Moody's Talks - Inside Economics - Bonus Episode: On the Bumpy Road to Recovery in 2022

Episode Date: January 12, 2022

With the Omicron wave upon us, it would be Pollyannaish to get overly enthused about the economy's prospects in the new year. But if the economy's performance last year is a guide, we should not be too pessimistic either. Despite being hit hard by the Delta wave of the virus, the economy grew like gangbusters in 2021. It will not grow as strongly in 2022, but inflation, which took off in recent months, will come back to earth. Having said this, how good a year the economy will have depends on the pandemic's path and how well policymakers respond. Webinar Slides 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.

Hello, everyone. Good to be with you. I'm joined by two of my colleagues. If you're a listener to our podcast, Inside Economics, my colleagues are familiar to you. We've got Chris DeRides. Chris is the deputy chief economist. Hi, Chris. How are you? Doing well. Hi, Mark. Good. Good. I didn't expect any less than that. Good is good. And Ryan, Ryan always complains. But so how are you doing? Ryan is the director of real-time economics. I'm good, Mark. No complaints. You're good too? Okay. No complaints. No complaints. Kids are in school or they out? No, they're in school. No, they're in school. Okay, good thing. No, it's no day. Good deal. This is the way this is going to work. I'm going to present for about a half hour. I'll give you a sense of our baseline outlook for the U.S. economy. I'm going to be focused on the near term 2022. I'll talk a bit about the risks. The risks are, there's upside. and downside risks, but I'm going to focus mostly entirely on the downside. I think that's appropriate.

Show a few slides along the way. And when I'm done, then we're going to turn to you and your question. So please fire away in the Q&A section of the Zoom. We really want to hear from you. And Chris, Ryan, and myself will talk about the questions that you pose in kind of a conversational format, kind of like a podcast format. And that reminds me, we are going to put this webinar up as a bonus podcast in Inside Economics. And so you'll be able to get it through the normal podcast channels, Apple, iTunes, YouTube, all those medium.

So this is going to be available through a podcast, Inside Economics. Okay. Okay, let me dive right in. And, Chris, you got your hand up. Is there a reason why you're... Yeah, before you do? Oh, yeah. We're getting some feedback from the audience.

They're saying you're coming in a little faint if you could speak up a bit. Oh, okay. Okay, let me move in closer to this. I think that's better. High-tech microphone. Okay, let me do this. Am I coming in better at all? You are to me, so.

Okay. All right. Well, audience, let us know if we're not. Okay. Okay, so let me dive right in. And I think this first chart nicely encapsulates where we've been and where we're headed. You can see history forecast. Forecast is highlighted by the shaded part of the chart. This is just GDP, real GDP trillions of $2012. You can see the recession when the pandemic hit back in early 2020, almost two years ago. GDP fell by $2012. 10% peak to trough, I think almost on the nose. And for context, if you go, you have to go, if you go back to the financial crisis, back a little over a decade ago,

which I, you know, obviously was very severe. GDP peak to trough fell 4%. So this gives you sense of magnitude. In terms of jobs, we lost 22 million jobs in March, April of 2020. In terms of unemployment, the unemployment rate topped out pretty close to 15%. It was probably higher that,

appropriately measured but officially measured 15% and that was back in April. We've come a long way back. You can see that in the chart. We're not quite back to in terms of GDP pre-pandemic trend. So we're not quite back there yet, but we're well on our way. Key to this recovery has been policy, monetary fiscal policy, highly supportive. The Fed, of course, implemented a number of credit facilities early on in the pandemic to insulate the financial system from the chaos and the economy. That worked out very well. Quantitative easing, bringing down long-term interest rates, and of course putting short-term rates, the funds rate, the federal funds rate at the zero lower bound. And that's where we are today. Fiscal policymakers also kicked in with a lot of

support, the CARES Act. That was back in March of 2020, all the way through the American Rescue Plan, ARP. That's March of 2021. You towed it all up. The support, comes to about $5 trillion. That's about 25% of GDP. And again, for a bit of context, in the financial crisis, all of the fiscal support during the downturn in the subsequent recovery came to about 10% of GDP. If you look globally, the countries that come closest to the US and providing fiscal support are the British and the Japanese, but that they provide about 12th support that's equal to about 12, 13% of their GDP. So about half of support provided by U.S. policymakers.

And of course, the vaccines have been critical to getting down the road here with the pandemic. Obviously, the pandemic is still on, still doing a lot of damage, making lots of people sick and hurting the economy, juicing up inflation. But we're in a much better place today than we were two years ago. You can see where I think we're headed. And I'd say this is a sanguine outlook. Again, this is the baseline outlook. This is the outlook in the middle of the distribution of possible outcomes.

So kind of right down the fairway. And I'd say it's a positive outlook. It's based on three key assumptions. There are many, but I'll just quickly focus on three. First, the pandemic. I'm assuming that while we will suffer more waves, obviously we're now in the middle of the Amicron wave. I'm assuming that will pass by as we make our way toward a month from now or two months from now. And there probably will be additional waves of the pandemic, but I'm assuming that

each wave of the pandemic is less disruptive to the health care system and to the economy than the previous wave. So Amicron, you know, obviously doing damage, but we'll do less damage than Delta did, which hit us back in the summer, fall, which did less damage than the wave. that hit us back a year ago. You may remember back December of last year, excuse me, December of 2020, employment actually declined because of a wave that we were suffering that winter.

But I'm a key assumption number one is the pandemic is going to steadily recede going forward. And we'll come back to that in the context of the risk. Second assumption around fiscal policy, you can see I am still assuming that we're going to get some form of the build back better agenda, through Congress. As you know, the infrastructure part of Build Back Better, that did get through into law. That's the $1.2 trillion infrastructure package over 10 years, 550 billion additional money

that was provided as part of the agreement. That will help the economy beginning late this year, but mostly in 23, 24, and 25. But that's embedded in here. And then I am I'm also assuming that some form of the build back better social agenda will get through. I'll have to say at this point, the probabilities of that feel like they're falling pretty quickly. We've not gotten to a place yet where we're going, we've taken it out of the out of the outwuck. It's still in the January baseline outlook. But we're getting pretty close to that.

And, you know, we'll revisit in a couple, in a few weeks when we start doing the February forecast. and there's a real possibility that we will assume that this doesn't not get through into law. At this point, it's not really a game changer for the economy. It will ding growth a bit in 2022 compared to what I have here. But, you know, the trajectory of the economy of the recovery will stay the same. And, you know, I do think build back better will help long-term growth and it will benefit low-middle-income households. So there are some downsides to not getting it done.

