Philipp Carlsson-Szlezak, Boston Consulting Group’s Global Chief Economist, joins the Inside Economics team to share his views on the economy and discuss his newly published book. He makes the case that macroeconomic threats are intensifying and can no longer be ignored by decisionmakers. He also provides a nifty framework for how to assess the seriousness of these threats and not get caught up in the doom and gloom that often characterize them.
Philipp Carlsson-Szlezak, Boston Consulting Group’s Global Chief Economist, joins the Inside Economics team to share his views on the economy and discuss his newly published book. He makes the case that macroeconomic threats are intensifying and can no longer be ignored by decisionmakers. He also provides a nifty framework for how to assess the seriousness of these threats and not get caught up in the doom and gloom that often characterize them.
Today's Guest: Philipp Carlsson-Szlezak - Global Chief Economist, Boston Consulting Group,
Click here to learn more about Philipp Carlsson-Szlezak
Click here for Philipp Carlsson-Szlezak's book
Guest Host: 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 a few of my colleagues and we have a guest, but before I introduce a guest, let me bring in my colleagues. Cris deRitis. Hey, Cris.
Cris deRitis: Hey, Mark. How are you?
Mark Zandi: I am doing well. It's raining today-
Cris deRitis: Been busy here.
Mark Zandi: In Suburban Philly, which is unusual.
Cris deRitis: Been busy this week. It's been hard to get ahold of you.
Mark Zandi: Really? I guess I was traveling. Yeah.
Cris deRitis: Traveling a bit. Yeah.
Mark Zandi: Traveling a little. Seeing clients in Boston. I hadn't been to Boston in a long time, but that was very productive. And you? Have you been traveling?
Cris deRitis: No, no.
Mark Zandi: No? Okay.
Cris deRitis: Traveling around the internet, I guess.
Mark Zandi: Right. Very good. And we got Matt Colyar. Matt Colyar. Matt, I'm so sorry.
Matt Colyar: That's okay. I'm used to it.
Mark Zandi: That name.
Matt Colyar: Yeah.
Mark Zandi: Are you sure you want to say Colyar? Can't you just say Colyar?
Matt Colyar: I have family members that don't pronounce it the same way, so I'm totally-
Mark Zandi: Oh.
Matt Colyar: Yeah. Whatever suits you is what I've come to from 30 plus years of hearing people butcher it.
Mark Zandi: Okay. You'll give me a pass.
Matt Colyar: Sure.
Mark Zandi: But I'll keep trying. I delay because I keep thinking of the county in South Florida. Your name is Collier County, right?
Matt Colyar: That's right. That's right.
Mark Zandi: But it takes me a few seconds to remember that county and what the name is. But anyway, we digress. And of course we're going to talk about the CPI report that was the big economic news of the week and get a read on that from you. And we've got a guest. Philipp Carlsson. Philip, good to have you on Inside Economics.
Philipp Carlsson-Szlezak: It's good to be with you. Hello.
Mark Zandi: And you're the chief economist of BCG, Boston Consultant Group.
Philipp Carlsson-Szlezak: That's right.
Mark Zandi: I remember BCG. I, way back in the day, went to business school and BCG had all those grids, X axis, Y axis, and you have a book out, a really cool book on shocks and crises and macro events and we're going to talk about that. And I noticed you had a few of those BCG charts in your book.
Philipp Carlsson-Szlezak: Not really, no.
Mark Zandi: Not really? Okay.
Philipp Carlsson-Szlezak: Not at all.
Mark Zandi: Not at all?
Philipp Carlsson-Szlezak: Not at all. No.
Mark Zandi: I thought I saw-
Philipp Carlsson-Szlezak: The book's firmly on the global macro space. I think what you're referring to is probably the famous BCG Matrix, which was really-
Mark Zandi: Yeah, matrix. Yeah.
Philipp Carlsson-Szlezak: A corporate portfolio allocation tool that had a big history. Still valid today. My book's really global macro, real economy, financial economy, global economy and more in the finance camp than business strategy, if you will.
Mark Zandi: Oh yeah. No, no, I didn't mean it that way. I thought I saw a few matrices in your book.
Philipp Carlsson-Szlezak: Oh. Yeah. It might be that we have one or two matrix looking charts in there, but yeah, yeah, yeah. I see where you-
Mark Zandi: I thought that ... BCG like to me. That's what I mean.
Philipp Carlsson-Szlezak: Okay.
Mark Zandi: The base of my limited experience, but-
Philipp Carlsson-Szlezak: Yeah. No, no, hadn't thought of it that way, but good point.
Mark Zandi: Hey, would you mind, before we dive into all of this, just give us a sense of your path to being chief economist of BCG? Very curious.
Philipp Carlsson-Szlezak: Oh, sure. I have a history not just in consulting but also in finance. Worked on the sell side for a number of years at Sanford Bernstein where I was chief economist and also in the think tank world and research. So I really see my work and my career as bringing together the corporate perspective, the finance perspective and the policy and research academic perspective, if you will. And I always worked in research related areas, never really done straight consulting work. BCG is a great platform to interact with executives across the world, all industries and investors alike. So I have both the investor perspective and a corporate perspective. And what I do is classic research and advisory. So much like you do it on the sell side, I churn out research and I speak with executives and investors about what they see, what worries them, what I see and what we can do to read the tea leaves of the macro economy. And the book is really just years and years of doing this, rolling that up in a book of what we see is wrong in public discourse about the economy, how we think we can do somewhat better hopefully. So that's what the book is about.
Mark Zandi: Cool. And again, it came out this week, right?
Philipp Carlsson-Szlezak: That's right. Yeah. On Tuesday, the 9th.
Mark Zandi: So are you watching your book sales carefully? Like every hour you go up and see how many books I sold?
Philipp Carlsson-Szlezak: Yeah, it's not that transparent. You'd think, right?
Mark Zandi: It's not transparent.
Philipp Carlsson-Szlezak: No, it's not. Amazon is a very opaque ranking system and you see the sales rank and there are like three million books on there, right? So if you see a number like 10,000, you think, oh my god, 10,000 is really low, but really there are three million books there. So if you make 10,000, if you crack that level, it's actually rather good for a business book. So yeah, we try to keep track of the numbers, but it's not like you have a real-time indication. We know we had a lot of pre-sales. We know a lot of clients are buying it. We know that there's a little buzz around it, so we're happy about it and hopefully your listeners will pick it up too.
Mark Zandi: Absolutely. I mean I wrote two books and I keep getting ... The last book was now almost a decade ago. Two of them around the financial crisis. And I still get statements. It was published by Pearson. But they all have negative signs like I owe them money. I don't know what's that all about? And I still owe them money.
Philipp Carlsson-Szlezak: I think that's because bookshops are buying them, then they're buying a little too much and then they're returning them and that's called negative sales, right?
