The Inside Economics team discusses what they found most encouraging and disquieting in the blizzard of economic releases and events of this past week. Emily Mandel, our state and local government expert, also weighs in on the fiscal health of states and how the economy is performing in states that stand to swing the Presidential election. The group also takes up listener questions; keep the Qs coming.
The Inside Economics team discusses what they found most encouraging and disquieting in the blizzard of economic releases and events of this past week. Emily Mandel, our state and local government expert, also weighs in on the fiscal health of states and how the economy is performing in states that stand to swing the Presidential election. The group also takes up listener questions; keep the Qs coming.
Guest: Emily Mandel - Associate Director, Senior Economist, 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 group of my esteemed colleagues. My two co-hosts, Cris deRitis and Marisa DiNatale. Hi guys.
Cris deRitis: Hey Mark.
Marisa DiNatale: Good morning.
Mark Zandi: How's everybody? You guys getting ready for the big Labor Day weekend? No?
Marisa DiNatale: Yeah, I don't really have any exciting plans, but it'll be nice to have a long weekend.
Mark Zandi: Yeah, we are off early this afternoon, at least in theory. Are you off early?
Marisa DiNatale: Oh yeah.
Mark Zandi: Yeah, I think there's an early close.
Marisa DiNatale: Oh.
Cris deRitis: I've got a meeting scheduled with this guy, Mark Zandi this afternoon.
Marisa DiNatale: He does that.
Mark Zandi: Did I really? Sorry about that. Did I really, did I schedule it during the early closing hours?
Cris deRitis: Probably. Yeah.
Mark Zandi: You know why? Because that was the only thing on my calendar that was open.
Cris deRitis: Exactly.
Mark Zandi: Now it makes sense. Now it makes sense.
Cris deRitis: There you go.
Marisa DiNatale: He's putting the labor in Labor Day.
Mark Zandi: There you go. There you go. All of us are going to be in Southern California next week.
Cris deRitis: We are.
Marisa DiNatale: Yeah. We'll see each other.
Mark Zandi: In your backyard, Marisa.
Marisa DiNatale: That's right.
Mark Zandi: We've got a conference next week. It should be very exciting. We've got a lot of folks signed up. I'm really excited about that. So that should be good. And we have also Emily Mandel. Emily is our colleague who's not been on Inside Economics before, I don't think. I don't know.
Emily Mandel: Well, this is the third time actually, but it's been about a year and a bit.
Mark Zandi: Now it's coming back to me. Now it's coming back to me.
Emily Mandel: Totally fair. Yeah.
Mark Zandi: So they were memorable, the other two times?
Emily Mandel: Oh yeah. Hopefully this one is more.
Mark Zandi: Well, good. I'm glad you're joining us. And we're going to talk about state and local governments, but we're going to talk about swing states and their economies because of course in our work, we found that how the economy is doing in these states determines to a large degree how people vote and who's going to win the next election. So we'll go through that and talk about that. We've got some listener questions. Weren't able to get to too many of those last week, so we'll do some more this week. And the stats game, I'm not sure. The way I wanted to frame this conversation today was ask each of you to give, given all the plethora of data and events and things that are going on, what out there strikes you as being most encouraging with regard to the economy, the economic outlook, and what is most disconcerting?
So that feels sort of like the stats game, so I'm not sure if we'll play it, but we'll play that by ear. We'll see how this goes. Does that sound like a good game plan here? Everyone okay with that? Cris, you good with that?
Cris deRitis: Yeah, let's try it. Let's mix it up.
Mark Zandi: You're usually an obstructionist, but you're okay with that?
Cris deRitis: Yes. Today, different.
Mark Zandi: Today you'll relent. Yeah. Yeah. Okay. Very good. So, okay, I'll begin with you Cris. What out there strikes you as being particularly encouraging about the economy?
Cris deRitis: Well, I think I have to go with the PCE, the Personal Consumption Expenditure indicator of inflation. The Federal Reserve's preferred measure. Looks good. It's coming in. It's not, of course at the level we want it. It's not at target quite yet, but it's still moving in that direction and seems as though increasingly inflation is under control. It's going to get to that target fairly soon. And the Fed can and should be focusing much more on the broader economy. So I see that as a positive. Inflation, keep an eye on it, but it's not nearly the risk that it had been earlier this year.
Mark Zandi: Yeah. That's been the blemish on the economy and that feels like that blemish is fading here pretty fast.
Cris deRitis: Correct.
Mark Zandi: Did you look at the PCE deflator to the second or third significant digit?
Cris deRitis: 2.95 I believe.
Mark Zandi: Someone was criticizing my use of the significant digits. What was that all about? Right? I can't remember. I read some email that came across the transom saying, I was saying something.
Marisa DiNatale: Yeah.
Mark Zandi: Do you recall? You don't recall? Okay.
Marisa DiNatale: That you're using, you were maybe conflating the significant digit with...
Cris deRitis: Decimal points.
Marisa DiNatale: Decimal points.
Mark Zandi: Oh. Oh, okay.
Marisa DiNatale: Significant in the sense of it’s statistically significant.
Mark Zandi: No, no, no, no, no.
Marisa DiNatale: Right? Yeah, that's not what you mean.
Mark Zandi: No, no, I don't think that's what he meant. Wasn't it that if it's 1.34, how many significant digits are there?
Marisa DiNatale: Three.
Mark Zandi: Three.
Cris deRitis: Three.
Mark Zandi: But I think I was saying to the second significant digit.
Marisa DiNatale: Oh, I see. Okay.
Mark Zandi: That's wrong. I guess he's right. He's right. All right, so should I say, Cris, did you look at the PCE deflator to the third significant digit?
Cris deRitis: I did not. I looked at GDP, which is what I just said, but I didn't look at the PCE at that level of detail.
Mark Zandi: What do you mean you just said GDP?
Cris deRitis: I said 2.95. I know there are astute listeners out there, would've picked up on that. GDP grew at 3%, but that's not PCE. Anyway. Move on.
Mark Zandi: Okay. You answered a question I didn't ask, is what you're saying.
Cris deRitis: Yes, yes. Essentially.
Mark Zandi: Okay. Okay. Oh, got it. Okay. We're getting off to a very confused start here. But the PCE deflator, you did not look at that. I think it was up 0.2 on the month, 2.5. This is the overall PCE deflator consumer expenditure deflator 2.5% year over year.
Cris deRitis: That's right.
Mark Zandi: Right. I think on the second significant digit, I looked very quickly. I think it was like 0.155, something like that. So that got rounded up to 0.2 and 0.155. You annualize that. That's at the Fed's target, right? Even a little bit below the Fed's target of 2%.
Marisa DiNatale: It was 0.16.
Mark Zandi: Well, okay, well that's to the second significant digit. 0.16. 0.16.
Marisa DiNatale: Okay, okay. Fair.
Mark Zandi: What is it to the third significant digit? 0.15?
Marisa DiNatale: I didn't go that far.
Mark Zandi: See, okay.
Marisa DiNatale: I don't have time.
