Moody's Talks - Inside Economics - Bonus Episode: In Person Recording, Increased Probability of Recession

Episode Date: September 27, 2022

Mark, Cris, and Ryan sit down for their first in-person podcast to discuss their recession odds over the next 6,12, or 18 months. They list out both contributing and mitigating risk factors and the market signals to watch to understand where the economy is headed.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.Watch the video of the in-person episode. 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 Sandy, the chief economist of Moody's and Alex. And welcome. This is a live podcast. Hey guys? Or in person, right? Are we live? Well, we are live here right now.

Gotcha. But not to the people watching. Live and in person. Are they the same thing? No. No. Well, the way he said. Oh, because when we have a podcast normally, we're live, but we're not in person.

Now we're live and in person. No, when we have a podcast normally, we are neither live nor in person. We're recording it. Oh, no, wait. We're recording this is not, okay. This is not live. Correct. This is in person.

Right. In a person podcast. Okay. Yeah, that's true. Okay. But it feels like I'm live and in person. You look live to me. We're off the rails ready.

Yes. All right. Well, okay, we're in person. We're not live. We're recording. And this is a, this is great. It's a lot of fun. Yeah.

Although I, I am hot. Are you not hot? No, I feel good. You feel good? Okay. Maybe because I, you know, got embarrassed there with the whole life in person. Sweating a little bit. Well, this is the first time we go out in the same room.

Yeah. This is the first time I've seen Ryan in person. Two and a pandemic, yeah. And he got taller. We were discussing this before we went. In live. Guys are shrinking. No, no, wait.

Listen, look, put the camera on, Ryan. Who does he remind you of? I never dawn on me until I saw him walk in the room today. Who do you think? 17 years. John McEnroe, you know, obviously a young version of John McEnroe, right? I don't know. Yeah, you look just like him.

I'll have to look it up. I think it up. I don't know. You're kind of irreverent, you know, sort of irreverent, you know, in a kind of quiet way. Maconroe is like a reverend in a loud way. Yes. He expresses a reverence. Ryan's got all kinds of looks and eye rolling.

Well, we're going to be talking about recession today, so maybe I'll channel my inner Mac and Robert. Yeah, there you go. And that is the topic of the podcast, is recession odds. And of course, we've been debating this one a lot and discussing this lot. Oh, yeah, the past a few months, really, really since the beginning of the year.

So this is how I thought we'd frame it. we each talk about our odds of recession over different kind of horizons. So next six months, we'll take the next six months. So between now and let's say March, April of next year, so kind of near term, and we'll talk about that. And I will say, I think when we had Alan Blinder on the Princeton University professor who was vice chair, we were talking that it's hard to imagine. that we wouldn't have a near-term recession.

We're going to have a recession. It's going to be near-term. And now it feels very different than that. So we'll talk about that. And then we'll go to the 12-month horizon. Okay. So one year, so between now and September next year. And then we'll go to 18 months.

Let's say through early 20-24, spring of 20. Gotcha. Oh, yeah, 18 months. Should we go longer than that? Maybe if we have time. Well, anything longer than that, it's 100% probability. You think so? Anything longer,

yeah. Well, we haven't repealed a business cycle. I think they will go down. Yeah, they could. But longer term, you haven't repealed a business cycle.

Yeah, at some point. At some point. Yeah, there's going to be a recession. That's what you meant. Yeah, for sure. Okay. Does that sound like a good...

Sounds good to mean. Yeah. Okay. And, yeah, before I do that, though, let me ask you this. I don't look carefully

at the consensus kind of forecast. I don't do it on a regular basis. Do you look at those? Once in a while, because I don't like being influenced. Yeah, you seem like you might be, you know, easily impressionable by. There's no reason he asked me here. Just a punching bag. No, but, no, but if you look at consensus,

what do you think consensus is for recession at some point in the next 18? months. Based on, there's different flavors of recession and different people have different views on what that recession might look like and when. What do you think? Consensus for you at this point? My guess would be 50-50. Kind of wishy-washy. Yeah, 55 assumption. Well, no, it's not well, 50% of economists say no, we'll make our way through. 50% say we're going in at some point, right? Yeah, yeah. Yeah, it feels roughly right. Yeah. Perhaps. Well, it's still a percentage, right? It's not just 50% say yes, 50% say no. Yeah.

Everyone's coming up with a new. Oh, yeah, yeah, yeah. But if I'm looking at the distribution of economists and the projections, and are we going into recession, Mr. or Ms. Economist, half are saying yes, half are roughly saying no. It feels like, sort of. Yeah. But I don't know of many places I have a forecast, like they're in their forecast,

their baseline forecast is for a recession. Yeah. I mean, there's maybe one or two that I've heard of it. No, no, no, no. I think it's growing. Yeah, yeah. It's growing? The investment bank.

I think. Yeah, yeah. In particular. If I look at consensus economics, for example, or focus economics, we use them for consensus. And you can see in the 20, 23 GDP growth forecast, a negative number or zero, I consider that to be a recession. And I'd say, I don't know if it's quite half or there, but at least a third or, you know, there.

And you got, you know, Bank of America, Fannie Mae, you know, a bunch of institutions, you know, that. I don't know if anyone who's calling for a deeper session or severe recession, right, even those that are. Yeah, that's true. They're all small negatives. They're all saying, yeah. You know, zero, you know, small negative, you know, minus one. I don't see minus one. That would be big. That would be pretty big for calendar year decline in GDP. Oh, I was thinking piquot-trop. Oh, peak to trough. Yeah. Well, okay, statistics game. Oh, oh, here we go. Oh, yeah, okay. I didn't even think I was going to do the statistics.

I'm prepared. I got. You've got a statistic, though. Lay it on us. It's not really, I'm doing it backwards. I'm going to, I'm not going to give you the statistic. I'm going to ask you, you know. What it is? Yeah, what it is.

It's like Jeopardy or something. Okay. Okay. All right, Alex, Alex, Rebecca over here. All right, what is the peak to trough decline, average peak to trough decline in GDP, real GDP in the 12, there's been 12 recessions since World War II, I believe, right? Yep.

Since World War II. Two percent. That's pretty good. Two and a half. Two and a half. Way to go. See this cowbell? This is, this is, uh, where do we get the, this is, this is from Tim, right?

This is from Tim. Tim, Tim Daly, our buddy, Tim Daley and the sales team. And these are custom made. Yeah. They're fantastic. Do you want to ring it? No, Chris got it. You ring it.

Oh, no, no, I got to ring it for him. Yeah. There you got. That actually has a good sound to it. It does. Yeah. Although the, we all look a little scary, I do. You definitely look like John McEnroe in this picture.

And I look even scarier than that. But anyway, two and a half, two and a half percentage points, you know, peak to trough decline in GDP. Okay, here's the bonus question. Oh, boy. Yeah. Okay. What is the peak to trough decline?

And this is all quarterly, by the way, quarterly. Okay. On a quarterly basis, quarterly periodicity. I've got another one on a monthly basis. But, okay, on a quarterly basis, what's the peak to drop decline in the financial crisis? Great recession began in first quarter of 08, extended through the second quarter of 09, a long recession. Oh, gee. Do you know four?

Four percent. Four. Way to go. Nice. Nice to go. Excellent. Good job. Okay.

Here's the, no collusion here, right? No. Now, here's the, here's the bonus question. On a monthly basis, and this goes to Ryan's monthly GDP estimates. Oh, so now I should get this. You should know this. What is the peak to drop decline in GDP in the past? pandemic recession in the pandemic recession.

