Moody's Talks - Inside Economics - A Veritable Economic Buffet

Episode Date: February 9, 2024

Bill Adams, Chief Economist of Dallas-based Comerica bank, joins the Inside Economics team to assess the economic outlook and consider a range of economic issues from consumer credit to China’s prospects. We also learned what he is most anxious about, and it isn’t the outcome of the Super Bowl. For more info on Bill Adams click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Chris DeRides and Marissa Dina Talley. Hi, guys. Hey, Mark. It's good to have Marissa back. Yes. You were AWOL last week. I was in Pennsylvania. Ah, on business? No, pleasure. Yeah, two of my very good friends had birthdays last weekend, and it had been a long time since I'd been there. So I flew to Philly for the weekend.

Cool. And then I had the most hellacious travel experience coming back to the weather here in Southern California. Oh, right. Yeah. Did you get back? You finally got back. I finally got back.

I waited for my luggage for almost two hours at LAX. My flight was diverted. Oh. Yeah, it was bad. I never thought, you know, I thought I'd always worry about the weather in Philly in February. I never thought I had to worry. about the weather in Los Angeles in February. But yeah.

Did the flooding affect you at your home or were you okay there? No, I was fine here. It just, my flight was supposed to come into Orange County. They diverted it to L.A. because the flight couldn't land in Orange County because of the rain for some reason. And then they lost the luggage that was on the plane and they took, they didn't take the luggage off the plane and the plane took off and flew somewhere else with our luggage on it. Oh, it was a new one.

one for me. Sorry about that, but you're your home safe and sound. I'm fine. Yeah, still raining here, but is it still raining? Yeah, it is. Wow. So are things turning green in Southern California? Yes. Yes. It looks very nice. Amazing. Amazing. So is the drought, you know, this is not the second winter in a row where you've got a boatload of rain. Is it, is a drought winding down or I haven't I haven't kept track. I haven't heard what they've said about the drought situation. I would just, it has to have had some. It has to have put a dent in it.

I think we got more rain in the last week than we've had in like six years combined or something like that, something crazy. Oh, wow. Yeah. That's true. Wow. Yeah. I mean, it's been raining pouring every day since last Thursday.

So we're going on eight days of constant rain. Goodness. Yeah. I know in Philly, I'm hearing secondhand from folks because I'm down in Florida, but you guys have been getting pretty warm weather down in Philly, right? Yeah. Yeah. It's pretty nice. Pretty nice.

Yeah. Well, good. Well, I'm glad you're safe and sound and glad you're back on the podcast. You missed a good one last week. I can't really. I listened to it on the plane. It was a good one. I can't even remember.

It was Jobs Friday. Oh, Jobs Friday. Yeah. Yeah, absolutely. Yeah, it was very good. Good. Well, this is going to be a good one, too. We've got a guest.

Bill Adams, a chief economist of Comerica. Bill, good to see you. Mark, thanks for having me on. Are you hailing from Dallas? Well, if you want to be really precise about it, I'm in Frisco, Texas, but close enough. Yeah. Frisco is like just north of Dallas, or no, is that right? Right.

Yeah, Frisco, we're about at 3 a.m., we're a 25-minute drive north of Dallas, and one of the fastest growing towns in, or cities, I guess we are, or Frisco is in the United States right now. Yeah, it's boom times there. Unbelievable. Yeah. I mean, just amazing kind of growth. Every time I go, it's like the whole thing changes. You know, it's just incredible.

It's a very exciting part of the country to be in. Yeah. I think of Miami, like Miami's booming too, like the Dubai of the United States. So what would be Dallas? What would be the global analog for Dallas, do you think? You know, being in Dallas, so I'm going to get in trouble for this. Like, I know you wanted to do my background later. So I was living in China for a couple of years in the 2000s, like right after China joined the WTO.

And it feels sort of like being in a major Chinese city in like the old go-go boom times. You know, there's a lot of cranes, a lot of construction. You don't go to a part of town for a year or two, and you're like, where am I? Which building is this again? And the same feeling of optimism and kind of confidence, really cosmopolitan outward-looking town because it's growing so much and people are coming from all over to come here, live here, do business here. Yeah, we get this really, I think I've talked about it before, this really cool, data based on credit files. We get all the credit files in the country from Credit Bureau,

Equifax, and you can see the address changes. And so we can track very timely, you know, like I can tell you how many people move from Southern California or even Marissa's neighborhood to Frisco, you know, last month in the month of January. It just feels like people are, well, actually with the immigrant issue, people are pouring in from everywhere, aren't they? you know, just into the definitely. Yeah, you see it in, you know, in the streets, in the license plates on cars. The parents and my kids elementary school and their middle school, they're from all across the United States all over the world. So it's, it makes for like a fun PTA events where like bring the food from where you're from. You get just an amazing.

amazing, you know, mix of backgrounds. Yeah, very cool. And so talking about your background, can you just give us a sense of it? How did you end up as chief economist of Comerica? And we've had points of contact over many years. You were a P&C. But tell us, what's your history? How did you get there?

So I joined Comerica in 2022 prior to that. that, I was an economist with PNC for about 10 years. And then prior to that, I started out my economic forecasting career with the conference board working in their China Center in Beijing. So that's like the standard version of it. The economist inside baseball version of it is, if you remember the movie Zoolander, and then there's the scene where Mugatu calls in Derek Zoolander, he's like, we should work together. And Derek's like, well, why are we talking? I've been here. Why now? Because, like, basically, almost everyone who I've worked with as an economist over the last 20 years came out of Moody's.

There's a lot of Moody's alumni at PNC, the former chief economist at Comerica also spent time. Yeah, Bob Die. Yeah, Bob Die spent time way back when. So I have been the odd man out of not knowing 10,000 Moody's data buffeting mnemonics off the top of my head. with this crew. So, yeah, it's a lot of fun for me to finally, you know, talk with folks at the mothership. Yeah, and that's what I call it, the mothership. Definitely the mothership.

Yeah, I forgot about that. Bob, Bob, now Comerica, you guys were headquartered in Detroit, weren't you? Now, that's way back when. Way back when there was a bank called the Detroit Savings Bank. And that bank merged with banks in Texas, in California, Sterling Bank, Imperial Bank. And they came together, became a regional bank, and that's kind of Comerica's identity today, where we're still have a very large presence in Michigan, but also a big footprint here in Texas, in California. and in Florida, and now in the southeast and Mountain West as well.