Mark Zandi: Oh, there you go.
Philipp Carlsson-Szlezak: That can happen, but I'm sure your lifetime sales are not negative, Mark. You're being too modest here. Your lifetime sales are firmly positive, I'm sure.
Mark Zandi: I don't know. I don't know. They did translate it into Mandarin, so that gave me a good-
Philipp Carlsson-Szlezak: Oh wow.
Mark Zandi: Yeah. But I think it's probably worth about a nickel on eBay or something. But anyway. But it's great to have you on. Before we dive into the book and the views there, let's turn back, hey Matt, to the inflation note. I think I'm right. CPI is the headline data of the week, right Matt? I would think.
Matt Colyar: I think absolutely. Yeah.
Mark Zandi: Not to color what you're going to say here, but I'd say wow, fantastic. Right? No?
Matt Colyar: I'd call it a great report. This is the broad-based disinflation that we're all kind of hoping for and a lot of underlying details would suggest was coming. I'm talking mostly about shelter there, which we'll get into. But yeah, it's hard to find a negative component to this month's or June's CPI data. I think markets reacted that way. We'll see what the Fed says in a few weeks when they meet. But yeah, I think your interpretation is probably the only one.
Mark Zandi: So headline CPI, consumer price index inflation was down a little bit because of lower energy prices and the core, excluding food and energy, was up a 10th of a percent, I think. Something-
Matt Colyar: That's right. I'm not sure if you still have an appetite for two decimals.
Mark Zandi: Yeah. Absolutely. What is it.
Matt Colyar: If you do, it's .06%. So it was actually rounded up to that.
Mark Zandi: No?
Matt Colyar: Yeah.
Mark Zandi: Really? Wow.
Matt Colyar: Almost flat core CPI, which would be nice. But yeah, excluding food and energy, prices rose .1% from May to June, which is a slowdown which lowered the annual rate from 3.4% to 3.3%. And both of the headline and core CPI figures were softer than our expectations and consensus expectations.
Mark Zandi: Now, your expectation, and I think the broader market expectation was for an increase in the core CPI of 0.2. I don't know what the second significant digit was, but 0.2. So what's the difference between the 0.2 and the .06 that we actually got?
Matt Colyar: I alluded to shelter. We've had this long frustrating relationship with shelter inflation. There's third-party data. There's all this other signals that say market rents aren't increasing anymore. This will eventually bleed through into government statistics. It's taken longer than we've expected. But finally in June there is a 0.2% increase in the CPI for shelter, which is basically half. It's the slowest monthly increase by a wide margin since say 2022. So it's this moderation that we've been expecting and finally came through in a way and given the weight that both tenants' rents, so what renters actually pay in rent and owners equivalent rent, the weird measure of owner occupied housing, both of those things slowed significantly and given the weight that they have within the CPI basket contributed massively to the undershoot or the very slow monthly increase in core CPI. I
Mark Zandi: I guess the other thing was hotel room rates were down and that's one feels like more one-off, doesn't it?
Matt Colyar: Yeah. Hotel prices fell 2.5% and if that was the only thing dragging shelter prices down a bit, it would be less encouraging because hotels are noisier. If Taylor Swift comes to Switzerland, I think the hotel inflation was a big story. It was a big enough deal-
Mark Zandi: Philipp, did she come to Switzerland?
Philipp Carlsson-Szlezak: You know what, she did and-
Matt Colyar: Do you remember that story?
Philipp Carlsson-Szlezak: And my kids went last Wednesday.
Mark Zandi: No.
Philipp Carlsson-Szlezak: Yes. So she played I think on the 9th and the 10th and my kids who happened to be in Zurich for the holiday. I'm from Switzerland originally. And they went to see her second show on the 10th. I don't know about hotel prices because they stayed with my sister, but otherwise it would've been unaffordable. It would've bankrupted me. I think you're right.
Matt Colyar: I think there was a story afterwards, and I could be wrong, but they're like, hey, this is enough that in national statistics, there's hotel inflation because of this tour stopping there. So the example being hotel prices, much more noisy. And if you had this one-off monthly decline and that was what drove shelter prices down, it'd be less encouraging. But owner's equivalent rent and tenant rent, so lot stickier measures, they both posted their slowest monthly increase in three years. So the kind of details we wanted to see and evidence of a more sturdy disinflation and why yesterday's report shouldn't be hand-waved away for negative one-offs like hotel price declines.
Mark Zandi: Just one more question in the weeds and then we'll talk about this more broadly. I'd like to bring you in, Philipp, to the conversation. Medical care inflation. That's the one part of the story that feels like it's going in the other direction. Everything seems to be disinflating. Most everything disinflating in a reasonably graceful way, but medical care inflation is starting to pick up given the long lags that exist between costs and price increases in the healthcare sector. I didn't notice, was there anything to worry about there?
Matt Colyar: A 0.2% increase from the month before, which is slower than May, but if you step back, healthcare inflation was around 1% in the beginning of the year and now it's at 3.3%, so I think it's following the script of, hey, we are going to see the higher input costs work their way through the pipeline to higher consumer prices in this industry. But it was never expected to be a rapid development and I think that's what's playing out now. And we have an expectation that that year-over-year growth rate will take up a little closer to four, but certainly not runaway inflation. But nevertheless higher than the Fed's target and something that'll keep the disinflation from happening quicker.
Mark Zandi: Okay. So broadly, it feels like everything is sticking to our script, meaning that inflation is continuing to moderate in a reasonably graceful way. Still a bit on the high side relative to the Fed's target if you measure it the way they measure it, what they're focused on. But all the trend lines here look pretty good, right? Any pushback on that?
Matt Colyar: No, not at all. I think more specifically, our forecast for the Fed, which maybe we'll get into, has become consensus and now I think markets are even getting out a little ahead of us.
Mark Zandi: Hey Cris, real quick, that broad picture, any pushback there? You feel pretty good about where things are headed in terms of inflation?
Cris deRitis: Yeah. It's looking good. It's a good report. More script to be written, so I always want to throw that in there, but yeah. It's hard to find some blemishes in this current report.
Mark Zandi: So Philip, you can tell we're pretty sanguine here about the inflation picture, which translates into expectations for the Fed to start cutting interest rates here pretty soon. What's your sense of the inflation story?
Philipp Carlsson-Szlezak: Well, I think Matt hit most or all of the key points. I would add perhaps when you think about base effects, they were not even that favorable this month, but go into August and September, they will be favorable because month over month inflation a year ago, August, September was I think four-tenths and five-tenths. So if you get a good print August, September, it makes for a big step down. So there's more in store, I think. The disinflationary story is a success. The soft landing is a success. We're on track. I think this is certainly ... In our research, we were in a non-recessionary story for the last 18, 20 months. We feel this is going well. We feel pretty vindicated.
