it.
Mark Zandi: It's not in the housing market, but it's related to the housing market.
Diane Swonk: Oh, okay.
Mark Zandi: Cris, I will bow to you. Go ahead, you deserve the cow bell.
Cris deRitis: That is the financial obligations ratio.
Marisa DiNatale: That's right. That's right.
Diane Swonk: Oh, there you go.
Marisa DiNatale: It's the financial obligations ratio in the fourth quarter of 2022. This just came out this week, this is data from the Fed. They put out data on the share of household disposable income that is going to debt payments, so there's also a debt service ratio that they put out that's accompanied by this. The financial obligations ratio is a bit broader, because it includes things like rent for people that are renting as opposed to homeowners, it includes auto lease payments, I think it includes homeowner's insurance payments, it's a bit broader. 14.4%, very, very low and pretty much unchanged over the last three quarters.
This is actually still lower than it was prior to the pandemic. If you go back in the months leading up to the pandemic, the financial obligations ratio is 14.6%, so we're almost there, but it's extraordinarily low and it goes to both we know that debt is growing, household debt is growing, and the cost of debt, obviously, has gone up with interest rate hikes, but income has gone up, too, and so as a share of income, it's still very, very low. I picked this to show still the sort of resiliency and bulwark of household balance sheet strength in this economy, which probably goes a long way to explaining why we are not in a recession and haven't been yet.
Diane Swonk: Absolutely.
Mark Zandi: The financial obligations ratio, the debt service burden are very low, stable, why are we seeing these.... This doesn't square with the big increase in delinquency that we're seeing in cards and unsecured personal loans. Is it just that, again, it goes back to the distribution, we can't look at the aggregates, we've got to look at the distribution and it's low income households, debt service is a lot higher, is that what's going on?
Marisa DiNatale: Yes, so delinquency rates for auto loans and consumer installment loans are now higher than they were prior to the pandemic.
Mark Zandi: And rising fast, right?
Marisa DiNatale: And rising. But for the biggest part of debt, which is mortgages, they're still very low and they're still lower than where they were. Yes, you have segments that are rising, and you're right, that probably goes to, I'm sure if you were to cut this by income, it would look very different for lower income households than it would for middle or high income households, but it's still a relatively small piece of overall consumer debt when you take it in totality.
Mark Zandi: Diane, you wanted to say something?
Diane Swonk: Subprime disappear in the auto lending business as a result of increases in interest rates. That is something that I think you're seeing the subprime echo and the affordability in vehicles is really low, all cash purchases on vehicles, and I think the actual transaction price as of December was around 47,500 on average. That's a big check to write out for an all cash purchase for most people and the demand for used vehicles has gone up yet again, and so the subprime aspect of this really hard, particularly for lower income households that also got squeezed by higher gas prices, higher insurance costs, higher maintenance costs on their vehicles, all of those things, I think that's where you're seeing some stress. But it is an area that got that waiver and so they kept lending in subprime, and so I'm not surprised to see it there.
Mark Zandi: Let's move on. Cris, what's your statistic?
Cris deRitis: This one is difficult, but here's my hint, during the pandemic, in the teeth of the pandemic, you would have known what this number was, you would have been tracking this.
Mark Zandi: Number of people sick with COVID?
Cris deRitis: Nope. Let me give you the number first. 2,189,372.
Mark Zandi: Oh my goodness.
Marisa DiNatale: Is this a statistic that came out last week?
Cris deRitis: The 22nd of March, yes.
Mark Zandi: Say it again.
Cris deRitis: 2,189,372.
Mark Zandi: It's a statistic we would have known in the middle of the pandemic.
Diane Swonk: It's not the number of people out sick, because the number of people who were out sick and unable to work in the household survey was 1.3 million from now-
Marisa DiNatale: That also didn't come out last week. Is it job market related?
Cris deRitis: No.
Mark Zandi: Is it related to the banking situation?
Cris deRitis: No, not to the banking-
Diane Swonk: Oh, is it something unemployment claims?
Cris deRitis: Nope.
Marisa DiNatale: Is it related to supply chains?