And what's in terms of asset size? How big is Comerica these days? I think Q4, 2023, we're around $85 billion in assets. $85 billion. Okay. So kind of just south of that $100 billion threshold when kind of life changes for a bank. That is, it's a very special time in a bank's life when they hit $100 billion. Right.

And we're not there yet. If you look at our historical financials, yeah, we've been kind of close enough to that $100 billion threshold that we get questions about it. Our investor relations teams get questions about that. Yeah, just for the listen to around there, once you hit the $100 billion, then a whole other slew of regulatory constraints, oversight, capital, liquidity. You're in a whole different ballgame at that point. Of course, I think the other threshold is, isn't it $250 billion? So it's $100 billion. You get an increased level of scrutiny from regulators.

Then you get over $250. Then you're in the big time. The scrutiny is very intense. That's right. Yeah. Right. Okay. Okay, good.

Well, a lot to talk about. But maybe with just an open-ended question, just to get a sense of where your mind is. And as I was saying to you, prior to going on the podcast, I'm going to try to find a place where we disagree. I have I've been talking a bunch of economists recently, and it feels like now everyone's in the camp of soft landing. Everyone's in agreement. The argument over recession is largely over. I don't know if it should be or not. I'd be curious what you think.

But now everyone's in the camp of, okay, the economy's okay, fine. we should be able to avoid recession. But so there's, it doesn't feel like economists are disagreeing with each other, which makes me very nervous. So therefore I'm going to look for a place where we can disagree. But okay. Just open any question, how are you feeling about things? What do you think about the economy's prospects here in your turn, near term?

So, I have this sort of split personality view of where we're headed in 2024. On the one hand, I feel like economic growth this year is probably going to, moderate a bit from what we had last year. So if you're looking for direction of momentum, I think probably we'll see some softness in parts of the economy that did really well. On the other hand, if you're asking about recession risk, I think recession risk in the 12 months ahead are considerably lower than I thought recession risk in 12 months ahead were at the start of 2023. So a lot of the tail risks that I'd been thinking about, falling inflation adjusted incomes, energy price shock, interest rate shock, global, geopolitical

threats to the U.S. economy, I feel like those are smaller risks now than they have seemed for a while. So on the one hand, I feel like the rate of growth that we've seen in the data in hand through the end of last year and early this year, maybe a little too good to be sustained. But on the other hand, in terms of what I see coming forward, like not a recession and not necessarily a big slowdown, just kind of a moderation closer to our potential growth rate. So just to put a finer point on it, if you were on the podcast a year ago and I asked, hey, Bill, what do you think the probability of a recession starting at some point in 2023? What would you have said? A year ago, I would have said, I think there's a risk that the U.S. economy already is in a recession or has

already had a recession at the turn of the year from the end of 2022 into 2023. Got it. And now going forward for the coming year, what would you say probably? I'd say the risk of recession now is like three in ten, which is pretty low. And I guess we've been what in recession like two, one-fifth of the time since World War II, give or take. So three and ten is slightly above historical average, but not high. I think that's fair. Since World War II, I think it is like, it is more if you go since like 1980, I think it's 1980 is kind of the threshold.

Because the world kind of changed in that period, conduct of monetary policy. I was born. I was born. It was just the big change in the world. Oh, there you go. In 1980? No, 1981. So like for me, yeah.

Yeah. Yeah. But yeah. So you saw nothing but falling interest rates. That's right. I did not believe interest rates could rise. who knew. Okay, so here we are. Oh, and so I would put the unconditional probability of recession at, say, 15%, but 15, 20, what you're saying, a bit elevated, but just a bit elevated.

Right. Right. Yeah. Okay. And why, and this is something I'm asking myself, because our forecast for growth in 2024 is a bit less than in 2023. So, 2020, real GDP grew 2.5% I think if memory serves calendar year. Yeah. I think we have it coming down to somewhere between two and two and a half percent in 2024. But every time I sit down and do the forecast, I mean, actually sit at the computer, run our model, do all the arithmetic, you have to get some pretty weak growth in the middle of this year, you know, now or sometime at some point this year to get something less than two and a half percent, right? You have to have quarters where you're well below two. What do you what do you why? Why would that happen? What,

what, what's going to be behind that growth slowdown? So if we get that growth slowdown and that is kind of my my base case, I guess as well as yours is, you know, two drivers. One would be consumer spending was really strong in 2023. And we saw run up in credit card balances. We saw a big drop in the household saving rate, which, you know, maybe that's just catch up after pandemic era savings, people spending that down. But there are a lot of other signs that households were under financial strain over the last two years. And so I don't think that of that is just a normalization. I think there are, especially low and moderate income households, but to an extent reaching into the some parts of the top half of the income distribution, where, where, you know,

you know, households are under some stress. And I don't think that rate of spending growth can, uh, is likely to continue. I mean, when you get the turning point is, is much harder to call than just like, wow, this fundamental thing seems out of whack and eventually you're going to revert to mean. But my, my forecast assumes that that is this year. Um, the other part of, uh, my expectation for a moderation and growth is that there was a big, um, boost to, the deficit, the fiscal deficit, federal fiscal deficit from like inflation indexed wonky stuff or like social security benefits rose a whole lot in 2023 because measured inflation was high at the end of 2022. Inflation slowed through the end of 2023. So we should see smaller increases in

federal expenditures on Social Security, Medicare, Medicaid. A lot of inflation indexed defense department contracting is probably going to see smaller price increases this year too. And then we're also, I think we'll see larger non-withheld tax revenues come April because stock market did better last year than in 2022. Bond market was not a bloodbath like in 2022. So I think capital gains receipts will be higher this tax season. Got it. So basically the story is that consumers drove the train pretty quickly in 2020. They're going to continue to drive the train in 2024 just at a slower rate. Sure.

I think that's a fine way of describing it. That's my simplistic way of doing it. Can I do a little bit of a tangent here and pick up on one of the, start pulling on one of the threads you put out there on low-income households? And there's a lot of hand-wringing. And clearly lower income households are under some significant financial pressure, right? Right. They got nailed hard by the high inflation.

