The Inside Economics team weighs this past week’s inflation data and considers what it means for the Fed’s interest rate decision next week and in 2025. With sticky inflation, a strong(er) economy, easier financial conditions, and looming tariffs and immigrant deportations, more rate cuts next year appear increasingly less likely, and rate hikes even a possibility.
The Inside Economics team weighs this past week’s inflation data and considers what it means for the Fed’s interest rate decision next week and in 2025. With sticky inflation, a strong(er) economy, easier financial conditions, and looming tariffs and immigrant deportations, more rate cuts next year appear increasingly less likely, and rate hikes even a possibility.
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Guest: 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 one of my trusty co-hosts, Cris deRitis. Hey, Chris.
Cris deRitis: Hey, Mark.
Mark Zandi: How are you doing?
Cris deRitis: Doing well. Saw you earlier this week.
Mark Zandi: Oh, yeah. We had a party, our Christmas party.
Cris deRitis: We did. We did.
Mark Zandi: What'd you think?
Cris deRitis: It was good to see everyone.
Mark Zandi: That's what you think?
Cris deRitis: Yeah, yeah. We don't see people in person anymore, right? So-
Mark Zandi: That's true, that's true. Increasingly it's going to be hard to get together I think, because we're remote and people are now becoming increasingly dispersed, right? It's not like we're all centered. Still there's a center of gravity here in suburban Philly, but increasingly that's going to be less the case I assume, going forward.
Cris deRitis: Yeah, I think that's the reality, right?
Mark Zandi: The reality, yeah. But it was good to see everybody. And we have Matt Colyar here. Matt, thanks for joining.
Matt Colyar: Absolutely. Mark, Chris, nice to see you.
Mark Zandi: This is Inflation Week and you're always with us on Inflation Week, and you were at the party as well.
Matt Colyar: I was.
Mark Zandi: I saw you with one of those cowboy hats and spurs, and-
Matt Colyar: Yeah, I like to lean into-
Mark Zandi: You were getting a little out of hand. I'm just saying, Matt. Is that typical for you, or is that you just-
Matt Colyar: That's most Tuesday nights, yes.
Mark Zandi: Most Tuesday. Oh, no wonder your productivity is down on Wednesday. Yeah.
Matt Colyar: It's true.
Mark Zandi: But you have a pretty high level of productivity, so you're still okay. So what'd you think of that Christmas party? I'm telling you, I wasn't a fan. I was not a fan. Next year I'm taking things under my own... I don't know what I'm going to do or how I'm going to do it. We're going someplace different than where we were. It was just too loud, in my view. Maybe I'm getting old. No?
Matt Colyar: Do you have a venue in mind that you would like to go to? Your house?
Mark Zandi: I have absolutely no idea where we go. No, but I got a whole year to think about it, that's for sure.
Cris deRitis: Yeah, a library of some sort. Okay.
Mark Zandi: A library of some sort.
Cris deRitis: [inaudible 00:02:21].
Mark Zandi: Anyway, it was good to see. You're right, it was so good to see everybody. It's been a long time since we got together.
Well, let's dive into the numbers. We got the consumer price index, CPI. We got the producer price index, PPI. I think we also got import and export prices, we don't generally talk about that. I suspect with tariffs coming, we're going to be talking about those numbers a little bit more than we have historically, but for the time being, it's mostly about the CPI. So, you want to give us a rundown on the... Unless I'm wrong, Matt, most of the story is with the CPI, right?
Matt Colyar: Most of the story, yes, but I think the PPI has more-
Mark Zandi: Oh, okay, okay.
Matt Colyar: ... interesting things to say than normal, but that doesn't mean it's supplanted the CPI.
Mark Zandi: Okay, very good.
Matt Colyar: I think it's a good place to start. The headline consumer price index rose 0.3% in November, that's in line with expectations. That lifted the year ago rate from 2.6% to 2.7%. Again, in line with expectations. Not a surprise, even if that year-over-year change in the wrong direction can kind of scare some people. It was a little bit stronger than October's 0.24% increase, and is consistently with what has been a little bit sturdier, stickier inflation in the closing months of this year than what we've seen through most of the year. Core CPI rose about the same amount, 0.3%. We were expecting a little bit lower, but with Trump-
Mark Zandi: Core being X food and energy?
Matt Colyar: Excluding food and energy. So there, the year-over-year rate stuck at 3.3%. It's been there now for three months. You take a different view, three month moving average on an annualized basis, we're at 3.7%, a little bit higher than the month before. Six month moving average up from 2.6% to 2.9%, and that's the first increase in that measure that we've seen since April or March of this year. So, more than a month or two of stronger inflation that we've been used to, but maybe it's, I'll argue, I don't think it's a five alarm fire.
Mark Zandi: Just a point of interest, the Federal Reserve has a 2% inflation target, but that's based on the consumer growth and the consumer expenditure deflator, which is a different measure. Typically, the CPI because of construction and other factors, runs a little bit higher than the consumer expenditure deflator, the PCE, so-called PCE deflator, probably at most about a half a point. Right? So if the target on the PCE is two, the target on CPI would be, say two and a half on the outside. And you're saying for the month of November year-over-year, we're at 2.7 on the top line and 3.3 on the core. So it feels like we're on the high side of where the Fed would want us to be. And you're also making the point that it feels, you say sticky, it's kind of been stuck there for the last few months. The progress and getting inflation back to target, which we were enjoying throughout much of '23 and much of this year seems to have stopped over the last, well, it sounds like last three, six months, something like that. Is that the way? Yeah.
Matt Colyar: Exactly how I would put it, yeah.
Mark Zandi: Yeah. Okay. Okay, so what's driving the stickiness? What's going on here? Why is it sticky? Why isn't it coming in more quickly?
Matt Colyar: Food prices, that's only going to apply to headline CPI because core CPI ignores them, but food in the past, so you had a 0.5% rise in September, then relatively mild in October. Then November they come jumping back again, and eggs get a ton of attention, but they're kind of the perfect measure there. You have egg prices rose by 8% in September, then fell by 6-ish% in October, then bounced back again in November. So it's following the same, if not more dramatic trajectory there, and that's a big part of people's budgets. That's how the consumer price index is calculated. So you're getting some upward pressure there. Food at home is the, we'll refer to as grocery prices, that's the BLS's measure of grocery prices, as I said, rose by 0.5% in November. That lifts the year ago rate to 1.6%, so it's getting a bit higher but still not the kind of thing that's drawing meaningfully up the year ago rate in headline CPI.
Mark Zandi: That feels like that's, I don't want to put words in your mouth, but I will. That sounds temporary, right? I mean, you're not expecting that to continue, are you?
Matt Colyar: I don't think so. I think that's, food price is extremely mild for over a year. '23, '24, year-over-year rate was 1%, a little below, a little bit above.
Mark Zandi: So that explains the part of the increase, the 0.3% increase in CPI inflation in the month, but it doesn't explain why inflation feels like it's getting sticky, why it's kind of stuck here.
