Moody's Talks - Inside Economics - Consumer Prices and Cars

Episode Date: June 11, 2021

Mike Brisson, Senior Economist at Moody's Analytics joins Mark Zandi  and the Moody's Analytics team to discuss the latest CPI report, labor market, homebuyer perceptions, and the vehicle market. 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. I'm the chief economist of Moody's Analytics. And as usual, I'm joined by Ryan Sweet, director of real-time economics. A lot to talk about with Ryan this week. CPI came out. It was on the hot side. And we'll dig into that. And Chris DeReedies. Chris is the deputy chief economist and key to the color commentary we do here. So it's good to have him aboard. And we have Mike, Mike Brisson, Mike. Mike is one of our colleagues at Moody's Analytics and is responsible for all things vehicle-related. And so we're going to decide it's the big topic this week, the vehicle industry, a lot to talk about. Hey, Mike, you know, I don't know much about your background. Tell us about yourself. How long have you been with us? And this is embarrassing because you've probably been with us for 20 years. I don't know your background.

But you've been 10 years or so? It's going on 7 this year. Seven. It feels like a long time, though. Yeah. So, and how did you come to Moody's Analytics? Was it me? Did I draw you to Moody's Analytics?

No. It was, my wife got a job in Westchester, and I knew what Moody's was, and I was an economist, and I said, I'm going to work there, so I applied 12 times, and I finally got in. Is that right? Was it hard to get in?

That's a good sign. Yep. Yeah. Who'd you interview with? Did you interview with me? I don't remember the interview. No. No, I interviewed with Sophia.

Sophia. And Steve. Yeah, she's tough. She's tough. She's really tough. I couldn't get past the recruiters, the computer recruiters. You got to check all the boxes nowadays. Oh, I see.

I got it. Well, I'm glad you made it through. You've been real key to our work on the vehicle industry and residual prices and all those kinds of things, which we'll dig into a little bit deeper. Did you work before? before you came to us or were you in school? I got my PhD at Northeastern, so I was teaching out there while getting my PhD. I also did some consulting work at Brookings.

Oh, cool. Over to Moody's. You know what? For some reason, I can't, you guys see Mike as a professor? I just don't, I don't know. You think Mike as a professor? Oh, yeah. Oh, yeah.

Oh, yeah. Hi, hip professor. Yeah, yeah. A lot of kids at the office hours. What's that? Oh, is that right? Oh, yeah. Yeah. And what did you do at Brookings? You remember the research you worked on? Yeah, we looked at the impacts of stimulus. So a lot of the same stuff that you do, we had a large macro model that looked at the impacts of stimulus and other policy actions. I did not know that. Brookings has a macro model that they simulate? It's not Brookings. It's one of their fellows there, Bill Dickens. So I worked with him. Oh, he maintained. a macro model or did, I guess. Yes.

I see. Oh, interesting. I didn't know that. That's interesting. Well, good. Well, welcome aboard. And as the faithful listener of Inside Economics knows, there's three parts to the conversation. At some point, I won't have to say this, I don't think, but maybe for a few more times.

But part one is the indicators, the statistics, and we're going to go through our favorite statistic for the weekend. We've called out a few statistics we're following regularly, and I think we should be. go back and talk about them as well. Part two is the big topic. The vehicle industry, a lot to talk about there. Chip shortages and new and used vehicle prices and pen up demand and electric vehicles. I mean, I can go on and on and on. I don't know if the vehicle industry is as key to the broader macro economy. It's not as it was 30, 40, 50 years ago. What was that old quote? Do you know the the old adage from the GM CEO.

As GM goes, America goes. Is that what it was? I think that was testimony before Congress or something. And when he said that, it was probably in the 50s or 60s. It was true, very, very much true. Not so much anymore, but still very, very important, still very critical to what's going on. So that's the big topic.

And then I'll in part three tied all together for you. Okay. So with that, let's dive right in. I can sense where Ryan's going, although he might give us a head fake here. I don't know. What's your statistic of the week, Ryan? I thought you're going to go with Chris first. I was going to say, okay.

All right. You need time. I know you need time. You need time. You have to settle in a little bit. And you know, you look like you're in the shadows today. I don't know what's going on. We can't see your face.

I'm not sure what that's. Oh, I'm on vacation. You're at the beach. Oh, yeah. We're down the shore. I'm sorry. It's raining, isn't it? Yeah, it is.

So it's kind of gloomy here today. But this podcast is a vacation, right? It is. It's the next little break. And I think the house we rented, like the lighting, there's like one light in every room. So it's like a very... Yeah.

So we're at the beach, are you? Oh, you told me, I think. Ocean City. Is that where you? Avalon, New Jersey. Oh, Avalon's great. I love Avalon. Very nice.