They blew through their excess saving. They built up during the pandemic pretty quickly. They turned to credit cards, consumer finance loans to supplement their income to maintain their purchasing power. Of course, rates have risen. So now they're left with the credit card bills at a higher interest rate and they're paying on that. And we've seen delinquency rates on credit cards and other household credit products, you know, rise. They're still, you know, not really high, but they've risen considerably, particularly cards and consumer finance.

Subprime auto would be another, you know, place where we've seen some significant increase. And there's now a lot of hand-wringing about that. Yeah. And do you have a sense of that? give a view on how serious a problem that is and will the credit problems become more of an issue going forward or is now with the Fed likely cutting rates and we'll come back to that, are we seeing the worst of the credit problems at hand? My expectation and, you know, work for a bank, so got to put in the disclaimer, I'm talking

about the economy-wide, not Comerica itself. So, like, across the economy, my expectation is that we still have some pain to be realized in defaults and credit stress affecting low-income households. And, you know, the credit cycle is long and slow when it's lagged to the real economic cycle. Access to credit was really good the last couple of years. And there was like this just sort of broad sense that the economy was had a ton of support from fiscal stimulus. And so there was a big lag between when shocks would hit households and when you would see it show up in delinquency on credit. So I think a combination of higher interest rates, people first running out of stimulus money and then tapping their credit cards and kind of running out of. their capacity to keep up on bills with that sense. For people who are in the most vulnerable

fifth of the income distribution, I think will continue to see some increase in delinquency rates and financial stress over the next 12 months. But for an economy-wide basis, I think you're, you've got a lot of puts and takes on credit performance. The expectation that the Fed is cutting interest rates combined with some interest rates are already down from where they were at their peak last year. And I was at an economic outlook event. It was somewhere here in North Texas last week. And I was listening to an economist talk about, oh, this was. one of our researchers at the Dallas bed talking about the real estate agents, part of how they're convincing people to go out and buy, given where mortgage rates are today, is I've got a mortgage

agent, they'll get you a mortgage today, and they will, with your mortgage comes a free refi in two years, is what I've heard is kind of the sweetener that they're using to pull people is in the market. At the prevailing rate, presumably. Whatever the rate is. There's no fee. Yeah, well, it's not a business that we're in, so I don't know exactly what the terms were for that.

But I think this, like as the idea that interest rates are headed lower now, I think is a big psychological shift. And you'll find smart business people coming up with ways, innovative products that take advantage of their expectations. of where rates are headed and, you know, find ways to do business around that. So I think a lot of the pain in the real economy from high interest rates is, I believe it's likely a majority of that has already been realized. Okay.

Chris, what do you think with regard to Bill's perspective on household credit? Yeah, I think I broadly agree that there's probably still some adjustment that's going on. So we do expect to see delinquency rates, default rates, continue to rise here for a bit, but we're most likely close to stabilizing at this higher level when it comes to credit cards and personal loans. Part of the reason why we saw this increase is just the lending standards during the pandemic had loosened up either directly or indirectly as people's credit scores improved. So we're just paying the price of some of that loosening. But since then, of course, as the banks have tightened up, certainly over the last year,

right, the credit quality of the newer loans should improve dramatically. So for that reason, I think barring a recession, I think the household credit picture looks pretty good. I wouldn't be overly concerned about some of the increases we're seeing. You know, Bill, I mentioned the the Equifax data that we get every month. And we got one of our colleagues, Justin Begley, sent us both Chris and I workbook last night with the data. And so it's monthly data. So I have data now through the month of January. We seasonally adjust the data because there's a lot of seasonality in the credit statistics in terms of delinquency. And delinquency rates look like they've stabilized, even on credit cards.

I think the 30-day plus delinquency rate, and correct if I'm wrong, I think it's percent of dollars outstanding was 4 percent, I think, on the nose or pretty close in January. And it really hasn't budged for three, six months. Consumer finance, same. Retail card, that's a whole different ballgame.

But, you know, auto, same with auto loans. You know, it is starting to, is rising for mortgage first and second mortgage, but that, you know, it's off an incredibly low level. I mean, it's still well below what it was pre-pandemic and there's no sign of any credit stress there. And the other thing I take Solis in is if you look at the growth in outstanding, you know, how much debt is actually outstanding. Those growth rates have really come down a lot. And over the, no, year over a year, I think total household debt, cars, auto, first mortgage, home equity lines, the whole shoot and match is almost come to a standstill. There's very little credit

growth going on. And the card is still high. It's still, I think, in the double digit, but that's coming in really fast as well. So I look at that. It feels like to me, we're probably seen the worst of it. In fact, you can look at the delinquency rate by vintage of loan origination. And to Chris's point, if you look at the loans that were originated a year ago and their delinquency rate, you know, like a year in to their life cycle, those rates are now coming in below previous vintages at the same point in their life cycle. So lower than the 22 vintage, 21 vintage. So I don't know. It feels like we're pretty close. And I bring all of this up because I'm so annoyed, and I'm curious if you're as annoyed as I am, with the New York Fed data. You do follow

the New York Fed data? You know what the New York Fed does on the consumer credit? The quarterly data, right? Yeah, that is, I just find that so bogus. I mean, first of all, it's a 5% sample. Okay, you can say, oh, 5% should be big enough for these big aggregate statistics. But I'm not so sure because our data, our data, which is the whole shoot match, doesn't line up with their data, you know, even apples to apples. So it's a sample. Second, it's very lag. You know, it's already out of date compared to the data that we have.

And then Chris, explain this weird thing they do with the, you know, the. the calculated delinquency rates on charge off. Explain what they're doing there. Oh, gosh, it's a, I think we need a lot of... I'm going to tweet about this this weekend. I'm gearing up for it right now. You're another podcast for it. My understanding, at least what they've explained, is that the, they leave in loans that have been charged off, right? They're, I believe the theory is they're taking more of a consumer-centric view, right? So if you are a credit card borrower, you default on your loan. Your loan actually gets charged off by the issuing bank,

but that doesn't mean you're off the hook. You're still on the hook for the debt. There's going to be some collection agency, presumably that picks it up and tries to collect that debt. And that continues until either until you pay off or it will remain on your credit report for up to seven years, this derogatory account. So I think the theory is, if we're looking at this from the viewpoint of the consumer, a debt is a debt and you're still delinquent even after the issuing bank has charged off. That might be fine in theory, but it doesn't really represent what's going on today and to my mind what the consumers are actually reacting to in terms of their current credit position. If I have this debt that's been charged off five years ago, I haven't paid it.