Matt Colyar: Well, that I think is a more nuanced discussion. I think the same concepts we've looked at, shelter, why is shelter taking so long to come down? Although it looked really good in November, it's still providing most of that year-over-year increase. It's keeping that elevated, even if it's on a month-to-month basis, growing at a more slow rate. And then if we look to this other, I mean, look at goods prices, which had been falling pretty reliably since peaking in 2022. There I'll use the vehicle market as an important, probably we have a perfect measure. Think about goods prices, they spiked in 2022, then they've come down rather consistently. In the past few months that isn't the case anymore. So they're starting to tick up. Again, they're low on a year-over-year rate, but they're monthly increases that were helping bring even a year-over-year rate down, those monthly declines that we were seeing in vehicle prices are no more. So all we're looking at is shelter prices and a little bit of inflationary pressure from things like core goods, vehicle prices, food prices.
Mark Zandi: So vehicle prices, because that had been declining, as you said, pretty steadily for the last, I don't know, 12, 18 months. And what you're saying now is it feels like that decline is over. We actually saw some pretty sizable increases for both new and used in the month of November. What's going on there? Is there something fundamental going on there? I mean, this goes to the question of stickiness. I mean, if it's just temporary, then no big deal, if it's something more fundamental, then maybe the stickiness is more of an issue.
Matt Colyar: I don't think the stickiness is more of an issue. I think it's more of at-
Mark Zandi: You don't?
Matt Colyar: I think it's more of a measurement issue where there was help from these falling goods prices. Now that help is no more and we're focused on shelter inflation and we can bounce around. There's no real support to lower the year-over-year rate just yet. There's also some base effects going on. There was a big jump in January in the CPI, and as that's still in the year-over-year comparisons, I think that's going to make it hard to have any improvement. I think we can be pretty confident in the first quarter of 2025 we'll start to see some improvement there.
So when I say sticky, when I say sturdy, we were used to seeing each month a lower and lower year-over-year rate, and that's stalled, but I don't think the forces underlying it are here to stay in any kind of meaningful way.
Mark Zandi: So we had been enjoying pretty steady moderation and you're saying a lot of that was this fallen goods prices, vehicle prices, would be the poster child for that?
Matt Colyar: Mm-hmm.
Mark Zandi: And we've seen some moderation on the service side of the economy, but here we are in the last few months, the outright declines in goods prices has abated, and we are actually seeing some price increases, you mentioned vehicles. And even though the service inflation and housing inflation continues to moderate, the fact that we're not seeing these declines in core and goods prices is causing the overall CPI to kind of get stuck, seemingly stuck here, but the trend lines still feel good to you. Like we're going to start moving again in the right direction back to target.
Matt Colyar: That's how I expect things-
Mark Zandi: You [inaudible 00:10:50].
Matt Colyar: ... to unfold in 2025.
Mark Zandi: Okay, okay. Chris, what do you think?
Cris deRitis: I generally agree, I think the underlying trend is still there, but it certainly is, it is sticky, right? It's taking a long time to correct. On the vehicle prices, my theory, I'll throw this out there. I think the hurricanes may have an effect here, right? You flooded cars, right? That's going to put some upper pressure on used car prices, even new car prices, so that would be my case. And if you look, it looks like October, November were the months where you saw some of that increase. So that's my-
Mark Zandi: [inaudible 00:11:26].
Cris deRitis: ... assumption for now is that it might be a one-off effect and we'll start to see more moderation going forward.
Mark Zandi: You mean these storms destroyed a lot of vehicles?
Cris deRitis: That's right.
Mark Zandi: So the supply, and then people needed to replace the vehicles and thus this combination of supply and demand caused prices to pick up.
Cris deRitis: That's right. That's my theory.
Mark Zandi: Oh, interesting. Do you agree with that? Do you think that's a reasonable explanation, Matt?
Matt Colyar: I look at wholesale auction prices and they flattened out in summer and then started to rise. But are they rising because there's fewer cars because they were destroyed by storms? That's I think certainly possible, but in general it's a trend that I think the automotive market has just come into better balance. And now after supply and production being constrained for so long and having a hard time coming into line with actual demand for cars, I think we're at a better spot now and I think we'll see more of a normalization in price increases. That's how I see it, but that's certainly a sound argument.
Mark Zandi: Now, we have been getting some really large increases in motor vehicle insurance and repair, and that was a function of the surge in actual vehicle prices back a couple, three years ago. Those increases have seemingly moderated, right?
Matt Colyar: Yeah.
Mark Zandi: There's still positive increases but not anywhere to the degree that we were getting just a few months ago. Did I get that right?
Matt Colyar: You did. Auto insurance fell slightly in-
Mark Zandi: Oh, fell.
Matt Colyar: ... October and then ticked up. So we're talking 0.1% decline in October, 0.1% in November, but after a stretch of 1% and more monthly increases, that's a change. That's an inflection point, it feels. In recent months, still 12.7% higher than a year ago but again, much lower monthly growth right now.
Mark Zandi: Okay, and I guess the other component of inflation that may be contributing to the stickiness is medical care inflation, medical services.
Matt Colyar: Yeah, so the medical care services rose 0.4% and is now up 3.7% year-over-year. That's accelerating. That's as we've discussed, it takes a longer time for healthcare to digest and pass through cost increases to consumer prices. And that's happening now and it's not a small component in the consumer price index. That's even bigger component in the PCE, but measured a little bit differently. So within the... And that 0.4% growth matches what happened in October. So we have physician services, it's a big 1.3% growth. Hospital related services, 0.1. Health insurance is up 0.2. So, kind of across the board, moderate increases in prices and we largely expected that, again, given the nature of healthcare, but kind of the one component moving in the opposite direction than a lot of the other major components in terms of still seeing slower and slower price increases.
Mark Zandi: I guess maybe the way to think about the stickiness issue is that, just to reiterate in another way, is that if you add up the cost of housing, rent for shelter, owner's equivalent rent, the cost of homeownership, with medical care services. In my mind's eye, that probably comes to not quite half the overall CPI. It's a big chunk of the CPI. And the prices for those two things, housing and medical care services, they don't move in a big... They're very inertial, right? They don't move down in a big way or up in a big way, they move very slowly. And because all the other stuff, the goods prices and everything else are kind of washing themselves out, they're no longer pushing price inflation down. You're left with these two things that are very inertial and that's why it is sticky. The reality is sticky, but it's not overly concerning because it continues to move in the right direction, just very slowly. Is that fair?
Matt Colyar: I think that's exactly right. We never expected goods prices to fall forever. We just expected shelter to disinflate and if that was the case, we'll get there and I think November's a good, on that front. November's a good data point, shelter prices were mild. So yeah, a little bit of volatility. It's not a straight line, but the larger story of shelter disinflation carrying the day remains.
Mark Zandi: Right, okay. You were mentioning, you kind of teased us a little bit on the PPI. You're saying there's some interesting information in the producer price index. CPI being kind of the prices we pay as consumers, PPI kind of the prices that are, call them wholesale prices, kind of the intermediate prices.