Mark Zandi: I'm telling you, I'm thinking it's 0.155. That's in my mind's eye. Yeah, I think so.
Marisa DiNatale: Could be.
Mark Zandi: But anyway, so your point is, inflation is coming back in.
Cris deRitis: Coming back in, yeah. And well behaved.
Mark Zandi: Do you think it's fair to say that effectively we are at target? The inflation is at target in the sense that in the last few months we've been at target or below. Another sense is the only reason why we're not well below target is the implicit cost of homeownership, the owner's equivalent rent, which is just very lagged. We know it's slowing and it's going to continue to slow, given that it's ultimately tied back to rents which have been flat for the last couple of years. So that effectively, at least in the context of what it means for the conduct of monetary policy, we're there. Would you disagree with that?
Cris deRitis: You mean in terms of actual truth versus measurement?
Mark Zandi: Yeah, yeah. Exactly.
Cris deRitis: Yeah. The shadows on the cave versus...
Mark Zandi: Yeah, the reality of what's actually going on here.
Cris deRitis: Yeah, I certainly would.
Mark Zandi: You would.
Cris deRitis: I've kind of made the case. We have made the case in terms of the owner's equivalent rent and some of the quirks in terms of measuring that. And I think that that's still present in the reported numbers. But if you were to control or abstract from that, the underlying inflation truly is at target.
Mark Zandi: Yeah. I mean, you could even argue below, right?
Cris deRitis: Perhaps, yeah.
Mark Zandi: Because we do see them below. If you exclude owner's equivalent rent from the PCE deflator, I think we're at 1.5% year over year, something close to that. So very, very tame, modest. And I guess that's why we've got the Feds very clearly telling us they're going to cut interest rates here. They've achieved their mandate in terms of inflation. Okay. Should I go on and get all the positives and come back and then get all the negatives, or should I get the positives then the negatives, the positives? What do you think, Cris? What should I do here?
Cris deRitis: Let's get all the positivity out.
Mark Zandi: Let's get all the positivity out there. Okay, Marisa, I'll go to you next. What did you find most encouraging?
Marisa DiNatale: GDP for the second quarter was revised up to 3%. So the economy is, we've had conversations about what potential growth is. It could be higher than it was before, but I mean certainly 3% seems like it's above the economy's potential. So concerns that the economy is slowing too fast due to the high interest rate environment seem at least unfounded through the first half of the year.
And then I would say in combination with that, there's still, if you look at the components of GDP, consumer spending is quite strong. And we also got readings on spending and income today, I think that look really good supporting what we saw in the first half of the year, which is that consumer spending has been the main bulwark of why GDP growth has been strong without a massive slowdown in the labor market. So I take all of that together and I feel better about the prospects of the economy going forward, even though the Fed still hasn't lowered rates yet.
Mark Zandi: So I know we've talked about this previously, but just to go back and talk about this a little bit more. So real GDP, that grew 3%, 2.95% according to Cris, annualized in the second quarter, and year over year, it's 3%. So if I look from the second quarter of '23 through the second quarter of '24, it's 3%.
In the same period of time, and here I'm speaking from mind's eye, so not exactly right, but roughly right, the unemployment rate is up almost a percentage point. So wouldn't that argue that the economy's potential is higher than 3%? During that period, at least. I'm not arguing that that's sustainable for any length of time. But wouldn't that argue that?
Marisa DiNatale: Yeah, I guess, yes. I mean, I would also look at, and we've talked about this before, taking the average between GDP and GDI, perhaps, that maybe GDP is a little bit overstated, and maybe eventually when the BEA benchmark revisions happen, it gets revised down closer to what GDI has been running at, which has been lower.
Mark Zandi: GDI, Gross Domestic Income. You're adding up economic activity from the income side of the GDP account. So personal income profits and all that kind of stuff. Just another way of looking at Total Economic Activity, GDP is on the output side, GDI on the income side. And you're saying if I look at GDP, it's 3%. If I look at GDI, I think year over year, it's like one and a half percent or something.
Marisa DiNatale: Yeah, and if you average them together, it's 2.1% year over year. So significantly slower than the 3% that the GDP reading will tell us.
Mark Zandi: I see. And you think that's closer to the reality of what's going on?
Marisa DiNatale: I think that may be the case.
Mark Zandi: Right. Okay. Cris, what do you think about this question, about potential? What is our potential right now, the growth potential? And again, the growth potential is that rate of growth consistent with at least my definition, enough jobs to maintain stable unemployment. Of course, the unemployment rate's moved up. That's my point. So what do you think where potential is right now?
Cris deRitis: Yeah, it certainly, to your point, seems higher than the long run potential, at least in the short term here. Is it three? I don't know where it's at.
Mark Zandi: Well, and there's reasons to believe that it is higher, right? I mean, if you think about it from a fundamental perspective, the thing that drives potential growth fundamentally is the growth in the labor force and the growth and the productivity of that labor force. We know the labor force has been growing very strongly, because of the surge in immigration and also increased labor force participation by the native population. And we know labor productivity growth has also been strong. Again, I'm not arguing these are forever or even sustainable for a long period of time, but that certainly has been the case over the past year. So those things would argue, I think you could make the case that the economy's potential growth isn't three, it's four. I mean, productivity growth is closer to two. Labor force growth is closer to two. That two plus two is four. So four. No?
Cris deRitis: For the first significant digit.
Mark Zandi: Yeah. To the first significant digit.
Marisa DiNatale: 4.0.
Mark Zandi: Yeah. 4.0. Yeah?
Cris deRitis: The only thing is here again, the measurement of both of those concepts, a little fuzzy, especially around productivity, right? We really struggle to say exactly what it is, but yeah, certainly that's why we say it's higher. I just don't know exactly where. Is it four? Is it three and a half? Is it 3.7?
Mark Zandi: Well, you're right, but it's more than an academic question, right? Because it goes back to fed policy, right? Because if the economy is growing, potential growth rate is stronger than, the rule of thumb has been two. That's kind of what people think it is over the long run. But if it's stronger than that, and the Fed is conducting restrictive policy to keep growth rates down to two, when the potential is four...
Cris deRitis: Yeah, it's a problem.
Mark Zandi: That's a problem. That leads to higher unemployment, that ultimately, even if it's being driven by labor supply and not decrease in labor demand, at some point that becomes an issue. That becomes an issue. Because people are unemployed. So that's not where you want to be, but you're sympathetic to the idea that, you're saying, I don't know what potential growth rate right now is, it's very difficult to know, but it feels like it's higher than this.
Cris deRitis: It's higher, yeah.
Mark Zandi: Than the standard 2%.
Cris deRitis: Correct.
Mark Zandi: Yeah. Okay. All right. Okay, that's a good one. That was a good one Marisa. Emily, do you have a favorite event or statistic or something recent that makes you most encouraged?
Emily Mandel: Yeah, I mean, since this isn't the statistics game, I'm going to steer away from statistics for a second, and I think most encouraging to me is just this general consensus stabilizing around September rate cut. I think that it's time, they need to get moving on it. And the fact that this is just the narrative now out there, I think that's encouraging to me that we can finally start this cutting cycle.