Cris deRitis: No.
Mark Zandi: Is it a demographic statistic?
Cris deRitis: No.
Cris deRitis: It is the number of people.
Mark Zandi: It is the number of people.
Marisa DiNatale: Cris, is it related... No, it's not related. Is it related to the housing market?
Cris deRitis: No.
Mark Zandi: Statistically, you said that it came out on Wednesday?
Cris deRitis: Yes. It comes out daily.
Mark Zandi: Oh, it comes out daily. Goodness gracious. Can you give us one more hint without giving it away?
Cris deRitis: It relates to consumer activity.
Mark Zandi: Oh, is it the number-
Diane Swonk: TSA throughput? No.
Cris deRitis: Oh, what's that?
Diane Swonk: TSA throughput?
Cris deRitis: TSA checkpoint, number of people traveling through TSA checkpoints.
Mark Zandi: Oh, Diane, way to go.
Cris deRitis: You got it.
Mark Zandi: That's a great one.
Marisa DiNatale: Why did you pick that?
Diane Swonk: [inaudible 00:54:41] I'm like, "Wait a minute."
Mark Zandi: I would have never gotten that, that's great.
Cris deRitis: Why did I pick this?
Marisa DiNatale: Yeah.
Cris deRitis: Well, we're looking for measures of how consumers are responding. We're talking about the confidence, but-
Diane Swonk: You got me when said daily, I'm like, "Oh, it's the throughput number," so you gave it away.
Cris deRitis: Spring break's not canceled yet, people are traveling, so this is right on par with where we were prior to the pandemic, and higher-
Diane Swonk: 2019.
Cris deRitis: 2019. Higher than it was last year.
Diane Swonk: We're getting to the 2019 level.
Cris deRitis: Consumers, so far at least, are reacting positively.
Mark Zandi: No sign yet of any... Of course, those were flights that were booked three weeks ago or four weeks ago, but I'm trying to give you a positive spin.
Diane Swonk: They were booked a lot longer ago than that.
Mark Zandi: Well, I'll take it. I'll definitely take it. Yeah, for sure. But that's a good thing to watch, you're absolutely right. Let's watch that carefully. That's a very good one.
Diane Swonk: In the labor market, to add on to that, we hit an interesting inflection point where we're finally seeing, in the monthly labor market data, even though the number of people who are up sick and unable to work is still elevated relative to prepandemic levels, we're hitting, month after month. February was the second highest record for the month of February, but December was a record, January was a record, the number of people out and unable to work because they're on vacation in the household survey.
Mark Zandi: I didn't know that was-
Diane Swonk: That's a data point.
Mark Zandi: Is it a data point?
Diane Swonk: In the household survey, yeah.
Mark Zandi: I did not know that.
Diane Swonk: [inaudible 00:56:17] employment situation.
Mark Zandi: That is so cool. I've got to look at that.
Diane Swonk: What's really cool now and the inflection point now is that the number of people out on vacation has exceeded the number of people out sick and unable to work, as well.
Mark Zandi: Oh. I'm definitely going to start watching that every month. That's a good one.
Diane Swonk: It's a good number.
Mark Zandi: Very good number. Diane, you're up, what's your statistic?
Diane Swonk: Sadly, I didn't know it had to be this week, so-
Mark Zandi: No, it doesn't. No, no, no.
Diane Swonk: Oh, okay. Mine's 1.8 million.
Mark Zandi: 1.8 million. Is it related to UI claims?
Diane Swonk: No.
Marisa DiNatale: Is it related to the job market?
Diane Swonk: Yes.
Marisa DiNatale: Is it from the household survey?
Diane Swonk: Yes.
Mark Zandi: Oh, okay.
Marisa DiNatale: It's not what we just talked about, it's not people out sick?
Diane Swonk: Nope. That's 1.3 million in February.
Marisa DiNatale: I knew it was something like that.
Mark Zandi: 1.8 million. There's so many data points in the household survey.
Diane Swonk: I also have some really great data on the number of people with two full-time jobs, 12-month moving average, but I'll get to that in a minute.