Matt Colyar: Exactly, and it's that same framework as you have this relatively strong month-over-month change. So the PPI rose 0.4%, and that was a little stronger than consensus, it was stronger than we expected. And there's different components we can discuss within the CPI or within the PPI, but all along, as we were looking at shelter in the CPI, I think the most important component within the PPI is the services PPI. That's service prices that are proxies for wages are a lot stickier. They move more slowly, but they're extremely important and that keeps lowering. So the service PPI for services rose by 0.2% in November, that's lower than October, it's lower than September, and it's moving in the right direction. So there's noise as well, mostly from food like we saw on the CPI, but within under the hood of that stronger month-over-month increase in the PPI is good news in the most important component, which is service, services.
Mark Zandi: Okay, good. One last thing on the data before we move to what this all means for monetary policy is, we got the CPI, we got the PPI. Both those data sets are used to construct the consumer expenditure deflator, the PCE, what the Fed is targeting. Do you have a sense of what that's going to be? I guess that gets released, is it next week that data's released or the week after?
Matt Colyar: It'll be sooner than normal because of the holiday. We'll get it Thursday or Friday.
Mark Zandi: Thursday. Okay.
Matt Colyar: And there you have this interesting wedge opening up. So the PCE and core PCE are expected to rise by 0.1%.
Mark Zandi: Why?
Matt Colyar: Which is interesting, because the most important components, I mean, shelter being low and it's like, well, in the PCE deflator, shelter's not as important. So why would that not be kind of moving the opposite direction? But things like airfare, physician services, the way that that's measured, the components that don't come from the CPI, they come from the PPI. Those were weak and they've weighed heavily on estimates of the PCE deflator. Total sanity check, we're right in median and consensus is, because at first I was like, without running our model, I would've guessed we were in that 0.2, high 0.2, 0.3 range.
Mark Zandi: Yeah, that was my intuition. Yeah, but we're at 0.1, you say?
Matt Colyar: 0.11.
Mark Zandi: What would be year-over-year?
Matt Colyar: That would lift the PCE deflator from 2.3 to 2.4%. Others are a little bit stronger, 2.3 to 2.5 because they rounded down from a little bit higher. And then core PCE, our forecast of 0.13% would keep the year-over-year rate at 2.8.
Mark Zandi: 2.8.
Matt Colyar: [inaudible 00:18:52], yeah.
Mark Zandi: Okay. So still on the high side of the Fed's target, but within spitting distance and it feels like it's moving in the right direction.
Matt Colyar: Yes, and something I still think we can be confident starts to come down.
Mark Zandi: Right, right.
Matt Colyar: For sure.
Mark Zandi: Any other commentary there? Color commentary, Chris, on that one before we move on?
Cris deRitis: No, I'm curious. I'm assuming the Fed obviously is paying attention here and will be using that in their deliberations, right?
Mark Zandi: Right, when the Fed meets next week.
Matt Colyar: Right.
Mark Zandi: Right. So you said the PCE deflator, the consumer expenditure deflator year-over-year. Wait, I thought it was at 2% in November year-over-year. It's not? It was higher than that? It was 2.2, you said?
Matt Colyar: It was 2.3 In-
Mark Zandi: November?
Matt Colyar: And then it was 2.1 the month before that. So it's risen [inaudible 00:19:47].
Mark Zandi: Oh, it did rise? Oh.
Matt Colyar: Yeah, it never actually hit 2%.
Mark Zandi: It never did, okay.
Matt Colyar: No.
Mark Zandi: Maybe it's my wishful thinking. Yeah, they were there.
It's funny, I did travel a lot this week. I was in Washington, New York, I mentioned. People love the... We're getting a lot of good comments on the podcast and one interesting comment was that we say interesting and fascinating a lot. And I thought they were being, this was a kind of mild form of criticism because when someone says to me that's interesting, that means they don't really think it's very good. Oh, that's interesting. But no, he meant it in a very positive way that everything we talk about, it's interesting, it's fascinating. So, I thought that was pretty cool, that was pretty cool.
So, that was interesting, Matt, the rundown. Fascinating.
Matt Colyar: Fascinating.
Mark Zandi: Very well done, very well done. All right, let's talk about this in the context of the Fed, in Fed policy. And Chris, maybe I'll turn to you because I know you look at market expectations around the Fed. What are investors thinking about next week and perhaps give us a sense of what they're thinking about next year, in terms of interest rate policy?
Cris deRitis: Yeah, so 97% confidence that's going to cut next week.
Mark Zandi: Really?
Cris deRitis: Right? So, investors are all-in.
Mark Zandi: I'm not even that confident I'll brush my teeth tonight. Geez, okay.
Cris deRitis: Oh, Geez, wow.
Mark Zandi: But 95%, 95. You should have seen-
Cris deRitis: That's not interesting.
Mark Zandi: That's not interesting. That's what, is it TMI? No, too much information.
Cris deRitis: Yes.
Mark Zandi: TMI. Too much TMI, TMI. I probably should have said-
Cris deRitis: [inaudible 00:21:33].
Mark Zandi: ... I'll definitely brush my teeth. No, I take that back. 100% I'll brush my teeth, 95% I'll use floss. Although I'll have to tell you, I don't know. I highly recommend this. I got a water pick. Is it called a water pick?
Matt Colyar: Yeah.
Mark Zandi: A water pick. Yeah, it's great. It's so much better than... Oh, here's a personal hygiene question. It sounds like you use a water pick, Chris, do you?
Matt Colyar: I don't, I floss.
Mark Zandi: Oh. Matt, do you use a water pick?
Matt Colyar: No, I floss as well.
Mark Zandi: Oh, then forget it. I can't ask you my personal hygiene question. I was wondering if you need to do both. Do you think you need to do both?
Matt Colyar: Yes.
Mark Zandi: I was going to ask my dentist.
Cris deRitis: I think your dentist will say yes.
Mark Zandi: Oh, yes. The dentist will say yes.
Cris deRitis: Or maybe not. Maybe they like work.
Mark Zandi: Maybe they'll want something... Probably say you should use two water picks one and then the other. So here, I'll sell you another water pick. Let's sell you another water pick.
Cris deRitis: Well, there's the age-old question. Do you floss or do you brush first?
Mark Zandi: Wait.
Matt Colyar: That's controversial.
Mark Zandi: Matt, I never heard that question before.
Matt Colyar: That's controversial, that's definitely controversial.
Mark Zandi: What the hell are you talking about?
Cris deRitis: How is that controversial? Why would you floss before you brush your teeth?
Mark Zandi: Exactly. That's my perspective. Really?
Cris deRitis: Because you want to get all the gunk out, you're, you sweep it away, and then-
Mark Zandi: Now that's way too much information. That's WTMI, way too much information.
Matt Colyar: Yeah, all right.
Mark Zandi: It reminds me of that. Do you ever watch Archie Bunker, All in the Family? Did you ever see that show? No? You're too young.
Matt Colyar: Oh, yeah. Oh, yeah.
Mark Zandi: Oh, you saw it, Chris, right?
Cris deRitis: I saw the reruns.
Mark Zandi: Oh, the reruns, yeah. Well, there's this one episode where Archie and his son, Meathead, are debating, do you put on both socks and then put on your shoes? Or do you put it on one sock and one shoe at a time? What's your view on that? Do you have a view?