Mark Zandi: Do you have a view on, I mean I think right now 100% probability are going to cut. The question is, or the debate is now 25 basis points, a quarter point or 50 basis points, a half a point, and what the trajectory is going on after, what the trajectory for the rate cuts are after that. Do you have any perspective on that?
Emily Mandel: I think they're going to go a quarter point. That would be my guess. I think because they don't want to spook anyone, so I think they're going to keep it slow for now, and then they keep indicating they're being very data-focused. So we'll see if the data stays, it holds up. I think they'll keep it gradual. If it starts to weaken a little, then they'll start signaling that maybe a little bit more aggressive cutting cycle is needed, but I think 25 in September would be what I'm expecting.
Mark Zandi: Yeah. You guys disagree? Agree. Any pushback?
Marisa DiNatale: Agree.
Mark Zandi: You agree? Yeah. Cris?
Marisa DiNatale: Yeah. Unless something really bottom falls out of CPI or something strange happens, I can't see them going bigger than 25.
Mark Zandi: Yeah.
Cris deRitis: Yeah. I agree. I've actually been trying to think of what would it take for the employment report, what kind of employment report would we have to see to see 50 basis points.
Marisa DiNatale: A negative number.
Cris deRitis: Yeah, I think it would have to be.
Mark Zandi: A negative number?
Cris deRitis: Even if it was just weak. So 50,000, I don't know that that's enough to really change their opinion, because you still have the data issues, single data point, I don't know, 50 basis points I think is a big deal.
Mark Zandi: Well, the other thing is, I don't know if we discussed this or not, but August payroll employment, which we get next Friday, we'll be talking about this on the podcast next week, almost always comes in very weak, at least the initial read. And I think that's the month. August is the month where we get the biggest, ultimately biggest upward revisions.
And I think the intuition is that that's when, because response rates are so slow, because people are on vacation, they're not responding, typically takes longer for them to respond. And that gives you more squirrely kind of numbers. And generally it's on the soft side, at least initially. So you could very well get a very weak payroll employment game, maybe even a negative number, but I'm not sure how much you should read into it given the fact that at least historically, those numbers get revised, get revised up to a significant degree. Yeah. Okay. Okay. That's a good one. Yeah, you're right. I think there's now a complete consensus. I don't know that I've ever remember a time when there's such certainty about what we think the Fed's going to do. Can't imagine the Fed won't do it. I mean, that would be...
Marisa DiNatale: I mean Jerome Powell pretty much said they're going to do it, right? So it would be very weird if they then did not after he said that at Jackson Hole.
Mark Zandi: Right. Now, Cris, the markets, the investors think there's going to be more rate cutting, right? There's a reasonable probability isn't there on a 50 basis point cut in September? And then I think the market investors, when you're looking at futures, you can kind of glean what investors are thinking about future rate cuts. They're expecting a bunch of rate cuts pretty quick here. I think they have the funds rate a full percentage point lower, 100 basis points lower by the end of the year. We've got it half a point lower by the end of the year. Is that right? Do you know?
Cris deRitis: Yeah, yeah. For September it's a two-third one-third split.
Mark Zandi: Two-third one-third.
Cris deRitis: So 25 basis points majority, but sizable population that says 50 basis point. But yeah, then seems to be that 25 basis points at each meeting, September, November, December, if not an additional 50 or an additional 25. So making it 50 at one of those meetings.
Mark Zandi: Yeah, it's almost like that's a risk, right? Because the markets are, suppose we're right, which I think we are. The markets are meaningfully ahead of themselves and that means they're going to have to adjust. The employment report might say, "Oh, you say this employment number comes in 150 K for the month." Which is I'm sure what the consensus will be, what we're thinking. Then they begin to think, oh, what's the reasoning behind cutting rates so quickly?
They shift their expectations back closer to something like ours, that creates, presumably that puts pressure on stock prices and bond yields, long-term interest rate goes back up again, some backup. That in itself could be an issue maybe.
Cris deRitis: Maybe.
Mark Zandi: Because the markets are so significant, they feel overvalued to me, richly valued, let me put it that way, richly valued. And therefore, if you don't hit their expectations on things like what the fed's going to be doing, you could see some pretty significant moves in stock and bond prices and bond yields.
Cris deRitis: You could initially, but this has kind of been the story all year, right? We've saw markets have kind of shaken off their predictions or their assumptions about six rate cuts at the start of the year. And yeah, there's an initial impact when the news changes or they get an update or their expectations aren't met. But then it seems as though investors have been pretty willing to shake it off and continue plowing forward.
Mark Zandi: Continue on.
Cris deRitis: So yeah, I think there would be some immediate reaction, certainly.
Mark Zandi: Some indigestion.
Cris deRitis: I don't know if it would be economically meaningful.
Mark Zandi: Right. Okay. Okay. You want to know mine?
Cris deRitis: Yeah.
Mark Zandi: Consumer confidence is measured by the conference board that came out this week. One, it's an index, 103. The average since the conference board has been doing the survey back decades ago. I mean, I think back into certainly the 80s, 70s, maybe even the 60s, I'm not sure, is just under 100. So we're very consistent with long run averages. So consumers seem like they're in a pretty good spot. They're not euphoric, certainly, and they're not overly pessimistic. Now you go look at the University of Michigan survey, that's more on the dark side, but as we've talked about in the past, I'm not sure I put any weight on that. The conference board survey feels like it's much more consistent with what consumers are actually doing and what's going on in the economy. That's hanging tough, that's hanging right in there. The thing I've noticed is that a lot of the improvement is around expectations. People are feeling better about the outlook, and I think that's encouraging as well as we move towards the end of the year into next.
So despite all the Sturm und Drang with regard to the election and the volatility in financial markets and everything else, I think people are starting to feel a little bit better. They feel okay, feeling a little bit better and certainly feeling better about the future. So I think that's encouraging. Any commentary around that? Any pushback on that one? Any views on that?
Cris deRitis: Not really. You saw spending was up as well, personal spending this week, so that's also hanging in there. Consumption in the GDP was the main factor. So yeah, I think you're right. Consumers, they're concern, but they're still opening their wallets.
Mark Zandi: Right, right. Okay. Okay, good. Okay, let's talk about the negative. What in the data or events, anything going on out there that makes you a little bit more nervous about what's going on and where the economy is headed? Cris, what's on your radar screen?
Cris deRitis: Down 5.5% in July. I'll give you a little stat.
Mark Zandi: We're playing the game.
Cris deRitis: Stats game.
Mark Zandi: Down 5.5%
Marisa DiNatale: Pending home sales.
Cris deRitis: Oh, there you go. There you go. That's a bummer. Pending home sales are at their lowest level ever in the history of the data. So it's just a very tough housing market. Affordability is a real challenge. Even with some interest rate relief, it's still not enough to really move the needle at this point.
Mark Zandi: Do you want to describe what pending home sales are?