It's a great little town. Great little town, yeah. Okay, we're going on with Chris first then. Chris, what's your status? of the week. All right, my number's 80.80. 80 on the nose. 80 on the nose, 80. 80. I know U-Mish came in at 86. That's not it. You want to give us a, oh, unless Ryan knows or off the bat. Is it within University of Michigan? Nope. I actually took a page out of the suite book this week and went for a statistic that is obscure. Oh, I like this. Well, then you have to give us a hit.

Like, you can play a lot too. It is housing related. Oh, they're my usual. That's not the, the survey they do. Who does it? NHB, no, not NHB. Yeah, NHB does a survey of traffic through homes and the sentiment. The NHB sentiment index?

No. Oh, it is a sentiment index. It's not the NHAB. Oh. Okay, well, I don't. You are on the track. Okay. All right.

It's the Fannie Mae home purchase sentiment. I didn't know they had one. They do. They did. They started in 2019, so it's not very old, but it gives us some interesting details. So it combines a number of different factors. It's a survey, all right? So they ask folks how they feel about buying, selling conditions, home prices, job prospects,

mortgage rates, yeah, home price expectations. So 80 is pretty stable for this index. It's been pretty flat throughout this year. throughout this year. But what is really interesting, if you dig into the components, there's a section on whether or not it's a good time to buy. At the moment, only 35% of the respondents indicated that it's a good time to buy. 56% said it was a bad time to buy.

And that's the first time those two lines have crossed this cycle. So to me, it indicates that there's a lot of buyer fatigue out there. People are getting fed up. and that could have some ramifications, take off some of the demand. Yeah, they're getting fed up with the higher house prices, probably. It's just unaffordable, even at these low mortgage rates. Yeah, and also the inventory is so low that they're losing out on bidding wars. I think a lot of, a lot of millennials are probably just deciding, you know what,

I'm going to enjoy the summer and see what happens rather than keep trying to bid on a house that I'm not going to get. Yeah, so you said 56% say bad time. 34% say good time. 35% say good time. 35. And this is the first time the bad time has been greater than the good time. That's a big swing.

That's a huge swing. That's a huge swing. Yeah, 20 points. In one month? In one month. One month. Wow. Yeah, yeah.

In April was 55. That is interesting. I mean, I am seeing signs of kind of the market top. popping out, right? If you look at that index I mentioned before about buyer traffic and builder sentiment, that definitely is, well, it's still very, very high, but it has, it's definitely leveled off and seems to be rolling over. And I am hearing more anecdotes. So it is consistent, but that's a big swing. That's a good one. You see it in Michigan as well. The University of Michigan Consumer Confidence Survey has a question about plans of buying a home. And it has cratered

over the last three, six months, and it's at its lowest since I think the data goes back to, you know, the mid-1980s. Oh, okay. So this is good for me to start thinking about buying a home then, I think, yeah, because if everyone else gives up, that's a good time to start thinking about buying. Oh, is it a contrarian? Yeah, well, I mean, come on. You don't want to really buy it the top of the market, right?

I guess that's what people are thinking. This is the top of the market. Yep. It's interesting. We might be in that situation where you watch what people do, not what they say. Yeah. because existing home sales are still really strong. New home sales are strong.

They've rolled over too, though. They've rolled over two. They've softened, but they're still relative to what we saw most of the last expansion are still rock solid. Yeah, interesting. That is interesting. So how many, is it, who do they survey? Who does Fannie survey for that?

Do you know, Chris? I mean, how many people do they survey? How big is that? Oh, gosh, I don't know. You don't know? Okay. All right. I'm going to take a look.

I'll send you a link. Yeah, send me the link. Yeah, absolutely. That's a good one. That's a really good one. When Chris goes off the rails, that's an obscure number, he gets a flying pass. When I pick one, you guys just torched you. That's true.

You know what? I didn't realize that, but you're right. I do do that. I am definitely biased. I'm anti-sweet. Yeah. In fact, I was thinking we, this came from one of our other colleagues. He thinks we should invent a kind of game, call it Stump the Suite.

I thought that was pretty good stuff this week. We may do something like that because you are damn good. I'll have to give it to you. We're going to come back to. That's the issue. You're damn good. Hey, Mike, before I go to the prima don't, can I, do you have a good statistic? And I'm telling you, this better be good.

This better be good. I was going to go with a softball for Ryan. It'll be underhand softball. Well, hold it. I learned last week there's just this thing as an overhand softball. What are you talking about? There's only an underhand softball. See, he listens.

Am I wrong? He listens to the podcast. Oh, is that what's going? Oh, is he joking? Was that sarcasm? It was. Oh, my gosh. That was beautifully done.