Mark Zandi: Very good. We were in the same camp. We did not have a recession. And the logic was that it all revolved around inflation. And the reason we were more sanguine about inflation was felt that the surge in inflation back in 2021 and 2022, demand and supply, but it was largely a supply side story, pandemic, Russian war. And as those negative shocks have faded, moved to the background, they're still having impacts, but they're now largely to the ... They're in the rearview mirror. Inflation has come in reasonably gracefully. Is that your perspective on things?
Philipp Carlsson-Szlezak: Yeah. I think a big misreading in '21, '22 was to conflate a idiosyncratic tactical inflation spike with a structural turning point. So the headlines were full of 1970 style meltdown narratives and wage price spirals and we're going to be off to the races. And in the end, the way we cast it was a mismatch of demand and supply. You did have a demand overshoot that came at the same time as a supply crunch and it conferred a lot of pricing power on firms. Usually you raise prices, you lose market share. Well, when demand is through the roof and nobody has the supply, then everyone gets to raise prices without losing market share, collectively we call that inflation. But as you say, as the demand overshoot wore off and as we rebuilt the supply chains, all of this kind of went away. So I know the transitory word was hated and people really flipped out if anyone said transitory, but will we not look back at this years from now and say, well, this was at least temporary? Much more like after the Second World War.
After the Second World War, you had a similar shock. Too much demand for civilian consumption, too little supply because the economy was stuck on a war footing. Prices went to 20% and then they reset entirely. It also took two, three years or a little more. But it was not a structural upshift in inflation expectations. It was not a regime shift or break. And that's pretty much the story that has played out and I think a lot of the narrative got that completely wrong and went into a hysterical false alarm narrative of we're in an entirely new world. Now, inflation's probably biased to the upside in future, but we're not in the 1970s.
Mark Zandi: And just to complete that thought, what you're alluding to is that there may be some broader structural tailwinds to inflation that might keep it on the high side compared to what the Fed would like to see. Is that what you're alluding to? So it's things like the fact that we're no longer globalizing as an example of that kind of tailwind.
Philipp Carlsson-Szlezak: Yes. Yeah, I would say this is one factor. In the book, we go into that as well. But I think the bigger story for me and in the book is we are in an era of tightness and that has nothing to do with COVID. The unemployment rate dropped below USTAR long before COVID. 2017. That's when we opened this window of tightness. And then COVID was a very brief and brutal interruption of this. The employment rate went to 14, almost 15% and then it came down rapidly back into this tight territory.
So really we're looking at a tight labor market era that started in '17, still ongoing. COVID was the interruption. And that tightness comes with a lot of good things. A lot of good knock-on effects from that. Not least that it really forces firms to look at CapEx more closely. In the 2010s, there was so much labor market slack, the corporate playbook didn't really include that much CapEx. The next chapter of growth was written with hiring. Now when you have this tightness, when wage growth is high, the incentive and later almost the coercion into CapEx is convincing. And that comes with shifting firms to the technological frontier that comes with a tailwind on the productivity side. We can talk about the size and the timing. Let's not get ahead of ourselves, but there will be a tailwind I think. And all of these are silver linings. Not least by the way, real wage growth that comes with that too, which is good and helps those at the bottom most. So I think there are a lot of good things that come from a tight labor market and that will keep also an upward pressure on prices. Not dramatically, but you used to struggle with 2% inflation target and I think it's more likely that you occasionally have to tamp it down and bring it back to two in the future.
Mark Zandi: So you don't buy into this story that artificial intelligence is going to juice up productivity growth to such a degree that it's going to cause markets to be not only not tight, but there's going to be a surfeit of labor. You don't buy into that.
Philipp Carlsson-Szlezak: Well, not that fast and not at that magnitude. In the 2020s, we argue in the book the era of tightness will not be undone or ended by AI. Which has the potential to displace labor and will, but it's incremental and it's a hard slog and it happens cumulatively. Lots of hurdles to overcome. And just keep in mind that stories of technological unemployment have been around forever and they've never panned out. Bill Gates, he talked about a robot tax in the 2010s because he thought automation would deliver mass unemployment. Well, where are we? Near record unemployment rates. Before him, lots of great thinkers got that wrong. There's a Nobel Prize winner called Wassily Leontief. I probably butchered the name, but I think he won the prize in the early '80s.
Mark Zandi: Oh, yeah. Output models. Yeah.
Philipp Carlsson-Szlezak: Yeah. I mean he also said human labor was going to go the way of the horse after the introduction of the automobile. We've only added jobs and jobs and jobs. And we talk about this in the book a lot. Technology is deflationary over the medium and long run and that means it removes costs, it allows firms to lower prices, to grab market share, and that really boosts real incomes. And when you see the real income boost, what does it mean? It means translation into new spending, new demand for new stuff, often goods and services that didn't exist at the time of a technological shock occurring. And then what happens is that you create new employment in those new areas. So once upon a time, half of America worked on a farm, literally almost 50%, and they spent 45% of their incomes on food. That was in the late 19th century. Since then, multiple waves of technology. They've removed all this labor from the farms. Today only 1% of Americans work on a farm. And how much do we spend on food? It's like 11, 12% of our budgets.
This massive real income gain, where has it gone? It's gone into everything we didn't know about a hundred years ago. Yoga teachers and ski trips and other services. And that has created employment in those new areas. And that is a process that will repeat, I think, unless you really believe in a future where every new work will either go to a robot or to an algorithm or an intersection of the two. I think gradually they will make inroads, but not on a timeline of five years. Even in 2050, I don't believe in mass unemployment. Even in 2060. So I think it's a very gradual story that we're looking at and ultimately tech will raise real incomes.
Mark Zandi: Got it. Got it. I mean we've kind of been dancing around the book and it is called Shocks, Crises and False Alarms. A really cool title. And there's lots of things to discuss here. Maybe it would be best if I just handed it over to you and let you riffle a little bit and give us a sense of the major point you want to make in the book. What's the thesis here?
Philipp Carlsson-Szlezak: The book is about how public discourse on the economy often fails us. This is where the false alarms in the title comes from. And it's also looking at what's wrong with economics in as far as it doesn't serve investors and decision makers very well and it's about calibrating a lot of these narratives and finding analytical instruments to bring down some of the volatility and discourse and read that more effectively. And when you think about the false alarms claim, memories are often short, but just to recap very briefly, the so-called inevitable recession of '23 is not the only false alarm of recent history. Total nonsense. It's not just that we scraped by. This is non-res recessionary by a wide margin. It's a massive false alarm. But over the last four years we had a pileup of such false alarms. Think back to March and April 2020 when COVID hit, the received wisdom was this would be a very, very long recovery, more like 2008, maybe like the Great Depression, big drama, big structural step down.