But at the end of the day, the picture here isn't going to change a lot if we don't get billed back better through into law. Finally, the third assumption is monetary policy. As you can see, the Fed has already begun to normalize monetary policy. They've now started to wind down their quantitative easing, their bond buying, so-called tapering QE. That's on track to come to an end as of March. of this year and then we have now four 25 basis point quarter percentage point increases in the funds rate in calendar year 2022 i have the we have the first funds rate increase in may then one following in july then september and then in december uh markets financial markets

are anticipating that as soon as the quantitative easing is over in march that will get the first rate heart immediately thereafter uh i i i I think they're going to take a little bit longer than that, in part because they're going to want to digest what kind of damage Amacron did to the economy before they actually start to raise rates. But I wouldn't argue with anybody if they said March as opposed to May. I think a pretty close call. But I think four rate increases. And then they'll steadily raise rates until they achieve what I would call the equilibrium fund rate. The fund rate that would be consistent with an economy in the long run, with an economy at full employment, growing at a

its potential with inflation at target and that's about two and a half percent. One final thing about the outlook, that's long-term interest rates, 10-year yields. I'm sure you've noticed that they're up over the last couple three weeks as bond investors digest the more aggressive normalization of monetary policy. I expect the 10-year treasury yield to be hovering around two and a half percent by the end of this year. And by mid-decade in the long run, that the 10-year yield will be about 4%, which is very consistent with, I think, nominal potential GDP growth in the economy. And in the long run, I'm not going to go into this unless you want to talk about it in the

Q&A. In the long run, again, with economy, full employment, growing up potential with inflation at the Fed's target, the 10-year yield should equal nominal potential growth. And that's about 4%. I think that's where we're headed. So in the long run, mid-decade, 4% 10-year yield, 2.5% fund rate. One more point about the baseline outlook, and that is I do expect the pandemic to recede, but I do think there are going to be longer-term consequences of the pandemic.

And one of the most, some are pretty obvious, increased online use, less business travel. But I think the one that is going to be most important in terms of the macro economy and different sectors of the economy regions is remote work. This is here to stay, and it's going to have a big impact on regional economic performance, real estate markets, state local government finances, you know, lots of different things, labor market dynamics, lots of different things. And you can see how a big a deal this is. This here, this shows net out migration in the second chart, net out migration from urban cores in the nation's 400 plus metropolitan statistical areas to suburbs and excerpts. It's monthly data. It's based on credit files.

So we get a 10% sample of all the credit files in the country from Bureau Equifax every month. It's anonymized. It's a consumer level anonymized. But we can see addresses. And so we can see address changes. and based on that data, we can calculate this information here. This is monthly, 12-month moving sum to put it on an annualized basis back to 07 when the data starts. The last data point here is for November.

And you can see the shaded part of the chart is the pandemic. So you can see just prior to the pandemic, net out migration from urban courts to suburbs and extrabs was just under 300k. It peaked at close to 600K this past summer in June or July. It's starting to come in a little bit, but it remains very elevated. And you can also see the 10 metropolitan areas in the chart. These are the 10 areas where the increase in net out migration during the pandemic has been most significant. I think no surprise, but it's really kind of interest, you know, very interesting, at least to me,

big urban centers in the Northeast corridor from Boston to New York to Philly to D.C., Philly being, of course, our hometown, Chicago. and then over on the west coast, L.A., San Francisco, the Bay Area, Seattle. Miami also a bit of a surprise to me that we've seen a lot of increasing net out migration there. These folks from the northeast, they're going into the south, the southeast in particular, and over into Texas, Austin. So MSAs that are really benefiting would be like Atlanta and Charlotte and Tampa, Orlando, Austin, Dallas.

And then the folks on the west coast, they're going to the mountain west. So going from north to south, Boise, Salt Lake, Vegas, Phoenix, Tucson, and again, all the way over into Texas. And, you know, this is this going to come in more as offices ultimately reopened? You know, we're not back to work yet, but in offices. But, you know, we will be at some point, I think, in 2022. So we'll see this come in, but we're not coming back. This is, I think, a dynamic that's a feature of the future. And again, all kinds of implications that we can talk.

about, but this is a key aspect of our baseline economic outlook when you take a look, particularly regionally or in different sectors, particularly in housing markets or commercial real estate markets. Okay, that's the baseline. Let me now turn to the risks. And as I mentioned at the top of the talk, I am, there are upside risks, and we can talk about that. But I'm going to focus on the downside because I think the downside risk still are predominant. And, you know, to get one's mind around this is pretty difficult.

There's a lot of different risks and cross currents. And so we've put together this risk matrix to help kind of get a sense of the risks. And just to describe the matrix, the X axis, the horizontal axis is the severity of that risk or shock. That's kind of like a present value of economic loss if that shock were to occur. The Y axis, the vertical axis is the probability or the likelihood of that risk or shock. And obviously, this is very subjective. So, for example, if you go to the northeast part of the chart, pandemic intensify. So, you know, the economy, jobs, unemployment, inflation, everything is still tethered to the

pandemic. And if the pandemic doesn't stick to our script, if it doesn't recede, if the next wave that we get isn't less disruptive than the previous wave, then obviously that's a risk to our outlook. And it's a problem. It's going to change the contours of the outlook and still number one issue. If I go to the, if you go to the southeast part of the chart, social and political unrest, well, you know, the feels like we're, everyone's very tense given the 2020 election. We're still, some folks are still trying to litigate that. A lot of, a lot of tension out there. And that could boil over. I mean, we kind of got a taste of that back in the summer of 2020. there's a risk that you know that we see something like that but but even more

more severe and intense and it does more damage low probability event but if that were to happen I would proffer that that has the potential for doing very serious damage to the economy if you go to the northwest part of the matrix forbearance cliff this goes to the fact that the government provided a lot of support to household debtors folks with with mortgages from Fannie Freddie FHA VA they had a more foreclosure moratorium and there was a moratorium on payments that started to wind down for most people student loan borrowers they still are getting forbearance on on payments so they don't need to make payments I believe Chris will correct me if I'm wrong but something like May at this point that was

extended to May these supports are coming off you know the rental eviction moratorium that's done the foreclosure more term is winding down the student loan debt more than term of that will end in May and there is the potential that you know these households will have some difficulty making payments we could see some increase in default and foreclosure and that could do some damage you'll you see that's that's a very high probability happening that's going to happen but at this point the cliff has gotten a lot smaller the number of households that are in financial trouble much smaller and so i think the macroeconomic consequences are relatively low you'll see in the southwest

part of the chart climate change you know I don't at this point it's hard to envision a scenario particularly in the horizon that we're talking about here over the next year or two that climate something around climate risk would really do a lot of damage to the economy doesn't feel like we're going to get a carbon tax or a carbon border adjustment tax or some other the transition risk doesn't feel at all likely and physical risk you know like hurricanes and floods I mean we're going to have that and more of that than we've had in the past because of climate change, but that does not feel like that rises to a level where it's going to do

significant macroeconomic damage. But nonetheless, I think it should be on the matrix and that will, I think, become more prevalent as we move forward if we're doing this a few years down the road and have the matrix, it might be in a different spot. So this kind of gives you a sense of it. I am now going to end the conversation by focusing on two of these risks. The first is around asset prices. You can see I have financial market sell-off pretty high here. is a probability that's correction in stock market you can see crypto crash house price declines i think asset markets are juice and i'll talk about that for uh for a bit and then i'm also going to talk about what i think is top of mind from for many folks is the high inflation of course we've got the

cpi consumer price index today and for the for the month of december consumer price inflation year or year 7 that's the highest that's been since 1982 and there's obviously a lot of angst about about where that's headed and how fast that the inflation will moderate. So let's just focus on those two risks. First is inflation. Oh, excuse me, I was going to do asset prices first. So let me do asset prices first, then I'll come back to inflation. First is asset prices.

