Moody's Talks - Inside Economics - Bonds, Baseball and Blankies

Episode Date: October 20, 2023

Mark, Cris and Marisa welcome colleague David Fieldhouse to Inside Economics to talk about the run up in long-term bond yields and mortgage rates, as well as the outlook for the consumer. The team discusses why the 10-year yield has breached 5% for the first time since before the GFC and what it might mean for the economy if rates stay higher for longer. They also consider the possibility of the yield curve reverting into positive territory soon. Mark tries to help Cris overcome his fears of a consumer-led recession and the team considers what a Phillies World Series win might mean for the economy. Follow 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 co-hosts, Chris DeReedies and Marissa Dina Talley. How's everyone? Doing well. Very nice. Very good. It's been a while since we've had the group together, I think. Yeah. Someone's been away. Yeah. Yeah, like last week you weren't here, Chris, right? That's right. Yeah. Not a week before that. And a week before that, Marissa, you were away on vacation. So I'm the only, Hey, hey, you're the, you're the north star of this whole thing. I'm the, I, I don't think I've ever missed a podcast, have I? No, in part because people move the schedule around so I can be on the podcast.

It actually isn't fair. Good point. Yeah. All right. No comment. No comment. Yeah. And we've got Mr. Fieldhouse, David Fieldhouse.

Good to see you, David. Hey, Mark. Thanks for having me back. Yeah. Last time was when. I think I remember it was hot out. it's all I remember. It was summertime. Definitely the summer. That's right. Yep.

Yeah, good to have you back. We're going to talk about the consumer, the state of the American consumer, and obviously household leverage debt, all part of that. And that's what you focus on. So we'll bring you into the conversation to talk about that. But of course, you can participate in the entire conversation, David, if you've got a view. And we're going to play the game at some point. And you're going to play that too, right, David? You're in on that? I got a stat. Good. Okay. Excellent. So I guess the headline for the week, at least from the economic perspective of the economy, is the surge in long-term interest rates. This is Friday, Friday, October 20th. I think it's some, I forgot, I'm, well, it's all a blur, but I think earlier today, the 10-year treasury got over 5% or close to. Is that right, Chris? Yeah. Yeah. It spiked down a little bit. 492 right now. But 492. Okay. So within spitting distance of five.

Yeah. I guess you have to go back when to find a 5% 10-year yield before the financial crisis. Before, yeah. Yeah. And of course, the other headline related headline is the 30-year fixed rate mortgage is now going for over 8%. Right? 8%. I think you have to go back almost 25 years for that to find a new.

8% mortgage, right? That's right. Yeah. Okay, so lots of questions. You know, what's behind this? Where are we headed? What are the economic implications? But let's begin with, you know, what's going on? Why have rates risen so far so fast? And just for context, I think if you go back to when David was on the podcast last in the summer, the 10-year treasury yield was well south of 4%, probably three and a half, three and three quarters. So we're up a percentage point in a half, let's say, you know, since where we, since the low back in the summer, that, that is a big move in a very short period of time. And, and the biggest increases have been most recently in the last few days, last, last couple of weeks. So, so let me turn to you, Chris. What do you think's going

on here? Why this surge in long-term interest rates? Yeah, good question. I'd say it's a, it's maybe a combination of things. There's been a lot of economic data, certainly. There's some, I don't want to take away a statistic, but certainly there's some evidence that the economy is a lot more resilient. Consumers are a lot more resilient. Strong retail sales, for example. So you could have bond holders, bond investors,

pricing in that resiliency. I guess we could start with what it's not. It doesn't seem to be related to inflation expectations. I think you'd agree there. There's no evidence that the higher yield is. Which is good, right? Yeah, which is good. Yeah. So it's not that investors are requiring a higher yield because they expect inflation is going to be taking off here. So that that is a good thing. And it doesn't seem to be related to the short term rate, right? The short end of the curve, the three month, six month, that hasn't moved much at all, right? So it's not that there, that's having an influence on the longer end. So it's really that nebulous. term premium component of the long-term rate. And that could be any number of things. So the resilience of the economy, certainly.

So the term premium, you've got to explain that for folks. You know, what is the term premium? Well, in general, I'd say it's the compensation for holding on to a longer term that instrument, right? Ten years a long time, right? You have to compensate, generally speaking, the investra. so you have to compensate me for holding on to this debt for a longer period of time versus a shorter period of time.

Right. And that can be influenced by all sorts of things. I'd say it's a bit nebulous because we don't know exactly what's influencing. We can hypothesize what investors might be. We're very good at it, by the way. Of course. We'll get right to it. Feel free.

I'm going to throw out some things. Feel free. I'll throw out a few things. You'll tell me why I'm wrong. Then Marissa will come with the right answer. Yeah, that's a good idea. Good plan. So I'd say the term period of today could be influenced by the resiliency of the economy.

So investors assuming that the economy is going to be stronger for a longer. The deficits, there's lots of talk about government deficits, right, expanding government deficits, higher costs, right, related to those. And then the third would be quantitative tightening, right, that as the Fed is engaged in quantitative tightening, right, allowing the Treasury securities, that they have to run off their portfolio, that that also is influencing, you don't have this large buyer of treasury securities out there as we did during quantitative easing, and that could also be causing the long end of the curve to pop up.

Right. So what do you think? I think we're all reasonable. I mean, just to put a frame around what you said, and I think we've talked about this in the past, we kind of decompose the 10-year yield into three parts. Part one is the inflation expectations. And as you say, they feel anchored.

No increase there. If you look at, and I'm not going to explain what these are, but just get it out there. One year, five-year-year-fowards or five-year-year-forward. Those are no higher today, not appreciably higher today than they were, say, three, four, five months ago. And that's a really good thing because if inflation, inflation expectations were arising and that's the key to why long-term rates are going up, that will put pressure on the Federal Reserve to keep raising interest rates because obviously they want to keep inflation expectations tethered, anchored, because that's key to getting

actual inflation down. So that's good. Second part of this decomposition is expected real short-term interest rates, and that goes to Fed policy. And there, here I'm I might disagree a little bit. I do think they have increased over the last couple, three months, that investors have finally bought into the feds forecast for rates, which is higher for longer, meaning we're going to keep rates up for a while. We're not going to be cutting rates anytime soon, certainly not this year, probably not even in the first half of next year. And it wasn't until the last couple of Fed meetings and all the jaw boning and press conferences and everything else that comes out of those meetings that I think investors finally became convinced that, oh, and the economic

data, as you point out, the economic data has been very strong. Oh, yeah, okay, the Fed's not going to be cutting rates anytime soon. And that has pushed up expected real after inflation short-term interest rate. So it's not that the Fed has changed policy. It's just that the market's reading of that policy has shifted here, in part because the economic backdrop has been, has been good. I mean, the economy, as you say, is resilient and is showing strength. But the November hike. Oh, go ahead.

Now, I was just going to finish the decomposition. That's term premium, part three. And there, I totally agree with you. Hard to know. That's like not elsewhere classified. Exactly. Exactly. We don't know what that is. But it does feel like, you know,

all the Treasury bond issuance after the end of the debt limit drama, because the Fed, excuse me, the Treasury couldn't issue debt for a long time because of the limit. Once the limit was increased, then they issued all this debt. And that kind of focused people's investors' attention on the government's fiscal situation. And also the government, just the governance. You can see the chaos that's ensuing even today in the House of Representatives.