The opposite was true. It's a swift tight recovery. Then we already touched on the false alarm of a regime break in the inflation space, the 1970 story. In my view, a big false alarm. Then when interest rates rose reliably, the doomsaying discourse veered into emerging market crisis. If rates rise in the US and other rich countries, we're going to see a contagion across EMs and we're going to see the dominoes falling and what happened? None of that sort. There was no systemic emerging market fallout from this. And then just to land on again, the failed prediction of a recession. Yet another false alarm. So if you're an executive, if you run a big firm, if you're in a big portfolio, the headlines are not your friend and frankly the models aren't your friend either. The models continuously got that wrong and the book hammers that quite hard.
Mark Zandi: Can I just push back a little bit?
Philipp Carlsson-Szlezak: Please.
Mark Zandi: Take the pandemic. You used that as an example of a false alarm. And obviously the US global economy's navigated through that certainly much more gracefully than one would've thought when everything was shut down in the spring of 2020. But the reason why we came out of that as gracefully as we did was in part we got a vaccine faster than anyone thought we could ever get a vaccine and also the policy response was just off the charts. I mean here in the United States the support, if you add it all up, was about 25% of GDP, which is massive. And that same kind of policy response occurred in other parts of the world. Not to the same degree, but very, very significant. So the doomsaying makes some sense in the context of you think about a traditional response to it would've been much worse. But we had this incredible massive policy response that kind of bailed us out. How do you think about that or is that fair?
Philipp Carlsson-Szlezak: Yeah. No, we discuss that in some detail and I appreciate the comment. Look, I think it was incumbent on the analysts at the time to anticipate the possibility of such stimulus as we did even in March of 2020. And the COVID vaccine is a little further out there in terms of what was predictable and plausible. But in March and in April 2020, even later when stimulus on the way, there was pervasive doomsaying. I mean just to quote a few. The book has lots and lots of great headlines and quotes. I mean people like Rogoff came out and said this will be a six-year recovery. We know that you can do stimulus. We went through the TARP drama in 2008. Remember that? It was voted down in Congress and then Congress approved it and there was a paltry 700 billion. And even in March and April, we did a piece at the time in Harvard Business Review where we outlined, okay, let's not run away with these negative assumptions.
If you get policy response fast, if it is innovative, if it is protecting balance sheets of households and firms, this can be a lot tighter, this can be a lot faster. Did we know it would happen at this XXXL level? No. But clearly the possibility was there for this to happen. So the knee-jerk reaction of declaring this the worst ever, and this is going to be worst than 2008, where did it come from? It came predominantly from what we call master model thinking. What happened? People looked at the unemployment rate. You look at the unemployment rate in the models and you extrapolate to recovery times. In 2008 you got 10% unemployment and you had eight years of gradually grinding down the unemployment rate. So if in 2020 the unemployment rate went to almost 15%, what does the model do? It extrapolates to an even longer recovery time.
So this is where a lot of the model-based thinking went wrong. And I think it's a good case in point to say in the end, economics is about judgment calls. The model at best is an instrument that helps you see a partial side of the story. It is not sufficient to make a judgment call. So the model will not look at the probability of stimulus. The model will not look at the composition and the political dynamics around that. Crises do align interests in Washington. Big crises get people to act. They lubricate decision-making. People come down. They won't let the house burn down. All of these things won't be captured in a model. And so you're right, Mark. I agree with you. The speedy vaccine was piece of it, the stimulus was piece of it. But the stimulus should have been part of the assessment of decision-makers, analysts, prediction-makers at the time it happened.
Mark Zandi: Oh, interesting. Well, I would push back again a little bit. Maybe a little bit more than a little bit. If you take a model like a straight up structural econometric model like what we use, what the Federal Reserve Board uses, what CBO uses, and you plugged in what the Federal Reserve did in response to the pandemic, go to the zero lower bound, immediately you start quantitative easing and then you throw in $5 trillion in government support in a very short period of time, you would get a pretty quick recovery in those models. They would say, "Yeah, that's exactly what you would expect." But the problem is that judgment expecting that kind of policy response. And here's the other thing I'd just throw into the mix and get your reaction. Suppose we had another pandemic today. Could we have the same policy response to that? Because we just don't have the resources. Certainly in the rest of the world, they couldn't borrow to the degree that they did without causing other dislocations. So does that mean we should be accounting for that in our thinking for the next pandemic?
Philipp Carlsson-Szlezak: I'd quibble with that. In the book we have three chapters on stimulus. One's on the long history of stimulus, where it comes from, what confers to power of stimulus. There is a willingness and an ability piece. The ability has to do with bond markets and how permissive are bond markets and what is the inflation, the rate environment. The willingness is a political story of do we want to do this? All of this is supercharged and we call it the compulsive stimulus machine. As much stimulus as we can. But there are two types of stimulus. There is existential stimulus, which you call upon in times of crises like 2020, and there's tactical stimulus. Tactical stimulus is kind of frivolous like a Fed put on the monetary side, like juicing the cycle with fiscal spending and deficits. And we're addicted to it. The tactical stimulus has completely gone off the charts over the last 20 years and existential stimulus has helped us tremendously in moments of crises in 2008 and 2020.
Now, when we look forward, as you do, Mark, what we say in the book, we need to differentiate between existential stimulus and tactical stimulus. We think the existential kind is not really at risk. If the next crisis comes, yields will fall. The ability to borrow certainly for the US economy and other rich economies will be enhanced. You'll be able to mobilize resources. Tactical stimulus on the other hand, the frivolous kind, that's different. That's already constrained. Not constrained in the bond vigilante kind of list trusts and what we may be seeing in France and what has already restrained people like Maloney in Italy. But even here, if you wanted to, it's not that easy now to just juice the cycle at will. Well, rates are higher, inflation's upward, and so the tactical side of stimulus is heavily changed I think, and will be constrained. The existential type, another crisis rolls around, you'll be able to mobilize resources in the US. I firmly believe that.
Mark Zandi: Cris, I saw you nodding your head back and forth. Did you want to pipe in here at all?
Cris deRitis: Sure. I guess my takeaway is certainly I would agree with the argument that we need to consider multiple scenarios. I think early on in the pandemic, perhaps there were people really sticking to a very negative baseline, not considering the possibility of the upside. So completely agree with that. I do push back a bit on the stimulus and that it sounds like the argument is, well, government always will come through in the end. That there will be this existential type of stimulus available. I'm not so sure that without those doomsday scenarios that were presented, without the idea that, hey, if you don't do something here we are on this very negative path-
Mark Zandi: That's very interesting.
Cris deRitis: That the stimulus would've actually been delivered. So I think that type of doomsday analysis, considering those more negative scenarios, if there's no other policy response, I think those are necessary in order to get the desired reset.