He put a dagger into my heart and I didn't even know it. He turned it. Oh, my God. Oh, man, I got to up my game here. Okay. I'm prepared now. I came in thinking this is going to be easy. This is going to be war.

All right, go ahead. We got elbows. All right, so the number is 18.8 million. Oh, is that the peak number of vehicle sales ever? 18.8 million monthly sales? No. You know, Chris. I got this one.

It's got to be in a vehicle space. I'm pretty sure. All right, go, Chris. What is it? I'm thinking consumer credit. Well, Mark was close. Mike, we're out. This is a podcast, Michael, Mike.

It's not a visual. You can't just shake your head. Yes or no? Those are my hints for you guys to make you sound smarter. Those are my hints to make you guys sound smarter. I'll shake my head. Exactly. Wasn't the G19?

No. No, Mark was close. It's the April revision of seasonally adjusted annualized rate of vehicle sales in the U.S. But it's not the ultimate. time high. So let's go this one further. So when was the last time that vehicle sales were higher than April of 2021? Okay, that probably was cash for clunkers when we got 20.1 million or something. No, okay. Wait, 0% financing first time over 20 million units. Nope. Farther back. Really? 2005, July of 2005. Remember what happened then? Oh, wait, July 2005?

July 2005. Something happened with the Red Sox. They probably lost to the Yankees, you know, three times that month. July, it was, don't tell us. Come on, give us a break. Hold on one second. Just give us a little breather here, July 2005.

You know what? I don't know. What is it? So the big three went in and said, employee discounts for everyone. And everyone went out and bought new cars that month. So it was the employee. discount for everyone promotion back in 2005, if you remember that.

Why did they do that? Sales were slumping. Were they? Interesting. Huh. Because 05 was a pretty good year for the economy, as I recall. Oil prices started to rise, so sales started to stop. Oh, that sounds right.

And then before that, I think this is an easy one. This is the all-time high, and it was the last highest before this. 9-11, 0% discount. Yeah. I'm sure they did some major discounting. it wasn't zero percent financing but it was 9-11 related wasn't it yep October 2001 rally around the flag yeah everyone goes buys new cars because well you don't want to go fly and everyone wants to go out and get a new car so there weren't the promotions but everyone went out and bought a car

that month and I keep wanting to say 20 million it was 20 million wasn't it was 21 the seasonally oh was it 21 million okay fine okay and typical is what's trend because we're going to come back to this trend is seven 17 million, because that's where we were at the previous five years before 2020. Yep. Okay. All right. Okay, Ryan.

We're up to you. What do you say? What's your statistic? I thought everyone was going to go with something with the CPI. So I picked something outside of the CPI. No way. Really? We can come back.

I get another number. Okay. So 2.7%. It's not CPI related. And it's not CPI related. Highest since the inception of the data in the early 2000s. Oh, that's got to go to Joltz somehow. That's probably...

You're on the track. Yeah, Joltz's job opening labor turnover survey, and 2.7 is a rate. Is that the layoff rate? Quits. Quits? Quits. Yeah. So explain that.

That's a good statistic. So the quits rate is it just shows the percentage of people that are quitting their jobs, and it's jumped significantly over the last several months. And why I brought this up is one thing I wanted to bounce off you and Chris and Mike is if you look at the quits rate and you look at revisions to job growth. When the quits rate is high, it seems like job growth is the initial estimates are overstated, which kind of makes sense. If you quit your job today, you may start work very, very quickly and you get counted twice. So when you look at the quits rate versus future revisions to employment, it seems to be down. Down, down. So I don't know. I mean, if you look at just the sheer number of quits, it's through the roof recently. So I don't know how big of employment revision we're going to get. Wow, wow. That is interesting. Just food for thought.

Yeah. How strong is that relationship between quits and revisions to the increased change in employment? Well, we don't have a long history, and that's kind of limiting the amount that we can do. But, you know, it passes the eyeball test. Yeah. Hey, I'm not going to play a game with you, but I just going off because we're not fun in games here. But the, at least for the time being, but the joltz was for May, was incredible, right? I mean, we had 9.3 million open positions, which shatters anything we've ever seen before. I mean, I think pre-pandemic, we were, what, hanging around 6, 7 million at most. you know, something like that, 9.3 million.

You mentioned the quits. I think they're as low as they've ever been. If you look at layoffs, they're as low as they've ever been in hires. If you look at hires, they're as high as they ever been, close to 6 million hires. So that jolt survey for May was just amazing.

And I guess it's good and bad, right? I mean, it's good in the sense that, wow, we're off and running here. There's lots of jobs, and we're going to create a lot of jobs going forward. But I guess it's bad in the sense that it highlights the difficulty the economy's having getting going here on the other side of the pandemic, turning on the lights and getting everyone back to work.