And it blows my mind. You know, I'm not sure it's right. But you did this, you constructed this. So it's got to right. Yeah, it's got to be right. Because we, yeah, peak to trough. So the peak was February of 2020. They all add up to GDP, quarterly GDP.

Okay, there you go. Yeah, so it's got up to you right. So it's February 2020. We cratered in March, April, I think April is the bottom. So really two month, two month decline. So in that two months, what was the peak to drop, decline in GDP. It was something crazy. Did we go double-digit? Did we go double digits? Double-dige? Yes, I thought. Yeah. I don't think. I don't know.

I'm trying to think. 12%. Pretty good. 15%? 15% percent. Yeah. Yeah. Employment also 15%. We lost 22 million. And we're not even sure if that was properly measured. Exactly. Right. Could be worse. Could have been a lot worse. Yeah. Okay. All right. But with that as a preface. Let's talk about the probability. of recession going forward next six months. So near term. And let me define terms. A recession is a broad-based, persistent decline in economic activity. Now, ultimately, it's determined by the Business Cycle Dating Committee of the National Bureau of Economic Research, a group of academic economists. But, you know, they use judgment and look like a plethora of data. But in my mind,

you can't have a recession unless, and it's not, it's not broad-based unless the job market is struggling unless we're losing jobs. We've got to be losing jobs on a consistent basis. Unemployment has to be moving north on a consistent basis. I think that's, well, do you agree with that? I mean, yeah. The first two quarters of negative growth that everyone talks about is very concentrated in trade

and in inventories. That's not recession. It doesn't feel like a recession. We create a lot of jobs and employment actually declined. You know, six percent at the start of the year, we're three seven, I think it was six percent. Was it? In 3-7 now, that's not consistent with.

I don't know. I think we were six at the beginning of the year. I think so. Seems high. It does seem high. No, I say it. But I think I'm, usually I get these, like, you're usually spot on. Spot on.

Yeah. I can fact check you when. Yeah, can fact check at some point when he's blathering over here a little bit. Give some time to check up on these statistics. Yeah. Okay, where was I? Oh, the six, oh, defining terms. I was defining terms.

Yeah. So you've got to have steadily declining employment. And let's say it's got to be six months more or more, you know, not three months, not two months. It's got to be three months. So the pandemic was not a recession? No, no, well, okay, good point. It really didn't meet their definition. It didn't.

Right. Lasting more than a few months. It was so severe. It was so profound. That dimension of it blew out. Oh, yeah. Just nitpicking it. The whole world fell, but that's a great point.

No, that's a great point. And we're saying it starts in the next six months. So it doesn't have to start next month, probably, you know, likely it won't. But at some point in the next six months between now and let's say March or next year, April, the recession begins, you know, something like that. Okay, so what do you say? What is the probability in your mind, Chris, of that? I would say between 10, 50,

Which is the historical average, right? Right. The economy has been in recession going back to 1900. So was that an ooh because it's too high or too low? No, it felt low. For six months. Six months. Yeah.

Yeah, I'll tell you why, but after you tell me why you think it's 10 to 15%. Okay. Because I'm going to use exactly what you use on me all the time to explain why you're too low. I can't wait until we go to 18 months and see what the... Oh, yeah. Well, that's the crux of the matter, I assume. So for me, you know, to get into recession within the next six months, given where we are today with such a strong labor market,

still a lot of firepower in terms of excess savings, means that there's some other shock that hits us within six months. So that's why I go back to the historical average. Oh, interesting. Something else must be happening within that period for us to get there. Yeah, but don't you, this goes to my, why I think if it's a little bit higher. I'm not going to know what yours is probably. I'm not going to tell you mine until he tells you it is.

But mine's higher than yours, only because for the same logic, it's low, but it's higher because we're so vulnerable to that shock. Right. Right. It doesn't take a typical shock to push us in, right? Even like that rail strike that was about to happen last week. That could have done it.

That felt like that in a more typical time, that would be, you know, okay. It's not great, but it's no big deal. But in this time, when supply chains are a mess, inflation is already high. People are already on edge, you know, that that would drive us in.

Okay, so you're assigning higher than 15% chance of some major event. Yeah, and I like that way you framed it, you're saying on average, if it was a typical year, on average, it's probably closer to 15 than 10, but let's say, 15.

Yeah, yeah, I think it's somewhere in there. Yeah, somewhere in there. I think that feels right, but I would put it at 20 because, oh, and I'm sorry, I went ahead of you. Oh, we're close. I was 2530. You're a little impressionable, so.

Did I mess with you? No. I would never change my number based on it. I do the opposite. Remember when we forecast employment? Yeah. If your number's the same as mine, I change my four. That is true.

He does do that. He makes me worried. Yeah, because he knows I'm dead wrong. So if you go to a restaurant and someone else orders what you want. Oh, yeah, I can't order the same thing. Really? No. Oh, yeah.

If Katie orders. My wife orders. Oh, that's reasonable. No, I can't do that. No, I agree with that. That feels weird. Yeah. But my wife does it.

Why is that reasonable? No, it's reasonable. It's very reasonable. That's a reasonable thing because, like, she gets the fish. And then, you know, she got the fish. She gets the fish. The fish is no good. Then what do you do?

You're O for two. You got to switch it up. You know, I get the pork chops. She gets the fish. The pork chops are good. You share? Maybe. That's my logic.

That's it. negotiation at that point. I see, okay, so it's a risk management. What about those Brussels sprouts? Are they part of the deal? Yeah. Yeah. You know what I'm saying?

No. So you guys get the same thing? If we both want to. I don't like it. I'm telling you I'm burning up in here. I'm burning up here. Maybe because I'm laughing started. We haven't even gotten started.

I know. I know. I know. I'm just waiting to get to the heated debate about recycling. Yeah. I'm going to be, I'm going to be a bloody mess, you know, before this is on. I hope not. I hope not.

It's all over. Okay, wait a second. Okay, hold on. Trade a thought. 20%. 20%. So typically 10 to 15, I get it. Okay. 20% just because, you know, I think fundamentally,

when you're creating so many jobs, hard to see businesses turning tail running for the bunker and start laying off workers. Yeah, exactly. And going into recession. Exactly how is that going to happen? Unless you get whammed by a shock, And I'd say the probability is it doesn't take a big shock to do that because everybody,

from the CEO down to the average individuals, is on edge, right? Right? Shem. Are you on edge? Are you worried about recessions? Shem is our producer. Yeah. So the quality of this broadcast depends on Shem and his buddy Eduardo.

Eduardo, you kind of like the sous chef? Would you consider you're the sous chef? Yeah, he's the chef and you're the sous chef? Yeah, okay. All right. Yes, I am worried about the same. See what I tell you. Yeah.

It's everywhere. It's everywhere. Yeah. Have you ever seen anything like this? No. No. Where we could talk ourselves into a recession? Well, when everyone's predicting recession.

No, everyone's always. Yeah, I mean, this is the first. This is bizarre. So it feels like everyone is on edge. And, you know, if anything slightly goes off the rails, then, you know, we're going to go, you know, into it down. That's what do you think? So everyone's on edge. Yeah.

So I'm using personal experience. Yeah. It's coloring me. Over the last couple of weeks, we've done a lot of business travel. We've gone to a number of clients and dinners and whatnot. And despite everyone talking about recession risk, the behavior doesn't seem to match up, at least in these major cities that we've gone to. So I don't know.