They're juiced. Their valuations are very, very high. Pick your measure. Go to the price earnings multiple for the S&P 500, in the equity market, look at credit spreads in the bond market, and look at house prices to ratios to rents, effective rents, or to income or construction costs, valuations are very high. That is, I think, nicely represented here across all asset markets. This is kind of sort of like an economy-wide price earnings multiple.

In the numerator of this ratio is the value of all the of the assets owned by U.S. households. This is data from the Federal Reserve's financial accounts. And in the denominator, we have GDP. So, you know, the price is in the numerator, GDP, which is the source of economic value driving those asset prices. So GDP is profits, GDP is income. Those are the things that drive stock prices or commercial real estate values or housing values. And you can see, I'm showing you data all the way back to early 1950s, as far as the data goes. It's relatively stable in the 50s, 60s, and 70s.

It's been, the P multiple has been rising pretty consistently since then, which is consistent with a steady decline in interest rates. And so valuation should be high. Interest rates are very low. And until very recently, they were at record lows. I mean, the 10-year treasury yield, I believe, was below 1% about a year ago. So very, very low interest rates.

And of course, the funds rates had zero. So you would expect valuations to be high, but it feels like they're going well beyond that at this point. Take a look at the most recent period during the pandemic. Pre-pandemic, the multiple assets to GDP was about six times, which, by the way, it was already pretty high. It was higher than it was back in the housing, the peak of the housing bubble back in the mid-2000s. You can see, you know, six times is pretty high. But as of the fourth quarter of 2021, my calculation, It's close to seven and a half times. So this just gives you a real sense that market tradition can kind of feel it.

You know, there's froth and speculation creeping in in the markets. Spacks and meme stocks and very aggressive IPOs, initial public offerings in the equity market. You can feel it in the crypto market. I mean, crypto, you know, arguably is largely just a medium for speculation. There are some use cases, but they're really on the margin. And most of what's going on in these markets are, you know, households speculating on price increases. And then, of course, in the housing market, there are signs of froth creeping in. And you get a sense of that here.

This shows the relationship between the investor share of home sales. So this is the share of home sales that are going to investors, corporate entities, entities with LLC on the deed, or owners that own a significant number of single-family property. I'm relating that to visually to house price growth. That's the core logic house price series, repeat sales series. That's the green bar investor shares, the blue line left-hand scale, house prices is the right-hand scale. And you can see that as investor shares picked up here over the past year,

we've seen house price growth really accelerate, and is now one of the key reasons why we're seeing out of bounds house price growth of about 20%. So my point is that asset markets broadly are very highly valued, overvalued, arguably frothy, bordering on speculative, and I think we should start talking about the potential for bubbles if prices continue to rise at this pace for much longer. And that doesn't make a whole lot of sense in the context of right. rising interest rates. So if you buy into my outlook for the 10-year treasury yield or the federal fund rate target, and also growth is going to slow, you know, by definition, I mean, we've been

barreling along here and we're coming into full employment and, you know, which I expect towards the end of the year, then, you know, we will have to see slower growth one way or the other. And the result of all this is that asset markets are vulnerable to corrections. Now, you know, I think at this point, if asset markets corrected, it would hurt, it would sting, it might take a bite out of growth. I don't think it would be existential to the economic recovery. You know, the leverage backing these assets, like margin debt in the equity market or mortgage debt in the housing market, still pretty low. It doesn't feel like, you know, we're at a place yet where if asset prices go down and we start seeing delinquencies default on the debt that's backing those assets, that it would be a financial system problem. But, you know, I won't say that six months from now or 12 months from now if asset prices continue to appreciate it like they have.

So this is something to watch. This is a, you know, a significant downside risk. Finally, I do want to end by just talking about inflation and, you know, quickly just to lay out first the baseline. Here's our, I think, you know, just nicely shows like the first chart I showed you in terms of GDP where we think inflation is headed. This is consumer price inflation, CPI percent change year ago. I'm showing you data from Q1, 2019, through the end of 24. This is our January baseline economic outlook. Again, you can see where history ends and forecast begins. That's the shaded part of the chart.

And motivating, you can see it's a pretty sanguine, just like with GDP and jobs and unemployment, it's a pretty sanguine baseline, right? We've got inflation seven percentish. Now this is quarterly data, so it doesn't quite get. there on a quarterly basis. But, you know, 7% on a monthly basis through December. And I have it coming in, getting back to the Fed's target by early 2023. The Fed's target at this point on the CPI is probably some around 2 and a quarter percent. On the core PCE, that's the preferred measure the Fed looks at is closer to two. CPI obviously is going to be higher than PCE because of differences in the way

things are measured. But I have it coming into the Fed's target. In fact, you'll even notice in 2023, a little bit of inflation that's actually a little bit below target. That's just a model result. But it makes a point that it's going to come in. The logic behind this is severalfold. Most importantly, is that the reason that inflation has surged to the degree it has is because the supply side impact of the pandemic, particularly in my mind the Delta variant of the pandemic.

That's where the surprise came in. Delta was a big surprise. No one anticipated that back on the other side of the vaccines in the summer of 2021. But Delta came on, creamed us and actually did a lot more damage to Asia, Southeast Asia, where a lot of global supply chains begin. And that's why we've seen the mess in the supply chains. Shortages for all kinds of goods, vehicles being the poster child for all of this. Shortages, low inventory and skyrocketing prices.

Even in the December CPI, a big chunk of the increase in CPI in December was vehicle prices. using new vehicle prices. Also scrambled labor markets, you know, people got sick or fearful of going to work because they were going to get sick. So that caused wage growth to accelerate, particularly for low wage workers and frontline industries and that got exacerbated the inflation dynamics. And then energy markets, you know, scrambled by the pandemic. You know, we saw demand start to pick up as the global economy reopened, the supply side of

the market slow to respond, which is not atypical. And the result is we've seen higher energy prices. But, you know, if I'm right about the pandemic, receding as I as I articulated early on is again it's an assumption that happens I do expect the supply side problems to work themselves out supply chains labor markets energy markets we'll start to see that come in and then on top of that because of these high prices in the profits that businesses are making you know corporate profits corporate profit margins are near record highs that they view this as an opportunity they're investing very aggressively

A lot of that capacity, I think, is going to come online 12 months from now, 18 months from now, 24 months from now. And we could even see some price weakness. And that's what you're seeing here on the good side of the economy. And that's what you're seeing here in 2023. And just to reinforce the point about the pandemic, this kind of decompose, this does decompose the growth in consumer price inflation year-over-year CPI growth into the contributions from the pandemic through three different sources. The first is energy supply and demand. That's the red part of the bar reopening. So this is another aspect of the pandemic.