You know, how in the world are these guys going to get it together to address our long-term fiscal problems, which are pretty daunting unless the lawmakers make a change? You mentioned quantitative tightening. Yeah, I think that's on the margin. You know, going from QE, buying bonds to QT, not selling them, but not replacing the bonds that mature or prepay on their balance sheet. The one thing I would also throw in there, maybe said this, I missed it, is just, it's a market. It's a financial market with lots of momentum players, speculators, lots of technical forces

at work. And once, you know, markets move in a certain direction, they tend to take on a lot of, life of their own. These speculators take over for a while, not forever, but for a while. And, you know, you had some prominent bond investors, you know, talking up yields saying 5%, and, you know, here we are. So I'm guessing that that's also played a role. But that's how I would frame it. You were going to say something, though. Yeah, just on the short term rates, my point was that market has coalesced around this idea that there will not be a rate hike in November. And, not less and even likelihood for December, it seems to be, you know, sharply reduced.

But that's more in recent days or weeks. I think you're, you were looking at maybe a little bit longer time horizon. Well, even on that, I don't think the market ever bought into we're going to rate, they're going to raise rates again. I mean, remember if you go back and look at the futures market was, yeah, the futures markets were saying some much less than a percent probability, right? Yeah, but now it's zero, right? Yeah, yeah, yeah.

But I think what was, and that's probably probably November. But more of what's going on is this, these rates out into the future, you know, out into 20, 24 and 25, the market, I think, if you look at forward curves, they pushed up their expectations pretty dramatically over the course of the last two, three months. And that's what I'm talking about. That shift up is what was behind this increase in long-term interest rates. I think. I think that's what's going on.

But I agree with you. the, you know, if I had to say of that 150 basis point, 1.5 percentage point increase in 10-year yields to say from 3 and a half to 5, I'd say none of that's inflation expectations. I'd say probably half a point is expected real short-term rates and probably it feels like almost a point is related to this increase in the so-called term premium, which by the way, interestingly enough, is simply a normalization of the term premium, meaning before all this, it was negative, which pretty hard to explain. You can explain it, but it's really weird to have a negative term premium,

meaning that investors aren't demanding compensation for buying a long-term bond. They're paying for the benefit of buying a long-term bond. The privilege of, which is really weird. It happens, but it's really weird. So all that has happened is we've gone from a negative term premium, which is really weird, to a positive term premium, which is pretty close to its long-run historical norm. So it just feels like we've kind of normalized here. Okay, Mercia, you've heard this conversation. Anything you want to add in or anything to say about that? I think that all

aligns with the way I'm thinking about it. We heard from Jerome Powell yesterday, two days ago. And he reiterated the higher for longer notion, right? So I do think that he seems to indicate they're done, raising rates, but that they're not going to be lowering them any time soon. And he also, in his comments, addressed the long run fiscal situation of this country and was talking about the unsustainability of the debt burden over the long term. So I do think what's going on right now in the House of Representatives has to be making investors nervous about the ability to govern, right, and to tackle these long run issues. I mean, if we can't. can't even get a speaker of the House, and pass any bills, how can we tackle long run fiscal

problems. So I do think that some of that term premium is reflecting investors, yeah, feeling of that it's a bit more risky 10 years out into the future than maybe it was five years ago. Right. I mean, I think we all knew how risky it was going to be, even if government was operating reasonably normally, it would still be pretty tough to do the things they need to do. Yeah, they've never done it before, right? They always kick the hand down. Now you throw in. Now it's impossible. Yeah, it's like, okay. Yeah. Well, we have an election coming up next year. Hopefully that kind of helps out here. We'll see how that plays out. But, yeah, I know that feels like wishful thinking at the current point in time. Okay. So we've seen this increase in yield. We're up to

5% on the 10-year bond, 8% fixed mortgage rates. We'll come back to what it all means for the economy. But why, it doesn't feel like hair on fire. It doesn't feel like, you know, people are really that worried or panicked or nervous about it. I mean, my barometer for that is the stock market. The stock market, you know, it's got red on the screen, but it's, you know, the S&P 500 is at 4,000250, which is still within kind of the range it's been, you know, for the past more than a year. It's basically been flat.

So as interest rates have been rising here, the stock market hasn't risen, but it hasn't really fallen either. It's kind of hanging in there. You look at, you know, credit spreads in the bond market, other kind of VIX index, the other, you know, measures of perhaps investor angs. And you don't get the feeling that people or investors are on the verge of losing it. I'm sure that can change in an instant. We could see some big sell-offs here. That's very possible, but we haven't so far. Why?

You know, what's going on? Do you have a view on that, Chris? Yeah, I think for the, for most households and businesses are, they're fairly insulated from these great hikes, right? House, let's start with households, right? If you have mortgage, two-thirds of households have mortgages or have own their homes, half of those have own, have a mortgage, right? they've locked in this ultra low rate, three and a half, four percent. So for them, it doesn't really matter, right? Mortgage rate goes to 8%. They're not moving. They would no plans to move when the rate was at 6. They still don't plan to move when it's at 8. But they're just paying that

monthly bill, very predictable, right? So no problem for them. There is, you know, some increased use of credit cards. So that is adjustable rate. So there you will feel some of the pain. But that, again, is tied more to the short term or the short end of the curve versus the long end. So there too, you know, it's high. Don't get me wrong, but it hasn't really shifted all that much because of the rise in the tenure. Then businesses, too, they've, a lot of corporations certainly have borrowed already in anticipation that rates were going to rise at some point.

So they don't only need the capital right away. So I think that's why there's a moment of calm here. if this persists or if rates were to go higher for an extended period of time, that, of course, would be more negative. Then you'll start to see more red on the screen. But for the time being, I think by and large, most households, most businesses, relatively immune from the effects. So my interpretation of what you're saying is it's not like hair on fire out there because the economic fallout of a 5% 10-year treasury yield and 8% fixed mortgage rate is, okay,

it's definitely negative, but it's not a big negative. The economy can digest that. So I'm an equity investor. I own stock. I'm not going to be buying in that environment in that situation, but I'm not going to be selling at that point. Okay. Okay. That makes sense. Marissa, what do you think? Why such a sanguine kind of perspective on all this? I agree with Chris. I think people haven't had to face the reality of 8% rates yet. We know that the vast majority of homeowners, like 70% have a mortgage rate under 6%. So the housing market's not going anywhere. And we saw that this week and the housing statistics, right?

People just aren't going to move. They're going to stay in place. Sure, adjustable rate debt and auto loans, right, which are a bit longer and are facing higher rates. but that's a small part of the overall economy. They still have a lot of saving, and I think we'll talk about this too when we turn to the consumer.

They still have a lot of savings. So they're not having to dip into these revolving debt instruments to the extent that they're really going to feel these higher rates yet. So yeah, I just think that they haven't had to face it yet. Now, I would say there is a lot of corporate debt that will come due. in the next couple of years. So there will be businesses that are going to be faced with having their loans come to do in a high-rate

environment and they're not going to want to refinance it, the rates that are out there now. So that's something maybe we can talk about or consider of how big of a chunk of, you know, of the economy is that? And does that pose a risk economy-wide? But in terms of the consumer and households, they're just insulated for the time being. I mean, if this continues for a couple of years and excess saving is completely drawn down by a lot of households that need cash for spending, then we might be looking at something different. You know, we might be looking at a riskier situation. But I think right now they just don't need loans at 8%.

Maybe the other reason, and I agree with all that, although I want to come back to the corporate debt. I'm really curious what data you're looking at. In fact, maybe we can bring that up and I just got a stat for the stats game. Oh, I hope I didn't give it away. Corporate debt. Actually, it's more the commercial real estate debt. Oh, CRE debt. Yeah, right, right.