Cris deRitis: Sure. So it's an index of, well, kind of as it describes a number of home sales that are likely to be reported in the official existing home sales statistics, right? When you purchase a home, there's a lag. You go through a process, you sign a contract, and it takes some time to actually go to closing. So this is giving you a preview of what ultimately those existing home sales numbers will look like. It's highly correlated.
Mark Zandi: These are contracts, not closings.
Cris deRitis: Correct, correct.
Mark Zandi: And generally a contract will lead to a closing, but at times that doesn't happen.
Cris deRitis: True.
Mark Zandi: But ultimately when it closes, that's when it's considered a sale. So this is a leading indicator of existing home sales, primarily.
Cris deRitis: That's right. That's right.
Mark Zandi: I think the new home sales data that we get from the Bureau of Census, this pending home sales data that come from the National Association of Realtors, the trade group, the new home sales comes from Bureau of Census. That already is a contract. That's not a closing, I believe. Do you want to correct me if I'm wrong? I think they're contracts.
Cris deRitis: Yeah. You've signed your sales contract for that new home that's going to be built or being built and put a deposit. Even there, I think you could certainly... There are cases where you can back out, but it's almost definite, let's say, that's going to through.
Mark Zandi: Yeah, I guess the thing about it's just a good leading indicator of close, which is when you actually record the sale. Exactly. Right, right. I'm a little confused. I mean, I'm not confused that pending home sales are a week. I mean, affordability is very poor, mortgage rates are still high. You combine that with the surging housing prices. I mean, I get it, but why a decline last month? I mean, mortgage rates are coming in this thirty-year. Fixed mortgage is down to 6.4%-ish, and it's still elevated, but that's well down from, I think at the peak it was close to 8% right back late last year. So in house prices, they're rising, but they feel like kind of mid-single digits. So what's going on? Why do you think this is just lagged effect? We're going to start to see improving sales here or what's going on?
Cris deRitis: I do expect to see improving sales. I think you have a number of factors going on here just in terms of the inventory. The inventory, although it's rising, it's still quite low. So inventory for sale, there's not a lot for sale. That's right. Not a lot out there for sale. Can you actually find the home that you want in your price range in the right location? So I think that's still part of it. Some of that matching going on. I think there's potentially some folks who are waiting for rates to fall further, so maybe some potential buyers holding back.
Mark Zandi: That makes sense to me. That makes sense. Because the rates have come down pretty quickly here and people are doing a forecast, and think now that they hear the Feds cutting rates, therefore I can expect maybe a 6% mortgage rate. So why buy now? Let me just wait a little bit.
Cris deRitis: Yeah. If I'm not in a rush, I can afford to wait.
Mark Zandi: If I'm not in a rush.
Cris deRitis: It could be lucrative, it could be 50 basis point lower. That's pretty significant.
Mark Zandi: Any other reason?
Cris deRitis: Other than the main ones...
Mark Zandi: Generally, I've been arguing that the worst is behind us in terms of sales and origination volume. And that's not saying a whole lot because they are very low. If you look at existing home sales, it's 4 million. I'm rounding 4 million homes analyzed. You have to go back into the pandemic shutdown or the teeth of the financial crisis a generation ago to find sales that week. I mean, they are really low.
Cris deRitis: Really low.
Mark Zandi: And so to say, well, the worst is behind us. I'm not sure. I didn't think I was saying too much, but do you agree?
Cris deRitis: I do agree, but I think it's a long, slow road ahead.
Mark Zandi: Long slow road.
Cris deRitis: I don't think it's a bounce back. I don't think we have a, if mortgage rates were to go down to 4% again, sure things would accelerate, but I don't see that on the horizon here. So it's going to be more of a slower grind, just more of a more natural increase in supply as people have to move, want to move, they get used to the higher interest rate environment, accept it, and then we start to see more activity going forward.
Mark Zandi: Yeah. One encouraging thing there is new home sales have held up better than existing home sales. They're also down, but they're not down quite as much. And that I think goes to the willingness of home builders to cut a deal, interest rate buy downs or other incentive, effectively cutting price. And so what it indicates is once there's some semblance of affordability, people will buy. There's plenty of demand there. And we're within spitting distance of that. We're not that far away from it that.
Cris deRitis: That's right. But I wouldn't expect it to roar back.
Mark Zandi: Yeah. Okay. All right. All right Marisa, what thing out there makes you most nervous?
Marisa DiNatale: The thing that makes me nervous or just disappointed I guess, is the whole conspiracy theories around the BLS jobs release last week with the revisions, the upcoming benchmark revisions. We talked about the revisions themselves on the show last week, and then there were a lot of headlines saying that BLS is purposely lying about the numbers, and the Biden administration was padding them this whole time to make themselves look better.
And it reminded me of the same situation back in 2016, or maybe it was, I don't know if it was 2016, it was a previous election cycle where a very similar thing happened where, yeah, I think it was 2016 where President Trump, then candidate Trump had said that the Obama administration had been fiddling with the unemployment rate to make it look better. So this is just really, it's like personally upsetting to me as somebody who used to work at BLS, worked for a statistical agency and know how that whole process works and how it's really, this conspiracy theory would really be impossible. And it's just on a broader level, this kind of distrust in government statistics and economic statistics and this misinformation stream that's going on. It's really easy to see why the politics have become so bifurcated and people have such glaringly different views of the economy depending on their political party affiliation. Yeah, it's just really disheartening to hear that kind of stuff going on.
Mark Zandi: Yeah, agreed. So just to reiterate, what happened is the BLS, Bureau of Labor Statistics released its so-called benchmark revisions to the historical employment data, and it was a big downward revision, which we talked about to great length last week, but it turns out, I guess the BLS released that early, I think as much as 15 minutes early. They have a regular release schedule, 8:30 A.M. Eastern time they release data. But a few people, investors presumably got the information a little bit early, and that's what you're, you're referring to what President Trump said about the revisions and what that means. But that's also played into-
Marisa DiNatale: Yeah, there were kind of two things going on.
Mark Zandi: Two things going on here. Yeah.
Marisa DiNatale: Right. Yeah. So they actually, they released it half an hour later than they were supposed to release.
Mark Zandi: Oh, yes, that's right.
Marisa DiNatale: But yeah, some people at BLS had given the numbers, it was supposed to come out at 10, it didn't get posted to the website until 10:30, but some people got the data at 10:15 if they called and talked to someone and asked for the data. It's not even clear to me that that was wrong. I mean, if the release was not embargoed after 10 o'clock, then maybe that was okay. It didn't look good for BLS.
Mark Zandi: Oh, I got that all wrong. I got that all wrong. Okay. So that's what happened.
Marisa DiNatale: Yeah. It was actually posted to the website late because of a technical error.
Mark Zandi: I see.
Marisa DiNatale: I mean, the other thing about that release is that is typically not a market moving release.
Mark Zandi: No one cares.
Marisa DiNatale: So it's not treated the way that the unemployment rate is or the jobs report. It's not given the same level of security. So it's not even clear to me that anything actually untoward happened there. It just was kind of a mess up that then spiraled into all these other conspiracy theories already going on about these numbers.