Any other interpretation of that? The data is just amazing. Does that suggest better matching that's going on? How so? Better matching. Well, with the quits, right? If you have higher quits. Yeah. Did I say record low?

I meant record high on the quits. Yeah, record high on the quits. Also consistent with this argument that people are waiting in unemployment, taking their time to select a job versus jump. Yeah. Maybe. Who knows? Who knows?

I mean, the only thing with the Jolt's data is you got to take a grain of salt. The response rate is very low relative to pre-pendemic. They're still having a response. So, you know, Dante and I, you know, one of our other colleagues, we're talking about this and it's like, you know, we're trying to have wrapper heads around, you know, nine plus million job openings and we're wondering how accurate the data really is. That's interesting. The same problem with the, with the BLS employment survey too, right?

The response rates that are low. Yeah. Yeah, at least the first one, the first response rate, and then it picks up. It does pick up. The second and third reports. Right. So I want to do two other things on the indicators before we dive into the vehicle numbers. Maybe the first thing we should do before we jump into the CPI, because that's

that would be a nice segue into vehicles, is our indicators that we each picked to follow on a regular basis. So do you want to go first, Ryan? Yeah, so I picked the 10-year treasure yield. Yeah. And it is down this week to 1.46%. So explain that to me. I don't get it.

What is going on? So I was curious about this last night because we had, I wanted to say it was a disappointing employment report for May, but then you get this hot CPI number, which normally would cause, you know, long-term rates to rise, but they actually fell. I think it's the Fed's flexible average inflation targeting, which is the idea that the Fed will aim for slightly above target inflation in good times to make up for low inflation and bad times. I think it's got all the credibility in the world with the bond market. You're seeing all these big crazy swings in the CPI, bond market saying,

we believe the Fed, that this is transitory, and that we'll get, you know, through this without significant further acceleration in inflation. Well, although you look at inflation expectations, they keep moving higher, right? I mean, if you look at our pulse inflation expectations index, it rose again last week to 2.3% on a core consumer expenditure deflator basis. So that's now, that feels like it's moving above what the Fed would even want under the AIT, the average inflation target. But you have five-year, five-year forwards, which I think, you know, that's driven

out of the bond market is, you know, they're still anchor. I mean, after the CPI report, they didn't even really budge. It didn't. And then you look at, you know, looking at OIS, you know, expectations for the tightening cycle. It's still pretty modest when you have inflation, you know, as strong it's been, roughly 100 basis points over the next five years. Yeah. You know, I, when you see moves, like the kind of moves we see in the bond market that are like three, four, five, six basis points in a, a very short period of trading.

I always go to more technical flow of funds, kind of, you know, something else is going on that's not fundamentally related per se that's driving that. And I wonder, I can't think of what it would be, but. Yeah, that's on my things to do this weekend is look at the technical aspect of it because I think that is playing a role in it

because of, you know, all the ebbs and flows in issuance. There's a lot of technical factors that are, and basically going back to the supply and demand of treasuries that could be distorting what's going on with the tenure right now. But all in all, I mean, it's a low end of the range that we've seen over the last few months. Yeah, I know. And this is a key variable for the outlook. I mean, for lots of different things.

I mean, housing, growth, fiscal situation, fiscal policy, monetary policy. I mean, so, you know, it's not yet. I wouldn't say it's the tenure's not. not sticking to our forecast script, not yet, but another month or two, if it stays this low, then I don't know. That means things aren't kind of sticking to where we think they're headed. Yeah, I wouldn't make a big change of the forecast yet because he's going to take a catalyst and then that's going to put it on track with our forecast. And that catalyst is going to be the Fed debating to bring their asset purchases, which is coming soon.

It's coming soon. Okay, fair enough. Okay, we'll wait for that. Do you think this is foreign investors? We should check that out. It's possible. I got to look. I mean, intuitively, that makes sense, right? I'm a German insurance company. I'm still only getting negative whatever, 15 basis points on a 10-year German Bund, 1.5% on the U.S. Treasury, even with the currency risk, looks pretty attractive.

So maybe that's a lid on U.S. long-term rates. So we should be able to see that in the data. So maybe take a look, Ryan. I'd be really curious. See what's going on there. Yeah. Chris, what's your statistic? What do you follow?

Weekly unemployment insurance claims. Right. Comes out Thursday morning. This week it was $376,000 down from $385,000 last week. So it continues to improve, you know, moving in the right direction. $250 to $300 is kind of normal. So still above. He keeps saying that, Ryan.

Is that right? I mean, that wasn't what we were thinking. That's not your number? No. Well, it wasn't pre-pandemic. I mean, I think we were low pre-pandemic, right? Well, we would say if it got to 250, that would be signaling a problem in the economy. But that's a function of, I can't quite remember.