Philipp Carlsson-Szlezak: Yeah. No, that's a fair point. I invoked TARP earlier. I mean why did congress act in 2008? Well, because when TARP was voted down, the market sold off ... I forget what, but a lot in 10 minutes. And that convinced politicians that they need to act. And can doomsaying and public discourse in the press play that role and convince them to act? Yeah, maybe. But look, I think the bigger question I think we're leading into is, is public debt too much? Are we in a debt problem? Is there a sort of a sovereign debt Achilles heel in the US economy? And that's another one of those stories that we cover in the book. Not in our reading. Debt is very high, the debt level is very high, but what does it tell you about risk? Next to nothing? The debt to GDP ratio, the trillions of dollars of debt, they say very little about risk.
What does tell you something about risk is the interplay of nominal growth versus nominal interest rates. If nominal growth easily is above nominal interest rates, the amount of debt, the trillions of dollars or the debt to GDP ratio isn't all that important. You're servicing the debt out of current growth. If interest rates rise above normal growth, then it's getting a lot harder. So it boils down to do you believe that say the 10-year yield will be durably above nominal growth in the US over the next say 10, 15 years? I don't think that's very likely. Can it happen? Yes. If it happens, it's not game over. It just means that you now have a debt sustainability equation between nominal growth and nominal interest rates that has flipped. You're going to have to set aside resources to service that debt in a more painful way. It's going to constrain you. But I don't believe in this Reinhard, Rogoff debt cliff. Remember they argued that 90% debt to GDP and new growth is going to go, whatever they said to zero. I mean that clearly hasn't panned out. And this is again exactly this point that we make about master model mentality.
Mark Zandi: Well, wasn't there some kind of calculation error anyway? They figured out-
Cris deRitis: On a spreadsheet.
Philipp Carlsson-Szlezak: That too was a problem in that research. But the mentality of, look, we found the model, we found the formula. If it's more than 90%, everything goes down the drain. That's master model thinking. And I think that just really didn't help so much. In fact, it had a lot of damage. It did some damage. Why? It fed into the whole austerity narrative. It really sort of played into the European policy world of well, we need to be very careful and see how it served economies like Germany to hold back on debt and stimulus. I mean the US economy has left them behind and that is one of the reasons, because they didn't spend after 2008.
Mark Zandi: You make an interesting point about the government backstop. You call it existential stimulus. By the way, whoever comes up with these ... This feels BCG to me. These are great descriptors.
Philipp Carlsson-Szlezak: I don't know.
Mark Zandi: Was that yours? Existential stimulus? I mean that's a pretty cool-
Philipp Carlsson-Szlezak: Of course. Yeah, no. I mean the book is full of these phrases.
Mark Zandi: I know. I love it. But what you're saying in the United States resonates with me to a significant degree. That the government has tremendous resource. The backstop is strong. If you look at historical experience, every time we get into an existential situation, policymakers come together, they do what they need to do to make sure that the thing doesn't evaporate. Even though you have naysayers out there saying moral hazard or saying let it burn, or we got to get rid of all the underbrush so that the economy can grow. All those kind of arguments just go by the wayside very quickly. But what about the rest of the world? Does that really work for the rest of the world? I mean they don't have those resources, right?
Philipp Carlsson-Szlezak: Well, we got to differentiate. There are other economies that can afford more largesse, but it comes down in the end to the status of the US dollar as a reserve currency, which is not a marginal advantage. It's a big one. And other economies and their currencies, they don't have that. Part of that ability of doing this is that role of the dollar. But I would say most advanced economies, your existential stimulus ability in moments of crisis will be strong. And in moments of crisis, these yields of these economies, their debt will fall. So in 2022, yields tumbled across the space, not just in the US. Across the rich world, at least. Yields were down everywhere. Flight to safety movement, you saw that and that enhances the ability to act. Sure, there's a distribution of ability and there is no other economy like the US. I'm totally on your side. But I don't think that Germany or even the UK or even France, if you had a big crisis tomorrow, they'd be able to raise money to fight that.
Mark Zandi: Okay, so you had a number of different, for lack of a better term, and I'm sure you have a better one, principles. Don't be a slave to a model. You call this a master model. You also rail against doomsaying. People tend to overdo the gloom and the doom. And the third, which I found pretty interesting, most interesting, very interesting, was you have to be eclectic in terms of the theories that are the basis where you're thinking about how things are going to play out. Did I get that roughly right?
Philipp Carlsson-Szlezak: No, you're absolutely right. The book is mostly about specific risks like sovereign debt, like stimulus, like global risks and cyclical and technology and all that. But up front we're framing three habits, if you will. What can executives-
Mark Zandi: Habits. That's right. Yep.
Philipp Carlsson-Szlezak: Yeah. There's three habits. What can executives, investors do day in, day out to cut through some of the noise, the false alarms and all the hysteria and how we cover and talk about the economy? And yes, the first one we already touched on quite a bit. Master model thinking. The belief that this is really a science. This is like physics and chemistry. I put in stuff and the model gives me the answer. It just doesn't work and we had a few examples of that. Whether that's 2020 or the GDP ratios and all that. The second one is discounting doom mongering. It's so pervasive. I mean the discourse really veers into the negative with such reliability. In the end it comes down to the business of news. It is a fight for your eyeballs and my clicks and will give airtime to those who tell the end is nigh. The headline that everything is really, really terrible and the worst ever just sells a lot better than we might be all right. And so I think every incremental data print is quite reliably spun into this is the worst ever and I see the impact of it day in, day out. A lot of the conversations I have and I do up to 150 a year in boardrooms with investors is sort of-
Mark Zandi: But who's counting, right? Who's counting Philipp?
Philipp Carlsson-Szlezak: Yeah.
Mark Zandi: A hundred.
Philipp Carlsson-Szlezak: Too many. Let's put it that way.
Mark Zandi: Too many. A lot.
Philipp Carlsson-Szlezak: Latching onto one of those latest-
Mark Zandi: Yeah, exactly.
Philipp Carlsson-Szlezak: What's the latest flavor? What is it now? Retail sales is all wobbly and so the recession is really just around the corner. And so labor market is weakening a little and the payroll print wasn't as strong and the household survey was negative and therefore the recession is just the next stop. There's a tendency to extrapolate into the negative with reliability and instantaneously and the book talks about how to lean against that. Then coming to the one that you said you found most interesting, which I find gratifying. Economic eclecticism is really our way of saying, look, if you want to make a judgment call on the economy and the model is too narrow and won't do the job and the headlines won't do the job, you're going to have to draw on many disciplines. I mean, think about the stimulus conversation we just had. Was it about an Excel sheet model or was it about a big Fervous model?