I think, yeah, it'd have to be a really major shock to get us over the edge in the next six months. Just the opposite of what I said. You don't need a minor shock. I just feel like this momentum is still there, despite the psychological aspect. Right. The businesses are still with plenty of job openings. I don't know if they're really going to pull back so quickly, even in the face of a minor shock.

Well, I have a hard time getting my mind around what this dark sentiment actually means for the probability of recession, right? The kind of the obvious way of thinking about it is, okay, everyone's bleak, therefore what I just said. it doesn't make much to push us in if something else goes wrong. Because the metaphor I have in my mind is we've got our hands on the bunker door, right? And if we hear one loud sound, we're going to run into the bunker, meaning we stop spending and, you know, we go into recession. But the restaurants are packed, the airport is packed, the hotels, wait in line.

There seems like there's a cognitive business. Well, let me ask you this. The other way, potentially thinking about it seems a little less satisfying, but I'm going to throw it out there. maybe there's even another way of thinking about this. Because it is so bizarre that so many people are just discounting recession. The fact that half of all economists are predicting a recession, that's unprecedented. That is unprecedented. Could be some group think that you don't want to be the last one to adopt.

But it's the entire everyone's the group. Right. CEO confidence is really low. Jamie Diamond, the hurricane is coming. Oh, yeah. You know, comment. So could it be that, you know, we're all thinking recession. recession doesn't happen.

Certainly not going to happen in the next six months. We're saying low probability of that. Then people say, well, you know, what recession? You know, I don't think there's a recession. And they kind of... No, no. I don't think that's what they're... I think it's the timing.

Yeah. What they have in mind. What do you mean? Not going to happen right now, but... No, but most people, when they think recession, they think right now. Shem. Do they? When you think recession, do you think recession, like, in the next few months?

or do you think recession in the next year or two years? See, that's what I'm saying. That's what I'm saying. That's consistent with Google Trends. Yeah. If you look at Google Trends date and search for what is a recession or recession, it is spiked. It's come down, but it was really elevated. So it was on people's minds, and that's what they're Googling.

But it's been on their minds all year, right? I bet if you went back to March, people were already worried about recession. The confidence was going, and we haven't had a recession yet. Yeah. Right. So what are you saying? So I think there's that level of anxiety is there. That doesn't necessarily trigger a recession right away.

It could be that they're anticipating recession later next year. Here's another reason why I think, and this goes if you're looking for things to look at to gauge whether it's a near-term recession, in my mind, and I'm curious if you've got other indicators, but the best indicator that I found for predicting a near-term recession over the next three to six months is a big decline in consumer confidence as measured by the conference board survey. We've got that. No, no, we do not. No.

Actually, we do not. Oh, yeah, three-month change. Not the UMISH. I was, yeah. Michigan is sensitive to gasoline and stock prices now. I don't find that useful, you know, as a pretty- It doesn't match my narrative. Well, true.

That's true. It's true. Cherry picking. Yeah, yeah, no, no, there's no, no, there's no, there's no, there's no, this is statistical cherry-picking. I mean, I go back and I look. Fair enough. Fair enough.

I go back and I look, right? Yeah. I have 12 recessions. I got 12 data points. Of course, I don't the conference board doesn't go back that far. I got maybe eight data points going back to the 60s or something. And the conference board survey does a really good job. If it declines, it's an index.

If it declines more than 20 percentage points in a three-month period, we're going into recession three to six months down the road. And it never, I don't think it ever falsely predicts, it has falsely predicted that. And I think it goes to the fact that the conference board survey is more labor market oriented. And right now, as of August, the last data point we got, it actually improved from July because the decline in energy prices is exactly where it was three months ago. So it's zero. It's not even negative. It was falling through July.

Now it's not even. But it's at a low level. But that's my point, though. That's my point. That's my point. In terms of predicting the recession in the next three to six months, it's not about the level. It's about the change.

That, you know, think about that metaphor about hand on the bunker door. When confidence falls 20 points, the bunker door just opened, and the consumer just walked in and shut the door behind them and stopped spending, and we're going in, we're going in, right? So I think the actual, I said three to six months. I picked that because there's, you know, a fair amount of standard deviation around. Yeah. But the actual average is five months.

is actually five months. So this would say pretty low, it would be, this indicator would have to get blown out of the water based on its historical record for not, it says saying no recession, to your point.

Yeah. So yeah. But you're discounting that. Well, yeah, the level of confidence. Yeah, yes, because we are vulnerable.

Yeah, but I'm just saying, well, sometimes we're nitpicking here, aren't we? God, he does this all the time. Yeah, he kills me. Yeah.

I don't know how you do. travel. You know what he's like, 15 versus 20? You know, the boxing metaphor? He's like the roper dope guy. Oh, yeah.

Yeah, I go after him and he's like, like this, like this. And then I stop and he goes, boom. He waits for the knockout. He goes right in the noise. Shem, am I right about that? Can you feel that? Can you feel that strategy?

He's employing hair. I like Chris. I know. We all like Chris. What are you talking about? We all like Chris. Where was I? Oh, what other indicators do you?

Jobless claims. Okay, jobless comes. That is a leading, or not a leading, it comes, it's more high frequent. It's every Thursday. Yeah. Counts the number of people that are filing for unemployment insurance benefits and gets back to the labor market argument. That has to increase for the labor market to deteriorate, which would then cause confidence

to fall. Yeah, that's a good point. This is kind of an early read of what conference board will do. And the UI claims are low. Really low. Very low. Very low. I think last week they were 213.

Yeah, something. 213,000, right? And that's about as low as it ever gets. And normally when we're heading into a recession, not in one, it's 300 to 350,000. So we got breathing room. Yeah, so what do you think, though, we don't need to get the 350 before you start selling the alarm bells, right?

No. Yeah. No, once we start heading in that direction, that's when the bells go off. So do you have like a rule of thumb, you know, what's the kind of the threshold above which, you know, recessions now seems like it's increasing. 300.

Oh, it's 300. We had to get as high as 300. I thought it was 250. No? I'd say 275 is when I get nervous. Yeah. Especially we're trending up and then 300 is. Okay.

Oh, 250 is when... I think 250 is normal. I think... Kind of typical. 275,000, if sustained, is consistent with no job growth. No job growth, right? We actually want to get to 275, right? Well, a little bit below.

We want 50 to 100,000 jobs. I wouldn't be bad if it got zero for a little bit, right? For a little bit. Yeah. But then you're dangerously... Yeah. Yeah, slip back in. And you're saying if I go over 300,000 initial claims for unemployment insurance,

people, you know, saying I'm unemployed, you know, government cut me a check to help me out. Right. We're in. We're in a recession. We're pretty damn close. Yeah, we're tipping in. We're tipping in. Yeah.

Okay. Okay. And do you have any kind of good indicators in your term, kind of intermediate term indicators you look at to gauge this question? Of course. No, don't do it. Not yet. Not yet.

No, not yet. It's a little longer term, maybe 12 months. Oh, he's got another, oh, really? I should know this? It's your favorite, your favorite. My favorite. Oh, you want to stick with six months? Not a Yolker.

Yeah, yeah. Oh, oh, oh, oh, no, no, wait, wait. That's not a near-term limit. No, well. That's what, 12 to 15 months, right? Yeah. It's pointing in that direction. 12 to 18.

Okay. 15 on average. On average is 15, right? I think we've had some episodes where it's been shorter. That's true. Yeah. Okay, we're coming back to that.

We'll save this one for later. I have Chris's knockout punched you. It's already in the forecast. You mean you're going to punch me? You mean? I'm not going to punch you. I got to stay employed. Metaphorically punched me?