I'm pretty clear that I've already made the choice as a consumer not to pay that debt. It's not really affecting my, my day-to-day decisions. I don't see that as a very meaningful economic statistic. The other issue is that this measure where we include these charge off doesn't line up with what the actual credit card companies report in their financial report. So a bit of a difficulty in terms of doing any type of benchmark comparison, right, in terms of the different measures. And then finally, there's just, there's a lot of, that's called variation in the practice of reporting delinquencies after charge off.

Some companies will continue to do so. Others say, well, it's, you know, I have no incentive to continue reporting on this debt. So, yeah, it's not really important that I ensure the accuracy of this. So you end up with a measure that, to my mind, is very convoluted. It's difficult to understand what exactly is going on when you look at those New York Fed statistics. The broad trends maybe are okay. And certainly if you look at some of their transition rates, that might be okay. But even there, I'm a little bit skeptical given the sampling that Mark brought up and just some of the other data treatments that we're talking about here.

Hey, Bill, I just want to point out, you saw the way I expressed my annoyance and the way Chris expresses his annoyance. I'm not even sure he's annoyed. I don't know. So what is unfair, Bella? What do you think? We brought you into this conversation, this kind of discussion we've been having. Do you have any,

you know, you don't need to. I'm just asking. No, fair. I think it's hard to measure the economy in real time, right? And your definition, you'll see really different things depending on your definitions.

I mean, we could, like, when I think of this, I think of like the analogy to like the recession argument over the last couple of years. Did we have a recession or not? And like I got by the official, every official measure I got the recession call wrong in late 2022, early 2020, delighted to see that the economy did better than I feared. But if you look at gross domestic income, we did see to consider. consecutive quarters of decline. And in theory, gross domestic income and GDP by the expenditures

account are measuring the same thing. So it's the, the, uh, an experience that I have, which, um, I imagine you probably have had some analogous, uh, conversations is when you talk to financial people, like people in a finance department, if they have like one version of their numbers and then they're like, never mind, we're totally restating everything for the last five years. We got better data. So this is a better measure of what happened to the thing we're measuring. Like, they get a lot of trouble for that. They don't like doing that.

And they don't like working with data sources that do that. But as macroeconomists, it's just part of the game. You know, it's like we're talking right now. We've been on this podcast for, I guess, about half an hour. I mean, you folks around. the clock. I'm on the clock. In theory, we're creating GDP right now. How much GDP have we generated in the last half hour? I mean, I wouldn't know if this, am I making a good point? And so my GDP per minute just went up as I started talking or was I actually making more GDP

when I was silent? I don't know how to measure that. And I don't know if there's a good answer. Okay. Okay, fair enough. Fair enough. Okay, this is what I wanted to make a finer and more actionable point. I don't think it's a good idea to base any business decision or any firm judgment about the economy, about things that happen too far beyond the decimal point. It's just we're not able to measure the economy to a degree of accuracy that I feel like that's a credible way of using our data sources and our judgments. Right. Yeah. Although measuring a delinquency rate, you would think we could get that one right. come on. How do we?

You think, you think, yeah. Anyway. Complicated, yeah. Now, you've kind of laid out the baseline case, kind of for the economy, relatively saying when kind of down the middle of the distribution, no recession, slower growth. You said risk of recession is a little bit elevated, so it feels like the risks to your baseline is a little bit skewed to the downside

compared to the upside. Can I ask, what's the number? one threat to your optimism? You know, if something went off the rails, what would that be? I'd say most... Yeah, I'm going to ask you the same question. Sure. Or maybe I'll ask you to comment on Bill's, you know, comment.

I think if you're, you know, if you're working in an institution and you're following a process, and I feel like you've got to put four in shock number one right now. War in the Mideast. Yeah. War in... between Russia and Ukraine. Ever since the Russia invaded Ukraine and then the war deepened, I feel like everyone has been sort of saying,

what about China and Taiwan? And what are the potential scenarios there? For listeners at home or on their delayed flights who don't subscribe to the Moody's scenario service, Moody's has been incorporating a China-Taiwan conflict in the downside scenarios for the last, I believe, a couple of years. So as a consumer of those, it's helpful to say that we have a view of one institution's view of how that would affect the broader economy. So that, but that is something that I think you have to keep in mind. you know, the U.S. economy has been amazingly resilient to these foreign shocks in the last

12 months. And I think it's largely because we're growing energy production so successfully right now at home, like oil outputs at a record high, natural gas, liquids, dry gas, also at record high and growing faster than crude oil. But we're also like, I think it's like 17% year-over-year growth of solar electricity generation in like I followed the EIA's monthly statistics for that, which come out of a lag, but point to really, you know, big changes underway in basic energy supply. And if you think of like the 1970s, early 1980s, oil price shocks are a huge part of why the U.S. had these very volatile, very sudden and deep recessions, a positive supply shock on oil, on energy supply, both conventional and renewable. It seems like it should

be good for the economy. And I think that's what's kind of offsetting the effect of this geopolitical unrest, uncertainty, wars, et cetera. But though, you know, there's no guarantee that we continue to kind of realize the best possible outcome among those. And I think that's still a downside risk. So, just to put it into my nomenclature, you're saying geopolitical risk, and that takes on different dimensions, China, Taiwan, what's going on in the Middle East, maybe North Korea, that that's the thing that makes you most nervous in terms of the economic outlook, near term economic outlook. Yeah, I think if you want to assign, if you want to come up with tail risk scenarios and you're coming up with a downside scenario and you're coming up with a downside scenario and you're, want the most likely downside scenario right now, I feel like makes sense to put a negative foreign shock in part of that. Okay. Okay. What do you think, Marissa? Yeah, I agree. That's my number one as well. I mean, it's the most obvious thing that's out there. I always worry about something

percolating in the financial system that we can't see because that seems to happen and we don't foresee it. So I do worry about that, but certainly something coming from abroad would be my number one. Like, how would that manifest? I mean, give me a scenario that makes you nervous. I mean, the conflict in the Middle East just seems to be, it seems to be widening, right? I mean, we're doing strikes on Iranian-backed rebels throughout the Middle East in other countries. It seems, you know, it seemed very contained to Israel, Gaza. Then we had the Houthis. Now it seems to be broadening. So if it draws in much more of the Middle East, then you could have a real oil supply shock. Now, I think, yeah, yeah, that's my conduit that I think about. I mean,

to Bill's point, we are producing more oil now. We are, I don't know, we're back and forth with Saudi Arabia, so I don't know if we're the biggest now or second biggest, right? So, I mean, in terms of production, correct me if I'm wrong, I think we're at, 13 million barrels a day, they've been cutting, they're down to like eight, seven. Okay. So, I mean, that has insulated us much more than it would have in the 1980s, certainly. But if something happens with these Middle Eastern countries, I mean, that's still a very large part of our oil supply and our global oil supply. So that's how you can make the are my, yeah, gas prices.