No, it was about what is Washington going to do? It's about politics, political economy. It's about finance. The depth and the dynamics in the bond markets. It had an international component. It has a historical component. History matters a huge deal in all of this. A lot of these systems that we constantly claim are so brittle and about to collapse, well, we need to understand their historical construction to assess how brittle they are. I mean, I'm not an engineer, but if you ask me how risky and stable is the building I'm in right now, I'm on the 47th floor, I'd say, well, show me its construction. How was this building constructed? That might give me an idea of just how risky this thing is. And in the same way, economics is about all these things. Yes, it's about economics, but it's also about politics. It's about international relations. It is about history. Big deal history. And of course finance. So this is economic eclecticism. Just a fancy word for multidisciplinary, much broader mindset. Econ is all fine. Economics has a lot of good uses, but don't think it's the answer to the questions you have day in, day out.
Mark Zandi: Yeah, there's a bit of a tension there in the sense that if you've got one theory that you ascribe to describe the world that we live in and how the economy functions and performs, it feels a little easier to execute on than eclecticism where you've got all these different perspectives on things. Which one do I use? How should I use it? It just makes it operationally very difficult.
Philipp Carlsson-Szlezak: Of course.
Mark Zandi: I think you're totally right. I think you're totally right. But for someone who doesn't do this for a living like you and I, what do I do with that?
Philipp Carlsson-Szlezak: Absolutely. You're so right, Mark. But this is what the book really says. If you're an executive, the last 30, 40 years, macro was really a background thing. It worked for you. It was a tailwind. Everything chugged along and you had hiccups like 2008. It was a big one, but outside of that, macro didn't have a major role to play in boardrooms. It was really just favorable in virtually every dimension. And now it is a topic in the boardroom and it is front and center for all stripes of investors. And what we're saying is they're going to have to work a little more and harder and get into the weeds of some of these things because you can't outsource it to a single answer from a model or from one expert that you trust. You're going to have to build your own judgment on some of these things.
And why should that surprise us? I mean, leading a big firm or being a portfolio manager, isn't a lot of that about judgment? Isn't that what leaders do? They make decisions based on the collective impressions and analyses they have and they make a judgment call. Why would that be different for macro? So I think it's really also a call to leadership and how we define leadership and that we bring macro into that leadership definition instead of pretending it's something I can outsource easily. One other point I want to make. The desire to have that answer is overwhelming. I don't know if we put it in the book, but there's a nice anecdote about Kenneth Arrow, another Nobel Prize winning economist.
And when he was a young man, he was drafted and so they figured out that he should predict the weather. They figured out he's smart and he should do weather prediction in World War II. And so he did that and he sent word up the chain of command and said, "Hey look guys, this weather prediction stuff is kind of garbage." And they sent word back down and said, "Well, the general knows that the forecasts are no good, but he needs it for planning." He needs it for planning. And we're not so different today, Mark. I mean after this whole convolution with inflation, I will tell you that people even today will have requests such as, "Hey, can we have inflation for the following seven countries for the years '26 through '29?"
And honestly, nobody can give you for seven countries inflation from 2026 to '29, not even for the US economy. You can have a take on that, you can have a directional view on that, but the idea that there's a point forecast that is an input into planning is laughable. And so the desire to have these clean cut answers is overwhelming, but we need to help leaders understand that it just doesn't work that way.
Mark Zandi: Well, the way we handle it, and I'm curious what you think of this, is scenarios. We run many scenarios and really think about ... They're narrative driven. What are the risks and what are the probabilities? And do this for every country and attach probabilities and we discuss the probabilities and that's where the judgment comes in. What's behind the scenarios and what are the probabilities that those scenarios are going to play out? Because at the end of the day, businesses are driven ... And I'm speaking to you as a business person. Run on spreadsheets. If you can't make it work in a spreadsheet ... And when I say a spreadsheet, you've got to put a number in the spreadsheet to make it work. You're not going to make an investment, you're not going to go hire somebody, you're not going make that decision about a new product. So at the end of the day, the general's right. Give me a number. I need a number. But the way we handle it's think about it's a distribution of possible outcomes. How do you think about scenario analysis in the context of the way you're thinking about this?
Philipp Carlsson-Szlezak: I think it's a good and important point and you almost have no other choice than doing this. Two calibrations maybe to it. In the end, if you write down a lot of scenarios, did you help the person consuming them? You still need a dominant narrative and a judgment call of what you think this will in all likelihood be. You still need to make a call of, well, which one is the one that captures my view of the world? And when facts change and new data come out, how does all that change? It's still about a narrative. It's still about judgment. Just because we replaced a single point forecast with four or five scenarios, we still owe an opinion and a view how to do things. The other thing about scenario planning is, in my view, certainly a must, certainly a very smart way of navigating around some of the shortfalls of forecasting.
But in the event, the thing that hits us down the line is going to be outside of those scenarios. So the risk here is that those who consume the scenarios, their view of the world as those three, four, five scenarios you've given them and then something happens completely outside of that. So organizations, leaders, they need to also find a way of building their own muscle of doing this so that when something hits, you can do something in real time. The idea that you have all the necessary scenarios on the shelf, and when crisis X happens, you pull that scenario off the shelf and you have a playbook for what to do, it's not going to be that pretty. It's not going to be that clean. So in the end, it's for organizations, whether that's in the real economy or in the financial economy, for them to have real time assessment, analytical muscle to react and find views and push that into the organization so they can act on it.
Mark Zandi: Well, let me ask you this. Maybe we can put some of this to work, some of the analysis you've done here. What currently is at the top of the list of concerns that you have? I assume there's a list of risks that potentially could become shocks and become a real problem. And I'm guessing that you have a sense of the rank order of those risks. What's at the top of your list of concerns? Is that a fair question to ask?
Philipp Carlsson-Szlezak: It's totally fair question to ask. Look, the way we ... Let me take this question as a cyclical question. What's the risk of the cycle is I guess where you going with this. How does the cycle end and like that or it's a recession risk, essentially. The way we frame this in the book is to say, look, recession risk, forget about the yield curve, forget about indicators. They're going to let you down. I mean the yield curve has let you down for many years. Also pre-COVID, right? A yield curve is a very, very noisy signal. Hasn't worked in '18, '19 and elsewhere. We're saying this has to be narrative driven. You have to think about what is the distribution of cyclical risks? What is their types, the different types, and what is their share of the risk distribution?
All recessions will be and were and will be one of three types. You have real economy recessions where something comes to an abrupt halt in consumption, investment, employment, that type of thing. Or you have policy driven, monetary policy driven recessions where rates go up too fast too high, which is the classic policy era kind of recession. Or the third type is a financial recession. Something blows up in the financial system, balance sheets crack, credit intermediation stops, and that tears things down. So with those three risk types, whatever goes wrong will come from one or several of these three. Then we go and say, well, instead of looking at a yield curve signal, what can we say about each of those three? Should we do that? Should we go through the three today?
Mark Zandi: Yeah. Sure.
Philipp Carlsson-Szlezak: Is that interesting?
Mark Zandi: Yeah.