So I think the corporate debt is not that large, but the CRE debt coming due over the next couple years is big. Yeah. Okay. Maybe the other reason why no hair on fire kind of reaction is people think Rachel are going to go back down. You know, the odds that we go from five to six is a lot lower than the odds we go from five back to four, right? That would be my, that's my view. I mean, if you, if you kind of step back and say, okay, fundamentally, what's at the top of the list of the reasons why yields are higher, what we're basically saying is it's kind of a stronger economy. The economy's been strong. I mean, our GDP, real GDP tracking estimate for the third quarter, just in the third quarter, and we're going to get GDP next week, is around 4%. That's

really pretty strong growth. And that's, that's not some one-off thing. That's strength across the board. Consumer spending, business investment, government spending, the whole shoot match. And that's double the rate of the economy's potential. But we do, at least I think we know, that it's going to slow pretty dramatically in the fourth quarter and first quarter, right, because of all the headwings who have been talking about student loan payments, UAW strike, government shutdown, the higher oil prices, now the higher long-term interest rates. So the gross slows, that feels like it's going to take the steam out of things, ring out those speculations, and momentum players that we were talking about, you know, maybe cause bond investors

have become a little less nervous about what the Fed's going to do on short-term interest rates, and we get interest rates coming back in as opposed to going higher. And so you've got that view that, well, you know, this isn't great. We're at five, but that it's, no, we're not going to six. We're more likely going to headed back to four than no, no problem. Does that, does that resonate? Yeah, and that is our forecast, right? By the end of the next year, we see the Fed lowering rates.

starting to think about lowering rates. So even if rates stay high for 2024, I think most people think, well, you know, I can tough it out for another year. They'll be headed back down by 2025. Yeah. Yeah. What do you think, Chris? Is that bringing true to you that argument? It does. I'm wondering, are you adjusting your bond portfolio? Should I call my broker? I haven't. I've been thinking about it, though. I've been really in, I've always, I've been in short bonds, a lot of municipal's for obvious reasons. And I buy the bond. I don't buy a bond fund. I always, that always makes me nervous. But I've been in short term bonds. And I wonder, feels like, geez, this feel five. What are the obvious, you said for obvious reasons.

What, it's not, why are you? I pay a lot of taxes. Sorry. Yeah, exactly. So, so, but I've been thinking about that. But okay. And in terms of, it sounds like, the third question I asked was, what's the ramifications of this for the economy? It sounds like what we're saying is, is the reason why no one's hairs on fire is because, you know, it's a headwind, but it's not going to blow the economy over, at least not by itself. Is that right? Not yet, right? Yeah. Yeah.

Yeah. This is new news, right? Yeah, exactly. As this persists, things will change, but. Right. The rates can be back down next week, right? Right. I am thinking that our forecast, you mentioned our forecast, Marissa, may be a bit too optimistic,

meaning we've got... Push it out further. Yeah, we've got yields coming back to four, even a little bit below, and kind of that's where we have the... That's where we expect them to remain. That's kind of the... For a long time, we've been thinking that 4% is kind of the long-run, equilibrium 10-year treasury yield, that that's consistent with nominal potential GDP growth,

and the long run, those two things should be roughly equal. I won't go into reasons why we talked about in the past, but that's kind of the stake in the ground that we use. But I'm wondering, if not, the stake in the ground should be at four and a half, four and a quarter, because the economy is so resistant to these higher rates for, you know, the reasons you described, that are kind of features of the... the economy that have developed over the course of the last five, ten years. You know, the fact that rates are so low and households and businesses locked in those

low rates, that's kind of sort of unique to the period, right? And it does make the economy more resistant. We can talk about other ways that the economy is more resistant to interest rates, but that's the obvious, one of the obvious ones. Therefore, to get the economy to a growth rate as more consistent with this potential, maybe for a while we need to see higher yields in, we thought, not 4% but maybe, as I said, four and a half percent. That also goes to the kind of the long run equilibrium federal funds rate target, the rate

the Fed controls, you know, the so-called R-Star, similar kind of arguments. Maybe that should be a little bit higher, you know, up to now it was two and a half. Maybe it should be closer to three. You know what do you think, Ms.o, is I making sense? Yeah. Yeah, I think that all makes sense. I mean, the interest rate sensitivity of the economy really hinges on housing, financial markets, right? Loans that households and businesses take out.

And as you said, we're very much insulated from much of that. So I think psychologically, households probably aren't even probably. processing that interest rates are so much higher because they're just not really having to face it unless you're looking at putting your home on the market or buying a house right now and you realize mortgage rates are 8%. But we were in a period of, I mean, pretty much my whole life that I can remember, you know, we've been in a period of very, very low interest rates. So I just think people don't most, there's a lot of people out there that this, they haven't processed. this kind of new world order with interest rates yet. And you're right. I think it's going to take a while for this to manifest itself in the economy. I wonder, you know, if I wonder about your opinion about you mentioned corporates had locked in low interest rates as well. What about other segments of the economy where loans will come do? What are you thinking about? I mean, there's the household sector they've locked in, the corporate sector.

commercial real estate. Yeah. You mentioned CRE. We've done a fair amount of work. It's not inconsequential, but it's very manageable. I mean, if you look at the mortgage, CRE mortgage debt that's coming due through 2025, by our calculation, it's $1.5 trillion. Now, that sounds like a lot, but, you know, in the grand scheme of things, not so much. And in the office market, the CRE mortgage loans for office properties, you know, that's, you know, three, four hundred billion in the banking system, $100 billion over that period. So not inconsequential, but, you know, it doesn't feel like the tsunami of debt's going to come pouring.

And the other thing is we're seeing a lot of forbearance, I think, being shown in that, in banks are showing a lot of forbearance on the, when loans are rolling over and need to be refinanced. They really don't want to push an owner, you know, over the, over the cliff and into default, because they know that it's going to lead to distress sales, more price declines and make everything even more difficult. And even the regulators, I think issue guidance. When I say regulators, I mean the Fed and the OCC and they have to say, hey, guys, you know, and they didn't say this explicitly, but this is what they meant, you know, be judicious and how you do these things. We really,

it doesn't make a whole lot of sense to push a lot of people, you know, into default. So. Yeah. But nonetheless, you know, there is debt coming. And to both your points, the longer rates remain high, you know, and stay there, the more difficult all this becomes and this debt rolls. Here, I wanted to mention one other thing, though, that goes to the point that the economy is more resistant to rates, and that is the most rate-sensitive sectors of the economy is our single-family housing in the vehicle industry. This goes to the consumers.

And for very idiosyncratic reasons to this period, those two sectors, you know, those two sectors are less vulnerable to the higher rates. In the single-family housing market, it's because there's a shortage of homes. There's an affordable, we've got a lack of affordable homes. I mean, vacancy rates, the homeowner vacancy rates at a record low. And so that cushions the blow, you know, from the higher rates. Certainly on home building.

I mean, not home sales, but home building in-house prices. And in the vehicle sector, you've got probably got some pent-up demand, right? because during the pandemic, global producers couldn't produce. So Scott prices went skyward people couldn't buy. And there's a kind of an underlying latent demand for new vehicles that is also putting a floor under vehicle sales and making it, you know, unlikely that we're going to see big declines in vehicle sales, even in the context of higher interest rate. So those two rate sensitive sectors of the economy are much less sensitive today. again, because of the kind of the features of the current economy. Does that resonate with you, Chris, what I just said?