It crushed pricing and industries that were on the front lines, hotels, rental cars, airfares, that kind of thing. Now that the economy is reopened those businesses and those industries have simply been normalizing prices, bringing prices back up to where they were pre-pandemic. And that adds to the inflationary pressures. That's the green part of the bar. And then finally, the supply chain bottlenecks. blue part and that as I said earlier is largely vehicle prices so you can see in December that's the last data point that a big part of the 7% inflation you know close to 4.5% of the 7% is directly related to the pandemic take 7% minus

and 1 half you know that's that's that's 2.5% that's exactly where you know you'd expect consumer price inflation to be so it's very driven by by the pandemic and And then finally, very important to continue to watch is inflation expectations. So far so good. Different ways of measuring expectations. My favorite is looking into the bond market because this is where investors are putting the money where their mouth is. And you can see two different measures, five-year, five-year forward. This is teased out of 10-year treasury yields.

That's the blue line. And five-year break-evens. That's the blue line. This is data, daily data, back to 2020. I think this goes through a couple days ago. And you can see they've normalized. I mean, if the Federal Reserve were looking at this, they'd say this is exactly where I'd want these things to be.

So far so good. So the baseline, you know, I feel pretty good about it. I feel confident that inflation is going to moderate. But, of course, it's all predicated back to the pandemic, how the next waves of the pandemic unfold. And if Omicron's worse than anticipated or the next wave is worse than anticipated, it does more scrambling, then we're not going to quite get the picture that I'm hoping for. But I think if everything kind of sticks the script with the pandemic, inflation is still moderate. But obviously, boatload of risk around that and something to consider going forward.

Okay, I covered a lot of ground and I took exactly 30 minutes on the nose. I know Ryan and Chris were timing me, but I nailed it, I believe. and we are going to turn to the Q&A part of the conversation. But before I do that, let me turn to the two of you. And maybe Ryan, you first. Is there anything I said that you take, I don't know if you would disagree with, but you'd like to add more color to or just to reinforce a point

or color a point? Yeah, I think you and I have a slightly different risk matrix. I would put a Fed policy error much higher and having a much larger economic cost, because what they're going to do this time around is not just raise interest rates, but at the same time, they're going to be reducing the size of their balance sheet. So they're going to go from quantitative easing to quantitative tightening. And we don't have a lot of precedence for when these two channels of monetary policy are tightening at the same time, maybe the impact on financial markets. So, you know,

again, to your point about, you know, a market sell-off, but also the economic, you know, drag from the Fed normalizing could be a little bit more than what we're anticipating. So you can see where I have Fed Reserve misstep. That seems pretty high to me. Where would you put it on the risk matrix? Oh, I didn't increase the odds. Oh, you'd increase the odds. Oh, yeah. I think it's very highly likely that, you know, we're barreling towards a moment. See, I have like a 50% probability that's going to miss step half they won't have. So you think they are going to miss step. They're going to miss step. And so what does that mean to in this step?

They're going to tighten too aggressively. They're going to disrupt financial markets. I don't think they're going to cause a recession, but, you know, I think the, you know, you always use the landing, the plane on the tarmac. We're going to come in and we're going to be bouncing around for, you know, a couple of years as they normalize. Yeah, it's interesting. They tighten in March. Yeah, they're going on March.

Oh, you think they're going to tighten in March. I think later this month, we get the fourth quarter employment cost index, which is our preferred measure of wages. And it's going to be very, very strong. And Powell has, Fed Chair Powell has pointed out that the ECI and the third quarter kind of contributed to their hawkish pivot. So you're going to get another data point. And I think that's going to lead them to raise in March. And do you have, would you concur with the four rate hikes in 2022? Yeah. No, I agree with you. Okay. You're just, you're just pulling it over. You're like investors. The markets are anticipating a March hike, you're saying that feels more right to you at this point in time.

At this point, yep. Yeah. Okay. I don't think I'd argue too strong. We're not off by a lot. You know, we're talking a couple months. Yeah. Right.

Well, someone asked me about this yesterday. A client asked about this particular kind of scenario where the Fed does misstep. It steps on the brakes too hard. And we get more of a boom bust. And I think that's a reasonable scenario. I don't think it's a baseline, but I think there is a probability to that. And I think the one thing I pointed out, I know, Ryan, you may not like this answer. But I said, or this observation, I said that keep your eye on the shape of the yield curve.

The difference between the 10-year yield and the funds rate are the 10-year yield and the 2-year yield, two-year yield is obviously very sensitive to expectations around future monetary policy in the direction of the funds rate. And every time we've had a recession, I think since World War II, or certainly since 19. the 1960 recession. It's preceded by an inversion where the funds rate or the two year have risen above the 10 year. And that's that's very unusual and that's an inversion. In fact, we did get an inverted yield curve prior to the pandemic in 2020. So that's an asterisk. Okay. There was no reason for a recession in 2020. All right. Took a pandemic. Really? I'm not so sure. You may recall. I think there were other reasons to be worried about 2020 in recession. But nonetheless, I think you would

concur, though, you would agree that it's not a bad indicator to watch because that's an indication that the markets are beginning to think the Fed's misstepping. Correct. And I mean, that could limit or tie their hands on how aggressively or how high they can increase interest rates. They're not going to invert the yield curve because, you know, they don't want to risk, you know, sending a signal that they are going to misstep. So, and correct me if I'm wrong. I think there's a number of Fed or maybe not a number, but there's been a Fed member or a couple that have actually highlighted the fund rate or the yield curve as a something that they don't want to do. That would be a signal that they've done too much. I think it was Raphael Bostek, the Elena Fed. There's a few. If you look at

the minutes, they talk about the yield curve a lot in December meeting in their minutes. Yeah. Okay. Ryan, Chris, anything you want to add color to take umbrage with? It's a good to say keyword. Humbergeny's disagreement. Strong disagreement. Yeah, there you go. No, I agree with the general contours of the forecast here. I guess from my perspective, I was looking at risk. I would underscore the pandemic effects.

So if I had to adjust this chart here, I would actually put the pandemic intensifies. I would increase odds of that. There's going to be another wave to my mind. And it doesn't even have to be a significant wave. given the one slide you skipped, which I think is a good one, just in terms of the labor supply impacts of people being out sick. And that's, that I worry about this.

I wanted to be within 30 minutes. Yeah. But, yeah, this is what I, if I went over, so I skipped this chart. So this is what I would underscore in terms of near-term risk, certainly that there could very well be additional waves. they don't even have to be as severe as Omicrod to cause some disruptions. And with that, I worry about inflation

lasting or persisting a bit longer than what we have in the forecast. So that's certainly what I keep my on. And just to explain this, the blue line, this is monthly data on September of 2020 through December of 21. The blue line is the change in employment. And that's the left-hand scale.