Cris deRitis: Socks, then shoes.
Mark Zandi: I agree with that. That's my view. Yeah, that was Archie's view too. Meathead was definitely the one sock, one shoe, one sock, one shoe. What do you think, Matt?
Matt Colyar: I can't imagine there's people that would have a barefoot next to a shoe'd foot.
Mark Zandi: Right. Okay. All right.
Cris deRitis: Well, if knew Meathead.
Matt Colyar: See, yeah, I don't.
Cris deRitis: You'd get the context.
Mark Zandi: Yeah, yeah, yeah, yeah. Where were we? Oh, investor expectations, yeah.
Cris deRitis: Yeah. So very confident for 25 basis point cut next week. Low confidence in terms of what's going to happen after that. Right? So you look out at the futures, by March there's like a 60% chance of another cut.
Mark Zandi: In March? By March.
Cris deRitis: By March.
Mark Zandi: By March,
Cris deRitis: Sorry, by March.
Mark Zandi: Because there's one, there's a meeting in January and then a meeting in March. By March.
Cris deRitis: Right. January, very low expectations of any movement.
Mark Zandi: Got it.
Cris deRitis: Pretty much a pause. And then even by March, at this point, only 60% chance. And if you look out throughout the end of the year through December, it's pretty disperse, in terms of the possibilities for rates. You do have some kind of at the very low end, which I guess would imply some type of recession or slow growth environment, right? So you have that kind of factor in there. And then you do have some folks who actually are calling for-
Mark Zandi: No cuts.
Cris deRitis: Increases.
Mark Zandi: Oh, increases?
Cris deRitis: Maybe a 25 basis point increase, right?
Mark Zandi: Oh.
Cris deRitis: If inflation takes off again, or-
Mark Zandi: Really?
Cris deRitis: Well, if you look at the median, it's maybe two to three cuts next year at the most. But like I said, it's a pretty wide dispersion.
Mark Zandi: Right. Well, our forecast has changed. If you go back prior to the election, we had a cut in December, and then we had four cuts in 2025, one each quarter. And then a couple more cuts in early 2026 to get back to the so-called equilibrium rate, which we put in the long run abstracting from the business cycle at about 3%. Post election, we took out two, we still had the December rate cut so we're on board with the consensus for December. And then we only have two rate cuts in 2025, one in March and then one in September. And then a resumption of cuts as we move into 2026. And by the end of '26 going into '27, we're back to equilibrium. And a lot of that goes to the Federal Reserve trying to digest the economic policies that are going to come out of the new Trump Administration, and we'll come back to that in a minute.
I'm beginning to wonder whether there are going to be any rate cuts next year. That's not a forecast, I'm just beginning to wonder that. And I thought it would be instructive, because we've not done this, but maybe couldn't do this on the podcast, go through all the different things that the Federal Reserve would consider, does consider when setting interest rates and assess what that implies for rate cutting next year. So we began with inflation, that's kind of at the top of the list of things the Fed looks at. And it feels like we came down as a group on, that would be consistent, our forecast for inflation would be consistent with more rate cuts next year. Right? Something consistent with at least two rate cuts in 2025. Would you agree with that, Chris?
Cris deRitis: I would, yeah.
Mark Zandi: You would, okay.
Cris deRitis: The inflation's coming in modestly.
Mark Zandi: All else being equal, all else being equal.
Cris deRitis: Yeah, exactly.
Mark Zandi: Okay. What about you, Matt? Do you think the inflation forecast is consistent with rate cuts next year?
Matt Colyar: Yeah, if there were to be a change, I would say three rate cuts, but that's just because we feel pretty good about inflation. I think two is the right spot.
Mark Zandi: Yeah, and that's in the context of all else equal, just looking at the inflation, you're saying at least two, maybe three quarter point rate cuts next year?
Matt Colyar: Yeah.
Mark Zandi: Yeah, okay.
Matt Colyar: Policy's still restrictive and we have a little bit of ways to go and all else equal, I think that would make sense.
Mark Zandi: Okay, so make a mental note of this. Based on inflation, it would say our forecast of inflation all else equal, two to three rate cuts next year, a quarter point each time.
Inflation expectations, that's the other thing the Fed looks at, right? I mean, this is in their so-called reaction function. This is what they talk about when they release their statement with each interest rate decision, each policy meeting. They begin with inflation, then inflation expectations. Here, I'm looking at five-year break evens, and that's simply looking at treasury inflation, protected securities, five-year tips, so-called tips. Compare that to five-year treasury yields and the difference is kind of the break even, measures what investors think inflation will be over the next five years. That has moved up meaningfully since really, over the past three months since investors began to discount President Trump winning the presidency and of course, his policies coming into place. That's up I think 30, 40 basis points over that period, which is not inconsequential. Chris, am I characterizing the facts there right? Roughly right?
Cris deRitis: Yes, I think the latest read is around 2.4%, right? Five-year break even.
Mark Zandi: Five-year break even 2.4. So do you think that's on the high side then, or not a matter of concern? Or all else equal, what would that imply for monetary policy going forward?
Cris deRitis: It's certainly on the higher side, right?
Mark Zandi: Higher side.
Cris deRitis: So I think it would argue for a pause in that case, at least. I don't know that it's screaming, it's not so far out of the historical norm, but it's certainly higher than it would be. So I don't think it calls for raising the rate, but I don't think it supports a cut.
Mark Zandi: Okay, so kind of the status quo?
Cris deRitis: Right.
Mark Zandi: Just zero rate cuts in 2025, right?
Cris deRitis: Yeah, based on that, again, we're looking at-
Mark Zandi: Yeah, all else equal.
Cris deRitis: ... [inaudible 00:29:48] and assuming it doesn't change, right?
Mark Zandi: Yeah, yeah, yeah, yeah. Sitting here today, we're doing a forecast. This is we're kind of thinking of what the forecast should look like based on the information we have and our underlying assumptions about these things going forward. What is our forecast for monetary policy interest rates? Matt, any pushback there or any thoughts on that? Inflation expectations?
Matt Colyar: No, and other measures seem to have been similar, consistent with what Chris is saying, which is on the higher side, but not scary.
Mark Zandi: Like what?
Matt Colyar: University of Mission comes to mind, but I want to say to the Philly Fed's professional forecasters, but I don't know exactly when the last quarterly figure came out, so.
Mark Zandi: Well, I put zero weight on the U Mich survey. Were you listening to the podcast, Matt? You need to listen to the podcast.
Matt Colyar: I listened to the podcast.
Mark Zandi: Okay, all right, sir. You know I don't like the U of Mich survey, but I do like the survey professional forecasters.
Matt Colyar: Right.
Mark Zandi: You know why?
Matt Colyar: Poll responder?
Mark Zandi: I respond to it, right, yeah. Should like it then, right?
Matt Colyar: Yeah. Are you able to exclude your own just to see what everybody else is saying from the aggregate? Probably not.
Mark Zandi: I do, yeah, I down weight those other forecasts, but no, only kidding, only kidding. Yeah, so you're in agreement that kind of on the high side here, so that would argue for no rate cuts next year.
Matt Colyar: Yeah.