Did that make sense? It does. Okay. Yeah, it's a bit of a mixed bag, though, right? It doesn't, yeah, there's some resilience there, but that doesn't necessarily help our inflation project, right? Yeah, but that's because you're wrong about inflation. You keep going back to demand. It's not about demand.

It's all about supply. And inflation is coming in. Do you think the supply is going to ramp up in housing anytime soon? Yeah. The multifamily side, yeah. It's coming in. Oh, the completions. Completions, yeah.

Okay. In terms of rents, which is what matters in terms of measured inflation, right? So, yeah, I actually think so. And on the vehicles, I do expect on the other side of the UAW strike, obviously, but I do expect we'll see a lot more supply there. And that should bring new vehicle prices down at some point. for the next 12-18 months. So yeah, absolutely.

I'm counting on supply. Yeah, for sure. Hey, anything else on long-term interest rates while we're on the topic before we move forward? Anything I missed? Anything you want to say?

Just going, going. What's the yield curve looking like? Oh, that's an interesting question. I mean, because... That's an interesting question. Oh, that's really interesting. Because it could be soon not inverted. I know.

Well, let's not go. crazy now. Okay, so the 10 years at 5, the federal funds rate target is somewhere between 4 and a quarter or 4.5. Let's say 435, excuse me, 5 and a quarter, 5 and a half. Okay. So it's, let's say, 535.5. So it's 35 basis, 0.35 percentage point difference, inverted. 10-year yields are, the Fed funds rate is above the 10-year yield. That's within spitting distance, though.

Yeah, it is. And if you do, you know, the two-year is. 509. This 509? Yeah. Oh, that's really spitting distance. Yeah. That's a spinning distance.

Yeah. I don't know. You know, if you go back in. You know, does it even matter, though? Well, it is interesting. Go ahead, Chris. Go ahead. Say what you want to say.

If you go back to the economic history, right? Oh, boy. It's the, it's not the inversion that leads the recession. It's the re-inflation or the steepening of the curve after that. version that then is correlated with the recession after it. It's the next step. So the curve inverts, then it becomes positively sloped, and then boom, you're in recession. You're in recession.

So I don't know if we want this. But here's the thing about that, Chris, because that dawned on me. So I went and looked. Let me ask you historically, why does the curve reestablish a positive slope right before recession? What is it, what's causing that? Is it the, is it the short term rate? The Fed's cutting, right?

The Fed's cutting. Right. Right. The Fed's, and it's not about the 10 year yield rising. It's about the Fed. So it's the short end of the curve. The Fed says, oh my gosh, I screwed up. I pressed on the brakes too hard.

We're going in. They then take their foot off the brakes, slam on the accelerator, and the funds rate declines, short term rate declines. So that's, you're already in, you're already going down the, the, the, the, the, the, simply, slippery slope into recession because and the Fed knows it and everybody knows it. Yeah. This time is different. You said it, not me.

Oh, God. You both said it. Yeah. You're finishing each other. I'm not kidding, right? So it's all about the 10. Well, that is what is happening right now. Yeah.

For sure. 100% for sure. 100% what is happening right now. This is totally different if it, if the curve goes positive again, totally for totally different reasons. Yeah. So anyway. Let's play the game, the stats game.

The game is we all put forward to statistic. The rest of the group tries to figure that out through cues and clues, deductive reasoning. The best stat is one that isn't so easy we get it immediately, one that's not so hard that we never get it. And one that's apropos to the topic at hand. We've been talking about interest rates, but we are going to talk about the consumer. And, of course, you can talk about anything you want. You can have a stat about anything you want. So tradition has it, Chris.

I nearly blew this last week. Oh, did. Yeah, I did. I nearly blew it. Marissa, you're up. Okay. I think you'll get this. So I think you're going to get it, Mark.

Oh, just Mark. Oh, wow. You'll probably all get it, but Mark is definitely going to get it. Okay. Now I'm not going to get it. But I like it and I want to talk about it. So that's why I'm using it. Okay.

So don't be rate me for using a statistic that's too simple. Go ahead. Yeah. Excuse me. $192,900. $192,900. $192,900? Correct. Oh. Really? Oh, yeah. Come on. Oh, really? It's really that simple. David, do you have any idea? No, I don't. Federal Reserve, Marissa? Yeah. Source.

A survey that came out recently? Survey of consumer finance. Clearly you know what it is, Chris. Is it net worth? Is it median net worth or something? That's right. It's median net worth in 2022 of U.S. households. Yeah, I was going to say 37%.

But I knew you would know that. Okay. So the survey of consumer finance came out a few days ago. And it covers, it's the first one of these surveys that the survey happens every three years. It's the first look we have at kind of pre-and-post-pandemic view of household finances.

And it's chock full of really cool data. So we get data on income, net worth, assets, debt, all kinds of things. They ask questions about COVID and work experiences during the pandemic. So the median net worth of all households rose 37% between 2019 and 2022. And that is an all-time record as far as this survey goes back. And if you look at the previous record, this is more than double that. So it was, the previous record had been an 18%

rise in median net worth. That was right before the great financial crisis. Media net worth for households rose 37%. Mean net worth rose 23%. So there's actually some compression between the bottom end of the income spectrum and the top end of the income spectrum in terms of net worth. That wasn't the case with incomes. So when you adjust for inflation, incomes rose 3%. And it was like 20 something percent before inflation. There was greater income inequality. But in terms of net worth, there was actually a little bit of compression between the top and the bottom. So 192,900 is the actual dollar amount of median net worth that households have. And it accrued to pretty much every demographic group. So that's true up and down the income scale. It was true of all ages, all races, all ethnicities,

education, generation. So it truly showed us what we already knew, right, because we've had estimates of excess saving during the pandemic. We obviously know how very strong the consumer is, how strong the job market has been. But this really shows us that households were able to really sock away a lot of money up and down the income spectrum during the pandemic because of the stimulus that a lot of households got directly. We had the forbearance on all kinds of debt going on. we had expanded unemployment insurance benefits, expanded other sorts of federal benefits like food stamps. So we had PPP loans, right? So all this stimulus in the economy at the same time that we couldn't really spend money on services. So people really were able to save and net worth. If you

look at the components of it, too, you see more people were able to start or contribute to retirement accounts, more people own stock than they did before. These things are modest, but you see it kind of across all of the different income categories. And at the same time, we saw debt not really change very much. So people did not take on more debt during the pandemic, generally speaking. I mean, of course, there are different outcomes, right? There's a lot of people that lost jobs during the pandemic, and they obviously didn't fare as well. But debt was pretty tame in terms of of the change over that period and just debt service actually fell to a 30-year low over that period of time too.

Yeah, do you know the survey of consumer finance triennial in three years? When in the year is it conducted? So when they say 2022, when in 2020? Yeah. So actually it does capture, it goes through April of 2022. That was the last month where they were conducting the survey. So it does reflect sort of the start of the, right, after Russia's invasion of Ukraine and the Fed had started to raise interest rates in March. So we do get a little bit of that. And of course, inflation had been high prior to that, right, just with the reopening of the economy in 2021 and supply chains being gummed up. So we were already in a higher inflationary environment. And then the Russian invasion of Ukraine put even more pressure on that. So there was some of that captured in this survey. Although if they do it over the course of several months, though.