Okay. Bill, would you, is that same way you would, would you connect the dots from geopolitical threat back to the economy? Or is there something else? No. How does it manifest? Yeah, I think gas prices. I think a shock to financial conditions, stock equity indices fall, you see a negative consumer

confidence, negative wealth effect. And then probably also you could, I would expect a sharp, a, appreciation of the U.S. dollar, so negative effects on U.S. foreign trade kind of manifesting over a couple of quarters. And maybe some shocks to like the oil importing emerging markets that, where we could see kind of knock on effects flowing back to the U.S. through other global channels. The U.S. were, it's very different, right, than it was 15 years ago where we were. so exposed to energy price shocks and now we're better insulated, but that's not true of the whole world. And so you could see effects of an energy crisis on global growth that then kind of flow through other trade or, you know, geopolitical shocks and then come back and affect us. What do you think? Is geopolitical risk at the top of your list of concerns as well? Not at the very top. I put the Fed at the top of my list. That makes some type of mistake. But although, you know, it's all interrelated, right? Why would the Fed make a mistake? Well, maybe it's because inflation starts to take off again because of a geopolitical threat. Just to add to the mix, because it sounds like we're in a risk identification mode here. Maybe I'd throw in the supply chains. I wouldn't discount issues in terms of

trade being disrupted. I hear the Somali privates are back because now some of the trade is being diverted closer to the Somali coast. So, you know, maybe they're small in the grand scheme of things,

all these different trade bottlenecks, but put them all together and they do increase shipping costs and certainly could lead to some delays in delivery of materials and product that could disrupt manufacturing other industries. Yeah.

You know, when I hear geopolitical risk, I think, oh, the economy is in pretty good shape. Because if we're going back to geopolitical risk, that's just a morphous thing. We always have geopolitical risk. There's always something going on somewhere that we have to worry about. I mean, I'm sure I've said this many times before. But when I was a kid in elementary school, we had drills where there was a nuclear bomb that went off and we had to run under our desk. In my mind, that's geopolitical risk.

Really? You know, come on. So this makes me feel like we're searching for threats, which makes me feel a little bit, at first plus, it makes me feel better. Then I say, oh my gosh,

but there's something that's going to be out there that we're not thinking about that's going to come back and hit us. And I do want to bring up one other risk and get your view, Bill. Then we're going to do the game. And then we're going to come back and talk about China because of your experience and expertise in China.

And then we'll call it a podcast. And Mersel alluded to it, the financial system. Look, the financial system is under a lot of pressure. The yield curve is still inverted at short rates or higher than long rates. So funding costs are higher than lending rates in many cases. So that puts pressure on banks and other financial institutions. That's how they make the most basic way of making money. I borrow short at a low rate.

I lend long at a higher rate. Loan growth is weakening because of the tightening and underwriting. credit quality is weakening. I made the case of household credit we're at the worst of it, but CRE commercial real estate, that's in train. So we got a sense of that this past week

with New York City community bank choking on their commercial estate loans. That's coming. And of course, the regulatory environment is more difficult. I'm not making a comment, is it good or bad? I'm just saying, look,

the regulatory costs are on the rise because of, you know, what's happened here over the past year. is that on your list of concerns? You know, something else going off the rails or breaking in the financial system, the banking system? I had a really great professor when I was in grad school. And I went back and talked with him a couple years after I graduated. I was thinking about like tail risks, risk identification and, you know, how do you think of these shocks?

And I asked him, you know, like, what's the right way to think of a financial shock affecting? Like, sure, the economy looks like it's, this was like in the early 2010s when the economy was like kind of crappy, but not in a recession. It was gradually improving from a very, very bad state. And I was like, well, couldn't we have another financial shock? And then that would push us into recession. And he said, there's no such thing as a financial shock that just. comes from the financial system. What you see is you have some stress from the real economy that then is

intermediated through the financial system. And then there's a vulnerability, a weak link in the financial system that then gets exposed because, but it only was exposed because you have that real economic shock. And he was, this was like, you know, over 10 years ago. So the analogies back then were all to the 2007, 2008 crisis. And he said, like, the things that were. went back wrong in the financial system then, you know, you saw them in financial institutions, but they were manifestations of housing prices falling and the stress that that caused on the real

economy, which then, you know, flows through the financial system. So I don't know that I'm necessarily a believer in that point of view, but it's a way, I totally disagree with that. It's an elegant argument. That's a whole different time. Yeah. So I think, but that's, like subprime mortgage. I'm just saying subprime. This is a, well, I mean, subprime maybe would have been okay if house prices get away. No way. No possible scenario. I'm not, I'm not betting my money on it. But so this is a long way of saying, I think that if the economy is still in decent shape over the next 12 months, you know, it would be pretty unusual to see a major financial shock with the healthy real economy.

Got it. Okay. Very good. Okay, let's play the game. The statistics game. We each put forward a stat. The rest of the group tries to figure that out through cues and clues and deductive reasoning. The best stat is one that's not so easy. We get it immediately. One that's not so hard, we never get it. And one that's apropos for the topic at Handler is recent. And we've covered a lot of ground. So that leaves a lot of ground for the stat. And we always begin with Marissa. She leads the way. Marissa, what's your stat? My stat is minus 0.8% year over year in January. A government statistic?

Yes. And it's also give you a hint. It's actually a happily coincidental statistic in this podcast. Oh, interesting. Whoa. Is it a credit, something related to household credit? No. No.

Okay. Is this a stat that came out this week? Yes. Okay. Is it an economic... Financial stability related? Financial... No.