Mark Zandi: Okay. All right. All right, let's go to growth or to the economy, growth in unemployment. Here, I want to call out something you put together and that is the estimate of GDP, current quarter GDP or so-called tracking estimate. And I nearly fell off my chair yesterday when I looked at it. You want to describe what you're tracking here?
Matt Colyar: Yeah. So, well, I'll start with it's 3.9% right now. But what does that mean? That means the model is built to be like if the quarter ended today.
Mark Zandi: Well, hold on, just so the listener sucks this in. You're saying your estimate based on this model, and you're going to describe it in just a second, but what you're saying, this model that we use for estimating current quarter GDP growth, and that's the Q4, the fourth quarter of 2024, is coming in at 3.9% annualized. 3.9% annualized.
Matt Colyar: That's right.
Mark Zandi: And we're pretty far into the quarter. It's not like there's a lot more script to be written here and you're going to talk about that, but, and that's real. That's real GDP growth?
Matt Colyar: Real GDP growth, yeah.
Cris deRitis: [inaudible 00:32:30] adjusted.
Mark Zandi: Did you know that, Chris? Did I tell you something?
Cris deRitis: I saw that.
Mark Zandi: You saw that too, yeah.
Cris deRitis: It's pretty shocking.
Matt Colyar: So that would be an acceleration from the third quarter and it would signal an economy that's heating up, accelerating. And I will say, most other metrics mostly from land of fed are within the same distance as we are.
Mark Zandi: Oh, they are? What are they?
Matt Colyar: Lower, like 3.3 I think is the last I checked.
Mark Zandi: 3.3, okay.
Matt Colyar: But a really important distinction to make is the model is built not to say, here's what we think is going to happen. It's, if the quarter ended today, there was no more new data for this quarter, what is the existing data saying growth would look like if we interpolated that out for a quarter?
And on that front, what we got was a really high increase in import volume in September, which is the last month of Q3, and then a sharp decline in October. More of a correction in import volume in October. So because that straddles a quarter and we do have a lagged effect, we don't over... we project out growth based off of a longer running growth trend, but that trend is very, that's more volatility than normal and now has pushed down our estimate of import volume in the fourth quarter. If you think about how GDP is calculated, it's a net of exports and imports. If you're importing a ton, that's bad for GDP growth as it's measured. And if you're exporting a lot more, that's better for GDP growth.
So we had a big swing in net X because of the drop in import volume in October. Now that's not an excuse, I think that's the model doing its job. That's saying what is being shown by incoming data, but of any situation, I think now is, unusually so, we can be confident that's going to be reversed. We think there's a lot of reasons to believe that imports pick up in the next couple of months as importers get ahead of tariffs, but kind of speaks to a volatility that may have started in September, likely jump in November after the election result. We don't have that data yet, so I think it depends-
Mark Zandi: So you're saying and particularly the trade data, that's really lag. You're saying the last data point's in October, so we got to wait for November and December. And you're saying October import, volumes were very low. That's not intuitive, but that was before the election. Now post-election, we're getting tariffs. The thinking is that importers are going to bring in product quickly in November and December to avoid the tariffs. And so we're going to get some bigger numbers here and that will push down. Your thinking is, well, wait and see, but what you're thinking is that that will push down the current quarter estimates as we get that additional data.
Matt Colyar: That's right and as unintuitive as October's decline was, it really did come after a big jump in September.
Mark Zandi: September.
Matt Colyar: So you saw the trade deficit widen, then it narrowed. We're overstating it in our model. I don't think that warrants any kind of adjustment or change right now. I just think it's a matter of, even if we're midway through December, still too narrow of a view of the quarter. I think if we get more incoming data that changes. I think growth is probably closer 2.5, which is still strong, it's about the economy's potential. So we'll see what happens when we get more trade data. But consumption spending, doing okay.
Other components, inventories, I think you might get some of the same strength of people hoarding inventories ahead of tariffs and starting to build up their warehouses. And I think that could be reflected in GDP data as well. So I don't think we're going to be seeing a reduction dramatically, but I don't think 3.9 is realistic.
Mark Zandi: Yeah, but still, it feels like the economy's really got some oomph here, right? Because we got on the jobs front, we got again, we got abstract from the monthly vagaries of the data, hurricane effects and strikes and everything else, but it feels like underlying job growth. Now I'm going back to last week's data in the employment report that we got last week, it feels like that's somewhere around 150K-ish, maybe even a little higher than that on a monthly basis. That's meaningful as well, that's pretty consequential. So the economy feels like it's growing strongly at this point and maybe even beyond the economy's potential as the potential growth rate is starting to slow as immigration flows start to moderate. What do you think, Chris? How do you view the data on growth?
Cris deRitis: Yeah, I'd agree with you. I guess I agree with both of you. It's strong but not as strong as what the current [inaudible 00:37:05] model suggests, but still underlying growth remains robust.
Mark Zandi: Okay, so all else being equal, what does this mean for monetary policy? Higher rates, no change in rates, or lower rates. Certainly not lower rates.
Cris deRitis: Certainly not lower rates. I think it's pause again. I don't know that it's rip-roaring growth either, at this point that you need to really worry about wage inflation taking off but again, I would say-
Mark Zandi: It's bordering though on a rate increase.
Cris deRitis: It is bordering on a rate increase.
Mark Zandi: It's bordering on a rate increase.
Cris deRitis: Yeah, I don't what do you think? [inaudible 00:37:43] one more report out there?
Mark Zandi: Yeah, one more report. Right, right. Matt, what do you think?
Matt Colyar: I would be more firmly as a pause then as a potential rate increase. I think the Fed needs to make policy less restrictive. Business debt coming due, it's going to be refinanced higher rate. It's not so much stimulative as it is normalizing. So I would make that argument over a rate hike but not a rate cut.
Mark Zandi: Okay, so inflation that would argue for cuts, couple cuts, you say two, three rate cuts. Inflation expectations, no change, a pause. Growth, the economy, jobs and unemployment, a pause in here. I would side with Chris and say it feels a little to the all else equal, raising rates, but I think pause more likely.
Okay. So here's the final set of criteria that the Fed looks at, this again in their so-called reaction function. So inflation, inflation expectations, the economy, jobs, unemployment, that kind of thing. How close are we to full employment, is financial conditions. Financial conditions, because at the end of the day, the rate increases, interest rate changes affect the economy through its impact on so-called financial contingents. Stock prices, corporate credit spreads, what's going on with commodity prices, housing, the value of the dollar, all those kinds of things. So this, I don't know, how would you characterize financial conditions, Chris?
Cris deRitis: They seem pretty frothy to me. Right?
Mark Zandi: Right.
Cris deRitis: Crypto at $101,000, that's just one example. But then stock market valuations, the net spreads you mentioned very tight. It seems like a pretty risky behavior that's going on.
Mark Zandi: Yeah, yeah, yeah. So you got stock prices, I mean, I think they're up almost 10% since three months ago again, when investors started to discount Trump victory. They're up, I believe they've doubled since the pandemic hit in the five years since the pandemic hit. I think they've literally doubled in value. You got crypto that's gone skyward, gold prices have gone skyward. Single-family housing values have gone skyward. I guess the counterweight to those things would be mortgage rates. They remain high, right? Fixed mortgage rates are close to 7%, which has really put a pall over the housing market. Existing home sales are at pandemic shut down lows.