Mark Zandi: I see. Oh, interesting. Interesting. Yeah, that is a bit disconcerting. You're right about this goes to response rates that are down-
Marisa DiNatale: That's right.
Mark Zandi: And if people don't trust, they're not going to respond. And then they're not going to get good quality data.
Marisa DiNatale: Yeah.
Mark Zandi: Okay. That's a good one. Hey Emily, you got a stat or something out there?
Emily Mandel: Yeah, honestly, I was going to go with the same one as Cris, so we've talked about it, but take it as someone from someone who's actively looking to buy a home right now, it is really, really rough out there.
Mark Zandi: Rough in the sense that you can't find any good homes?
Emily Mandel: There's no homes for sale. There might be two posted a week, and then there's a massively full open house. And then this is also, even as mortgage rates fall, you're still looking at prices that are what, 40% above what it would've been before? So I think there's just a lot of trepidation about people, I don't know, paying that. I mean, there's the demand, but there's...
Mark Zandi: You'd be a good case study for this question about mortgage rates. What mortgage rate do you think is a reasonable quote unquote, air quotes, reasonable mortgage rate? At what point do you think, okay, that's something I should expect. I can't expect rates to be any lower than that, at least not in a recession.
Emily Mandel: I mean, I don't expect to see it especially soon, but maybe in the fives, probably.
Mark Zandi: In the fives. Okay.
Emily Mandel: Could feel more steady state coming out of this.
Mark Zandi: That's reasonable. That's reasonable in your mind. Has a 5% handle.
Emily Mandel: Yeah. Painful but reasonable, I'd say.
Mark Zandi: Yeah. Yeah. Can I ask, do you own your own home now? Are you a first-time homebuyer?
Emily Mandel: Yeah. Yeah. No, I'm renting now.
Mark Zandi: Okay. You're a first-time homebuyer. Okay.
Emily Mandel: Yeah. And if things hadn't been this bad, would've a few years ago, but have just stayed in my rental for longer because just nothing to buy.
Mark Zandi: Yeah. Who do you blame for that? I'm just curious. You don't have to answer that question. Anyway. Okay. That's a really good one. I'm heartened that you said in the fives because that's kind of sort what I've been thinking. And actually I think in the long run, abstracting from the vagaries of the ups and downs in the economy, the business cycle, the mortgage rate, the fixed 30-year fixed mortgage rate should be five and a half percent-ish, maybe five and three-quarter, something like that. That's a 4% 10-year treasury yield, which is roughly where we are, a little bit below that right now. And then a 150, 75 basis points, 1.5, 1.75 percentage points so-called spread that you add to the 10-year yield and you get to five and a half, five and three-quarters. Does that arithmetic sound right to you, Cris? Roughly speaking.
Cris deRitis: It does. I think 150 basis point spread is pretty thin. I think it's going to be on the higher end, but five and three-quarters is kind of what I have in my mind.
Mark Zandi: In your mind too. Okay. Hopefully most potential homebuyers, first-time homebuyers are thinking the way you are, Emily. And five percent's the number. And also existing homeowners who put their home up for sale, because you need inventory.
Emily Mandel: I did want to ask, with all this talk about a potential credit for first-time buyers maybe with the new administration, who knows if it passes or anything, but with the chatter out there, do you think that would keep anyone on the sidelines hoping that they might get that 25,000 or whatever they've been talking about?
Mark Zandi: Interesting.
Marisa DiNatale: That's a good question.
Mark Zandi: I don't know, how many people actually...
Emily Mandel: Know about it?
Mark Zandi: Yeah, I'm not sure. I think that's...
Emily Mandel: I mean, it's a kind of popular policy though.
Mark Zandi: Is that you, are you describing you?
Emily Mandel: No, no, no. I'm not holding out for that.
Mark Zandi: There might be some income thresholds too. I don't know. We'll see how that, so I don't know. I think that's on the margin. I would think.
Emily Mandel: That's fair.
Cris deRitis: Isn't that plan conditional on getting a lot more supply first?
Mark Zandi: If you read...
Cris deRitis: That's what they say.
Mark Zandi: That's what they're saying. Once we get supply, a lot of the Harris housing plan has a lot of tax subsidy for increased affordable rental and increased homes for sale, for home-ownership. Once you get the supply, then you put these kind of demand side incentives in place because otherwise, like you, if you got the first time home buyer tax credit today and you went out to buy a home, because there's no inventory, all that would happen is the seller would jack up the price. And they would capture the subsidy. So you're no better off.
The only person who's better off is the seller of the home who's in a pretty good place anyway because the house prices are pretty high, so it doesn't make any sense, at least in my view. Okay. The statistic that makes me a little nervous, and we'll play the stats game here, 2.9%. What is 2.9%? Marisa, you're usually pretty good at this. The economic release that came out today.
Marisa DiNatale: Is it personal income?
Mark Zandi: Personal saving, the personal saving rate.
Marisa DiNatale: Oh, it's the savings rate.
Cris deRitis: Oh, savings rate.
Mark Zandi: Yeah, the savings rate.
Marisa DiNatale: Oh, it fell further.
Mark Zandi: Fell again. 2.9.
Cris deRitis: Below three.
Mark Zandi: I think it's the first time in a long time below three. Now this data gets revised too, but nonetheless, the trend lines here are pretty clear. I think what's going on is high income, high net worth households, they're feeling pretty good. Stock markets at a record high, house prices are a record high. They got a lot of cash still based on our estimates sitting in the checking account built up during the pandemic. So they're feeling pretty good, and so they're willing to spend beyond their income and draw down the saving rate. That's the classic so-called wealth effect. I feel wealthier, I'm more able and willing to spend more out of income. So I'm not surprised it's down, but 2.9% is half of what it was, a little more than half than what it was pre-pandemic, which is what you would consider to be kind of long run equilibrium where savings should be.
So I worry a little bit that we'll see some more significant weakening in consumer spending. I expect consumer spending to weaken as we move into next year. I mean, if you look at our economic outlook, we have growth slowing from two and a half percent this year, GDP to two percent-ish next year. And bulk of that is a slowing in consumer spending growth. And so that's consistent with it. But nonetheless, with each month we're seeing this saving rate tick down and at some point if it snaps back, that means consumers are pulling back and that could be an issue. So something to watch. Okay. Let's turn to the topic du jour, and that's what you work on Emily. I failed to introduce you properly. You want to introduce yourself?
Emily Mandel: Sure. I mean, my area of focus is state and local governments, so everything related to what they're spending their money on, what revenues they're bringing in, are they hiring? Just looking at how that sector of the economy is really performing.
Mark Zandi: Yeah. Great. And you've done a couple of things in your visit to Inside Economics. One is some so-called stress testing work you do. And maybe you can describe that a bit and what the results are, where you look at the fiscal situation of state governments, you stress that fiscal situation under very bad economic conditions and see how the states fare fiscally as a result. And then also from your vantage points, what's going on in some of these swing states. But let's first talk about the stress test a little bit and can you just describe that and what kind of results you're getting?