And this is non-farm payroll employment. The red line is the number of COVID cases during the survey week that the BLS conducts to calculate employment. And, you know, it's pretty obvious, right? In fact, the relationship doesn't look quite as strong more recently, but I suspect that's because the data, the employment data hasn't been revised yet. So once it gets revised, it probably will look more right. But the point is, if you kind of do a forecast here, what's COVID case is going to be when the BLS does the survey next to? week for the January employment number is going to be this week oh it's this oh yeah this week what's going to be this week 700 or over 700,000 yeah yeah well okay you can do the mental kind of uh arithmetic here

that would imply a negative number right for the month of january certainly um so that's a possibility so i think it's possible yeah i think that is a very significant threat significant risk okay um so i just reiterate to the audience if you have questions please pose them we're going to start tackling them now we've got a queue but please fire away and if we don't get to all of them we will respond in writing you can do that through the Q&A button in in Zoom so please please feel free so so Chris or Ryan I know you've been monitoring the the questions where should we go next to recycling inflation sure yeah why not all right so there's one question whether or not

rate hikes that we have on our baseline is going to cause inflation to be weaker in 2022 and 2023. Well, I'll answer it and then I'll let you guys answer it. The way I would answer that is, yeah, that's critical to our inflation outlook that, you know, I did argue strongly that the surge in inflation we've observed to date is related directly to the pandemic and the supply side disruptions that the pandemic has created to supply chains, labor markets in particular. But, you know, as you move towards the end of the year, if we can kind of get the growth that we're expecting GDP, jobs, unemployment is going to continue to come in, labor force is going to continue to increase, participation is going to increase.

We're going to come into full employment by the end of the year going into next. And, you know, if you're growing strongly and blow past full employment, then you've got an inflation problem. That's a fundamental inflation problem. That's, you know, that's not pandemic. That's, you know, classic business cycle on past full employment, labor markets are stressed kind of inflation. And that's where the Fed really will step on the brakes. But we're saying, look, to avoid that, to avoid blowing past full employment a year from now and getting, you know,

fundamental acceleration in wages and prices, the Fed needs to slow things down. And the way to do that is to raise rate. So we have four quarter point rate hikes, a full percentage point on, the funds rate in this year. And of course, that leads to higher. And of course, no QE. And in fact, another point to make is the QE, the bond buying is going to end in March, not too there long after. And I'm curious what you think, Ryan. I think they begin QT quantitative tightening. That is allow the balance sheet, the treasuries and mortgage securities on the balance sheet to wind down. And that will add upward pressure to long-term rates. We got rates moving higher. And I think

the economy is pretty sensitive to rates. We talked about it in the context of asset prices you know we're going to see weaker asset prices and that will slow growth so that as you get to the end of the year going the next economy is growing at a rate that's more consistent with this potential and unemployment stabilizes it and that's why Ryan did you hear what I just said that that seems pretty complicated that's like that's difficult to even say think about actually doing that you know in the fog of of the pandemic you know and everything else that's going on. And these are, these are only the things that we know about. What about the

things that we don't know about that are certainly going to happen between now and the end of the year? So Ryan is saying really high probability if Fed gets this wrong, you know, one way or the other. And, you know, price is too hard or not hard enough. And, you know, we have a bigger problem down the road. So, yes, the rate increases are critical to getting the economy to land on the tarmac in full employment without inflation becoming a fundamental problem. So I think you just talked yourself into raising the probability of a Fed policy error. Well, you know, I'm very sympathetic to it. But when I say error, it kind of feels like to me crash landing, you know, recession.

And I don't think I want to go there. I don't think that's going to happen. At least not at this point. I don't think they'll be able to navigate that. But that's what I mean by kind of sort of what I mean by a misstep. But maybe maybe you mean something less than that. And if that's the case, then, you know, more. sympathetic to it. Anything to add to what I just said about that in response to that question,

Ryan or Chris? No? No, I think you covered it. Yeah, fair enough. Okay. I mean, the only thing I would add is that inflation would moderate this year without Fed rate hikes because the supply chain issues are going to start easing. And that's two percentage points of disinflation that will get wrung out of the CPI over, you know, this year and next. But you're right, like, 2023, if they didn't start raising rate soon, then we're going to have an inflation problem down the road. Yeah. That's a great point. That might be a nice side way to this next question here, which touches on supply chains.

The question is, what is the base case for real GDP growth for 2022 and 2023? Maybe you can just summarize those numbers. And then is there any meaningful impact to supply chain disruptions from China's recent closure of factories due to Omicron? Yeah, good. Yeah, generally, I don't give specific numbers because I figure folks have it in front of them. But that's not fair enough. That's just that's not right because many people don't. So to be precise, real GDP growth in 2021, of course, we haven't gotten Q4 data yet, but it's so it's a bit of a forecast. It's going to come in around 5.5%. I think it's 5.6% to be exactly precise.

In calendar year 2022, we're expecting GDP growth of 4.1%. And then in calendar year 2020, something, I think it's 2.7, 2.8%, somewhere between 2.5% and 3. At this point in time, I think the economy's potential growth, and I don't think this is long-run potential growth, but I think its current potential growth is about 2.5%. So that gives you a sense of we're going to continue to see declines in unemployment.

an increase in labor force participation over the next 12, 18, 24 months. So the unemployment rate is 3-9 as of December. I have a bottoming out in the low threes, somewhere 3-2-33 by December of this year, and then kind of stabilizing. We have participation rates rising, so participation is 61.8% as of December, and it's somewhere between 62 and a half and 63 by late 2022 going into 23. I also have we also have a bit of a pickup in working age population growth. Working age population growth has been very depressed.

You know, a lot of that's retirees, boomers retiring early, but it's also more importantly less foreign immigration. So if you go back pre-Trump, it was about a million per annum in immigrants. President Trump changed policy and of course the pandemic crushed immigration our estimate is that in calendar year 20, 21, we probably got quarter million in immigrants. I expect that to start coming back, and that provides a little bit juice from working age population growth. So you add all of that up. That means we get to an economy that's at full employment by the end of this year, going into 23

and growing very close to its potential rate of growth. That's kind of the contours. Now, in terms of Omicron, that has affected the quarterly patterns. So before Omocrine, so if you go back to our December forecast, which we did in early December before Omicron really came on the scene, we had 6% growth in Q1 of this year. No, excuse me, 5% growth in Q1 of this year, a little over 5%. And now we're down to just about two. So we've shaved three percentage points off of GDP growth in Q1.

But we've added that back in Q2. So we're assuming that Omocrine is a very intense wave. It's going to do a heck of a lot of damage in January. We talked about potential decline in employment in January, but that's going to come off very quickly. That's kind of sort of what we've seen in South Africa, for example. Hopefully we see that in Europe pretty soon, and we tend to follow Europe in terms of infections by a few weeks. And then by March, certainly going into Q2, infections are back down and the economy revs right back up. on the supply so it's changing the path the pattern the quarter of the pattern but not the annual

growth rates to any meaningful degree on the supply chains i am assuming omicron is going to slow down improvements in supply chain dynamics but it won't short circuit then because i you know i think i'm assuming that the disruptions in asia are less severe much less severe than they were with delta in part because they're much more vaccinated. If you go like to Malaysia, I go to Malaysia because Malaysia shut down all its chip plants, which, you know, created all the vehicle manufacturing in this country and caused vehicle prices go skyward. And that's a, as I said earlier, a big part of the increase in inflation.