But if they do it now, if they did it now, it wouldn't look nearly as wow, right? Sure, right. Yeah, because stock prices are down, housing values are down. So I would think it's still up a lot from where it was pre-pandemic, no doubt. People are still a lot wealthier, but not nearly as wealthy as those data seem to suggest. Yeah, I mean, we had a 40% increase in housing. prices over a two-year period. And this reflects that housing inflation and the stock market had done really well, right? Then it kind of tanked throughout 2022. Home values went nowhere or fell slightly.

So yeah, it does not capture the decline in asset values that we saw through much of 2022. Yeah, but it's a good statistic, particularly in the context of the consumer, which we'll get to just after this. Hey, David, do you want to go next? Yeah, I love to. So my number, it's 20.5. This is a number that it didn't come out this week. It was released earlier this month. That may be a bit of a hint, but 20.5. 20.5. And this is a percent?

It is a percent, yep. 20. 5 percent, yep. Credit related. Consumer credit related? Is it a growth rate? No. No.

And is it a government statistic? It is not a government statistic. Oh, it's okay. Is it from the Equifax data? It is. Okay. Is it a, you said it was not a growth rate? Is it a share?

Yeah, a share of something, yes. Share of something, okay. So the share of households that have a consumer finance loan. It's, I would say it's more of a share of a different type of statistic. Is it a it? of a different type of statistic. Yeah, so it's one portion of another statistic. I don't know if that makes any sense.

Yeah, so you're, boy, it's not something like the... Two numbers. It's a division that's going on here. Yeah, right. Yeah. It's not a delinquency rate. Is it? No.

It's too high. It's some sort of debt service. Getting closer? I don't know. No, but somebody, you know, David comes up with these weird statistics. Yeah, yeah. Let's see. It's a statistic on something that you all have, I presume.

An auto loan. No. There's even more of the matter that. You might have a couple of them, maybe. Credit cards. Power washers. Credit cards. Mark's wealth is in power washing machines or power washers.

They got to finance them. Geez. Yeah. So something related to credit cards. Credit cards. Oh, well, oh, no. It sounds like a credit card interest rate almost. Is it the percent of households that have more than three credit cards?

No, no. It's a measure of how much households are stressed, but it doesn't have anything to do with delinquency. It's something to do with credit cards. Is it like the share of the balance they're carrying over from months to month? Yeah, the utilization rate. Oh, okay. Okay.

So the utilization rate is 20%. 20.5%. Exactly. 20.5%. And the reason I bring that one up is that it's getting very close to where it was prior to the pandemic. So if you look, you know, it's obviously seasonality in credit cards. but that's, you know, when you look prior to the pandemic, September, so this is a number from September, September 2009, it's 20.7%

and right now it's 20.5%. So what that says, right, the utilization rate is it's almost where it was prior to the pandemic. We haven't got there yet, so it's going to seem a little bit boring, but it was increasing pretty rapidly. we've seen growth in the credit card space, credit card balances. It's been pretty aggressive. It's been slowing. It's been still coming in.

But we're still seeing some growth and we still have some room to grow on the credit card side. So this does suggest that households are, you know, still have some wherewithal and can still continue to borrow. But their borrowing is increasing. And when we think about that, you know, that conversation we had about the interest rates, right, that any balances that they're paying interest on is going to be quite expensive, right? So that's going to start to be something to continue to watch. But right now it's still manageable. We're almost right back to where we were prior to the pandemic.

Right. I'm sorry, go ahead. I was just going to say maybe you should define the utilization rate for listeners who may not know. Oh, yeah. No, that's great. So this is basically the balance relative to the total credit lines outstanding. So total balances divided by total credit lines outstanding for the, the population in the United States.

So it's essentially the fraction of the credit card line that's being used. The higher the utilization, the more stress that these borrowers are, the more likely they're going to turn to revolvers pay more interest. And I got cut off because of my Zoom problems, but you said the utilization rate on cards is 20.5. What is it typically? So just prior to the pandemic in the same month, it was 20.7. So it's been rising.

We're almost back to where we were prior to the pandemic, but we're still not at the level where we were prior to the pandemic. So we understand mortgage finances in pretty good shape. But when you look at credit cards, by this measure, if you look at utilization, we're still, we're still okay. But it's definitely been the fastest growing consumer credit segment out there. Okay. So we're just back to pre-pend.

We're not above pre-pendip. No, and I think the question, no, we're not back to where we were. I mean, there was a lot of headlines out there about the- Well, there's no difference between pre-pendomendom. 20.5 and 20.7, is there? You're not saying that. No. No, I mean, we're essentially where we were the difference is, yeah, right. Yeah. Yeah. Right. Thank you. Thank you. According to my calculations. For that person. Calculation. Okay. Very good. That was a good one. I had a quick question on that one. Do you know if that's, is that more, people who typically revolving or just revolving more, they're taking on more debt? Or do you see more people who

are typically transactors, they usually pay their balance off every month, but now they're starting to revolve more. I think the dynamic could be different. Yeah, it's a great question. I think we are seeing fewer revolvers prior to, prior to the pandemic. So when you look at things like the utilization rate by different credit bands, you're actually seeing that the utilization rate is pretty much lower in every single band except for the highest credit band. So what I'm saying is that subprime borrowers are using the cards less than they did prior to the pandemic, the typical subprime borrower, but the very highest segment, the superprime borrowers are actually using the cards more. So when you think about some stories out there about retail spending overall,

you know, and a lot of additional spending by wealthier or more established people, that's very consistent with that superfying population, just using it for more transactional purposes and not necessarily revolving. So that's the only sliver we're actually seeing high utilization rate is really the people who are unlikely to really need the credit cards for revolving purposes. I see. So could that be just inflation related? People are swiping for gas, gas costs more.

It doesn't only point to stress. No, no. Yeah. And I don't think it's point to stress at all. I think it's just there are swiping more. You're right. It could just be gas prices. It also could just be that this wealthier, you know,

the wealthier part of the population potentially is just spending more overall. Okay. Yeah, that was a good one. Very good. Thank you. Chris, you want to go next? Sure. 4.5% and 13.8%.

The same statistic just for two different. government statistic government statistic retail sales no came out this week came out this week consumer related yes okay mercy you're pretty good at these uh four and a half and is one like month over month and one year over year well they're both year over year they're both year over a year. Yeah, what else came out this week? There was housing data. Yeah, there was housing.

There was existing homes sales. Anything on existing home sales? It's not housing related. It's not housing. It's not housing, consumer related. Yeah. Huh. The beige book.

Can you give us a hint? It is income related. Income. Oh, is it average weekly earnings? You got it. You got it. Four and a half is the total, right? So full-time workers, weekly earnings went up four and a half percent over the last year.

Any guesses on the 13.8? It's also. Leisure hospitality. No, same report. Just a different demographic. Yeah. Who's up 13 and a half? Wow.

13.8. 13.8. It's a demographic group. It's not an industry or something. Correct. The young or the old? Yeah, the young. It's got to be the young, right?

No, it's the old. Really? 65 plus wages up 13.8%. What's that all about? It's a complete reversal, right? You're right. Yeah. Recently it was the young getting the big.

Yeah. I don't know. There's no detail, but... Oh, interesting. They also had a 7.7.6% increased last quarter, so it's not just one. job switching. Possibly. By the older demographic.

Yeah. How old? 65 plus. Yeah. That's weird. It could be a mix issue potentially, right? Yeah. It could be just data.