You were just talking about the rope-a-dope. Here's Chris's knockout punch. He put it in the forecast. No, I'm going to save it. What's he talking about? I'm not sure. We'll say. He's cryptic.

It's the McEnroe in it. Oh, it's a Maconroe. It's messing with our minds. It's mind games. You play tennis? No. Did you see the way he said that? He looks down to anyone who plays tennis.

Oh, no. Jim, do you play tennis? Hello. Oh, see? You're a big tennis player, aren't you? I used to be in my prime. Yeah, well, my elbow is all shot out from baseball. So you can't swing a tennis racket.

Pickle ball? I heard that's fun. Have you played? It's a lot of fun. It's a lot of fun. Yeah, we're getting into it. Really? Oh, you play it?

A little bit. I mean, the kids are starting. My oldest is kind of being able to hit it back. Where do you go for to play pickleball? Like the Y or something? Yeah, the Y. I can be saying it that way. See the way he does that?

No, I'm sure. Yeah, you see, you know, he's like, you know. Where do you go play pickleball? Oh, you haven't played pickleball? Chris, where do you go? If I play pickleball, I would go to the, to the Y across the street. And there's a, there's a park in Westchester that has a pickball courts. Oh, cool.

So, yeah, I got to get that shot. Well, I noticed at the beach, the New Jersey Shore. Oh, you probably saw this. They're turning tennis courts into pickleball courts because people don't play as much tennis anymore. Yeah. Yeah, but pickleball is a lot of fun. Yeah. I got to give it a shot.

Okay, let's move on. Oh, I need to turn your probability. Oh, 30%. 30%. 30%. Okay, so why are you on the high side? Because the peak in... This is the probability of recession beginning in the next six months.

Early next year, first quarter, is when we get the biggest drag from the tightening of financial market conditions. So that's going to be a drag on the economy. early next year. I think we get through it, but that's my concern. So you want to explain that? You know, what did you mean when you said that? Just explain that to the list of it. Yeah, so when financial market conditions tighten, so stock prices fall, corporate bonds, spreads widen out, long-term interest rates rise, you know, it hits some parts of the economy right away, like housing, value of the dollar, a great one. But then there's a lag, and like the wealth effect, for example, plays out over time. So when people see the stock market decline,

they don't pull back on spending right away, happens over a period of time. That will likely the biggest drag on the economy will be early next year. And also some of the tightening from the Fed hasn't hit the economy yet. That's going to be early next year. So that's kind of two things going to hit us all at once. Right. And I guess fiscal policy also had been a massive tailwind that's now turned into a bit of a headwind. It should be neutral. Kind of neutral, I guess, by early next year. Well, the infrastructure should start, yeah. Some of it should start kicking in.

But if that's delayed, then that's just another support pulled away early next year. Right. So you think, would you say 30%? 30%? 30% in the next six months. Okay, all right. Shem, are you writing all this down? You know, we have a track record here.

Yeah. Wow. Yeah, we've got a track record. Okay. Let's go to the six-month, excuse me, 12-month horizon. So between now and, let's say, you know, next September, October. what do you say? I'll have to turn to you first.

Probably. Oh, you have to come to me. Yeah. Or you're 75%. Between now and next year, 70. 70 to 75. I don't even want to know your 18 months. Yeah, exactly.

But actually, it's lower. Yeah. Because if we get through the next 12 months, then I think we dodge it. Interesting. Because the same thing with the, you know, the next six months. You've got tightening in financial working conditions. You have the Fed. And they're not stopping.

We have them, well, we can talk about the Fed forecast later. We should, right, right now. Because it's three and a half percent we have it in our September baseline. It's more likely going to be four. Yeah. Later this week, the Fed's going to release their new dot plot. Yeah. And I think it's going to be four and a quarter to four and a half where they think they're going to stop.

So by the time this is aired, we probably will have this from the Fed. Yep. So right, well, let me, so you're saying very high probability we're going into recession. Very good. Very high probability. If you were doing the forecast today and you were responsible for deciding. I put a recession sometime in 2023. Second half.

Second half of 2020. But starting in between now and in the year from now. Yeah, because the Fed is not going to stop. Okay. So lay out the path for me that for the, because it boils down to interest rates in the federal reserve policy, right? Okay. So lay out the path for me as how you think the fund rate, and that's our benchmark for what the Fed's going to do, plays out over the next year. So 75 basis points this month.

Okay. So we're right. The federal funds rate target, two and a quarter to two and a half. So let's just say two and a half, the top end of the target. Fed meets this week, Wednesday. Wednesday. They're going to raise it. 3.25 percent.

So 75 basis points. 3.25. Then November. Another 50. That's 375. Then December. Another 50. 425.

Right. And by the way, I'm with you so far. Okay. Then we go into next year. Correct. Where do they go? So as of now, I would expect them to pause if our inflation forecast is correct. Well, no, no, no.

This is your forecast. Oh, you want my, oh, the recession forecast? Then they go 25 in January when they meet. Okay, so the inflation isn't coming down fast enough. It's not coming down fast enough. Job growth isn't slowing fast enough. It's not. So they will keep going.

Correct. So we're now, we're going from 425 to 450 in January. Mm-hmm. And then what? Then one more 25. 475? Yep. And that is sufficient to generate a recession.

Yeah. So if you shock our macro model, if you have that, that's a mild recession. When you say mild, do you mean like two quarters of, we lose jobs for six months? Yeah, you lose jobs. We define a recession. Yep. Broad-based, persistent decline, at least six months, we lose jobs, unemployment rises meaningfully. Because you get further tightening in financial market conditions.

Right. And then that bleeds through into the broader economy. So what happens to the stock market in that scenario? We're down 20, peak to trough now. So what are we down? Like 2530? Yeah, 2530. Okay.

10-year yield goes to, we're at 3.5% on the 10-year yield. Oh, you're north of 4.5. Or no, close to 4.5. You're going to go up a full point. Mm-hmm. Oh, the 10 years is going to go from 3.5 to 4.5? If the Fed funds rate, oh, no, no, no, I'm sorry. The funds rate is $4.75.

Yeah. You think it's going to go to four and a half. Four and a quarter, I think. I got to double-check the scenario. It's right right there. Yeah, we're over four. There's an inversion. There's an inversion between the 10-year and the Fed funds rate.

Okay, which is, we'll come back to that in a second. And mortgage rates were 6% plus mortgage rates. I don't know. I didn't look at mortgage rates. You don't? No. Oh, what did you do? Yeah.

Yeah. Because I know the model is going to spill over into words. I'm going to look at housing. What about the value of the dollar? Is it going to higher? What is this? I'm just, I'm just flushing out the view. Think about this scenario.

The Fed's continuing to tighten. Yeah. Eurozone is about to fall in a recession. Yeah. So the ECB is going to start cutting. So the dollar is going to keep going up against the euro. Okay. And elsewhere in the world.

Okay. Because interest rate differential are going to remain. So part of your story, well, big part of your story is the Fed over Titans. Titans, because they need to get inflation in, and it's not happening by itself without a recession. Part of your story is overseas, particularly Europe week recession, so that kind of reverberates back on us. Any other elements to that? No, the key one is the Fed. I mean, if you listen to Fed Chair Powell's Jackson Hole speech, it's, you know, hell-bent on getting inflation back.

And reading between the lines, the whole stomach a mild recession to address that. And if you look, we talk about this all the time. Our inflation problems are on the supply side. It's not the demand side where the Fed can affect inflation. So they're going to keep hiking rates, and inflation might start coming down if oil prices fall, supply chain stress eases. But if they don't see that, off they go.