Malaysia is now, I think, 80% vaccinated. It was like 15% vaccinated before Delta. And I think they're going to have a very, very different kind of COVID policy. They're not going to shut down factories like they did, at least not to the same degree that they did in Delta. And I also think that American companies, U.S. companies are getting better, kind of identifying bottlenecks

in the supply chain and managing around those bottlenecks. So I do think supply chain issues will become less pronounced. Not quickly, I think at the first half of this year, most of the moderation and inflation, hopefully is around energy prices. By the second half of this

year, I think that's where we get the big improvements in inflation, and that will be largely around much better supply chain dynamics and labor market. So that's really, really when I expect, you know, to see the most of the improvement in the second half of 2022 on inflation. I know I covered a lot of ground there. I think I answered the question, right? You did. I think there were a number of questions about labor, labor market itself and

the longer term participation. So I think you touched on that as well. I think there was perhaps a question about the boomers and the early retirement. Do you expect them to come back in? Is that going to impact the participation rate at all? Or is it really that I'm a boomer, but I'm not going to tell you what I'm going to do. So what do you think I am going to do, Chris? What do you think? Oh, you're sticking around. You never exited.

Yeah. Well, maybe I'm a little weird. You know, it's hard to shove me out. Yeah. So what do you think happens? Well, what has happened with the boomers during the pandemic? And what do you think is going to happen going forward? Yeah.

So early retirements are up. You can see that from survey data, a number of folks in the 55 plus category have indicated that they're not looking for a job and they're not interested in looking for a job, right? So they're indicating that they're out. And I think the majority of them actually will stay out because of house prices, asset values have gone up. Stock portfolios are performing, so they can afford to retire early. But I do think that there's a segment that will come back in, at least part-time, whether that's because of preference or a choice, right? You get bored at home when it work. But then there is certainly a segment that will need to come back in at least part-time to supplement incomes or, you know, inevitably things happen.

So I don't count on that group providing a whole lot of additional labor. So from my perspective, these labor supply issues are going to persist for quite a while. Because immigration, although it comes back up, it's not going to come back up very rapidly. And the generations are smaller, right, after the millennial. So it's going to get less and less labor supply coming forward. So I think this imbalance is going to persist for a while. Ryan, any perspectives on that point around boomers and retirement? No, I would agree with Chris.

I mean, I think the other thing is, with boomers doing early retirement, I'm wondering if, you know, that's generating a little bit of the increase in entrepreneurship that we've seen. So if you'll get, you know, maybe people are starting their own companies, you know, the employment identification number data, which tracks new businesses. It's been really, really strong since the pandemic began. So I'm wondering, you know, if some of the boomers left because they could, and now are, you know, starting their own businesses. Right, right. Well, just to give people a sense of the numbers, so we have participation rising, settling in between 62.5 and 63%. But that's still well below the pre-pandemic peak in participation, which was, you know, roughly speaking, 63 and a half percent, you know, somewhere in that order of magnitude, maybe a little 10th or two below that. So that half-point difference, a little more than half-point difference, a little more than half-point.

point, that is largely retirees. Those are the folks that, you know, whatever, some, we would have seen, even without the pandemic, participation would have declined over this period because of increased retirement by boomers, but that was all accelerated and pull forward. And so it contributes to about a half point, a little over a half point decline in participation, you know, here going forward. Hey, Ryan, let me, since we're on this subject, because I know there's, you, you tend to have these statistics that you just don't like. You think they're mislellan. leading. I mentioned the yield curve. The yield curve. Yeah, yeah. It's pretty high up there. Tell us, you know, when people think about full employment, what full employment means,

you know, they think about it in the context of unemployment rate, which we kind of think would be in the mid-threes for full employment. They think about the participation rate, but you think about something else, the employment. Yeah, I ignore the participation rate. Yeah. Do you want to explain that and what that is, what it is and, you know, where it is now and what the benchmarks are for full employment? Yeah, so my, my benchmark is the prime age. So these are people 25 to 54. So it's a prime age employment to population ratio. And right now we're at 79 percent. And at least historically, when an economy has been at full employment, we're right around 80 percent, maybe a little bit higher. So if the recent trend continues, we'll be, you know,

by that metric, at full employment by the end of the year. Yeah. So it's the employment to population ratio for workers that are 25 to 54. Correct. That's just their employment divided by their population. Correct. That incorporates unemployment and participation kind of all in one. And it's sitting at 79% today, which is up a lot from the bottom. If you go back, when the teeth of the pandemic in early 2020 was what was it?

It was like close to 70% it wasn't? It was very low. It was low. And now it's 79. And you're saying once we get to 80, if you look at, history and look at past previous business cycles, at least over the last three, four business cycles. Once the economy has E-pop over 80, that's pretty consistent. It feels like a full employment economy, wages and everything else. And so we're still not quite there yet, but if everything

kind of hangs together, we will be there by the end of the year, which is what we're saying. Right. So, I mean, even though the participation, the labor force participation rate will fully recover from the pandemic because of the demographic issues laid out, prime age employment to population ratio will get back to where it was pre-pendemic, if not higher. So, you know, that's just a sign that, you know, the labor supply issues, I mean, they're going to be there, but they're not as binding as I think some people are making it out to be. Yeah, got it. Okay. All right. Next question, Chris, or Ryan? Chris, you have one? There are several questions about inflation, as you can imagine. So maybe combine a couple of these. One is that just asking for additional color on

today's CPI report. Then one I'll connect it to inflation certainly has information, inflation implications, is around agriculture. And what we think about input, the input costs, reliance on exports, the weather. And how, so the question I'll formulate out of that is what are we thinking about commodities? Commodities in general, agricultural commodities, and then you certainly broaden that out. in the context of inflation.

Chris, I thought you're going to bring in the, I thought you're going to bring in the cobweb model. I'm going to bring in the cobweb model. See, that's why Chris weren't right to write to ag. That's why I went to that. Yeah, I knew it. But maybe you can comment on the CPI report first. Yeah, that's a good idea.

Go ahead, Ryan. That's your, uh, your, uh, your, uh, expertise far away. Yeah, so it wasn't that surprising. It was up five tenths, uh, between November, December. Energy was a slight drag after boosting the CPI in the past several months. But again, you go back to the supply constraint components. So if you look at new and used vehicle prices, that was the lion's share of the increase in the CPI. So if you exclude just used car prices, the CPI was up only three tens.

And then you laid out earlier, looking at it year over year, we're at 7%, but you take out energy, take out these supply constrained components. We're down closer to 2.5% or 3%. So I think the one area that I'm really focused in on the next several months is rents. So owner's equivalent rent, if you look at ten-inch rents, they're pretty sticky. And they were up four-tenths of a percentage point between November and December, which is identical to what it was in the past couple of months. That's going to change. That's going to really pick up probably this summer.

We'll see that's when rental inflation will be at its peak. Do you know why there's such a lag between the rents observed in the marketplace? If I go look at, you know, there's data that looks at current rent growth and it's 10%, 12%, 15%, depending on which measure you're using. But that takes a while to show up in the Bureau of Labor Statistics measure of rents in the CPI Consumer Price Index. Why do we have that lag? I think Chris, he explained it about it. Isn't it something with reporting? Chris, good idea. I thought you knew the new right off the top of your head.