Cris deRitis: Yes.
Matt Colyar: Yeah.
Mark Zandi: I guess-
Cris deRitis: Housing leverage is low, right?
Mark Zandi: Yeah, housing leverage is low. I guess the other thing would be underwriting standards, bank underwriting. They're no longer tightening but they did tighten in the wake of last year's banking crisis. Right? That would be a tighter, all else being equal, tighter financial conditions. And the value of the dollar is stronger, right? I mean, it's pushed up since it became clear Trump was going to, or investors started discounting Trump win, and tariffs. So the financial conditions aren't all blowing in one direction here, there's a lot of headwinds and tailwinds. But Chris, you would say net, net, net, appropriately weighted across all these different things, financial conditions are easing?
Cris deRitis: I think so, yeah. It feels frothy, like I said.
Mark Zandi: Yeah. What do you think, Matt?
Matt Colyar: It's hard to argue with those asset prices being as high as they are, even if credit demand and lending standards are still tight. Yeah, so I'm with Chris.
Mark Zandi: Yeah, I think the key is stock prices, right? Because that goes to wealth, net worth, and that goes to the wealth effects, and I think that's one of the driving forces behind consumer spending. The high income, high net worth households are willing to lower their saving rate and increase their spending, and that's powering economic growth. So it feels like that's probably the single most important measure of financial conditions and it has a higher weight than the other ones. And that would suggest that the financial conditions are easing. So, Matt, what does that imply for all else equal, for monetary policy in 2025?
Matt Colyar: Pause.
Mark Zandi: What?
Matt Colyar: The lending... I mean, the Fed can control-
Mark Zandi: Oh, come on.
Matt Colyar: ... credit demand, they can control lending [inaudible 00:42:34].
Mark Zandi: I took you down the Primrose path and you blew me off.
Matt Colyar: I know, and I knew you were expecting it. Yeah, I think [inaudible 00:42:41].
Mark Zandi: I think Matt really wants to pause on monetary policy. He definitely, yeah. What do you think, Chris?
Cris deRitis: Except for inflation, right? He wants the cuts there.
Matt Colyar: Right.
Cris deRitis: He wants the cuts.
Mark Zandi: What about you, Chris?
Cris deRitis: I actually think they should hike, if that criteria alone, right?
Mark Zandi: Right.
Cris deRitis: It seems way too frothy to me.
Mark Zandi: I'd say it argues for a hike bordering on pause. I mean, because there are again some cross-currents here, but I'd say hike.
Okay, so what are we, inflation, cut. Inflation expectations and growth, the economy, pause. Financial conditions, hike.
Cris deRitis: Hike, yeah.
Mark Zandi: Okay, here's the last thing to consider. Economic policy under President Trump, right? Which obviously, a boatload of uncertainty but it feels like we're getting tariffs of consequence and it feels like we're going to get some deportation of immigrants of consequence. And those are the two key policies that will hit in 2025. There's other policies, fiscal policy on tax and spending, but that probably won't matter until 2026. But in 2025, those are the two key policies and both those policies I think, and you'll correct me if I'm wrong, but both those policies mean higher inflation and diminished growth, diminished growth. So what do they mean for monetary policy? The conduct of monetary policy in 2025? If you're the Fed, and of course I'm not arguing the Fed that this today needs to... Because they're going to wait. They're going to have to wait and see, which also suggests something about policy next year, the monetary policy next year. But given what we know or what we think we know, what does that imply for monetary policy next year, Matt?
Matt Colyar: It has to be a cut if you think these things are inflationary. I put the most weight-
Mark Zandi: A cut? A cut?
Matt Colyar: I'm sorry, I'm sorry. A Hike, I'm sorry.
Mark Zandi: Oh, geez.
Matt Colyar: That would've been funny. Yeah, a hike.
Mark Zandi: A hike, okay, a hike.
Matt Colyar: I put the most weight on the labor market constraints and what that could do to prices through wage growth, through services. I think of the other ones as a kind of wash. Tariffs are going to destroy demand, I think the upward pressure there is less so than the labor market, but a hike.
Mark Zandi: A hike, okay. What do you think, Chris?
Cris deRitis: Well, clearly beating the witness. So, one to two hikes, yeah.
Mark Zandi: Oh, no, no. I think it means a pause, actually.
Cris deRitis: You think it's pause?
Mark Zandi: Yeah, because it's a negative supply shock. Tariffs and deportations are negative supply shock. It hits the supply side of the economy like a hike in oil prices, and that means higher inflation, diminished growth. So what do you respond to, the higher inflation or the diminished growth?
Cris deRitis: I don't know. I think it's the inflation now, right?
Mark Zandi: Yeah, maybe at least initially.
Cris deRitis: Yeah, given the mandate from the election.
Mark Zandi: Yeah, given the mandate.
Cris deRitis: [inaudible 00:45:51].
Mark Zandi: Okay. All right, I'm going to say pause, bordering on a hike, but I don't say that with great confidence so I'm not going to argue with you too much about that.
Okay, all right. So we add it all up.
Cris deRitis: Pause.
Mark Zandi: It's a pause, right? Isn't it a pause? Pause means no change in monetary, no change in interest rates in 2025. That should be the forecast, right? This is what I was saying when we first started the conversation. I'm wondering whether we should make another change in the forecast. Of course, we have some time until we have to do the forecast again, thank goodness. We have to think about this but that's what it feels like, right?
Cris deRitis: It does, although a lot comes down to timing, right? In terms of the economic policy piece of it.
Mark Zandi: Right.
Cris deRitis: Tariffs, yeah, it sounds like they're coming but when, where, how? Right?
Mark Zandi: Right.
Cris deRitis: It could be second half of '25. It could be into '26 before you get the full-
Mark Zandi: But here, we have to put pen to paper. We've got to do a forecast, meaning we got to actually produce numbers to put in our databases, but with our models next month for 2025. So when we sit down next month and determine what the underlying assumptions are behind the forecast, monetary policy is going to be one of those assumptions. So we have to say, okay, are we going to change this again? We went from four rate cuts in 2025 before the election, to two rate cuts now. Does that mean next month when we sit down and do the forecast, we're going to have zero rate cuts in 2025? It feels like a big move.
Cris deRitis: That's a big move.
Matt Colyar: That is a big move.
Mark Zandi: Yeah.
Cris deRitis: Especially on the financial conditions. Those could change in an instance, right?
Mark Zandi: Themselves.
Cris deRitis: They could get the effect of a hike essentially from there. So I don't know that you'd want to go all the way, but yeah, if you want to remove one hike or one cut, sorry. I wouldn't disagree.
Mark Zandi: Yeah, you wouldn't argue. Yeah, okay. All right. Well, it feels like we're like with the market, right? We're taking away cuts in general from where we were, but a high dispersion around-
Cris deRitis: Absolutely.
Mark Zandi: ... that. I mean, not a lot of confidence around that forecast at this point.