Usually when you can't explain it, it's the data problem. Or we like to think there's a data problem for sure. Yeah. It doesn't fit the narrative. Doesn't fit the narrative. Yeah. Interesting. But the 4.5.

was the metric to focus on, right? Because that is coming in. It was 5.7% growth last quarter. right so that wage growth is slowing okay good right yeah okay good let's uh let's move forward uh and talk a little bit about the consumer and let me preface this by saying i sent an email to you guys earlier in the week and said what do you think we should be talking about this week chris you came back and said the consumer and uh because it intimating that the consumer is fragile in some way, and that might be some kind of threat to the economy. And I immediately thought the opposite, the consumer's in really good shape and doing their part and hanging tough. And one of our other colleagues, Scott Hoyt, who we tried to get on because he follows

the consumer carefully, couldn't because he's away, sort of said the same thing. He goes, what are you worried about? What's what's concerning you? So, what's concerning you? What's going on? I mean, why are you worried about the consumer? Well, we're future focused, right? So, I'm worried that the consumer is going to face, is facing headwinds, right? The student loan debt is one of the headwinds you mentioned earlier. David, I think alluded to debt growing, right? So particularly credit card debt, which is adjustable rate. So certainly there are some threats here. And we are projecting a slowdown in the economy overall.

So some of these had some of these tailwinds in terms of labor market and wage growth, right? They're not going to be blowing quite as hard. So I think we need to continue to focus on the consumer because the consumer is really in charge here of our economic futures, right? So that's the, that was the motivation. I agree with you. Current data or most recent data, no problem, right? Things are looking even better than expected.

Right. But higher rates, you know, going into an environment, potential slowing. Right. What we expect. I mean, it would require, right, because right now the consumer is hanging tough, doing their part to describe it how you want to, but the numbers look pretty good, right? I mean, overall, real after inflation consumer spending is 2%. is, give or take, depending on the month.

It's exactly where you'd want it to be. That's strong enough to keep the economy moving forward and not too strong to feigned inflation or paying inflation to any significant degree. And all the fundamentals look pretty good to me. I mean, jobs, low unemployment, wage growth is moderating, but it's now growing more quickly than inflation, particularly for low wage workers. leverage is low, debt service is low, people have locked in as we discussed, net worth is up, you know, asset prices are up, they're not as high as the survey consumer finance says

because it was done early in 2022, but still people are in pretty good shape. A lot of excess saving. We can a lot of debate as to how much, but no matter how you debate it, there's still plenty there for middle and high-income households. So you kind of scan the income and balance sheet of households. You say, you know, yeah, I mean, there's always things to worry about, but broadly speaking, it feels like it's on pretty solid ground. No? Yeah.

Yeah. Currently, there are pockets of risk, though, right? Delinquency rates are rising, right? Well, let's take it. Let's take one at a time. Okay. Let me, let's, I'm going to play economist psychiatrist. You, you're always so worried.

Let me, let's just, let's just, let's. unpack your fears, Chris, and let's take them one at a time. Okay. You mentioned delinquency. Is that where you want to start? Is that your darkest fear for the consumer? It's one of them. Okay.

Let's start there because we've got David. We've got the specialist in the house. So, okay, what's your fear? Articulate your fear on delinquency. I guess it's on debt, consumer debt and leverage. Right. Yeah, in terms of... Not you, David.

First, Chris. Chris is on the couch. Chris is the one that's scared. Chris is the one who's scared. We're going to listen to his fears. And then I'm going to ask you, make him more scared or make him less scared. You're going to play, you're going to play specialist. But go ahead, Chris.

What's your, what's to articulate your fear? Sure. So revolving debt is increasing, right? Borrowers are continuing to add to their bank card, credit card balances. particularly for lower middle income households, right? So that is going up. I don't think there's any debate around that. Interest rates are high and no sign that they'll be falling anytime soon.

So those monthly payments will continue to rise. The delinquency rates are rising today. They're at levels that are, let's focus on credit card. That's probably where my biggest credit card consumer loans, probably my biggest fears. those delinquency rates are rising. They are either at or above 2019 levels, and that's occurring at a time when the unemployment rate is still relatively low, and we projected to go higher.

So those delinquency rates are bound to rise further. The fear is that given this environment, you'll see more consumers having to cut back, having to pull back, that certainly could lead to higher losses, higher defaults in terms of banks, tighter lending standards, and then just a more general slowdown in spending growth. Okay. So, David, is Chris on solid ground here? Has he got good reasons to be nervous about what's going on?

I think there's definitely some reasons to be concerned. I'm going to try to be a little more optimistic. Sometimes I come on here, a little pessimistic here, so I'll try to take a counterpoint. Yeah, yeah, I want to know your real, real feelings. Yeah, you know, I'm definitely concerned about the pockets. So you see the finance loans that are out there. There's definitely been some bad loans that have been issued since the pandemic. There's seen very high default rates.

If you look at subprime auto, especially in the used cars market, very, very high default rates, very, very high delinquency rates. But that is a very isolated set of loans and consumers. I think you've seen on personal loans, especially finance personal loans, high delinquency rates, high default rates there, higher than, you know, prior to the pandemic. So those are areas of concern. However, there's been tightening overall. So you have seen tightening in the finance lending overall. So we're not having loans just issued to anybody who maybe can't, doesn't have the capacity to repay them. Lenders have been tightening for last year. And we've really seen that come in.

So I think that's a reason to be optimistic. And so some of those higher delinquency rates are just coming from those bad loans. And if we don't have the poor issuance anymore, tighter lending standards, we should see some of those delinquency rates potentially come in a bit. Now, Chris's point, though, is very valid that there are some high delinquency rates overall, and the economy is in really great shape. So what happens if the economy deteriorates? That would be my biggest concern is where does the economy head?

And then the other, you know, the other concern I have is really, you know, is the current debt levels sustainable for a wide portion of the population, given where interest rates are. So if you look at the credit cards that are being assessed interest rates, interest right now, you're seeing interest rates around 23% for credit cards prior to the pandemic. That was closer to 16, 17%. So, I mean, that's, that's a meaningful difference. If you start revolving on the credit cards, you start revolving on those cards, very quickly things can get out of hand for some bars. So we don't have a ton of revolvers right now out there based on historical standards, but there are some. And I think that could be quite problematic.

Feel any better, Chris? Or I don't know, he said he was going to be more optimistic. I'm not sure. I mean, you brought up three other reasons to worry. I don't know. Yeah, yeah, I don't know. But I always talk myself in there, but I will say here's some reasons So be optimistic. Mortgage financing is in great shape. So we've talked about that. When you look at things like the Pulse Survey, how households are facing a potential hardship, that's actually improving.

So more households today are indicating that they're going to be able to make their payments than they did a year ago. And it's been sort of improving over the last couple months. Just for the audience, the Pulse Surveys, this special survey census has been conducting since the pandemic on an irregular basis. And it's very detailed in terms of the questioning. And you get some really good granular information about things like how hard it is for the folks to pay on their debt by income, by age, by different demographic groups. And you're saying that feels like it has a better tone to it.

That's what you're saying. Yeah. It's more households are indicating they can make payments today than they were several months ago a year ago. So there's been some improvement in the trajectory there. So, you know, some of that sense with inflation coming back in. And the job market's strong. That's remained strong, yeah. Yeah.

Here's the thing, Chris, that I take Solison. How much card debt, here's a good statistic. How much card, David, I know you know this. I'm sure Chris knows it as well. But how much credit card debt's total outstanding? Was it 900 billion, a trillion dollars? Trillion now. Trillion.