That's not, that changes what that kind of threshold is. Yeah, some flows throughout the business cycle. Yeah. You know, I think 250 to 300 was a good rule of thumb for a long period of time. Usually once you get above 300, you know, there's signs. There's problems in the job market, but instead of using that, you know, rule of thumb, what we do is we calculate the break-even level of jobless claims. In other words, what's the level of jobless claims consistent with no monthly job grove?

Right. And then that kind of gives you, you know, as we get closer to that, you know, line in the sand, we know that there's some problems developing in the job market when job growth slowing. The issue is that, you know, I tried up, but I updated this last week and the numbers just with the pandemic and all the volatility. It's hard to read. Separating the signal from the noise is nearly impossible. Well, I guess the bottom line is it's definitely moving in the right direction.

Yeah, about the trend right now, right? Yeah. I would say low 200s is normal. Okay, so you say a full employment, rip-orne economy, life is good, 225 per week? Yeah, 200-225. We were 215. I like a range. I like ranges to give me some woodwork.

room. Okay, okay. But it's, it's not 200 to 250. It's 200 to 225. Probably. Something like that. Okay, well, let's keep that in mind going forward. Chris doesn't see you convinced. I read, and I'm not sure I read this. I think it was, you know, a pretty good, from a pretty good source that a big part of the UI is now related to fraud. Is that possible? I mean, I, I know fraud has played a role, but do we have any sense of how big a role it's played? Have you seen any studies come out? I missed it if one did come out on this. No?

I've heard anecdotes, but I haven't seen anything. I mean, I read the GAO report, the government accountability office, but this was several months ago. Yeah, right. I mean, fraud is a problem. You can see that in the Ohio unemployment insurance numbers, when you're, when you're they had big swings and a lot of it was attributed to fraud. Once they got their system locked down and figured out, jobless claims in Ohio quickly had itself.

Right. But I think I read the same number. They were saying like half of UI benefits were fraud. I think that's way too high. Yeah, that's what I heard. That's enormous. That sounds wrong. Yeah.

I know you guys like the data, but I like anecdotes a little bit better. at my house, I received a unemployment insurance. Hey, who invited him on this podcast? I received a unemployment insurance application and someone filed it at my address saying that they had, they lived at my address and that they were unemployed. So. Oh, is that right? Yes.

So I had you resolve that issue? I threw it away. Oh, there you go. That's all that problem. That's somebody else's a problem. Okay. If I get bigger fish to fry. I got my own problems.

I can't solve the UI system problem. Yeah. Okay. All right. My statistic, the one we keep going back to is copper prices, Dr. Copper. No change, $4.50 a pound, which is still consistent with a, you know, strong global economy and elevated inflationary pressures. remember, $3 a pound is typical in a typical economy. Two is dollars a pound would be in a tough economy where we were a year ago.

$4, anything about $4, that's a, you know, that's indicative of a economy that's operating hot, certainly on trade and on production. So that's still very hot. Okay. Well, let me, you know, we didn't do this, so we got to do it. CPI, consumer prices. And congratulations, Ryan. As I recall, tell me if I'm wrong,

but the consensus was for a increase in the overall and core CPI consumer price index of 0.4 percentage points, 0.4. I think that translates into about a 3.5% year-over-year growth rate, which is obviously strong. And you were expecting a 0.6 percentage point increase in the month? And that's what we got, 0.6. Yeah. Yeah. The one surprise was the core. I thought, and I missed on that because I thought energy was going to be neutral for the CPI in May, but it ended up, you know, being a slight track. But, you know, it was all the usual suspects, at least for the last few months. It's the reopening in the economy, which added a tenth of a percentage point to the CPI. And what we include in our reopening of the economy CPA basket is rental car prices.

sporting emissions, movie theater admissions, lodging away from home. That's hotels, motels. And I think there's another one that I'm going on. I'm sorry? Do you put airline tickets? Yeah, airfares. Thank you, Chris.

So that added only a tenth, which isn't a lot. But then when you look at this other transitory factor, the global semiconductor shortage driving vehicle prices, nuts, used in new car prices added three tens of percentage points. So add up these. two transitory factors reopening the economy, auto issues, that's four-tenths of the 6% or 0.6% increase in the CPI was transitory. So stripping out these so-called one-off transitory effects were at 0.2, you annualized that.