Cris deRitis: Yeah.
Mark Zandi: Yeah, yeah. All right. Okay. Good, good. Hey guys, you want to, I think we're already getting pretty far into the conversation. You want to end by playing the game? You guys ready for the stats game?
Matt Colyar: Oh, sure.
Mark Zandi: We haven't played that in a while.
Cris deRitis: We haven't. We skipped I think.
Mark Zandi: I think we skipped last week.
Cris deRitis: Without Marissa, it's not much fun.
Mark Zandi: Yeah, it's not the same thing because I like beating her. Don't tell her I said that, by the way. Yeah.
Cris deRitis: There's always an asterisk on these.
Mark Zandi: Yeah. Well, why don't we end the podcast by playing the game.
Cris deRitis: Sure.
Mark Zandi: Okay. Unless you got something else you want to talk about.
Matt Colyar: No.
Mark Zandi: Chris, no?
Cris deRitis: No. Yeah, we can talk about next year's holiday party, but.
Mark Zandi: No, yeah, no, yeah. If you got any thoughts, send them my way. Yeah.
Okay. Matt, what's your number? Oh, I should say to the listener, I'm kind of now taking this for granted, but the stats game is we each put forward a statistic, the rest of the group tries to figure that out with clues, deductive reasoning, questioning. The best stat is one that's not so easy. We get it right away, not so hard that we never get it. And if it's related to the topic at hand, then all the better. With that as a description, Matt, what's your stat?
Matt Colyar: I'm going to be considerate of everyone's time.
Mark Zandi: Yep.
Matt Colyar: 8.7.
Mark Zandi: I should know that. It feels like I should know that number, 8.70. Oh, I know what it is. The increase in egg prices in the month.
Matt Colyar: No, it's very close though, but no, and it's not a percentage change.
Mark Zandi: It's not a percentage change?
Matt Colyar: It's a change.
Mark Zandi: And you said I'm close?
Matt Colyar: Just numerically you were, but not-
Mark Zandi: Oh, because I think egg prices were up 8.7%.
Matt Colyar: 8.2, or, yeah.
Mark Zandi: I'm pretty sure. I'm going, why would I know that number? Can you check that out? If that's, if I'm right?
Matt Colyar: You can have it if you're right, [inaudible 00:50:14].
Mark Zandi: Okay, yeah, I'm going to take it if I'm right. If that's 8.7. I'm probably way off.
Matt Colyar: 8.2.
Mark Zandi: Oh, 8.2, okay. 8.2, okay. That's kind of quasi impressive, isn't it?
Matt Colyar: Yeah, yeah.
Mark Zandi: Yeah, kind of quasi impressive. I knew I-
Cris deRitis: It's not a growth rate, it's just a change.
Matt Colyar: It's a change, yeah.
Mark Zandi: A level change? I mean, just a difference?
Matt Colyar: A difference.
Cris deRitis: Difference.
Mark Zandi: A difference, is it related to consumer prices?
Matt Colyar: No.
Mark Zandi: Is it related to inflation generally?
Matt Colyar: Very indirect, indirectly.
Mark Zandi: Oh, 8.7. Is it another economic statistic that came out this week?
Matt Colyar: Yes.
Mark Zandi: Government statistic?
Matt Colyar: Not a government statistic.
Mark Zandi: Not a government statistic. Oh, goodness. Should we know this?
Matt Colyar: Chris should know this. He had to endure a rant from me on Tuesday about this. I cornered him.
Mark Zandi: At the holiday party?
Matt Colyar: Prior to that at the office.
Mark Zandi: Oh.
Cris deRitis: Oh, NFIB.
Matt Colyar: That's right. It was the increase in the NFIB.
Mark Zandi: Oh.
Cris deRitis: That's right. That's right.
Mark Zandi: Oh, right, right.
Matt Colyar: Yeah, so-
Mark Zandi: You want to explain?
Matt Colyar: All the surveys, as you mentioned about the University of Michigan, a lot to not like about them. NFIB, Small Business Optimism Index is probably the most politically compromised, but it's a 8.7 percentage point increase in the index from November, or I'm sorry, from October to November.
Mark Zandi: That's a diffusion index, isn't it? Isn't it?
Matt Colyar: It is, yeah.
Mark Zandi: Oh, it is. So it's a difference between positives, less negative responses, isn't it?
Matt Colyar: And then they normalize it to 100. Those were all [inaudible 00:51:55].
Mark Zandi: They normalize it, right, yeah.
Matt Colyar: Yeah. So that's the largest ever monthly positive movement in the survey's history.
Mark Zandi: So bogus.
Matt Colyar: Just, which is okay, there's small business owners, lighter touch regulation, lower taxes. There's things that they should like about the election result, but even backward looking indicators were unusually positive from September to October. So just feeling great in ways that they hadn't. So yeah, compared this month's revenue to the previous month's revenue, the increase there is the largest since when vaccines became available in 2021 and people could start doing stuff again. Not a whole lot of material changes in the economy over the past month outside of the election, but yeah, very interesting. We're economists professionally and we think about this stuff.
Mark Zandi: Yeah, it's-
Matt Colyar: I think it's changing.
Mark Zandi: It just feels like it's just kind sentiment. There's no real economic content in that. I mean, sentiment matters, I'm not saying that, but.
Matt Colyar: I don't know that, I mean, if it does, it's changed how it matters. And I don't pretend to fully understand it yet, but it's something that I've been, yeah, I've doubted the sincerity of these surveys for a while and this is a very glaring example of why we shouldn't take them as serious, at least in the same context as they were being taken seriously.
Mark Zandi: Well, this would be good point to highlight our survey that we conduct on the economy, economic view website every week. And that shows sentiment has, the election had no impact as far as I can tell on the results. We do this every week, I mean, I can't see any meaningful impact of the election. But the thing that's most telling is it's steadily improved throughout the year. I mean, now it's, I'd say, unambiguously strong. I think businesses are feeling good about the economic environment.
And the one part of the survey I spend the most attention on is the percent of positive responses to the broad question about present conditions. So we ask, how's your business doing today? Positive, negative, or neutral? And this is the percent that respond positively. And when that falls below 20%, percentage points, that's typically consistent with kind of recessionary. We're sitting at almost 50% at this point, and that's consistent with a very healthy economy, and that's steadily improved throughout the year. So I actually put a lot of weight on that particular survey. I find it relatively useful. In terms of turning points in the economy, it feels like it's very useful. But the NFIB survey, that just feels like a beauty contest to me.
Matt Colyar: Yeah. Yeah.
Mark Zandi: Okay. All right. Chris, you got one?
Cris deRitis: Sure. So just on that note though, I guess listeners should go to Economy.com and sign up to take the survey.
Mark Zandi: Yeah, absolutely. Please do. We welcome your participation in the survey. Make it a stronger survey for sure, absolutely.
Cris deRitis: Economy.com.
Mark Zandi: Economy.com.
Cris deRitis: All right, I got two numbers for you. 3.8%, and negative 0.4%
Mark Zandi: Related to inflation?
Cris deRitis: Yes.