Mark Zandi: Oh my gosh. She's like a master player of this game.
Marisa DiNatale: Is this people not at work, employed, not at work for a particular reason?
Diane Swonk: Nope.
Mark Zandi: Is it a demographic cut?
Diane Swonk: No, it's not a cut, but it is from the household survey.
Mark Zandi: Is it the number of people out of the labor force that say they want to work? I think that's lower than that, but-
Diane Swonk: No.
Mark Zandi: Are we in the right ballpark in terms of what you're thinking? Kind of, sort of?
Diane Swonk: Yes. It's not an obscure number.
Mark Zandi: It's not an obscure number.
Diane Swonk: No.
Mark Zandi: Well, it's not the number of unemployed.
Diane Swonk: No, no.
Marisa DiNatale: Is it a cut of people out of the labor force?
Diane Swonk: Nope.
Mark Zandi: We're tortured here, I think we're going to have to call it.
Diane Swonk: The reason I picked this number, it is 1.8 million from February 2020 to February 2023 that the labor force grew by, that's only 1%, which is one-third the pace of the 2010s. The number of foreign workers grew by 2.1 million, which means absent the number of foreign workers in the labor force, which cut up with the benchmark revisions in January and February, the January benchmark revisions, we've got more foreign workers, which have a higher participation rate, helped to elevate participation in the labor market, as well, within that immigration, we would have had a contraction in the labor force between February of 2020 and February of 2023 without immigration.
Mark Zandi: That's pretty amazing. That is an amazing-
Diane Swonk: It is. It's one-third the pace of the 2010s.
Mark Zandi: I think the number of foreign-born in the labor forces now, has been growing at its pace prepandemic, but-
Diane Swonk: It's 2.1 million above February 2020 to February 2023, so it's 300,000 down without the foreign-born.
Mark Zandi: But we're back to normal, kind of, sort of, with the foreign-born, but the domestic, the folks that are born here, that's just so weird, it's just so foreign to me. Now, obviously, there's things like retirement, there's things like parents with young children, maybe some COVID in there effects-
Diane Swonk: They've also the male situation, especially white men, prime age white men. Great book, Richard Reeves, I don't know if you've read his book. That's a terrific book on male participation. But that we had [inaudible 01:00:22] session and that still, prime age men didn't come back, even though we had a lot of male-dominated professions go up in demand, and women are much more likely to cross into male-dominated professions than men are to cross into women-dominated professions, but really interesting. The fact that the labor force is still, we're really supply constrained without immigration and-
Mark Zandi: Absolutely.
Diane Swonk: Also, I think there's some major issues that we need to think about in terms of everything. We've had a record every month of people out on parental leave, which I think is a sign of expansion of parental leave, but also a record number of people out last month of people with childcare problems. These are things that have persisted and got worse during the pandemic and are not uncoiling very rapidly.
Mark Zandi: That's a good one. That was a very good one. I wasn't thinking in terms of changes, I was thinking in terms of levels.
Diane Swonk: Yeah, I know, I know.
Mark Zandi: But I would have never gotten that anyways. Hey, you want to hear my statistic?
Diane Swonk: Yeah, what's your statistic?
Mark Zandi: Last one. I don't know if this is hard or easy, 17.6 trillion. I'll give you a hint, a big hint, to move things along, it's related to the banking crisis. 17.6 trillion,
Marisa DiNatale: Is this the amount of borrowing at the discount window over the past-
Mark Zandi: No, no, no. 17.6 trillion, are you kidding me?
Diane Swonk: It was 158 billion came down and it came down to 100 billion-
Marisa DiNatale: Trillion, trillion.
Diane Swonk: No, not, no, no. Not trillion, not against the economy, that would be more than a crisis.
Mark Zandi: I'll give you dollars, $17.6 trillion, and it's top of mind, I'll just say that, related to the banking situation.
Cris deRitis: The total amount of sum asset class.
Mark Zandi: Or how about on the liability side of the balance sheet?
Cris deRitis: Liability, the deposits total-
Mark Zandi: Deposits, 17.6 trillion in deposits. It's down from a year ago, 18.1 trillion, so it's down 500 billion.