It's about a trillion. And of course, that includes everybody, right? Folks like me who were, you know, I don't borrow against the card, but I use the cards a lot. And that's reflected in the data. So a trillion. How much consumer finance is there? That's buy now, pay later, you know, all the consumer finance stuff. How big is that, do you think?

David, you probably. $100 billion, probably. And how much? $200, there's different estimates, $250,000. Give me the highest one you got. I think it's around, you know, $250 billion. Yeah, $250 billion. Okay.

Take subprime auto. How big is that? The whole shooting match. What do you think? Four or $500 billion? Yeah. Maybe, yeah. If that.

Okay. You add that all up. I mean, $2 trillion. Well, that, on the cards, I'd say no more than half of that is a real debt. Okay. So maybe it's a trillion. in debt that you're worried about.

But in the grand scheme of things, there's what, what a total household liability? 16, 17 trillion, something like that? Something like that. So I don't know. It's hard to get worked up about, I mean, I'm not arguing it's not an constraint on particularly low-income consumer spending,

but it's hard to get to a place where it could be existential in some way to consumers. The thing that really dings consumer spending in a meaningful way. No? I agree with that, but what about some of these households that might be stressed now having to pay back student loans as well? Talk about that, David. I mean, you're pretty saying one about that, too, right? Yeah. So the great thing with the resumption of student loans payments is that there is a on-ramp period for all of this, right? So it's going to take basically a year until next October before we reported to the Bureau. The government's letting everybody sort out new servicers and everybody getting used to paying again. So I think what's going to happen

here is that you will start to see payments resume. We are seeing student loan balances being paid off at really at a record rate by obviously the people who are ready for this. And for those who aren't, they're going to have a year to adjust. I think you'll see people making payments. The only real negative of not making payments right now is that you're going to be assessed interest rates or interest. So you want to start to pay back that debt to avoid occurring additional interest. And you'll see people start to pay that back. They're going to start to work through their precautionary savings. So that's maybe a concern that's out there. So you're able to pay your student loan and your credit card today. But you know, it's going to, you're going to start

to draw down on your excess savings. Eventually, you know, you get into trouble. Let's say it's next year. now you don't have the same level of savings. Now you have trouble making the payment to that credit card because you already started paying this student loan. So I think there's a bit of concern out there, and we do see a correlation between student loans and unsecured debt overall. So those are the categories where people may have trouble making payments.

But overall, because of this on-ramp period, it's going to be a very soft easing back into the world of paying student loans again. Okay. And those loans typically have low interest rates. Low interest rates on the loans, right? Yeah. Yes, but they are rising.

The student loan debt interest rates are rising. So the direct federal student loans are pretty reasonable. Definitely nothing like a credit card or subprime auto loan, but they are rising. So it's another fallout from these interest rate environment that we're in. They're tied to the tenure, aren't they? Yes, yeah. The federal vac loans, right?

So it could be, for new borrowers, it could be an issue, right? Yeah, it could be an issue. Yeah. All right, Chris, what else is bothering you about the consumer? Leverage. I mean, I don't mean to dismiss it either. I agree with you. That's definitely a soft spot.

In a high rising rate environment, it's going to hurt. There's no doubt about it. You throw in the student loan payments. It's definitely going to take some steam, some starch out of particularly low, low, low middle-income households in their spending. So I don't mean to diss it or dismiss it, but what else is bothering you? Yeah, it's on the margin, right? We're talking about margin matters, right?

Yeah, yeah, absolutely. What else? Well, certainly the labor market has to be front and center. Yeah. And we have a labor market projection, certainly that is calling for some slowing. It's not going off the cliff, but there's risk there, right? Right. You get an unemployment rate north of four for and a quarter percent.

You know, on its own, it's not a recession necessarily, but it is starting to do some damage in terms of spending power. Right, right. Yeah, that's a difficult one because it's very simultaneous, right? We're saying the consumer is going to hang tough, therefore the economy's okay, but if the economy's not okay, then the consumer is going to be suffer. It's like, you know, with the modality here, you know, it's pretty difficult to get your mind around it. But what you're saying is if something kind of pushes the labor market more off the rails, it's, we expect it to slow under the weight of all these things we've been talking about, interest rates, so forth and so on. If it slows more than we anticipate, then it could do more damage to consumers and then it becomes all self-reinforcing downward. That's what you're right.

Yeah. Yeah. Okay. But something else has to come or, I mean, at least in our thinking, if we've got it roughly right, something else has got to happen for that to occur unless we got it wrong, unless the slowdown is going to be much more substantive than we're dissipating in terms of job creation, I guess. Yeah, there has to be another trigger. It has to be something else.

Yeah, it's not on its own, right? Yeah. Conditions look strong in demand for labor is strong right there. Yeah. There isn't any reason to believe that, you know, labor market's going to go sell, but it could be, you know, higher for longer interest rates are going to actually do more damage than what we've anticipated here, right? So just as one example. Or oil price shocks. That's probably another key consumer factor that worries me is that you could get another surge in gas prices here. But, you know, thinking about it from the prism of the consumer income statement and balance sheet, I mean, the kind of the only kind of soft spot that you can identify is leverage among low income households, a debt service, those with cards, subprime auto, student loan, maybe. but there's not something else in the income statement or balance sheet that's got you worried. It's something else out there that has to happen to cause consumers to pull back and then you get into a kind of a self-reinforcing cycle down.

But there's nothing else. I'm asking. There's nothing else. Yeah. Again, on its own, I don't see that we could have a, I think it's unlikely that we would have a truly consumer-driven recession where consumers, for no other reason. and, you know, except for the debt that they've incurred, slow down their spending and push us into risk.

I agree, there has to be some other factor that has to be layered on top. Yeah, because in times past, if you look at other periods prior to recession, the consumer, there were more issues, it seems to me. You know, there was more what I'd call spent up demand. People had bought forward, you know, in the vehicle industry, that was common, that the vehicle producers would provide these big discounts, zero rate financing, pull forward sales. So when things started to soften up, people really pulled back because they have bought ahead of time. Or, you know, asset prices fell sharply, you know, the stock market cratered, you know, down 20, 25 percent,

and stayed down and, you know, knock the wind out of high-end consumers. Or, you know, the financial crisis, too much borrowing, too much leverage, a lot of foreclosures. you know, collapse in housing values. None of that is evident today. And again, there's some blemishes around the, in terms of cards and subprime model, but it feels like that's small potatoes in the context of those previous historical experiences. Yeah. Although this could be more of a garden variety or in a recession, right?

Not all recessions, of course, have involved the consumers as the main cause, right? Yeah. In fact, it's interesting when I talk to other kind of economists who have recession forecasts, they tend to blame it on businesses, not on consumers. They go, okay, the consumer's fine. I don't see that happening. But businesses, that's what I'm really worried about. But, yeah, that's a topic for another day. That's a topic for another day.

Okay. Marissa, anything on the consumer, you want to bring up anything worrying you that hasn't been mentioned? And that's okay if there's nothing. I'm just asking. No, no, I don't think so. I'm feeling pretty good about it. I'll just mention we get a lot of listener questions and we've had a lot of questions asking for our excess saving estimate,

an update on that. You mentioned Scott Hoyt, who compiles these for us. And so the data were just revised because the BEA did comprehensive revisions right to the GDP statistics. And along with that, they revised the savings rate. So our estimate of excess saving as of the middle of this year is about $1.9 trillion. Over half of that, though, is in the very top of the income distribution, the top 10% of the

income distribution. And then it's kind of spread out. The bottom 20% has 6%. And then you're looking at anywhere from 6% to, about double that for people in the top half of the income distribution, the 60 to 80 and the 80 to 90. So there's still excess saving out there for every income distribution, but it's definitely dwindling at the bottom end of the distribution, right? So back to what we're talking about.