Yeah, well, my assumption, and maybe I need to confirm this, is that it has to do with just the contracts, right? That the rents, you know, there are longer term contracts, 12 months, so it takes time for those contracts to renew. So when we are looking at new rents and seeing, oh, it's 10%, 20% up in the last year. That's on the new contracts, but then majority of the rental contracts still outstanding are based on the old rate, right? So you're kind of blending it. So that's why over time those lease agreements get renewed and they will catch up. That's my understanding for the lag. And on the owner's equivalent rent, my understanding there is that it's, that is survey-based.

So it's really the owners indicating how much they think they could rent their place out for. And that too may not be an accurate measure of the current market from the owner's perspective. If an owner is living in their home, they're not renting it. they may not have a great idea of what market rates are at the time. So that also could be a bit lagged until they catch up on the news, if you will, in terms of what accrualum properties are renting for. So that's my understanding. Yeah, I think that's right.

Well, it makes sense because some of the alternative rent data, it leads the CPI component by roughly 12, 18 months. So that's why we kind of know when the peak is going to happen. It's going to happen later this year in the summer. So I buy into your argument. Yeah, I mean the rent of shelter, so if I'm renting my home, what we're observing is the folks that are moving into their apartment or getting renewed. And so the rest of the stock of homes, that still hasn't changed yet. So it takes time for that to happen, you know, to get into the data.

And then for folks that are own their own home and of course the CPI for homeowners equivalent that's that's that's that's a rental measure that's based on surveys and that takes time for that survey to be conducted and for that and people's views of in of their implicit rent to rise I mean you think about it you know they said last year was 3% they're not going to meet like say 6% right it takes time for that to happen in people's thinking so it's takes time for it to bleed so-called bleed into the you know the measures of CPI but that's going to happen so that's a you know very significant what about commodity prices you guys chris did you want to

talk about cobweb the cobweb model or uh and and just commodity prices in general we could do we're going to we're going to we we're going to we we uh negotiated with the powers the b and we got this to 1215 so we've okay so we got 15 more minutes to to to um to um to do you're going to um to chat here. So do you want to talk about commodity prices and how do you think about it? And I think the Cobb Web model will come up in this description. Yeah, yeah, certainly. So I think, so the question about agricultural prices, I think that's highly relevant

in the broader inflation discussion as well. We talk about the income measures at a very high level, but I thought Ryan had some interesting data in terms of, you know, that 7% numbers based on this generic kind of economy-wide basket of goods, but different people buy different items. He had some interesting data about the impact of this type of an increase in inflation overall on different demographic groups. I don't know, Ryan, if you wanted to share some of that info, because I think that feeds

into the fact that everyone has to buy food, of course, but that's going to be a larger share of the lower-income households, basket of goods, if you will, than the higher-income households. So overall, that's 7% increase in inflation. The counterfactual will be 2% inflation, which is roughly the average that we got in 28, 2019. That differential costs the average household $250 per month. And then Chris and I looked at it across age. And not surprisingly, there was 35 to 44. It's costing them $300 a month in change.

and then it's 45 to 54 is $306 per month. So younger households, so it's under 25, it's costing them $155 per month. Interesting. Yeah, and then the over 65, I thought it was a 194. It's a lower amount, right? So they're consuming perhaps more medical care, which actually didn't see much of an increase in the inflation statistics. Yeah, I would ignore that basket.

it. Okay. Fair enough. It seems like I'm saying ignore everything, but that the medical care component of the CPI, the response rate, so what percent of the surveys getting responded to has been falling for years and it's very, very low. So I don't know how reliable that data really is. So you didn't talk about commodity prices in Cobweb.

Do you want me to do that? Oh, okay. Yeah, we can go ahead. We can go in that direction. So, okay, so the hook there is food, right? Talking about agriculture or all prices. Certainly, we've seen commodity prices rising along with everything else. As you've got married, you focus on asset prices, but commodities have been rising as well for a variety of reasons.

Which is an asset too, right? I mean, yeah. Right. Go ahead. Sure. What's unique about agriculture, of course, is that there are these growing cycles, right? So there's this Codb web model, which takes your standard supply demand curve and introduces some lag effects, right? So how do farmers or ranchers or other agricultural trachmody producers respond to the prices that they're seeing,

while they're going to adjust their planting decisions or their growing decisions? And that comes with a lag. So as that demand curve shifts, the supply careful will shift as well, shift out as farmers respond to those higher prices. But because there's a lag in the time between you plant and you, you reap, right, there's a coordination problem, right? So if all the farmers suddenly see that coffee prices are way up and they start to plant their fields with coffee, by the time they actually go to market, they could see that the prices actually fall because now there's oversupply effect going on.

So a concern here, I guess, is that with the higher commodity prices that we've seen, we might actually see a flood of additional supply coming on the market and then in terms turn the farmers will respond again, maybe cut back on their production, move to other crops, right? So you'll see that cobweb spinning around until we actually hit the equilibrium. By the way, I think that kind of dynamic, that cobweb kind of dynamic plays out in lots of markets, right? I mean, absolutely. Chip markets and because, you know, if you go back to our chart of the inflation outlook, we had inflation dipping below target, and that goes to actually, I expect that prices for goods stuff is actually going to be declining deflation in that period,

in part because demand is going to weaken as the pandemic receives, people go back to buying services, less goods, but also because businesses are going to respond to the currently high prices and all the money they're making by increasing capacity. So we're going to have a lot more chips, you know, 18 months from now, right? And we're going to have a lot more lumber 18 months. Sawmills are going to be, are being, the, the, The industry is investing in sawmills, so we're going to have a lot more lumber. Same kind of copper.

You know, we'll get a lot more copper because we're investing in copper. So that's why we could actually see, you know, it feels like a bit of a stretch at this point, given how high inflation is. But we could actually some deflation, maybe not 12 months from now, but 18 to 24 months as this capacity comes on. And that's the, that's the Cobb Web model at work, you know, that dynamic. So I think that's, you know, very, very important to understand. Now, I will say in terms of commodities, every commodity has its own.

idiosyncratic demand supply stuff going on but I will say broadly there's a lot of cross-currents in terms of commodity prices you know and where they're headed up or down on the on the upside you know particularly if you think about agricultural products you got weather events right you got climate risk you know one reason why lumber prices are as high as they are is because British Columbia got inundated with I don't know what they call that the atmospheric river or something that completely cratered shipments of lumber from Canada into the United States and cause help cause lumber prices to rise. Same kind of dynamic.

A lot of, you know, we have weather events and that affects supply. But on the demand side, we've got China whose economy growing much more slowly and, you know, has a lot of issues and probably going to grow slowly going forward. And there, of course, the marginal consumer, a lot of these commodities. So if they're consuming less, that means downward pressure on commodity prices. So I think you've got a lot of, you know, cross currents here. And it depends on which market, which product that you're looking at because you know it's very idiosyncratic but that cobweb model that you that you describe that very is better than I've ever heard a professor give that description of that cobweb model and I've heard that description many times in my day you know is a very apropos way of thinking about

things like commodity prices that's why I'm worried about 2023 yeah exactly oh well exactly the inventory because businesses right now are are double booking triple ordering so we're going to be a get a huge inventory build this year, which sets us up for a hangover in 2023. Just adding to your boom bus cycle. You know? Trying to connect all the dots, Mark. I know. You're doing a good job.