Emily Mandel: Sure. Yeah. I won't get too deep into methodology here, but basically we look at where state's revenues are today and then what kind of stress we'd expect those to come under under a recession situation. And we see, okay, do they have the cash in reserve in order to plug those gaps, basically?
And the results were pretty encouraging this time. This is an exercise that we've done for... I think the first version of it started in 2014, so it's been about a decade of this. And in that time we've seen states really build up these, what are called rainy day reserves, the funds they have in their back pocket that they can go out and they can go fill any gaps with in a recession. And so even though in this update we saw pretty severe stress to revenues, more severe than we saw last time, most states all except for nine, had those reserves there in order to fill those holes. The main thing that-
Mark Zandi: Which states didn't, were there any states that didn't pass the test?
Emily Mandel: Yeah, yeah. There were nine states that didn't pass the test.
Mark Zandi: Oh nine. Okay.
Emily Mandel: Now some of those are close, some of those are within a couple percentage points of being able to fill that, but there were a few that were on the other side of that. Some of these, many of the states that didn't pass this, it was usually due to one of two factors. One, either they just really haven't built up those reserves in the same way that other states have. A state like South Dakota for example. We aren't seeing a huge amount of stress, but the reserves just aren't that big at this point. On the other hand, there's some states that have passed really pretty big tax cuts. That's the big trend that has kind of played into this is these state-level tax cuts that almost every state has passed, since the pandemic, since 2021. Now, some significantly larger than others, some just kind of tweaking rates on margins.
Mark Zandi: Are these one-time tax cuts or are these lower marginal rates?
Emily Mandel: These lower rates, I mean, many of them. If you think back coming out of the pandemic, there were a lot of refunds and things that states were putting out. That was one time. But the states that we're seeing some stress now are ones that have kind of lowered these rates in perpetuity, and they're going to see some of these lower revenues as a result.
Mark Zandi: And who are those states? Did you say ,that they've cut taxes and now are in a bit of fiscal trouble, at least if we get into a stressed environment?
Emily Mandel: Yeah. The state that I'd probably highlight here is Arizona.
Mark Zandi: Arizona.
Emily Mandel: They moved to a flat income tax rate back in, legislation passed in 2021, so a fairly significant drop in that tax rate. And they've also passed some pretty big expansions in state expenditures, particularly through school voucher program. And so put that together and they're facing, they had to cut their, even just baseline spending for this current fiscal year pretty significantly in order to fill those gaps that they're already starting to see.
Mark Zandi: Of course, I'm interested in Pennsylvania, and that's also a key swing state, at least by our calculation. In fact, we have this election model we talked about in the past where the model predicts the share of the vote in each state that goes to the incumbent party based on a bunch of economic and political factors. And after you put in our expectations for things that influence the result like gasoline prices or mortgage rates or household incomes, Pennsylvania is the state that is right on the bubble. It goes to Harris, she wins the state, and by the way, the model is saying that she's going to win the election. It's going to be very close, but she's going to win. And Pennsylvania is the state that's on the bubble. She wins it by, I believe, five basis points, five basis points, 0.005. I think if you do the arithmetic it's like, I don't know, I'm making this up, but give you context, 10,000 votes or something. So Emily, do you live in Pennsylvania?
Emily Mandel: I don't. I'm in Massachusetts now. Lived there for a long time, but moved out.
Mark Zandi: And of course Marisa lives in California, but you're in Pennsylvania.
Cris deRitis: I am. My vote matters.
Mark Zandi: Yeah, your vote definitely matters. Your vote definitely matters. So what about Pennsylvania? How did it fare in the stress test. And more broadly, how's it doing economically?
Emily Mandel: It did well, it passed and it passed pretty squarely in the stress test. Pennsylvania-
Mark Zandi: Which is unusual, right? Because historically it had some pretty significant fiscal issues.
Emily Mandel: Yeah, it's true. But it's prioritized putting away some of that cash, and they've been in a pretty good fiscal space currently. They've been one of the states that have still been seeing surpluses going into this current budgeting season. They passed a little bit of a cut to their corporate tax rate but it's pretty minor on the scale of things. So they're not really seeing that perpetual reduction coming out of that, and that's helped this fiscal situation that they're seeing out of this.
Cris deRitis: It looks like energy is a big factor here, at least as I look at the list of states in your report. Is that including Pennsylvania? The fracking, is that something that generates a lot of revenue, allows for those rainy day funds to be generated or am I off base here?
Emily Mandel: Energy is a big factor. It kind of cuts both ways though, right? States that are pretty heavily reliant on energy, they tend to have very volatile revenues, so they tend to see them decline more significantly during recessions, but they tend to put away more money to cover those. And so it's basically these swings in both ways that they're aware of, that they prepare for that can balance out. I think Pennsylvania, I don't expect energy to be a huge factor, at least relative to some of these other states than Pennsylvania.
Mark Zandi: Relative to these other states. And you said...
Emily Mandel: Oh, so all these other states nationally.
Mark Zandi: Nationally. Okay.
Cris deRitis: Like a Wyoming or North Dakota.
Emily Mandel: Yeah, exactly.
Cris deRitis: Energy is a huge part of the economy.
Mark Zandi: All right. So you're saying that Pennsylvania's fiscal situation is pretty good. Can I ask one other broader question about the stress testing? The American Rescue Plan, I mean, that gave states a lot of money. I mean, if I recall, if you consider the money that went to education state and local education and everything else was 500 billion dollars. The ARP was passed, that was the COVID relief plan passed early in the Biden Administration March of '21, and it was two trillion dollars, 500 billion of which, and again, I'm rounding, but roughly speaking to state and local governments, that must be playing a role here. No? In terms of the better fiscal situation.
Emily Mandel: Yeah, I mean it's definitely helped states. It's definitely given them a lot of money to spend, even if this purpose of this money to kind of finance your everyday operations, it's more to devote to certain purposes. Money's inherently fungible. If you get more money coming in, you're able to spend it in different areas.
Mark Zandi: Or build your rainy day fund.
Emily Mandel: Yeah, I think there was a restriction on you can't take that money and put it in the rainy day fund but the end result is it's there, right?
Mark Zandi: Yeah.
Emily Mandel: So it's helped. And I think a lot of states saw that these surpluses that people saw, especially a couple of years ago, they were temporary. They were propelled by all these one-time factors, including the federal funding. And so pretty much across the board, they took that money, put it into rainy day funds. The offsetting factor, of course is these tax cuts where they also were like, "Hey, this is a great opportunity to pass some of these."
Mark Zandi: And those states that passed permanent tax cuts, you're saying those are the states that are vulnerable here going forward.
Emily Mandel: I think so, depending on the scale,
Mark Zandi: Which makes sense, right? Makes perfect sense. But broadly speaking, in the 10 years that you've been doing this, at this point, the fiscal situation of states is about as good as it's been in that 10-year period. Is that right?
Emily Mandel: I think that's true. That might be a little bit of an overstatement, but I would say the fiscal situation is strong. I think that states-
Mark Zandi: Overstatement in what sense? There's been periods when it's been better?