Is it some part of the imports report? No. From the foreign trade? No. Okay. Not related to foreign trade. Is it a stat that we follow... A government statistic that we would typically follow?

Or is this more... Oh, it is? We're all in trouble. Came out this week. Came out this week. What came out this week? I'll say, Bill, you're like tangentially on the right track there. Trade related.

It's not, is it wouldn't be the trade deficit, would it? No. The dollar, something related to the dollar? No, trade weight of dollar. Hmm. Are we going to be embarrassed if we don't get it? I don't think so. Okay.

Okay. I mean, I'll try not to embarrass you. Can you give us one more hint without giving it to us? You know, I was so busy this week. I really haven't paid a lot of attention to you. The reason I said it's happily coincidental is because of Bill and his expertise. China. No.

Banking. China? Banking. Oh, it wasn't year over year imports from the, China. It's a banking number. Is it, oh, was it, we did get the consumer credit report this week. And I was looking, but I was looking at the month over month change.

It's not consumer credit. We did get consumer credit. Okay. All right. I think we're going to give. Yeah. Oh, by the way, this related to UI claims in any way? I didn't even look at UI claims.

What happened to UI claims? They fell. They fell. Back down to what? They fell slightly. They went from like 220 to 218 or something. Just asking. All right. Okay. Okay. We give. What is it? It's Chinese CPI year over year in January. Of course. Of course. Yeah.

We all knew that. Sure, we did. Yeah. I picked it not knowing that Bill was like a Chinese expert here. I just thought it was interesting because this is kind of the deepest deflation China's had since the financial crisis. I hope my mom's not listening. Mostly, yeah. Yeah, maybe you are embarrassed, Bill. I don't know.

This is mostly driven by food prices. So there is a glut of pork production in China. And pork prices are down like 18% over the year, 17% over the year. So overall food prices have been just plummeting in China. Energy prices are falling too. But overall, as we know, consumer demand is also really weak. So consumer goods prices are falling. Service prices are up, but they're really, really weak,

and they appear to be weakening month over month. So I picked it because I thought it was interesting, and we've talked in the past about how weak Chinese demand may actually be helping or have helped the U.S. economy to kind of keep inflation under control, right? It's put a damper on overall global demand and demand for U.S. exported products. That's a good one.

Hey, Bill, do you have any perspective on what's behind the Chinese deflation and how big a deal that is for global inflation? I mean, for pork prices, China grows pork domestically using, like, soy and other kind of feedstocks that are linked to the global commodity price, global agricultural commodity prices. So I think we're finally seeing some pass-through of the food price shock of 2022 coming out of food prices there. For China's economy more broadly, man, it doesn't look great. I was in China over the holidays. And, you know, you see the effects of the housing market downturn. But commercial real estate utilization also looks quite weak. like a lot of barely occupied retail space.

I was in Beijing, you see it there. And like I lived in China from 2004 to 2006 and then 2009 to 2011. And the change in demographics, just kind of looking around on the street, seeing how few children there are compared to how it used to be. It's very dramatic. And so that kind of anecdotal, the longer-term thematic story about the constraints on China's growth kind of binding more tightly now, I think, are very palpable. So, yeah, I don't think we're likely to see a big turning point in the Chinese economy in the near term.

Bummer, yeah, that was a really good statistic, Marissa, very good one. Bill, you want to go next? Sure. So first time playing. My number is, my number is 5.1%. So how much detail do I give when so that I'm playing fair? That's a good number and we'll start asking questions. Yeah.

Okay. We'll suss it out. You suss it out, yeah. Is it a government stat? Yes, it is. Is this? Did it come out this week? No.

Oh. It's a, it's a. It's an old, it's a government stat. It's one from a slow-moving data source. Census Bureau? Not Census Bureau. It's not, it's a demographic variable? I'm trying to think of where I would find it in data buffet.

In data buffet, it may be under demographics. Oh, okay, 5.1%. Actually, no, it's actually not in Data Buffet. I was talking with the help desk earlier this week. Oh, no. Let's edit this part out. Sorry. This is a nice way to force us to answer.

It's demographic-related. Is it a statistic from the past year? It is no longer a statistic covering the past year, no. Two years. Yeah. This is a, this is a 2022 annual number, which is the most recent release. 5.1% is, and it's not housing-related, it's demographic. So, to lay out my thematic story for this, I'll give you one that I'm pretty sure you're going to get.

What was 3.6% for the last two years in a row? not not not 22 2021 it's from for 2022 and 2020 it was 3.6% annual average um wasn't inflation was it uh no uh 3.6% the unemployment rate the annual average unemployment rate yeah oh oh oh oh was it 3.6? yeah 3.6 for both years on annual so um so this number it went from

3.8 in 2021 to 5.1% in 2022. And so, which is getting worse. Labor market related, then. Labor market related? Not labor market related, actually. But a broad measure of the health of the household and consumer sector. Oh, I see. I see. Savings?

So I, yeah. Oh, is it, is it a, is it a like debt service burden or a financial obligation ratio? That sounds really high, though. No, it's, so this is, this is very low food insecurity in the United States. So maybe I'm cheating by picking something too obscure, but. No, that's okay, fair enough. Like, so 5.1% of the population has food insecurity. So this is 5.1% of the population had very low food insecurity, had very low food security in

2022, which is, this is the USDA, and their data comes out at a long lag. And so, like, to your question about, are we going to have a recession, did we have a recession? Like, I feel like this is, so it went from 3.8% in 2021 to 5.1%? in 2022, which is the high, and they only, they measure it on like, it's not measured the way the rest of our economic statistics are measured. Like, they only give an annual average number. And they, they're measuring like, did you experience, did you have so little access to food over the last year that someone in your household had skip a meal? It was essentially the, that's like the simplistic version of their question. Yeah. And I've, I've been like, like, I'm

everybody, I've been thinking about the kind of vibe session debate and like how, how, how, what, what happened to the economy really? And, like, you don't, most measures of the economy, you don't see a recession. And you don't, you definitely don't see a recession as the MDR defines it. But, um, like that, you know, to, um, like, there's, uh, Mark, I'm sure you, like, demote people who try to do this at work, but it's sort of like an unavoidable temptation of the economists to say, well, the reason there wasn't a recession is because we're measuring it wrong. There really was a recession. It's just, it's not fair, the definition. But so I know it's like, it's not what you're supposed to do as an economist. No, I hear you. I hear you. Let me push back a little bit.