They're going to keep going. Okay, can I ask one more thing before we move on? In terms of underlying assumptions, what do you assume about oil prices in this world we're in? They come down a little bit, but then they remain higher than what's on our baseline. forecast. So we have, well, we have oil going back up to, it's $90 a barrel. We have it going to $100. It comes back down to 90. It just stays a rate around where they are today.

Right around where, so you're assuming nothing goes off the rails with Russia or oil prices. That's not part of this story. This is a whole policy mistake scenario. Okay. It's, well, it doesn't sound like a mistake. It sounds like it's by design. We're going in because they want to ring out the inflation. Well, I think if the Fed in your perfect world, we want to engineer a soft landing. Yeah, but that's... But at the end of the day, they decide they can't do that. Right. Yeah. Okay. Yeah. So it's like them facing Hobson's choice, a mild recession now or potential stagflation down the road. What about the pandemic and supply change? Are you assuming that continues to wind down and fade away? Yep. So we get a deceleration and inflation.

It's just not fast enough for them to... Yeah. Underlying core. We can get oil prices down, gasoline, jet fuel, we get some benefit from vehicle prices coming in because of supply chains. But the core underlying rates of inflation remain stubbornly high. Wage growth is strong, which goes to the high- rents keep rising. Medical care cost inflation, and therefore, and I'm not going to, let me ask you this. One more question. What do you assume about inflation expectations? They remain anchored.

Oh, they remain anchored? Yeah. Okay. throughout or that's the Fed's credibility. I think the Fed's credibility is still intact. Yeah. I mean, most measures, not all of them of long-term inflation expectations are still anchored. That doesn't mean that, you know, that's going to help us on the inflation front today or next year.

Right. And the Fed, to keep their credibility, they'd rather wring out the inflation now by overdoing it. Okay. All right. Okay. So what are your, he's 70, 75 percent, which means if he were king economist, he would, we'd have a recession in our forecast built into our forecast. Yeah.

Because remember, over the 12 months. Remember, because our philosophy, I think we all are on the same page here, that we make a, we will only make a big change in our forecast and going from no recession to recession is a big change.

An enormous change. If we are confident and confidence defined by a two-thirds probability, which is obviously subjective, but we have to feel deep down, because we don't want to get whipsawed. We don't want to recession, no recession, recession, that makes for bad planning.

You know, it's not just a recession. It's like fiscal policy, monetary policy. Any major assumption. Exactly. Yeah. Okay. So you would, you'd have, you'd be one of those half of economists out there who have a recession built in. Okay, fine.

Okay. Where are you on this? I agree with all that Ryan has laid out here, except the timing. I think that recession is a bit later than that. So as we get to the 18 month, that's, you see my probabilities rise. But for the 12 month, I would estimate something 50, 55%. Okay. Right.

Yeah. But for many of the same reasons, yeah. Right. I do think that consumers do still have quite a bit of firepower, so there might be some delay. It's a good point.

It's a good point. So they're really eroding the psychology. When real incomes are going to improve, right? They are actually improving because oil prices are in. Inflation is coming down. So we're going to get a real income boost here. We got nailed by real income. See how he does that?

No, I'm thinking. See, I can see, when he's on Zoom, I can't see him do these things, but his facial expressions. No? No? But if that happens, the Fed's going to go even more aggressive. So instead of 50, 75. Put a camera on, close up on this guy.

Watch his facial expressions. Yeah. Yeah. No. Here we go. Okay. You can't hold anything. Can't hold these against me down the road.

Well, he twitched. I know. He twitched. I know. He twitched. He twitched. There's got to be meaning in that twitch. I'm a very sensitive guy. You are very sensitive.

I think the pandemic has made you more sense. I'm very sensitive. I follow everything. We could have arguments and you would not get. I'm not uptight. I'm not uptight. Am I uptight? Shem,

am I uptight? God, I like this guy. Yeah. Yeah, he's a good producer. Eduardo, I'm not sure about you yet. You're still on probation.

We've got to figure you out. Oh, wow. Well, maybe that's too strong a word. What was the right word? Probation. We'll go probation. You see his face? I'm telling you.

What you're saying is exactly what my wife says to me all the time. She's like, you wear your emotions. People can tell exactly what you're thinking. It's so funny. Chris, I can't tell him. Next time. He's like Aristotle.

Yeah. I think that's how Aristotle looked. Okay, podcast poker. Okay. Podcast poker next time. Oh, no, I would be awful. Okay, well, lay out your path for the Fed then. So we're at two and a half.

Yep. What happens this week? Very similar. 75. 75, 50, 50. We're at 4.5 by the end of the year. Yep. Then what happens?

We get another 25 in there. I don't know specifically, sometime in the first quarter. Okay. And then what? Then they pause. They pause. Okay.

And the effects of that, all of that tightening actually make their way. into the economy. Yeah. Right? That's what it takes time. They see inflation starting to come in a little bit. They see job growth slowing a little bit.

They've done all this tightening and they say monetary policy works with a long lag. Right. Let me just hang out here at four and a half for a little bit. See what the world looks like. Right. Yeah. And I think they're getting pressure as well because because job losses are starting to come in, right? You start to get those those doves are turning.

Yeah. So they're weighing that inflation versus job growth tradeoff. And then I think we do have higher probabilities of some other shock hitting us as well. The one I'm particularly worried about is Europe next year. I think Europe gets through this winter reasonably well. I still think they go into recession, but the real pain doesn't occur until next year when they're trying to refuel all their gas tanks, they're still in the middle of this protracted conflict with Ukraine.

So they're in, and they potentially could go into a very deep recession at that point, and that has some... Because of the energy issues? Because of the energy issues. Okay. They go through their storage of natural gas. Correct, and they have to refill at that point. And there's no one to refill it.

And it's very difficult. Yeah, very difficult. Yeah. So they go down, and although the linkages between Europe and the U.S. aren't so tight, I think there are some repercussions from that slowing there that it are exporters and make it just very different. And also the psychology. I think consumers look over there, see what's going on with utility bills and start to pull back at that point. Got it. Okay, I'm at 40% over the next 12 months. And my path is very similar to yours. I mean, this is very

interesting because you're, the Fed keeps on going. You are they pause, but then they have to start raising again at some point, right? I mean, no? No? Oh, they still stay four and a half? They're, they're there for an extent period of time. Oh, and you're saying there are four and a half and then something bad, something happens. Yes. And we're vulnerable, fragile, and that's when we go in. Yes. That's right. And the consumer firewall is deteriorating at that. Right. Those excess savings are getting depleted increasingly. Because, because why? Because the job market has slowed. Oh, the inflation is still not very low. And the job market is slowing, right? So those wage gains are slowing as well. Okay. So I guess I'm at 40% the next 12 months. I'm not dissimilar to your

perspective. You know, four and a half, I'm not going to argue with a half percent. Yeah, yeah. Who knows? You know, four to four and a half percent, something like that. And I agree with you. They pause, right for the reasons you gave because top line inflation should be coming in if oil prices are stable if the supply chains are ironing themselves out and vehicle prices are starting to come in you know that's part of core you know we should see some moderation job growth should should it's slowing already we were at 500k a month on average you know back in the spring we're down to 350 I think we discussed that in one of the podcast yeah we need to be no more than 100 right and I don't know I think it feels like we'll probably be there by you know that time

early next year, around 100K. And they say, okay, I'm going to pause because you're right. There's a long lag between monetary, because it works through financial conditions. Right. That takes a long time to, you know, kind of iron, figure it out all that out. So they pause. And then in my 40%, they, inflation works out in their favor, that, you know, inflation continues to moderate.