Emily Mandel: I think that it's important to keep in mind that even in a kind of baseline, things going as planned situations, states are going to see some weaker revenue performance. And so in that type of situation, it's not a, okay, let's take the rainy day funds and let's fund our operations. It's more a maybe needing to have a little restraint in order to account for those reduced revenues. Just in kind of a baseline. I think it's thinking about, okay, can they get through a recession? Yes, probably. But are they acknowledging the realities of a slowing economy in their just day-to-day budgeting, which takes those rainy day reserves out of the picture a little bit.
Mark Zandi: Okay. So what you're saying is, they're in a pretty good spot if we get nailed by a recession at this point, but longer term, thinking beyond the next recession, there's some still pretty significant fiscal issues.
Emily Mandel: Yeah, I wouldn't say significant, but I would say there's definitely some things to watch out for. States have seen expenditures increase pretty significantly. A lot of that is coming from higher labor costs. That's something that's going to stick around, especially in the public sector. If you're paying someone more, you're going to keep paying someone more, right? The payrolls are less flexible in a way, and that's something that's going to be there for the next few years coming out of this period.
Mark Zandi: One more quick question, and you may not know the answer, but one of the criticisms of, we had this huge bipartisan infrastructure legislation passed under Biden that added significant amounts of hundreds of billions of dollars extra in transportation and spending and other infrastructure spending, which is now flowing through the economy right now. One kind of broad criticism of the Feds providing more funds for infrastructure, is that state governments pull back on their infrastructure spending. That they say, "Oh, the feds are doing this. I don't need to do this." And so the net of that is we don't get as much infrastructure as we think. Have you noticed any of that going on here across states? Are they spending aggressively on infrastructure along with the feds?
Emily Mandel: Well, it's hard to disaggregate that because I think something like 90% of the funding for the infrastructure laws isn't actually spent by the federal government. It flows through into whether it's states, locals, even private sector. And so that then gets aggregated in with what states are kind of organically spending, at least when you look at some of these economic output type data. And that's been incredibly strong coming from state and local, just state and local investment has climbed just massively quickly coming out of this. I think a lot of that's coming from the federal government, but I would say it's a positive. I would say that these things have been so underfunded. We need more just investment infrastructure to help economic growth moving forward. And so even if that's coming from the federal government at this time, it's probably going towards a good cause here, a good goal.
Mark Zandi: Okay. All right. Let's go back to the swing states real fast. I did want to take a listener question or two. The swing states, according to everybody's modeling, including our modeling and the polls and everything, we mentioned, PA, Michigan, Wisconsin, North Carolina, Georgia, Nevada, and Arizona, those seven states seem to be the key swing states, with PA, Michigan, Wisconsin probably being the most important, probably being most important. Of all those states, which states do you think are faring the best economically and which are not faring quite as well? It feels like the economy's doing pretty well coast to coast. It's not like we've got any states that are sucking wind here in any meaningful way, but there are differences in performance across the country. Of those states, which do you think are performing best and which are lagging behind?
Emily Mandel: Well, kind of just looking at some of these fiscal indicators that we're looking at states that fare well in that. I think the Great Lakes seem to be doing pretty well.
Mark Zandi: Pretty well.
Coming out of this, that they seem pretty well positioned in that sense. I mean, they've had some good federal money flowing through to help prop up manufacturing side in those areas. That's helping them keep going. So I'd say there's some positives there. But yeah, I mean, we've seen pretty strong growth pretty much across the country from an economic perspective.
Okay. So nobody stands out as being kind of a significant lagger here in terms of growth. And by the way, the stronger the economy, presumably that helps the incumbent. I mean, that's kind of the thinking here. So the stronger the economy, the more likely the state's going to go towards Harris as opposed to former President Trump. But nobody's really lagging.
Emily Mandel: No one comes to mind, really.
Mark Zandi: Okay, fine. Okay. All right. Thank you. Well, I appreciate that, Marisa, let's take a couple questions from listeners in the remaining time that we have. Do you have any good ones there?
Marisa DiNatale: Yeah, I've got a couple good ones. So there's actually a question about the issue I raised, which is this mismatch between perception about how the economy's doing and how economists think about the economy when they look at economic statistics. So this person is saying, the US economy is doing very well by objective measures. It's disheartening to read polls revealing that the average voter feels otherwise. There's a big gap between statistics and what the average person perceives. He's asking, is there someone or a branch of economics perhaps that has the tools to educate the public simply, without requiring everyone to take Econ 101. And what responsibility do professional economists bear in getting the correct message out to the public? Or is this merely a media problem?
Mark Zandi: Oh, geez. I'd say listen to Inside Economics.
Marisa DiNatale: Yeah.
Mark Zandi: I know that's a little cute. They probably didn't have that in mind. I don't know, Cris, how-
Marisa DiNatale: No they probably did have it in mind.
Mark Zandi: They probably did have it in mind. Yeah.
Marisa DiNatale: They're writing to us through the podcast.
Mark Zandi: I mean, generally you don't see this kind of gap. I mean, it's unusual to see such a wide gap in how most economists are thinking about how the economy's performing and how the general population is thinking about their own financial situation. They're one for one. I think this is an unusual period in that we experienced a very serious surge in inflation back in '21, '22 going into '23 because of the pandemic, primarily because of the pandemic and Russian war.
And people feel, and when I say significant, I mean staples, food prices up 20, 25% from where they were three, four years ago, rent's up 20, 25% from where they were three, four years ago. Gas prices, they've come back down a little bit, so less of an issue, but they're still somewhat elevated. So I think that's what people are feeling when they say they're not comfortable with their financial situation. Even though at the current point in time, the economy's performing just fine. We talked about GDP, jobs, unemployment, inflation's back in the bottle, stock market's at a record high, housing values are as high as they've ever been, debt loads in aggregate are low. So this is unusual, I think, in that respect. The other thing is economists tend to paint with a broad brush, so they're talking about everybody in aggregate.
And the other thing that is, this isn't unique to this time, but is more brought into relief by events, is that folks that are in the middle part of the distribution of income and the top part of the distribution, they're doing really well, particularly in the top third of the distribution. Folks in the bottom third, not so much, they got nailed by the inflation. They don't own a home, they don't own any stocks. They took on a lot of the credit card consumer finance loans when inflation was high, in part because they could, because lenders were very aggressive in extending credit. And it was okay when rates were low, but then the Fed jacked up rates and now they got to pay 22% on their credit card. That's a record high. So I think once you dig underneath the top line numbers, there's a lot of variability. And I think the angst to folks in the bottom third, the distribution is well-founded, I mean, they're under tremendous financial pressure.
And then I think the other thing is the media. The media is just completely fractured, which is very different from times past, and everyone's listening to their own media, and a lot of that media is driven through a political prism, and there's an agenda, and every data point is parsed in a way, consistent with that political agenda, and makes it very difficult to reach people or economists that are speaking broadly to reach a broader audience. And no one believes anyway, going back to trust, there's a lot of distrust in the institutions built up by our political fracturing. So I think all those things have contributed to this disconnect between the happy talk that people hear from us, me particularly, and what they may be thinking about their own financial situation. What do you think, Marisa? What do you think about that? Would you add anything? Do you agree with that? Would you add anything to that?