Mark Zandi: So, percentage changes in some particular components of the CPI?
Cris deRitis: Yeah.
Mark Zandi: Yeah?
Cris deRitis: Yes, yes, yes.
Mark Zandi: Okay. okay.
Matt Colyar: Are they month-over-month comparison? Is one a monthly comparison, the other, the same component annually?
Cris deRitis: They are both year-over-year.
Mark Zandi: Both year over year. And they're related?
Cris deRitis: Yes.
Mark Zandi: 3.8, minus 0.4. Are they on the goods side of the economy?
Cris deRitis: Oh, they capture all the prices.
Mark Zandi: Oh, really?
Cris deRitis: Yep.
Mark Zandi: Okay. What do you think, Matt?
Matt Colyar: I was going to say hotel prices for 3.8 year-over-year growth, but that's not-
Cris deRitis: Think broader.
Mark Zandi: We got to think more broadly here.
Cris deRitis: More broadly, yeah.
Mark Zandi: Yeah. Oh, I think super core versus goods? No?
Cris deRitis: No, not really.
Mark Zandi: No? Is the minus 0.4 goods prices?
Cris deRitis: No, it's a group of prices. Yeah.
Mark Zandi: A group of prices.
Matt Colyar: Core goods, X vehicles?
Cris deRitis: Nope.
Mark Zandi: Oh, boy. Geez. That's a good one.
Cris deRitis: No, that's-
Mark Zandi: No, this is good. This is one of those ones that we're going to kick ourselves we're not getting, I'm sure.
Cris deRitis: It came out the same day as the BLS reported it, but it was actually released by the Atlanta Fed.
Mark Zandi: Oh, is this the Atlanta Fed?
Matt Colyar: So, wages?
Cris deRitis: No.
Matt Colyar: Atlanta Fed's wage tracker, okay.
Mark Zandi: Is that something to do with inflation? Sticky prices, or-
Cris deRitis: Sticky prices.
Matt Colyar: Oh, right.
Mark Zandi: Yeah, sticky prices.
Cris deRitis: Yep, that's right. Which one is sticky?
Mark Zandi: The 3.8.
Cris deRitis: Yep.
Matt Colyar: [inaudible 00:57:15], very good.
Mark Zandi: And the minus 0.4 are the non-sticky prices?
Cris deRitis: Yeah, the flexible prices.
Mark Zandi: The flexible prices.
Cris deRitis: So it goes right into-
Mark Zandi: What we were saying.
Cris deRitis: ... what we were saying earlier. What's interesting is the sticky price index from the Atlanta Fed, it's certainly high, right? It's not where it needs to be, but it has been persistently coming down by about a 10th of a percentage point every month. Right? So if you continue that trend-
Mark Zandi: Oh, okay.
Cris deRitis: ... that takes you into October, September, October of next year if we continue along this path here.
Mark Zandi: Oh, okay, and that kind of feels like the path in our forecast. That's how long it's going to take.
Cris deRitis: Yeah. Things will continue to improve here, but slow going.
Mark Zandi: Right. I haven't looked at that index carefully. If you look at sticky prices, what are the key sticky prices? I'm sure it's the housing, owners equivalent rent.
Cris deRitis: medical care. It's what we mentioned.
Mark Zandi: What we mentioned, okay.
Cris deRitis: Yeah. Insurance.
Mark Zandi: Insurance.
Cris deRitis: Medical services, those prices don't tend to change at all. The actual definition is based on, they look at the frequency of price changes across these different goods. And prices that typically change within four months are classified as flexible. Those that change after four months or a longer horizon are sticky. So yeah, but it's consistent with what we mentioned, they just group all the prices into these two sets of-
Mark Zandi: Two buckets.
Cris deRitis: ... of goods and services.
Mark Zandi: Yeah, I'll have to start paying closer attention to that. The Atlanta Fed did some really good work. They put out some-
Cris deRitis: They do.
Mark Zandi: ... cool indices, I'll have to take a closer look. Okay. You ready for mine?
Cris deRitis: What's your number? Yeah.
Mark Zandi: 266 basis points. That's 2.66%. It's a financial measure, it goes to financial conditions.
Cris deRitis: Is it the yield spread?
Mark Zandi: Yeah. Yield spread. What yield spread?
Cris deRitis: Bond yield spread?
Mark Zandi: The bond yield spread. Okay, but in the corporate bond market, it would be the high-yield-
Cris deRitis: High-yield versus treasury.
Matt Colyar: Or treasury, okay.
Mark Zandi: So you take the interest rate on high-yield corporate debt, subtract the 10-year treasury. Well, I might be simplifying here, but roughly speaking, the 10-year treasury yield. Now that I think about it, it might be option adjusted or something. There's some complexity to it, but roughly speaking, 266 basis points. We have data back 30 years. This is high-yield corporate debt is below investment grade debt, this is the debt of lower quality companies or companies that have a higher risk of not being able to pay back on that debt in a timely way. And so interest rates are obviously higher and they're more sensitive to investor expectations with regard to what's going on in the economy and what that means for corporate cash flow, and whether businesses are going to be able to pay back the interest and debt that they owe. In that 30-year period for which we have data, there's only one other time when the spread, the difference was thinner than it is today. You want to guess when? No? Give up?
Cris deRitis: I give up.
Mark Zandi: Right Before the GFC, the great financial crisis. Briefly, I think it got to as low as 246 basis points. The average over that 30-year period, abstracting from the financial crisis, 500 basis points, five percentage points. So, talk about easy financial conditions, that's a very good example of that. Investors are very, very optimistic about how things are going to go here. And all else being equal, we'd argue for the Fed to be certainly not ease interest rates and may even start to raise interest rates.
Okay. All right. Well, very good. Before we call this a podcast, any parting words, Chris, Matt, anything?
Cris deRitis: I guess a question based on that. Have you changed your recession probability? We haven't talked about that.
Mark Zandi: Well, I'm still at about 20% for calendar year 2025, so a little bit elevated. I mean, I think through the kind of a unconditional probability of recession would be about 15% over the coming year. A little bit elevated, 20%. What do you think?
Cris deRitis: I think it was around 25, 30, and-
Mark Zandi: Yeah, still there?
Cris deRitis: I'll stick with that, yeah.
Stick with that, yeah. Matt, any views on probability of recession? I haven't asked people that in a long time.
Matt Colyar: Yeah, it's about where I am too. Although your bond spread theory, wouldn't that support cuts next year if there's an imminent financial crisis coming?
Mark Zandi: Well, first thing's first, Matt.
Matt Colyar: Sure.
Mark Zandi: First thing's first.
Matt Colyar: Right.
Mark Zandi: Yes, it would.
Matt Colyar: Yeah, it's fall of 2007 again.
Mark Zandi: Yeah, right. Okay. All right. Well, I think we'll call this a podcast. Will Marissa be back with us next week? Chris, do you know?
Cris deRitis: I believe so. Yeah.
Mark Zandi: Our wayward host, she'll be back here next week hopefully, and I think we'll probably have a guest next week too. But with that, I think I'm going to call it a podcast. Thank you for listening in, dear listener. We'll talk to you next week. Take care now.