Job growth slows. labor market eases. That takes the steam out of wage growth. We don't have a long way to go. We're at 5%-ish, you know, kind of on wage growth, depending on the measure. We need to be 3.5%-ish, you know, on wage growth to be consistent with 2% inflation. And we get that with that moderation. And that's kind of sort of a soft landing.

You're seeing this very smooth type of path here? Well, it's never a straight line. And there will be shocks. But, you know, I'm – and you're right. If we get another supply-side shock of any consequence, you're right. We'll go into recession. But I'm not building that into my baseline. And maybe that's kind of where we...

Maybe that's where we differ. Or agree. Oh. When it comes to the forecast, because you would not change the forecast, you would still have a non-recessionary forecast. In the next 12 months. In the next 12 months. Here you come.

Okay. Here it comes. Okay. Okay. So what indicators should we be looking at to gauge recession over the next? 12 months or should I wait until we do the 18 month and come back to that question? No, I think it's appropriate. Okay, it's appropriate. Okay, it's appropriate. Okay, it'll Yeah, it'll feed into the 18 month as well. All right, so it has to be the yield curve. It has to be the

yield curve. Yeah, okay, you want to explain? Difference between the 10-year and the two-year treasury rate. Are you treasury yields? That's one yields. Yeah, that's one yield curve. That's a pretty good one. Yeah, that's a good one. It doesn't fit with my narrative, but yeah. Exactly. Right. Typically, typically upwards sloping, typically longer duration or longer time periods require higher yields. When they invert, where the two-year is above the 10-year yield, it has signaled a recession almost every time since World War II. Right now, we're deeply inverted, about 40 basis points, and we've been that way

for several months now. I think we inverted briefly in April, kind of undid that, and then in June, July. Yeah, this is a hard inversion. This is definitely a hard inversion. This is harder than the pandemic, pre-pendemic inversion for sure. Yeah. So. Well, that, I mean, that's not a great example.

No, but. But actually, that was signaling something. Something. Yeah, yeah, it was going to weaken before, even before the pandemic. True, but it wasn't signaling. Versed this kind of much. Yeah. It wasn't nearly as severe.

Right. Yeah. That's right. I remember, I remember somebody using the yield curve to support their 2020. I still am. I still am. Wait. I got a counterpunch.

I got a counterpunch to this. I've got a counterpunch to this. We'll see. I'm playing robo dope now, baby. Yeah. I learn. You know, I can learn still in my age, you know? There you go.

Yeah, okay. Especially with this guy, you know, you've got to be... I don't know how to adapt. I can't imagine traveling with you too. The conversations and the debates. Actually, it works out really well. Yeah. Yeah, I go like this.

I go like this. I get tired and I say, Chris, please. He puts his headphones on. On the plane. Actually, it works out well. We got a good thing going, I think. Yeah. We can charge for this.

I'm pointing to Sarah. Sarah is like, leads the way on all this stuff. So inverted yield curve. Explain the people are saying, well, what's the intuition behind that? Why does it an inversion of the yield curve signal recession? What's the intuition behind that? Yeah, so it's investors indicating that. they are afraid of the future, right?

That the economy is going to face some type of slowdown, and they're willing to accept a lower yield for that very long-term debt that they are supporting in exchange for that security. On top of that, perhaps, if you're thinking more economically, it is a strain on the financial system, right? Banks make money when the yield curve is positively sloped. When you have that inversion, it makes it very difficult for them to earn any type of net interest margin.

Yeah. So that you could say that the yield curve then is causing the stress on the financial system. Credit dries up, and that leads to a pullback in spending. Right. Too much credit's a problem. You're over levered, that kind of thing. Not enough credit's a problem. Credit crunch.

It slows economic growth. There's a happy medium there. Exactly. And if the curve inverts banks that fund themselves with short-term money at a higher rate, then they can lend out with long-term money. make money, so I don't lend. That's right. No credit, no gross.

Yeah. I kind of like. Okay. But you don't like the yield curve as it laying in the cure. Historically, you've not liked it. Not historically, no. Why? Just because I think with quantitative easing and tightening,

which is the Fed buying and selling treasury securities, they're altering the term structure of the yield curve. So I just think the message today is different than it was in the past. So you do believe it prior to this round? Pre-financial crisis? Pre-financial crisis? Yeah, I thought the yield curve was a pretty good predictor. But the kind of the consensus view, and it doesn't mean it's right,

but the consensus view on the quantitative easing and tightening is what matters for interest rates, long-term interest rates, is the stock of securities that the Fed owns, not the change in. Right. So they expanded, in the QE, they expanded their balance sheet, took a lot of treasury mortgage securities put it on their balance sheet, It's bloated. So all else being equal, that would suggest long-term interest rates are lower than they otherwise would be without the QE.

Correct. Okay. So you're saying the 10-year yield should actually be higher. Be higher. So the curve is not inverted. Yeah, it's not as deeply inverted as it is now. As it appears to be. Right.

It may even be the 40-50 basis points that relative to the two-year yield today may actually not be inverted at all. Correct. So that would be a signal that there is no recession. Right. Okay. So that comes counter to your 775%. Talk about a blow. No.

That's a blow. No. No. Right to the nose. Qisham, was that a blow? No. Yeah. I love this guy.

Yeah. How much did you pay him? I didn't pay him anything. Yeah. He's taking them out of dinner. Yeah. No, because the economy and financial markets can do two different things. So if you look at the economic data, it's suggesting, you know, we're, we're, we're, we're,

we could get in trouble soon because if you look at the senior loan officer survey, the net percent of banks tightening lending standards on C&I, C&I loans, commercial and industrial, is rising. So more banks are tightening screws back to the yield curve being inverted. So you said that's a good indicator to watch for... It's in our probability recession models. And it works pretty well? Yep.

It's one of the most important along with the yield curve. But it's just reflecting the yield curve. Potentially, yeah. I did it with both. Take the yield curve out, put senior loan officer survey in, vice versa. And that model would say 60% probability in the next 12 months. Yeah. Okay. All right, but that's a tough argument to make here, right? High recession odds. I don't believe the yield curve, and yet the yield curve supports your high

recession odds. No, I'm not saying it supports it 100%. I don't even look at the yield curve. I don't care about the yield curve. I hate the yield curve. Oh, I see. So it might not have to, it doesn't have to invert to have a recession. Don't even pay attention to the curve. Yeah. But that's a pretty, that's pretty hard to do. Yeah. Because it's so pressure. Especially working with you two. Like, all I hear about is the yield curve. Well, if you're right about the recession, right? Then we're naturally going to look back and say,

oh, yield curve inverted. Well, okay. Victory. No, I would not say the yield curve. I would not use that as a victory. Well, I don't want a recession. Nobody wants a, no, no, victory for the yield curve. Oh, yeah. Of its ability to predict. And he'll say, no, no, asterisk. Well, the pandemic is a huge

asterisk on the yield curve. But the yield curve. No, what do you mean? I thought it inverted. It did invert. No, it did invert. It wasn't a hard inversion. No. But it inverted. All right. So.

But it's not the pandemic. It was just saying that the economy is vulnerable. Probably, okay, never. No, no. But I got something else. All right. I want something else on the yield curve. Okay.

We need to discuss. The policy yield curve, which is the difference between a 10-year yield and the Fed funds rate, has also been quite prescient, very prescient, very prescient, historical. Yeah, that's heavily manipulated. That's right. What do you mean heavily manipulated? That's all of, It's due to the Fed controls it.