Marisa DiNatale: Yeah, I mean, I always go back to the media and how people get information and consume information. I mean, there's just so many ways now that people can hear anything from anybody, right? Social media means that anybody with an account can speak on any topic, and potentially have millions of people listening them, even if that person themselves is not well-informed. So that's very different from how it used to be when we had a couple television stations and a few big newspapers.
So I attribute most of it to the media, but I do agree with the inflation thing. I was talking to somebody at my gym, I was talking actually to a personal trainer at my gym the other day, and he said, "So when is the economy going to get better?" And I said, "Tell me what you mean by that exactly." And he said, "Well, I have been looking for a house and there's no way I'm ever going to be able to buy a house, and when are interest rates going to come down?" And oh, he said something about a recession, implying that the economy was in a recession. I said, "The economy's not in a recession." And he said, "Well, what's the difference? What's the difference between you saying it's technically in recession and where we are right now?" And I said, "Why do you think it's in a recession?" And he cited all these price things.
Mark Zandi: I see.
Marisa DiNatale: Yeah. So I think people are far more sensitive to inflation than maybe economists predicted. And they're also far more sensitive to the price level compared to what it was four or five years ago. They don't really care that inflation is only 2.9% or whatever it is right now. They just know that-
Mark Zandi: 2.5.
Marisa DiNatale: Five years ago, food was 25% cheaper and houses were half the price they are now. So I think it's a combination of the sensitivity to inflation and the just proliferation of opinions and information.
Mark Zandi: Yeah. Emily, any views on that?
Emily Mandel: Yeah, I mean, I think those are the two major points. I think it's an economy that you can read really differently depending on what you're focused on. And so if you're looking at the labor market, you're probably like, "Okay, cool. I can get a job. Hey, it's paying more than a year ago. That's great." I'm an economist, so I like to talk about economics with people who probably don't want to talk about economics.
And so I'm asking people, "Do you feel like grocery prices are still going up?" And people feel like they are just because they're looking at their receipts and they're still paying more than they used to. And the fact that maybe that hasn't changed in the past year or two, they're not noticing it just because things are expensive. So what Marisa was saying I think is really still a huge part of it. If you're taking that reading on the economy. And this comes back to the media story you're saying, right? Where depending on what you want to look at, depending on who you're listening to, there's the ability to read the data in two very different ways.
Mark Zandi: Yeah. Okay. Let's take one more question. Marisa, you got another one?
Marisa DiNatale: Sure. Okay, here we go.
Mark Zandi: Go ahead.
Marisa DiNatale: This person is a housing developer, and he is antsy to see interest rates drop. He'd love to hear a discussion around the Fed's portfolio of mortgage bonds. I know it's been letting long duration bonds mature without purchasing new ones as a means to shrink its balance sheet. What is the policy and political landscape around the idea of restarting quantitative easing, particularly for mortgage bonds, to reduce the spread between the 10-year and the 30-year mortgage? Good idea, bad idea, something the Fed should do, but probably won't. What do you think?
Mark Zandi: I got a view, but let me turn it over to Cris. What's your perspective on that?
Cris deRitis: I think there's-
Mark Zandi: It's a trick question. And maybe you could can flesh it out a little bit with some explanation here. What's he talking about?
Cris deRitis: Yeah. So the Fed, as part of its quantitative easing exercise during the pandemic, as they were trying to lend support to the economy, get interest rates low, they started buying up Treasury securities as well as mortgage-backed securities. The idea being to increase the demand for those securities and push down the interest rates. So that's what the Fed did. Very successful in the sense we got interest rate, mortgage rates down to rock bottom levels and really spurred a housing boom during the pandemic.
Now the Fed is stuck with all these securities that they bought at very low interest rates, these mortgage-backed securities. So we've already talked about the fact that people aren't moving. If you're locked into this very low mortgage rate, you're not going to sell your property, meaning you're not going to prepay your mortgage. So all these securities sitting on the Fed Balance sheet, and they're very slowly rolling off. Some people do, certainly they are paying back their principle every month. So some of these bonds eventually do get retired, and certainly some people are moving. So it's not zero. It's just a very low level of activity.
I think there's no appetite to reengage in any type of quantitative easing at this point certainly. So I think the outlook here is for those bonds to continue to roll off, but then any other new mortgage-backed securities are going to be purchased by the open market, not really up to the Fed at this point. I think there's a lot of mixed views in terms of how successful that program actually wasn't from the mortgage perspective. So we did stimulate a lot of activity, but then we're kind of stuck here in the aftermath. So what's the real cost benefit? I think there are going to be a lot of dissertations written on this topic.
Mark Zandi: Yeah, I totally agree. I think there's zero probability the Fed's going to restart QE for mortgage securities. I mean, just the opposite. I mean, they're fearful, with some justification that buying mortgage securities is kind of like fiscal policy. You've identified the housing market and you want to help the housing market. That feels like fiscal policy, that doesn't feel like monetary policy where you're saying an interest rate that affects everyone differently. But you're paying the same interest rate regardless of what sector of the economy you're in. So if anything, they would want to get out of the business of holding mortgage securities. I don't think they'll ever sell. That would be highly disruptive. And they would take losses, wouldn't they? If they tried to sell.
Cris deRitis: They would. Yeah.
Mark Zandi: And that would cost taxpayers. So I don't think they'll do that. They're just going to hold to maturity and as rates come in, we'll see more. We'll ultimately see more prepayments. It will happen. That will ultimately happen. But it's going to be a long time before they wind it down. But I think the prospects of them actually restarting without, if we get into another recession and we hit the zero lower bound on the federal funds rate, then yeah, we might be back at it. But barring that, I just can't see that, that's not happening. If anything, it would be just the opposite.
Cris deRitis: Yeah.
Mark Zandi: Okay. Good. Well, I encourage listeners to put forward their questions. These are great questions and really allow for a good discussion. So keep them coming. We'll keep taking them. And Emily, I want to thank you for joining us. I appreciate that. Too bad you're not a Pennsylvania resident. Your vote would be Well welcome. I think, it would be welcome. But anything else, guys, before we call it quits and you guys have a great holiday weekend. I'll see you in California next week. I'm looking forward to that. Anything else before we call it a podcast?
Marisa DiNatale: Rate and review the podcast, please? On whatever platform you listen to it on.
Mark Zandi: Oh, actually, we are getting some reviews and we will read them next time we're on. Maybe not next week, because I think we've got some folks that won't be able to join because of the travel, but maybe the week after or the week after that, we'll read these reviews. So hopefully they're okay.
Marisa DiNatale: Maybe we won't read them.
Mark Zandi: I don't know. No, no. Good or bad. Good or bad. Yeah, we can take it. We can take it. Okay, very good. With that, dear listener, we're going to call this a podcast. Take care now.