That's, I don't know, 2.4%, 2.5%. That's on the CPI. So that's exactly where you'd want to see it. Correct. That would be your interpretation of the data. I mean, that's what the bond market was at least. That's what, yeah, exactly. And I mean, if you look at where all the strength in the CPI is,

it's in the most volatile components of the CPI. So again, if you're the Fed, you're trying to separate signal from noise, and they're getting a ton of noise. So I think that's why, you know, the bond market's, you know, comfortable with the Fed's, you know, sitting tight for now because, you know, the sticky price, Atlanta Fed index is, or measure of CPI isn't going anywhere. So, again, we have a little bit of demand poll,

but a lot of cost push inflation right now. And cost push typically is transitory. Actually, that's a great way of thinking about it. That's a great way of articulating it. The only thing I, and of course, I think our very first podcast was around inflation. And we actually came up with our own forecast, right? You were on the low side. Chris was in the middle, like he always is in the middle.

And I was on the high side. Over the next five years. Yeah, of course. And someone wrote down this. We have a bet, I believe, a dollar bet or something. We do. Well, it's recorded. Oh, right.

Oh, yeah, right. Always go back. Right it down. We can go back to just listen. That's the danger of this podcast. We can always go back and. So are you sticking to that forecast given what's going on here? You still feel pretty good about it.

Because here's the thing that I would say about that. Yeah, it's point two stripping out the one time effects. That's two and a half percent. That's kind of right down the strike zone. But that's now coming out of a recession. with 5.8% unemployment, what does that mean about what the state of the world is going to look like a year from now or two years from now,

given all the job growth that's dead ahead of us and the fallen unemployment? You're not concerned about that. Or you are, but still you haven't changed your forecast. No, I think I'm a little, I think the recent date is starting to. You were going to say I'm a little low. I'm a little low, but I'm not, I'm not, Zandy High. He's caving. He's caving.

No, no. I'm wavering. It's coming in my life. Hey, who said it when the facts change, you know, your opinion change? I think that was Keynes. And then Tommy Lasorda? No, I'm not sure. No, who's Yogi Berra?

Yoga Bear, Yogi Berra. Who says everything up her? Yeah, right, exactly. My forecast might change for the next year or two, but once you get into years three and four and five of our bet, I'm betting on the low side. All right. Okay, you heard it here. It's got this demographic.

Yeah, he's got this demographic thing going. Okay. Anything else on, I'm going to come back to car prices. Just a second, Mike. Hold on a second. Anything else other than car vehicle prices that you want to talk about on the CPI that we should know about? Anything you learn anything else about what's going on?

No. Well, some of the things that were hot in April, like lodging away from home, they started a moderate. So I think, again, this gets back to this transitory. You get this big boost in some components, and then it begins to fade pretty quickly. Yeah. I think the key to the one of the keys to the longer run inflation outlook is what happens with the cost of shelter, housing. And, you know, that feels like that could be a real supercharger to underlying inflation. That's sticky, obviously. So it's like it's going, yeah, because, you know, vacancy rates are very, very low. And feels like that might become more of an issue, you know, going forward. All right. Let's turn to vehicle prices. Hey, Mike, so what in the world is going on?

Ryan, what of the six-tenths of a percent? How much of that was due to vehicle prices new and used? Three-tenths. Half of the increase in CPI in the month of May was due to vehicle prices. What is going on, Mike? What's going on there? So there's two separate things going on. So vehicle prices were up 50 percent higher than they were May a year ago.

And so about half of that growth took place in the summer of 2020 where people stopped using public transportation. They bought these COVID cars. So there's a large demand for these used cars. So about half year growth came right there. But the more recent growth, that's really from that semiconductor issue, where the lack of semiconductor chips has made there be a restriction on the number of new vehicles available. So without those new vehicles available, dealers start bidding up prices and the wholesale market. then those prices get passed down through to the retail market. The BLS survey for CPI, they use the same data that we use for Moody's Analytics

use car price index, and that is the wholesale numbers. So there might be a little bit of difference between the wholesale and the retail numbers. One reason for that is the leases can come in and the dealership can buy back that lease at the price or you can buy back your own lease at the contract price. And so you'll get it for cheaper than what the wholesale price is right now. A reason that you wouldn't just take that vehicle and say, oh, let's bring it back to a wholesale market because wholesale prices are less than retail is you have you want that repeat business. You have F&I finance and insurance and you also have

parts and labor on the service side that you can charge costs on. So there's other profit avenues that these dealerships really want to hit. So they want to sell that car even more than making a little bit more profit if they go back to the wholesale market. So there's a number of different things going on here, but what we're looking at is wholesale. So in my simplistic way of thinking about things, it's what you're saying is demand and supply, duh, right? Demand is up because the COVID effects, particularly for used vehicles, obviously. The new market, the local market got hit hard last year. It's coming back now, but it's really, I'm going to buy used car as opposed to a new

car. So it's demand. And now it's supply because, well, the most obvious thing, I'm sure there are other things, but the most obvious thing is the global chip shortage. That's having an impact. So it's those two things, conflating, coming together, demand, supply, higher price. That's what's going on. Exactly. And it was a huge bump in demand from the stimulus payment that you can get a down payment on a new car. You can go purchase a used car. And the demand for goods continues to outstrip the demand for services because of the nature of the virus. And there's no inventory out there, right? I mean, I think you told me you went into, are you looking for a car or were you just

doing more anecdotal? I was doing more anecdotal. And so I walked into four different dealerships and I looked to see what they had and for a test drive. And I couldn't get a SUV. I couldn't get anything with three seats. I couldn't get any vans. So the only thing that could show me were sedans.