Philipp Carlsson-Szlezak: I mean look at the real economy first. So the share of real economy recessions has really fallen over time. Cycle has moderated. Expansions are much longer. Why? We're shifted to a service economy, which is like 70% really now, and services are a lot less volatile. So the idea that a swing in investment gives you a recession is a much higher bar. You had the fracking boom bust in the 2010s, 2015. Fracking collapsed and everyone said that was going to be a recession and it wasn't. Why? Because the real economy, just the physical economy just isn't as big a deal anymore. So I don't see anything currently in employment, consumption, investment that would say, hey, this is a cliff edge situation. This is weakening. It should be softer than it was. So I don't look to the real economy to say, this gives me in a near timeline or even over the next 12 months, easily visible a recession.
Then I move on and say, okay, the policy error type. So yes, this is probably where the biggest concentration of risk is. Keep in mind, even if we cut in September and in all likelihood we will and we probably will get another cut, you're still going to be tight relative to R-star, relative to the neutral rate of interest, you're going to stay tight because that's at around 3% and if you cut twice, you're going to be way above that. You stay above R-star. You don't know how much tightness you can really digest. We've seen a lot of resilience. The worst is behind us. We did not get a wave of bankruptcies neither on the household side or on the firm side. So I would think things are getting easier, but certainly the policy era, you stay too high, too long above R-star is something to worry about, to think about, but nothing that alarms me today. And then you move to the financial system risk that I mentioned as the third type. And there you have two subtypes if you will. One is that you get a shock that blows up something in the financial system banks. Like SVB, just bigger. But back to stimulus, back to policy. Was that not pretty impressive how that was handled and how that was dealt with?
Mark Zandi: It was.
Philipp Carlsson-Szlezak: It was. It was pretty good.
Mark Zandi: Yeah. Pretty good.
Philipp Carlsson-Szlezak: So it's very opaque. Financial system. There's always something that can blow up that we don't see today. Very poor visibility in that regard, but I don't have something to say today and that will end it and therefore I'm very, very, very worried about it. The other side of the financial system risk is that you get a big step down in market. It's a big drawdown and that weighs on household wealth and then consumption is under pressure and consumer confidence is down. But the bar for that to deliver the recession is really high. I mean, just think about '22. '22 was a big drawdown in markets and it did not give you the recession. Why? Because that wealth effect that is implied in the equity market contraction, the bar's all higher for that than just land you in a recession. So look, looking across those three types of recessions, and we went one level lower, one can go one or two even deeper, I don't see things today that allow me to tell you with a straight face, and this is where the recession comes from. Can there be an exogenous shock that ends it all? Of course. Another pandemic, a solar flare. We can talk about geopolitics and world wars and we can talk about all that, but I'm not a pessimist pricing that in as my base case.
Mark Zandi: Okay. I think that's a very cool frame. Really nice way of thinking about it. Although they are somewhat related. Like too high for too long also could put pressure on the financial system and break something.
Philipp Carlsson-Szlezak: Sure. There are linkages. Yeah.
Mark Zandi: Yeah. All kinds of linkages there. And I think certainly Cris would agree with you about the policy mistake. He's been pounding that drum for quite some time that that's what's going to do us in here if something happens. But going back to the exogenous shocks, because I don't know if I give 150 speeches or talks a year, I haven't been counting them, but everyone that I give, the way I begin the conversation is I turn it back to the audience and I say, "Well, how can I help you? What's bothering you about the economy? What's the thing on the top of your mind that's making you most worried?" And in fact, I find that quite educational. I learn a lot from that by doing that. And invariably in the current period, the answer is a standard geopolitical risk. And then I go, "Well, what do you mean geo ... What does that mean exactly?" And that's a plethora of different stuff. Israel-Hamas, Russia-Ukraine, China-US, North Korea, so forth and so on. Should that be at the top of people's list of thinking and in there, is there anything that's really keeping you up at night, making you nervous that that may be the so-called exogenous shock that does us in?
Philipp Carlsson-Szlezak: Short answer, no.
Mark Zandi: No. Okay.
Philipp Carlsson-Szlezak: We have four chapters in the book on the intersection of geopolitics and the macro economy and the main message it's so treacherous to extrapolate between the two. Be very, very careful. I mean, just case in point, you have a war in Europe's backyard. Horrendous story, horrendous human suffering, real geopolitical shock. Did you get a recession in Germany and the Eurozone? No, you did not. Did you ever look at industrial production, which is the eye of the storm? Industrial production in the Eurozone was higher on average since the war started than in the year before the war started in 2021. Remarkable resilience right there. Not saying it's easy, but even the auto industry in the Eurozone, they rebuilt their units coming out of the COVID trough. Despite the Ukraine war, they rebuilt their unit production, they rebuilt their margins, they rebuilt their profits, their stock prices are higher than before.
So the idea that there is a terrible war and that automatically flows through to the economy is extremely treacherous. Hamas war, same story. Oil price is lower. It's been sliding. Insurance, if you look forward, futures, cheaper than it was before the Hamas war started. The attacks in Israel started. So it's very tempting, particularly for those who analyze this from afar and everyone is a bit of a hobby geopolitics watcher. Everyone's a bit of a hobby economist. It makes so much sense to extrapolate cleanly. One example we give in the book to highlight the treacherous nature of this is the juxtaposition of World War I and World War II. Because not even the direction of impact is so straightforward. So when World War I breaks out, the US stock market drops 10%, they actually shut it down. It's not well known, but they shut down the market for 136 days.
Mark Zandi: I didn't know that.
Philipp Carlsson-Szlezak: And when they reopen it, it fell another 20%. It makes perfect sense, right? It's a world war. Of course, the market's down 30%. I mean, why would you suggest anything else? Well, only when World War II begins, the market pops 13% and it stays up until the fall of France. The US market is up and up and up. Why? It single-handedly ends the Great Depression. Draws in labor, production, CapEx. It's a big massive tailwind. And so we need to be very careful even about the direction of impact. Don't make these assumptions and markets and the economy, they're not moral weighing machines. They're looking at demand-supply, future profits, discounting them. You can find that callous and nihilistic. I'll agree. But in the end, if we want to read the economy, we're going to have to do it that way. And I think even the geopolitical disruption we have now and the decoupling or de-risking or whatever you want to call it with China, is that not a cyclical tailwind, even over the medium term for the US economy?
Are we not building that Micron plant in upstate New York? Are we not doing the same in Arizona with other? I mean, all of that will add to that era of tightness, more employment, more CapEx, more pressure cooker kind of tailwinds. And yes, we have to see that next to the textbook version of global trade and we've been hammered into our heads that is the only way of running the global economy. The reality is going to be much more messy than that and there's silver linings in a lot of these disruptions in generations and the book is really about trying to navigate through that in a reasonable, calibrated way.
Mark Zandi: Yeah, that's fascinating. Well, I know we're going to lose you, but what about the presidential ... I know there's elections all over the planet, but the one that's top of my mind is the US election. Is that on your list of concerns at all or you kind of think it's just business as usual?