I mean, couldn't that simply be the American Rescue Plan? I mean, the American Rescue Plan provided so much support in 2021, particularly around food assistance, you know, Snap, expanding out the SNAP program. That expired, I think, in 2022. And so you see, you kind of see what you're describing. And that doesn't necessarily mean, you know, recession, I guess, right? I mean, it's tremendous support, less support. But it goes to the vibe session, for sure. Yeah. Because people had support, then they don't. And that doesn't feel good. So I get that. I think the withdrawal of fiscal stimulus and support for households is a huge part of it.

But like the surge in the price of food and gas and rent for low and moderate income households and for middle income households that might be renters or have someone who's a renter. And it's, I think like there was, I think there was a lot more economic stress on the household sector in 2022 than we have good data to measure. And especially like retiree households where like what does the unemployment rate matter if you're retired? Actually, higher unemployment means probably means there's more home health workers who are available.

So your standard of living might get better if there's more slack in the labor market. But you do, and I think you can get at it through these. sort of what we consider or what I would consider a kind of ancillary measures of the health of the economy that aren't really linked to output. And they're not really linked to consumption, right? Because you're not measuring consumption in dollar terms. It's not big dollar amounts, but it's important to kind of standards of living. So, yeah, it's a good one. It's something that's been. We'd never have gotten it, by the way. But Bill, what does that statistic look like relative to prior to the pandemic? Like, is that a low number, a high number, just historically speaking?

Right. It jumped back to where it was in 2014. So it's measured annually. We don't have, I don't, I guess the Census Pulse survey, there is high frequency data on, and which, which listeners are home, you can get Census Pulse and Data Buffet. The, that's the special survey, the census began with the pandemic to provide a lot of granular understanding what was going on to people because of the pandemic. Health and labor market. I think they do ask about food and security in that survey too. You get the data every two weeks. So that was the first time that we had data like that on a high frequency. But this indicator, the last time it was, it rose as much as it did in the 2022 data was in 20, it was at that level or high level in 2014 when the unemployment

rate was 6.2%. So if you want to think of like broad summary statistics of the economy going from where they were in 2021 and then going back to where they were in 2014, I feel like the unemployment rate, it was I think 5.6% annual average in 2021, somewhere in the fives for most of the year. If it went to 6.2%, like, that would have been a mild recession. So, again, the weasily economist who was wrong argument. I mean, I love the statistic. I think you're stretching, but okay. I am really stretching.

No, that's totally fair. Hey, Chris, what's your stat? 53.4. Is that the ISM non-manufacturing index? Bingo. He wanted to give us one that would, because we were miserable on the first two. You want to explain, Chris?

Well done, Marissa. This is a little bit of good news, right? This is a, this is the services PMI, right? 53.4 indicates expansion. It's the 13th consecutive month of expansion of the services purchase managers index. So that's, you know, above 50 is it, is consistent with expansion. So that's certainly quite positive. If you look through some of the components, there are still very bright signs in terms of business activity.

New orders are up. The purchase managers are indicating that demand remains strong. The one blemish you might point to, and I think this might be related to some of our earlier discussion is prices paid. The purchase managers are indicating that they are facing higher pressure for prices again, Part of that related to transportation and the shipping costs that alluded to earlier. So that's certainly something to watch. If that were to continue and manifest into broader inflation, that certainly would be a negative.

But overall, right, this is a very positive report. So, Chris, like, surveys of sentiment have been so weird the last couple of years. Are you starting to put more weight on them now? Or are you still like, man, been such a bad leading indicator of what's really going on. It's a huge grain of salt still. Well, I think it varies a bit. I don't put a whole lot of stock in surveys to begin with, right, because of, you know, just the subjectivity and interpretation of the question, whatnot.

I will say, though, that I think the ISM to purchase managers index is a bit of a combination between sentiment and actual hard data. So put a little bit more stock into this one versus. is a consumer confidence, which is just more of a gut feeling. And as we've talked about on the podcast, you see very strong relationships with political affiliation, so hard to really put a tremendous amount of weight on that. But yeah, PMI, I think it's worth watching. Again, I don't think it's necessarily tells you something that's very different from other

hard data you might see in the economy. but I think it can give you a bit of a useful signal in terms of sentiment. So I think it's worth the- Kippen-A. That ISM Services Index, that's some really weird months, hasn't it? Like, I can recall last year there was one month when it plunged and then came right back. Yeah. A lot of weird stuff.

Yeah. I don't know that you want to. Yeah, hang your house. I certainly wouldn't look at one month and conclude, you know, very much. about a lot of things. Yeah, true. That's right. Hey, I got a stat.

You'll never get it, but it's a good segue. I'll give you a lot of help, but you'll never get it. This is a good segue into the last part of the conversation around China. Therefore, that was a big hint. Okay. $1.77 trillion. And you may get it because it was in the headlines this morning. I saw it in the headlines this morning in the financial news related to the stock.

market. Another big hint. One point seven, seven trillion. And I'm not going to belabor it for too long before I. It's a financial, it's a financial related number. It is indeed. Yes, it is. Well, if I'm not going to get it, I remember the fiscal deficit was 1.7 and change can't be that, can't it? No, but that was good. If I think another stat that matches that number, do I get like that happens? happens. I'm going to put you out of your misery. That is the market capitalization of Navidia, NVIDIA, the, you know, the AI chip company whose stock has gone skyward, part of the magnificent seven, the seven companies whose stock prices have gone north. So,

Navidia is up again today. 1.77 trillion, and this is why I bring it up. NVIDIA's market cap is now larger than the market cap of all Chinese equity. So you had up all the market cap of Chinese stocks because China's stock market's been humbled here. And NVIDIA is higher than that, which is a comment on Chinese stock, but it's also probably a comment on our own stock market, you know, what's going on with regard to, because I do worry a bit about it feels really hyped here. These are great companies, you know, that are the magnificent.

Microsoft and meta and, you know, they're all good companies, but nonetheless, this is... Yeah, what's the P-to-E ratio on that? On the Invidia? Let me see if I can tell you. I can't tell you very, very... I'll tell you here very quickly, I hope. The P.E. is 94. 94.