Cris deRitis: As of when? What was that?
Mark Zandi: Oh, last week, it's weekly data, the Fed's H-8 data. Did you know this, there's only one other time in history, at least in the history we had back into the '70s, that deposits actually fell on a year over year basis? Very, very briefly and that was in the mid '90s. It's never declined, never declined. It's declining, year over year now, 3%, which is quite interesting. Here's the other interesting thing, you could look at the data, large banks, small banks, I think large banks are defined as the top 25 banks in terms of assets, that's how it's defined, I think, in the data, that's where the declines are occurring. For small, mid-size banks, it's flat, it hasn't declined at all. All of the deposit runoff, at least so far, I'm guessing that might be changing in the current environment, but up to this point in time, has been large institutions losing deposits, which I found fascinating, but that's really-
Diane Swonk: It also gets to me the larger issue, and this is one I'd love to get your view on, as well, Mark, you said that we look at these benchmarks and the reality is, coming out of the pandemic, shutting down an economy happened overnight, reopening happened in phases which created frictions, and the idea that we can seasonally adjust the data, that we can measure the shifts in the economy that's happening so rapidly, and then the speed with which things can change in this economy. We talked about the overhang of savings and the reason people had a lot more deposits because they weren't spending on things and they got some stimulus funds, as well, all of that, and that's dissipating, but trying to put this economy into the historical format is a really hard thing to do.
It's always difficult in a crisis, but I think we have to really be mindful not to do too many rules of thumbs, just because of how hard it is to even capture, I have a lot of questions about, retailers are saying, "We're ready for a recession mode," and you look at the retail sales for the first two months of the year and you say, "Well, these retail sales look like they're really great, what am I missing here?" Obviously, the credit card data, the comps from a year ago, remember Omicron wave, the first one? You have that, as well, but-
Mark Zandi: That feels like 20 years ago, but it was just almost a year.
Diane Swonk: I know.
Mark Zandi: Bizarre.
Diane Swonk: I used to say this was aging in dog years, now it's like aging in insect years, the last two weeks alone, but I think there's a really difficult time in trusting how the seasonal adjustment is of the data. They're trying so hard. I give the statistical agencies a lot of credit for trying to do the best they can, but how do you seasonally adjust against the surge in extreme weather events, against reopening and closing an economy, and how do we think about these measures? Cris was saying, "Well, TSA throughput, well, it's back to 2019 or a little above, that's our benchmark," but is that really the right benchmark either? And then you add high frequency data into the equation, well, a lot of the high frequency data has no history to it and we all flooded to it to look at it for the pandemic, but then does it have the same meaning going forward?
Mark Zandi: You're absolutely right. I think very difficult to understand what's going on, even if we had perfect data to now throw in, the data that we have, it's really obviously very difficult and humbling, obviously.
Diane Swonk: By using the data point that you're pointing to, it says something, it doesn't usually happen, but it doesn't necessarily mean, it could have been what was sustaining spending and helping to buoy spending through an inflation bout as part of the resilience of the economy, as well.
Mark Zandi: Yeah, absolutely. Well, we've taken a fair share of your time, I thought an hour, we're definitely well over an hour, so I think we probably should call it a podcast. Well, I feel a little bit bad about that because I'd love to explore your pessimism in greater detail, because that would fit right in with Cris's thinking, though, but I don't think we have time for that at this time, because I know you have to get going. But we'll definitely, if you're up for it, have you back.
Diane Swonk: Sure.
Mark Zandi: Hopefully, you're just dead wrong, on every level, I hope you're dead wrong about-
Diane Swonk: There's some things that you actually hope you're dead wrong on, because you don't want to have these disruptions in the economy.
Mark Zandi: Absolutely.
Diane Swonk: I'm right there with you, hope springs eternal.
Mark Zandi: Indeed. Well, with that, we're going to.... Cris, Marisa, anything else you'd like to say? Are we good? We're good. We're going to call this a podcast. Thanks everyone for listening in and look forward to next week. Take care now.