All right. Any other questions, Chris? Any other thing coming from the audience? I see a few more in the queue. Ryan, do you want to do? I had a good one. We talked about supply chains. Oh, here's one.

You talked about working from home being a permanent, you know, long-lasting effect of the pandemic. What are your thoughts on tourism, hotels, and airlines? When do they get back to pre-pendemic levels? Well, in terms of tourism, you know, obviously it's very pandemic dependent. I mean, I see the way I would think about it is domestic tourism will normalize more. much more quickly. In fact, it felt like it was getting pretty close before we got creamed by Delta and then Omicron. If you go look at, you know, number of people going through TSA checkpoints, that was getting back pretty close to 2019 levels, which would be, you know, consistent with

domestic tourism, you know, recovering. That, you know, obviously, though, has been sidetracked by Omicron and, you know, it's not until people aren't fearful of getting sick, you know, that that will normalize. But we're well on our way there. With regard to foreign tourism, that'll take longer. You know, I think that'll lag at least about a year for domestic tourism because it's going to take a while for governments to let the guard down and borders open and, you know, let people in and for people to feel confident about going to another country and feel like they can get back without getting stuck. I mean, there's, I have a lot of example, personal examples of people, you know, that had gone away for Christmas, the holidays, and, you know, and got stuck in literally got stuck in Mexico because they tested positive for COVID and that was a nightmare.

So I think that that's a that's not going to be this going to take a while to forget about all that. But then business travel, I don't I don't see that coming back at all. That's going to be a long time coming back. You know, I think the Zoom technology that we're using now is very effective for a lot of business travel, particularly internal meetings like you know again just it's all about me you know I would travel to our offices in different parts of the world to see our economists I feel no need or very reduced need to do that now right because we're on zoom calls with them all day long and it's a little bit of a hassle if they're sitting in you know Singapore it's a bigger hassle if they're

sitting in Sydney it's not a hassle at all if they're sitting in Prague or London it's no big deal so I don't feel the same you know a need there'll be you know conferences and events and people will start going back to that particularly nice spots but I think it's going to take a while and that I don't think we're getting back to where we were for a long long time so that you know that has all kinds of implications for for the hotel industry of course it depends on what kind of hotel you are and who you're catering to and you know which city you're in but you know rental cars airlines you know very significant

implications for the travel industry. So I think that's domestic tourism first. You know, it depends on the pandemic. I say by next year, global tourism after that, probably 2024, business travel, you know, not in my working lifetime, I don't think. I don't know. What do you guys think? Any disagreement with that kind of timeline? No, okay. I think you're right. Yeah. Okay. I think we have time for one more question, if there's There is a question out there. If not, I have a question for you because I think it would be, should I ask my question or is there a good question from the audience?

We have a lot of good questions. You have a lot of good questions. Okay. Yeah, we have a lot of good ones. I mean, we can do yours. My question is good. Let's do yours. We'll do yours because we're going to get back to everybody.

We'll respond. We'll answer all the questions that we didn't tackle. Okay. Okay. Here's my question. What should we be optimistic about? You know, what is the one thing? you would identify as a reason for optimism.

I said there's upside risk, we did nothing but talk about downside risk. What is the upside risk here? So we'll just take a crack at it. Ryan, you first, then Chris, then I'll go. Oh, you got to throw me. I'll go. Okay, Chris, you go first.

All right, Chris. I would say adaptation. I think we tend to underestimate the power of people to adjust to their circumstances. You can see that with the pandemic itself, right? Omicron is far worse than the earlier waves of the pandemic, and yet people are adjusting, businesses are adjusting, and the economic impact at least is not nearly as severe.

And I think that's going to play out in all the other areas we mentioned. So labor force participation is low or won't recover as quickly as we might like it to. We'll see more automation or outsourcing, right? the businesses will figure out how to how to manage this environment and still turn a profit. That's a good one. I should have on first adaptation. I call that a meta, a meta positive, right? I mean, our ability to adjust and that manifests in lots of different ways, the beauty of the

capitalist system and the American version of the capitalist system, we, we, you know, I think that's the nation's comparative advantage, actually. We adjust, you know, to changing economic conditions. Clearly, the pandemic has been a doozy of an adjustment, but we've done a pretty good job there. Ryan, is anything you wanted to, any upside risk you wanted to point to? So I'll focus on the next one to two years. And I think that there's a big question mark around excess savings.

So the additional amount of savings that households are sitting on relative to pre-pandemic saving patterns, it's at $2.5, $2.6 trillion. And correct me if we're wrong, I think in the baseline forecast, we assume a third of that is spent over the next couple of years. I mean, more of that could go flying out into the economy and you could see very strong consumer spending as people start to release pen up demand for consumer services. So I think that's something to watch.

Yeah, that's a good one. I mean, that's a pretty difficult. That's a tough one, right, to gauge what consumer behavior is going to be and how that's going to play out. Correct. But there's a lot of excess saving. Yeah, I, I'm, you know, I think there's reason to be optimistic around the, innovation and investment that businesses are making you mentioned business formation just to flesh that out you know we have very good data from the internal

Reservu Service IRS on EIN numbers these are employer identification numbers and so if you start a company you need to file get an EIN so you can pay payroll tax and pay your taxes and so that's a very good measure of the number of businesses that are forming and that has gone skyward and that's across I think almost every industry and across all regions of the country it varies by industry and it varies by region but you know generally speaking it's up and it's up a lot and that goes to investment i think businesses and this goes to your point about adaptation they're they're not sitting still they're making a lot of money cost of capital is very low credit is available you can get no problem getting

a loan which by the way is another reason for optimism the financial system is on very solid on footing thanks to all the changes that occurred after the financial crisis so credit is flowing And they're investing. They're investing in, you know, if I can't find workers, I'm going to invest in labor saving technology. If I, my supply chains are not, are a mess. I'm going to invest in supply chain resilience. And that's what we're saying.

And I think, you know, it takes a bit of time for that to get up to speed. But you can kind of feel it. If you look at the productivity numbers, they're improving. They're starting to improve. Even on a long run secular basis, it feels like they're starting to rise, which is another reason to be a little less concerned about the wage growth that we're observing because we're having a higher productivity growth, which sets the impact of that. So I think, you know, there's good reasons to be optimistic here. You know, we just need to get to the other side of this

pandemic that we're in. And hopefully that happens to script. And if we do, I think we'll be feel much better about things a year from now. Clearly that's, you know, the baseline is a relatively optimistic same when you're going to get out look. So with that, a bit of optimism, I thought we should end on a high note. I think that's, you know, only it's typical. You always find a way to end on a bad on a positive we got to we have to you know that that's that's that's critical I think we're going to call this a webinar a podcast and here I'm going to introduce a new word listener pod an R pod and R so that's a webinar couched as a podcast podinar so we're going to trademark that I think at least Sarah's going to

trademark that so with that thank you for attending we will get back to all the to all the questions and respond in writing to those questions but thank you for your attendance have a good rest of the day and talk to you soon take care