Well, that's the point. This recession we're talking about now is a lot largely result of Fed policy, what the Fed's going to do or not do, right? Yeah, yeah, but if you believe the Fed was bought. Okay, let me just finish the thoughts. So the yield curve, what I call the policy yield curve, I don't know if anyone else calls it. No one else calls it that.

You can go, I like it. I like it. You can point it. That's good. Because it is a policy yield. It is, yes, it's very true. So you have the 10-year treasury yield relative to the federal funds rate target, the actual rate they control.

And every time that inverts, we get a recession. And I think the one rap against you've had a couple three false positives along the way. It inverted a little bit and a recession not followed. Not a deep inversion, but you had some inversion. But what's that? False negative, right? False negative? False negative?

Well, false negative. Whatever. You know what I'm saying. Hey, that's my little jab back, all right? Yeah, but that has right now, the 10-year yield is three and a half. And it's moving up pretty quickly. It's been moving up. It's up 50 basis points, a half a point in a pretty short period of time.

And the fund rate is now two and a half. Let's say they go to 75 basis points like we all say this week. That means the top end of the range is three and a quarter. We're still at three and a half. And conceivably, even under our forecasts for Fed funds, you know, the tenure can keep on moving northward and stay above the 10-year yield. You know, the curve will get flat, flatter than it is now, but it actually won't invert. Therefore.

It could. It could also not. No, I know. But my point is it's not signaling proof positive that there's a recession, you know, dead ahead, right? No. No. Right. Yeah.

Yeah. So the best yield curve is the 10 year minus the three month and the three months sensitive to policy rate. And that will invert on Wednesday or Thursday, Thursday morning. Why is that the best one? It's not controlled by the, uh, No, it's so close. Come on. It's so closely tied. It's not direct. But it has the best track record.

Beats your 10-2. Oh, you can. Well, 10-year policy rate? No, the 10-funds? The 10-2. The 10-2. Let's go look. I can look at it.

That's a good question, though. That's a good question. Okay. All right, let's move forward. This is now we're down to brass tax. We're getting, yeah. Recession probabilities over the next 18 months. 70%.

I didn't ask you. Oh. Oh. Shem, did you see how he did that? It just jumps in. Yeah, he just jumps in. I found my, yeah. I found the, 70%.

Okay, 70%. So what are you at? Oh, it's less than 70%. I'd be 65 to 70. Ooh, that's interesting. Oh. Because I think the next 12 months, if we get through that, we have a fighting chance to get to avoid it.

Yeah. But it's still high, uncomfortably high. So what is it, you said? 65 to 70. Okay. still you would have a recession. Oh, yeah. In your forecast.

Okay. Okay, so 70% because odds are in this 18-month period, we are going to get hit by something that's big enough to push us in. There's that, certainly. But I also think the sociological pressures are also there over that longer time period. What does that mean? Well, recession is a sociological phenomenon, right? People lose faith, confidence, businesses decide not to time.

to invest. Yeah. And all these things we've mentioned, or at least I've mentioned in terms of a global recession, Europe, probably parts of Asia, going into recession in the not too distant future, the excess savings that consumers have built up, would have been doubling down over time here, right? High interest rates from the Fed actually having real economic impact over this time period. That's what pushes us into recession.

And I think any little, then I would agree with you, any type of little shock. at that point, pushes us in. Do we need a shock then? We don't really need it, but any excuse at that point, I think, will be one that we go in. It takes us in. Yeah. Okay. Shannon's signaling we've got about 10 minutes left.

Okay, I'm at 50%. That's low. That's low. That's really low. I'm surprised the two of you are like housing gurus, and you didn't mention housing. So in our forecasts, we have year-over-year declines in new home sales, 30% in the first quarter next year. one false positive. Yeah, but I, what do you mean?

When it falls 30% year over year, a recession is usually 12 months ahead. Oh, that's interesting. And the only false. Is that new home sales or existing homesales? New home sales. New home sales. We get 30% decline around the pandemic when you had sales go through the roof and come back down. Yeah.

But if you go back to the early 1970s since any time new home sales fall that far, recession's 12 a little bit maybe right around there, 12 months later. Yeah, that's an interesting point. I didn't know that. It would make sense because housing is the most rate-scentry of the economy. But I almost look at that as at this point, and it's almost like bad news is good news. How to cool the housing market?

We need to get job growth down fast, right? I mean, otherwise the economy will overheat. I mean, wage growth, inflation won't come in like we want. So we've got to get job growth from $350K,000, where we're our underlying job growth right now, monthly, down to 100K, south of 100K. So if it isn't from housing, where is that coming from? You know, I mean, what's going to cause job, you know, where's it going to be? You know, where's the job growth is going to come from?

The slowing in job growth is going to go. Job losses. Well, we need job losses somewhere to get the job growth, an aggregate to come in, right? So if it's not in housing, I mean, I'm just a little confused by, because everything else, even in housing. The thing that makes it maybe different this time, you know, I hesitate to say that. But the

thorned in the economy side. The vacancy rates are so low. Yeah. And there's so much multifamily activity because, you know, people can't afford to buy single family homes. Affordability's been crushed. So first-time buyers can't become home.

Potential first-time buyers can't become, their rent. So we see a lot of construction. And they are short-stabbed. You looked at, At unfilled positions, they've got a lot of them. So what happens is they stop building single-family homes, and people just walk across the road and go work on the multifamily development.

And then we got the infrastructure thing kicking in in 23. So maybe, you know, I'm worried we don't even see any, I mean, it's really weird to say, but we see no job loss in construction. So where's the job loss going to come from? You know what I'm saying? Yeah. Beecher hospitality, other sectors of the economy, where people are pulling back, right? Yeah.

But now you're feeding prisonized narrative that if the job growth doesn't slow, the Fed's going to come in even harder. Yeah. Gumbs a blazing. Yeah. That is the scenario, though, to get to recession. It's the following, that they go to a quarter, four and a half by the early next year. They pause.

Right. Things don't slow sufficiently. You know, we don't get the job growth slowing like we need to. We don't get overall inflations and core inflation slowing that we need to. and they start tightening again at that point. That feels more like to me the most likely recession scenario. But you see that as low probability. No, 50%.

I don't see that low. That's pretty damn high. If you read the Fed's page book, employers plan on keep hiring just because they know how difficult it is. So they don't want to pull back and they don't want to lay off workers. That's why I think one of the best things I'm tracking is the beverage curve. Yeah. The relationship between the unemployment rate and job opening rate,

the Fed's got to pull it straight down. Yeah. The whole labor to being down. They've never done that. Yeah. Because without the unemployment rate rising, and that's kind of my narrative for a recession. By the way, did you see my Twitter feed this weekend?

You're not looking at my Twitter feed? Shemmer, are you looking at my Twitter feed? Oh, wait. See? We had lots of sports on the weekend. The lowest thing on my list. He can come back anytime he wants you. Eduardo, I'm not so sure about.

He's very quiet over there. Yeah. What did you tweet up? The beverage curve? Uh, you know, variation, Phillips curve. Okay. Oh, the prime age? Yeah.

E-pop versus wage growth. It's actually really at Mark Zandy. At Mark Zandy. Uh, you know, uh, really cool chart. Oh, this was in this week in the economy on, uh, economy. Yeah, but in, yeah, you saw that there. Was that a cool chart? Yeah.

Yeah. It's too hard to explain everybody. Yeah. You need to visually. It's free, though, right? Yeah. It's free. Yeah, it's free.