And I asked when I could get a SUV. and four different dealerships for major OEMs, original equipment manufacturers. They all said, oh, we'll probably get a delivery at the end of the month. So there's real tightness and supply out there. You look at the BLS or the BIA numbers on inventory. They're down to three million cars available across the whole country. BIA being a Bureau of Economic Analysis. Just, you know, spell out of those acronyms.

Yeah, April was three million vehicles. So April of 2019, there was 7 million vehicles and inventories. So it's less than half the inventories available across the country than two years ago. I did not know this about Mike. He takes his job very serious. It's like undercover economists over there. He's going into dealerships. I'm thinking what else we can send them into to learn more things.

Maybe you should get and go buy a home or something. The way I look at the jolts, I just drive down the street and see how many signs are out. side. Yeah, that would be a good way of doing it. Hey, so do you buy into Ryan's kind of sanguine view that this is transitory and supply side effects going to fade? Don't worry about it. You know, a few months down the road. Are you in his camp on this? It's a part of using vehicle. Use vehicle prices. I was not in his camp in December. I would tell the story that, oh, we prices are sticky about 20% above. from 2011 to 2014, they rose by 30% and never came down.

But this time, this supply chip issue, I am thinking that it's transitory. Prices are going to come down as supply comes back onto the market. I don't think that this gain of 50% over where they were is reasonable. And I don't think it's supportable by what future demand is going to be once more vehicles start being pushed out the lots. Presumably, prices are going to decline. Right. Okay. So at some point, what, this fall, late this year, certainly by this time next year,

we're going to see a pretty sizable decline in vehicle prices? Yes. I'm forecasting about 15% right now. I think that's conservative. And prices, according to our Moody's Analytics, use vehicle price index, our weekly index, prices already peaked the third week of May. So they're already starting to come down a little bit in the weekly data. Now that you bring that up, just quickly tell us how you construct, what do you do to construct that index?

So we create a hedonic index that controls for mileage price. Hadonic being. Hadonic as in we are able to see what each vehicle sold for. So individual vehicle sells. And we're able to control for the make model, the subsegment, the fuel type, the body type, the mileage. And we control for all that and you kind of take the residuals off of that. And then that's really the movement in prices is that residuals once you control for all those other factors. And so that's a moving window over time to really see what's going on with just what's going on with prices.

But that also doesn't control for inflation. We do have a valuation index that controls for inflation by using MSRP. So that value, our Moody's Analytics evaluation index controls for the, increases in price or costs to the manufacturers through controlling for the MSRP of the vehicles that's sold in each transaction. Okay. So based on the transaction level, you're looking at the car level data and you're aggregating up controlling for the attributes of the vehicle and after you control for it, you can get

a sense of what's happening with price. By the way, by the way, that's so called what you called hedonic pricing, which is what you're using. That is what the Bureau of Labor Statistics uses for lots of different products and services, right? Yes. In the CPI, they control for the, let's call it, quality of the product or service that they're buying. The CPI for vehicles, they do control for quality. They do it, so it's more similar to our valuation index, whereas our price index is more similar to the Mannheim,

because we really just care where prices are going. We do care about price inflation in that sales price index. Both indexes right now are moving up because the MSRPs aren't moving up and the cost of goods aren't really moving up for. Let me answer a question. So, you know, I've started leasing cars, which I find, you know, every three years I get a new car, right? My wife gets a new car. So one of the leases is coming up in the next two, three months. What's your advice on this?

How should I be thinking about this? So this is this is called personal investment. investment advice. Buy it. I should buy it. Buy it at the contract price, resell it, and then get another lease. That's what I should do. I can make a pretty penny?

Or can I squeeze the dealership and say, hey, you really want me to do this? Can't you just give me a lower price on the new lease? Can I just say that? They won't do that. It depends on your negotiating skills. Oh, really? Pretty bad. But it sounds like you're pretty good at it.

Could you come with me? Do you think about it? As long as you're COVID careful. Okay. I might do that. I might have you come along. Maybe you can help me out. Are you a good buyer?

You know what you're doing when you go out? I've locked out of my fair share of negotiations. Oh, you have. Okay. That's a good sign. All right. All right. Where were we going to go?