And if there's risk out there, these are the people that are most likely to have to put things on credit cards to finance spending. And as this goes on, if we're facing higher oil prices for a long time, if we're facing higher interest rates for a long time. This is certainly where the risk is at the bottom of the income distribution. But for right now, they do have excess saving left. Did you define excess saving? Do you want to submit to define it? Yeah, this is the latest. You didn't define it, though. What is it? Oh, I didn't define it. That's right. I don't think so, did she? No, no, I did not define it. So we've talked about this before. So this is a measure. The Federal Reserve puts one out. There's

there's other measures of it. We take the Fed's data and we do some of our own estimates and, and combine it with other sources of data. So we looked at what the savings rate was prior to the pandemic. And we compare that to today. And we say, are we still at seven? I think we were at seven percent as the sort of equilibrium savings rate. Is that right? Well, because of the revision you mentioned, it's closer to six. Okay. So it was seven. Seven. Yeah. All right. So with the B.EA data, right, the kind of pre-pandemic savings rate was six percent. So we look at any savings. above 6% as being quote-unquote excess saving. So saving above and beyond sort of what this pre-pandemic equilibrium saving rate was. And so that we are estimating at $1.9 trillion as of the

middle of the year. It's a bit of a lag in the data. So Chris, that feels like a warm blankie to me. No? It should make you feel very comfortable about the consumer. I mean, that, well, the distribution, right? You're worried of your distribution. High income households. It's, yeah, it's highly dependent. It's highly skewed in that direction. And then there's a question of whether that, how much of that, well, I guess this is a philosophical debate. Is this how much of that savings is truly available for consumption versus, you know, have the households actually classified that as wealth at this point?

Yeah. Here's my theory on that. If it's sitting in your checking account. Yeah. This is not. It's not sucked away somewhere. That is, I can see it in my bank account. If I need it, I will use it.

Right? No. Well, if I need it, I will use it is a recipe for avoiding a prolonged recession, right? Avoiding the downside risk, right? I have a shortfall. I have the savings. I can use. I can fill the gap.

It doesn't lead to additional spending. No, no, no, no. So it's not an accelerate. But it's insulation. It's insolation. It's a warm blankie I've been talking about. You know. In fact, that might be a good title for this podcast.

We got to get the more blankie in there. Well, okay, we're running short of time. You mentioned listener questions, and you're saying there were a lot of questions around excess saving. Do you want to throw out one other question? We'll take it before we call it a podcast. Yeah, can I go back to a question about CPI because we have several of the same question about owner's equivalent rent?

So owner's equivalent rent is the implied rent that a homeowner estimates they could get for their house where they'd have put it on a rental market, right? So Mark mentioned that rents make up a very large portion of the consumer price index because the cost you pay for your housing is the biggest cost you have. So there's a lot of questions around OER that are skeptical, I would say, in tone. Like, how good are homeowners really at estimating what they could get for their homes, were they to put it on the rental market? You know, they have some expertise about the rental market that they're adequately, accurately estimating that. And why is that even a thing?

Why aren't we just measuring rents directly? Why are we asking homeowners what the value of their home would be on the rental market? Chris, do you want to take a crack at that? Sure. So I guess I would, going back into my memory here. So as I recall, the survey of the homeowners in terms of what they expect they could get for their rent, for their homes if they were to rent it, that number is used to wait as a weight. But the actual price, the actual rent in that owner's equivalent rent calculation is actually from the rent survey. Yeah.

Right. So the listeners are correct in their, in their assessment, and that is actually what the BLS is doing. You could still argue, well, maybe that weight isn't the greatest, right, because you are relying on us. But the impact, I would argue, on the overall calculation is muted, right? Because you're not actually relying on that rent on that homeowner to declare what the rent is and use that as the actual price. right? So, you know, I think it all goes back to market rent. It's actually, it's, it's, it's, the, the rents that folks are actually paying in the marketplace that ultimately drive the owner's equivalent rent and the rent for shelter numbers. So, you know, I don't think there's that bias that the caller, the, the, the, uh, listeners are implying in the data. So I don't think that that's an issue. Although, having just said that, all of a sudden, I'm worried that. maybe I'm missing something or I forgot something. Probably we'll go back and take a look and just make sure I have that right. Yeah. Okay. I mean, the series are pretty or are very highly correlated. The primary.

Yeah. Yeah. So, right. Yeah. Even if they're not measured precisely, they're still quite informative. Yeah. Yeah. Okay.

All right. I think we're going to call it quits late afternoon on a Friday. and we've got lots of sports here in Philadelphia. We've got Phillies tonight, got Phillies on Saturday. We got Eagles on Sunday. So a lot going on here. Got a lot of games. You don't care about this, do you, Marissa?

I do. You do? Okay, you still a Philly fan? I mean, mildly. Yeah, mildly. People don't know this. I've been watching the Phillies. Yeah, I've been.

Okay. Yeah. I mean, I, you looked for how many years? I jumped in during the playoffs. I mean, did you live in Philly? before you moved out to Southern California. I mean, almost my whole life. Oh, really?

You're Philadelphia-Dade? Oh, I didn't know that. Yeah. Oh, I didn't know that. Yeah. Okay. From Boston to Philly when I was six or seven. Oh, that explains a lot.

Now I understand you better. Yeah. That whole Boston thing. Yeah. There's some Boston in there. There was some Boston in there. Okay. Very good.

Chris. David, anything? Are you conflicted by Philly's victory and the prospect of recession? I know. I know. Yeah. I thought you were going to bring that up, actually. Yeah, you want to explain that?

Someone want to explain that curse? Yeah. Go ahead. Yeah, I think you should because. Because you know baseball back. Well, every time the Phillies win the World Series, there's economic calamity. Yeah. Right.

2008, 1929, I think, wasn't it, 1929? So there's this theory based on data. We got two data points. So, you know, do the data that whenever the Phillies win the World Series, buckle in, baby. So, you know, I am conflicted because I want the Phillies to win, but certainly don't want a recession. So the economy was already in a recession when the Phillies won the World Series in 08. Oh, is that right? It's probably, oh, yeah, because they would have won the World Series in October.

And there you go. The recession had started a year before. There you go. I knew she could come up. So it's good. You can root for the Phillies with abandon. Yeah. Correlation, no causation. 1980, though. I forgot 1980.

I forgot 1980, right. 2008, 1980, 1929, right. I forgot 1980. So all really pretty abysmal years for the economy. It seems like the statistic is that when we are in a recession, the Phillies are more likely to win a world series. Oh, that's what it is. That is interesting. We're already in a recession? Is that what you're?

I'm just saying, in both of the. So in 1980 as well, right? We were already, I think a recession had already been, had already begun. Right. By the time the Phillies would have won the World Series. Probably wasn't declared by the time. Yeah, it wasn't right. None of these things were probably declared by NBER.

We were in hindsight. We were definitely in, yeah. I know, it sounds like we should do some research here. What do you think? I have one of the young economists take a look. Oh, this is a topic. I'm sure our listeners are going to jump off. over. I'm sure. I'm sure I'll get some emails about this.

Typical. Well, please listen or send in your questions. We love them and we'll definitely try to get answers to them in future podcasts. But guys, I think we're going to call this a podcast. Everyone have a nice weekend. Take care now. Talk to you next week.