It's free. It's free. It's free. Yeah. It's good. You don't put it on the banner. Let's make it free. Let's make it free.

It's going to be free now. Yeah. Yeah. So it boils down, in my mind, that you get into, into, you know, second half of 23, maybe mid-23. And the question at that point is whether the labor market's kind of normalizing. Because at the current employment to population ratio for prime age workers, it's about 80% a little over, that would be consistent with 3.5% wage rates historically, which is exactly where you would want it. That's where we were pre-pandemic.

consistent with a full employment economy. But because of the pandemic, shifting, you know, creating problems in the labor market, disruptions, it just pushed that Phillips curve up and out. And so that 80% EOPPOP for primary workers is not consistent with 5%. Right.

And what is key to, whether we go in recession or not, is whether that normalizes that curve, the Phillips curve, come back to where it was in time so that, you know, we get, you know, three and a half percent consistent with an EOP.

Also, the other, the interesting thing is the slope of the curve is now more positively slow. So it suggests you don't need as much of a decline in E-pop to get wage growth coming in, right? Right. Then you did before. But that's the crux of the matter in my mind. And I say 50-50 because, you know, I can see it going either way here. You know, that it normalizes sufficiently that wage growth moderates and inflation comes in back to the Fed's target quickly enough that they don't have to start tightening again. but that's very much a forecast.

So it moderates without additional Fed interaction. Well, you have four and a half. Financial conditions are tight. You know, according to the model, we're pretty close to death at that point anyway. But you're saying consumers, businesses are self-regulating them, right? They're moderating their spending. Interestingly, they have been, haven't they?

Right? They have some. Consumers certainly have been, right? But we'd expect much more. Yeah, I expect that they don't do, Well, they provide the resilience so we don't go in, but they don't, they're not spending with abandon, right? They moderate to enough degree that grows slow sufficiently that we get wage growth in and

inflation. That is quite a needle. That's right. No doubt. No doubt. No, I totally agree with you. That's a narrow path. It's a narrow path.

So if you average the three of our probability recessions, it's still below. No, no, wait. You're what? 70. 70? No, that's 18. 18 months. 70?

70. I'm at 40. No, 50. 50. Sorry, 50. Sorry. 120. 120.

And 70. Okay. 190. 190. Divided by three. It's clearly close. It's close. It's like, yeah.

A whisker. Fortunately, that's not the way any of this works. The votes are weighted a bit here. Mark's waiting. Oh, man. Marks gets 99% way. Well, no, this is a great way to end, right? Because this is exactly where we are.

I mean, in my mind, we're right on the precipice of changing our forecast fundamentally from one that slow, under any scenario is going to be painful, no doubt. Oh, yeah. Yeah. Nobody's debating that. Yeah, yeah. But whether we go for, and this may be more symbolic than real, I'm not sure. Because what's the difference between an economy that's kind of struggling along?

bottom or one that goes into a mild recession, there's a difference, but, you know. Yeah, and then demographically, some people. Yeah. Already today are feeling it feels like it's a recession. Oh, yeah, yeah, for sure. So even if we just are growing below potential. Yeah, people are going to feel pain. There are definitely people who are saying this is a recession for you. Yeah. And remember, that's what the Fed said. They're going to keep going, even though it's going to cause pain to households and businesses. Yeah. All right. Well, let's end with this. what would have to happen for you to change your forecast in a significant way?

And for you to lower the odds and for me to raise the odds. What would have to happen? Oh, so some type of resolution to the Russia-Ukraine crisis, certainly. That would do it. Yep. Changes my outlook. Yeah. It feels like a cop-out, though.

Something more fundamental than that. No? Yeah. Beyond that. You know what I'm saying? in terms of the workings of the economy, something else has to work out. Maybe it goes back to my Phillips curve chart. It just has to work out properly.

Yeah, okay. Well, let's take that off the table then, right? Energy kind of normalizes not the factor. I still, it's very difficult in the situation for the Fed not to make an error. So what else has to happen? I think it's this concept of consumers and businesses self-regulating, right? If they pull back gradually. That's interesting.

Right? Without actually going off the cliff or being forced off the cliff. Right. Yeah, they just keep their hand on the bunker, cautious, circumspecting their spending and investment, but they don't actually go in. That's right. You're seeing the job growth actually moderate. Yeah.

The Fed doesn't have to act quite as aggressively. They're getting what they are looking for. Yeah, good point. Okay. What would it take? I agree with Chris. Yeah. And the fact that the Fed's able to maybe put enough fear in businesses to, you know,

pull back on hiring, cool the labor market, but those people that are getting lost or unemployed find new work quickly, so the unemployment rate doesn't increase. So it's kind of pulling this rabbit out of their hat where they can cool the labor market, at least historically, they've had a hard time doing it. Yeah. So the vacancies are the job postings are coming off. Coming down quickly, but the unemployment rate, just because the job market's still strong, demand is strong for labor, that those people find work quickly, and we don't see an increasing the non-prior rate. It comes out of wage growth. Comes out of wage growth. By the way, one quick

point, you mentioned something to me on the last podcast that the quit rate, the percent of the labor force that's quitting their jobs, a very good indicator of wage growth, future wage growth. For the employment cost index. It is elevated, but it is coming in pretty much. It's coming in quickly, yep. Yeah, which is a positive thing.

Yeah, I mean, in terms of what we're talking about here. It's good for a quarter ahead. Yeah. But it's, I mean, the near term, what's going to matter is the next six. No, but the trend lines here look. They look good. They look good. Better, yeah.

But we'll see. I mean. If it's a steam. Yeah. Okay. Well, for me, I mean, obviously, the flip of what you said, if any goes wrong, oil prices go up or toast. You know, I had this nightmare of a hurricane blown through the Gulf, hitting the Texas coast, wiping out a refinery, no capacity. Yeah, even if oil prices stay where there are, gasoline prices go to, you know, back up to $5 a gallon, we're done.

You know, that undermines confidence. we're going in. If anything goes wrong on the pandemic, if China, you know, has a bad wave and they shut the whole thing down, supply chains were disrupted again. I think we're toast. And I'd have to say, you know, if we're going to, my scenario is going to come to pass,

we need the monthly inflation numbers to go from, you know, right now it's 0.4.5 per month on core and CPI inflation. On average. On average. Yeah. Yeah, it's a little lower time, last one was obviously a little higher. Right.

But we've got to get down to, in the next few months, we've got to be printing 0.2.3. And then a year from now, we've got to be printing 0.1.2. Right. Some encore. I'm just worried about the next few months because of rents. Yeah. And services inflation.

But in the next three, six months, we're still at, you know, 0.4.5. You know, I think there's no way inflation is going to come in fast enough. Right. And then we go down that path where the Fed has to. Slam on the brakes. Okay. And then we covered a lot of ground. Yeah, this was fun.

Very therapeutic. Yeah. Yeah, I really enjoyed it. It's all in person things. Yeah. Don't get any ideas. Not every week. No, no, no.

I'm like, are you kidding me? This is Sarah. This is Sarah. This is a brain child. This is good. So still work from home for you. Remote work. There's no going back for me. No going back.

I'm remote entirely forever. Well, you know. It's not very long. All right. All right. With that, we're going to call out a podcast, I hope you enjoyed it as much as we did.

Obviously, we really enjoy. this. Any topics, top of mind? Let us know. We'd be very happy to tackle them. If you've got guests you'd like us to invite, you know, let us know. We'll be happy to invite them. But we'll catch you next time. Take care now. Bye.