Philipp Carlsson-Szlezak: No, it's certainly a risk factor. And if you look at insurance, if you look at forward out contracts, there is a bit of a kink in the curve around October, November. Markets are pricing that a little bit and rightly so. I think where we need to be careful is the degree of expected disturbance. How big an impact can an election be? And what's easily forgotten in the debate is that the US political system is really built to prevent these abrupt big shifts in anything really. You need legislation, you need to get consensus in Congress. It's not like a new president marches into the White House and then can rewire the economy at their will. To move anything substantial, you're going to spend political capital to pass big legislation. For Trump, that was the tax cut, and then he ran out of political capital to do all that much more.
And so you have discretion in some areas. Tariffs obviously, and this is where the 10% promise of 10% increase in tariffs Trump comes from and comes in as a legitimate thing to think about as a risk. But it's not like you march in and then you revamp the whole economy. So I think the cyclical risk, do you think you're going to get a recession because of the election outcome? I don't think so. Idiosyncratically for individual firms, there can be very big consequences. There's a distribution of experiences in such periods of change. But for the macro aggregate, it takes time for policy agendas to be realized, to filter through. I think we're overplaying that often in the assumption that the president is some kind of emperor king who can wave a magic wand and they do everything the way they want. It's just for better or for worse, the system isn't constructed in that way. And so I'm a little more sanguine about the idea that the presidential election will give us a clean impulse in the macro cycle.
Mark Zandi: I don't know about you, Cris and Matt, but the more I listen to Philipp, the better I feel. We should just keep on talking, I think. I'm feeling pretty good. Hey, but we're at end of time. And you can tell me if this is a fair question or not, but what is the forecast that you've made that you're most proud of? I mean, you've had a wonderful long career, highly successful. You've really thought obviously very deeply about these things. What are you most proud of and what are you least proud of?
Philipp Carlsson-Szlezak: Oh boy.
Mark Zandi: And again, you can tell me Mark, I don't want to answer either of those questions.
Philipp Carlsson-Szlezak: No, no. I always say all questions are fair game.
Mark Zandi: Oh, is that okay? All right, fair enough.
Philipp Carlsson-Szlezak: Well, on the positive side, let me think. Well, I kind of got the Trump 2016 call right. I thought he would win and not like with the last home stretch of it. I thought that early on. I thought there was something. I spent a lot of time in the UK. I'd seen a lot of debates. I'd seen Brexit go that way earlier in the year. I felt there was something in the making. And that's not even an economics call going back to the economic eclecticism. It's also politics. It's also about the society and the world we live in. All of these things filter in. So I saw that one coming. Maybe just a lucky call. On the economic side, it was tough to ... And I believe you said you were non-recessionary as well, so I'd be willing and interested to hear how you experienced this.
It was tough sometimes the last two years to stand there and say, look, we think things are actually better than you think. I speak with a lot of executives who are under pressure. You go in front of them and say, "Look, the macro economy is pretty good." That's not what they experienced. There was a mini kind of recession in the goods economy. Their year over year numbers were often negative. They experienced the real symptoms of a recession. So standing in that storm of inevitable recession and saying, look, this thing is actually pretty decent, that felt tough. And having navigated through it and being a little vindicated there, that feels somewhat gratifying.
On the negative side, look, I didn't see the inflation spike coming in '21, '22. I did not believe that the fiscal spend would give us the inflation spike. To be fair, it wasn't just the fiscal spend. Those people who congratulate themselves of having extrapolated from stimulus to inflation, they're at the same time taking credit for things they couldn't have known. Supply side crunch, the labor market hiccups, the war in Ukraine, the oil consequences that came from it. So I feel like the tactical inflation call went wrong. Felt terrible when it went higher and higher, and that felt not very good at all. That said, the bigger call to make was is this tactical or is this structural? And we discussed that earlier.
And even though we were somewhat burned by this, we stuck to our guns and we said, "Look, we still think this is idiosyncratic. We still think this is a mismatch of demand and supply. Yes, we didn't think it would go to 9%, but we also think it will come down again and we don't think this is the 1970s." And at that point, a lot of people rolled their eyes and said, "Well, you got it wrong with the 9%, so why would you believe in the 1970s?" And so the thing is always moving, right? The thing is always moving and you have to believe in something and stick to it. And when you get it wrong, you need to look hard why, but your conviction-
Mark Zandi: I'm going to let you off the hook on that one, Philipp. And I had the same ... I was right there with you saying that I thought this was going to be transitory temporary. And of course this was now in 2021. But the reason in my view why inflation took off unexpectedly was the Russian war. I mean, that came out of nowhere. That was early 2022, and it caused oil, natural gas, agricultural, commodity prices to go skyward. And that's when the thing I think people missed and how important why that was so important was that shock, the Russian invasion war, conflated with the pandemic effects, and that's when it started to metastasize and it began to affect wage and price dynamics and became much more of an issue. Without that Russian war, I'm very confident. We can't go back and redo this, but the counterfactual is that inflation would've come right back in.
And by the way, the inflation that we got as a result of the American Rescue Plan, that fiscal support that you were talking about, that's what you're referring to, people forget that inflation was deemed to be positive, good inflation. Because we had been through a period, a long period since the financial crisis of suboptimal inflation. In fact, in the Federal Reserve's monetary policy framework, if you're below target for a while, you want to be above target for a while. And here we were. We got exactly what we wanted. So if that's your worst call, you're golden. I would not be worried about that at all.
Philipp Carlsson-Szlezak: There are others. You said I could choose.
Mark Zandi: Yeah, very good. Well, and actually I got Trump wrong. This is one of my worst forecasts. Back in 2016, Brexit and then Trump. I got them both wrong. And I should have learned from Brexit because Brexit was kind of Trumpesque in terms of the implications. Anyway. Hey, I really enjoyed the conversation. I can't wait to really ... I haven't had a chance this was released. I haven't had a chance to dig deep into the book, but I can't wait to read it. Definitely going to be reading it on the beach here relatively soon, in short order. And I recommend everyone to go get this book. It sounds fantastic. And of Cris and Matt, I cut you out of the conversation. Hopefully you forgive me for that.
Cris deRitis: That was great. It was great listening, so thank you.
Matt Colyar: Absolutely.
Philipp Carlsson-Szlezak: Thank you guys for having me.
Mark Zandi: Philipp, I know there's a lot of moving parts there and a lot of things you want to talk about, but I'm afraid we're out of time. But I really appreciate the opportunity to chat with you and for you coming on. Thank you so much.
Philipp Carlsson-Szlezak: I really enjoyed it too. Thanks so much for having me.
Mark Zandi: Dear listener, I hope you enjoyed it as much as I did, and we'll talk to you next week. Take care now.