Okay. Just for context, listener, the, you know, historically P's or should be around the S&P 500 is 15, 16, 17, something like that, so 94. Which brings us back to China, and this is where I want to end the conversation, because Bill, you spent a lot of time in China and your early part in your career, you were focused on what was going on with China. And you already kind of mentioned this. It feels like you're kind of pessimistic about Chinese prospects here.

Is that fair to say? So there's, I think you need to sort of answer. I hear two questions in your question. One is like China's stock market is so cheap right now, you know, is there too much pessimism priced in? And I think like I'm not an equity strategist, so I'm not, I don't have a specific view on that. I feel like part of what's priced into Chinese equities is a combination of like the economy's not doing great. But then also if you're a U.S. investor, are you going to be forced to divest to divest? or your shares go to zero because there's sanctions on China if there's a conflict between China and the United States.

So I think for the Chinese economy, yeah, I'm pessimistic about, well, it's funny. I see a lot of things that are going wrong in the near term. And my experience being like a China forecaster and also someone who's, who studied Chinese economic history is that China often gets to these points where things are very obviously going wrong. And if you read like a layer or two into the media coverage, like a lot of the media coverage in the Wall Street Journal and Bloomberg, like they're great, great journalists. But they like they'll often notice things first because I'll see a report in the new China news service run by the Communist Party that, wow, there's this issue that the Communist Party

and the government are paying more attention to now, we've got to come up with something to fix this. So the Chinese state, like on a, I guess, 40, 45-year time horizon, did a good job, or good as a value judgment, did an effective job at identifying problems and coming up with changes to their system to work through those problems and to manage those problems down.

They haven't done that as well in the last couple of years, though. And I think that a lot of the kind of more meta pessimism about China, both here and in China is just that concern that that more pragmatic approach to, like, you have a problem today with X, Y, and Z. let's change the regulations for this one sector so that we can work around it. They're not willing to make those pragmatic changes. And then also that they're, they don't have the same like positive demographics and long-term trends with urbanization and the growth of the labor force and so forth. It's just really harder, much, much harder to grow out of problems than it used to be in China. So, yeah, I am, I am. them worried about the longer term for China's economy. And hopefully they surprise us again in the West by coming up with some clever adaptation of their system that gets them through these problems. But don't see a lot of evidence of it right now.

I could have said another statistic, $450 billion. Now, that's related to data that came out this week and related to China. $450 billion. Oh, that's not the... Is that a trade statistic? Yeah, trade statistic. Is it our... It's U.S. imports from China.

Oh, okay. And then calendar year 2020. I'm rounding. Okay. And but Mexico, imports from Mexico to the U.S. now are higher than Chinese imports or exports into the U.S. or U.S. imports of Chinese goods. for the first time in 20 years, for the first time in 20 years. So that gives you a sense of how dynamics are shifting.

And in terms of the pessimism around China's prospects, you didn't mention, or maybe you didn't, I missed it, the U.S.-Chinese relationship. It feels like that's definitely going in the direction that's not going to be very helpful. For either economy, it diminishes both, I suppose, but particularly hard on the Chinese economy. Yeah, I think that it's hard to see that improving. given dynamics on both sides of the Pacific. Mexico, as you point out, a big beneficiary of that. Like the U.S. trade deficit has, you know,

continued to go up since the pandemic and broad strokes. So it's not like we have a smaller trade deficit than we have. And like, as all of you know, like the trade deficit tends to track with the fiscal deficit over time. And but the where we are running that bilateral trade deficit with has really shifted. And I think the and where we're buying from, like I talked to a lot of management teams at companies, talked to a lot of clients. And I think some of it is geopolitical. A lot of it is just after the supply chain problems in the last couple of years and poured along Beach, companies wanted to diversify. and Mexico and getting good to cross U.S. borders over land rather than through a court has been attractive.

So I think that's a big part of that story. Well, very good. Well, guys, anything else you want to ask Bill while we have them? Any burning issues? Super Bowl pick. Super Bowl pick. Ah. Yeah, this is going to be very telling, you know, what he says here.

Yeah. Oh, man. I think we'll win it. You don't follow football? Really? You're not a football? Oh, man. I've got to, I've been, it's been 24-7 trying to get these stats the last week.

I get it. And I got them all wrong anyway. I don't have anything for you. I'm sorry. No, no. Mersa, do you have a pick? No, I really don't. I really don't care.

You don't care. I've noticed. About either of these. You know, given this whole, Taylor Swift, Kelsey thing. A lot more women are like engaged. No, you haven't noticed that? I mean, not this woman.

Not this woman. I'm really sick of hearing about Taylor Swift and I'm sick of it. I'm not going there. I'm not going to get hate mail for saying that. Chris, I'm curious, who would you, are you, oh, you know, you play botchy ball. He plays botchy ball.

He doesn't play football. And we go again. I think she's going to make the game. That's my pick. What do you mean? It's all about Taylor, right? Oh, it's all about Taylor. She's going to make it.

She'll be there for the game. She'll be there for the game? Flight back. Yeah. Oh, I haven't been following. Boy, now he really is going on. He's stalking her. Whoa. He's a Swifty.

I told you. He's a Swifty. He's a crypto. Billy, this guy is really interesting guy. This is why you could never be people, some movies. You've got to be weird and like, you know, Chris. You've got to be Crypto King, botchy ball player,

zip wine and cellars in Italy somewhere every summer. We don't know where he goes in the summer. He calls us from some wine cellar somewhere. Do we get to hear Chris's good news before the podcast eggs? Oh, yeah. What were you going to tell Chris? No, no, no, that's personal. Oh, Mark, Mark.

I can't do that. I can't do that. It's good news, though. It's good news. Okay. All right. Okay. How about when will the Fed release C-Car? Oh, geez, Louise. Yeah, Bill, you know. Yes, not today. Excuse me. The C-car, the C-car stress scenario. We're all waiting with baited breath for that thing. But not. We are, we are, yeah, we're not, we're under $100 billion. So I watch with great interest, but the stakes are different when you're at, at, at,

a bank under $100, $100 billion in assets. Yeah, very good. But good luck with all of that. I was looking at your production schedule. It is a very tight production schedule for movies. Yeah, we're very tight. We take great pride in that, actually. So thanks for calling out.

And thanks so much, Bill, for coming on and being so gracious with your time and your insight. We really appreciate it. With that, I think I'm going to call this a podcast. So take care, everyone. Talk to you next week.