Oh, I was going to ask, we should talk about vehicle sales. And just to frame it, when I take about, vehicle sales, I usually write, my mind goes immediately to new vehicle sales as opposed to use vehicle sales, because new vehicle sales are, you provide the juice to economic growth. I mean, used on the margin, but it's a used car because you just produced it. And that's, that's GDP, that's growth, that's, you know, that what drives economic activity and jobs, more so than used vehicles.

Last year in the pandemic, 2020 calendar year we sold, I think it was 14.4 million, right? I think it was something like that. And as we just discussed a minute ago, trend level of sales. And when I say trend, that abstracts from the vagaries of the economy, the ups and downs in the economy, the business cycle, what's going on in the economy. It just goes to demographics, age distribution, relative cost of driving a car, you know, those kinds of things is about 17 million units. So if you do the so-called back of the envelope calculation, which economists are pretty good at, which I practice quite regularly, that means if I can do the arithmetic right, we're down, what, 2.6 million units, and we should get those 2.6 million units back at some point here in the future.

Am I thinking about that right? Is that how you think about vehicle sales and the outlook of vehicle sales? It's not. So I don't think that we ever really come out of a recession where we regain all of those lost units from trend. Looking back at, I think data goes back to 1976 for the series, and every time we have a recession, it goes significantly down. It comes up, but it never really gets higher than the previous trend that it was at. And my theory on this is we lose all of those miles driven. And the function of new cars is how many miles you get from it. So the way I buy a car, I'll drive it for 10 years, 150,000 miles,

and then maintenance outweighs the cost of getting a new car, and then I'll buy a new car. And so until I get to that 150 miles, since mileage just runs through cars, it's more important to cars than age, then if you sit on this car for a year, so imagine this last pandemic where you didn't drive for a year. I basically have an extra year, so now I'll have a car for 11 years, 150,000 miles. And so I didn't need to go buy a car for another year.

And so once you lose those miles and every recession mileage comes down, and that means that the number of new cars needed recedes from that previous trend. That's interesting. Very interesting. But what does it mean in terms of the numbers? So 2.6, if you just, by the way, that 2.6 million, million people who are listening may have heard the term pent up demand. That's pent up demand. That's what that is. If the level of sales is below that trend level consistent with demographics

and income and wealth and driving cost, everything else, that's the pent up demand that needs to get unleashed. And you're saying, well, okay, you're not saying you don't buy into that framework. You're just saying there's a missing variable here. And the missing variable is in the recession. I'm driving less and therefore it's going to reduce the pent-up demand that I have by some amount. How much is that? And by the way, I have retort to what you just said. Sure you do. Okay.

And I'll come back to that. But is this a big deal? So of the $2.6 million in pent-up demand, kind of the simplistic back of the envelope, how much do I subtract because of this? Let's say the number of miles were. down 15% last year from pre-recession levels. So 15% of, let's say, 17 million is 2.5 million. Oh, my gosh. So you're saying there is no pen-up demand. We're not getting anything back? I think that there is a boom because of the stimulus and raised incomes. I feel a bet coming on. I feel a bet. A bet is coming on.

I bet we don't get any year over 18 million. I'll bet you that. No, no, no, no. That's not fair. That's not right. That's not right. Now, no, you just said to me was there's no pen up demand. So therefore, we should be going back to 17 million units, no more than 17 million units on average.

Well, let's, no, we'll be at 17. We'll be at 17 exactly this year. Okay. And I think we go up to 174 next year. Okay. So there is some pen up demand. It's not exactly two points. Or just so you can think of it like a business cycle where you start to get a little bit higher and then you have a couple years that are lower.

See, he's so crappy. I don't know how to pin him down. What's he talking about? So, okay, we 17 million's trend, 14, 4 million we sold. That's $2.6 million in Penn Up Demand. You just told me two and a half million of that is not coming back because of the reduction in driving during the pandemic. So that means to me that going forward, we should still be 17 million units, you know, going forward. There's no 17 and a half million.

I'll take the five-year bet like Ryan. I bet we average 17 million over the next five years. How about if we do three years? Because, I mean, you want to say five years? It's going to all work out in five-year period? Okay. All right, fair enough. Okay.

But interesting. Well, here, let me tell you the counter to that. You know, the thing you just explained is, which is intuitive, actually. I hadn't thought about it. It's kind of interesting. I have to think about that. because I'm sure it plays something of a role, is that the reason you observe fewer sales than coming out of the recession

in the recovery than what you lost in the recession, you don't get all that pent up demand back, is because invariably before the recession, you have what I would call spent up demand. You have a period, extended period of sales that are above trend. And so therefore you have to work down that spent up demand before you actually get to the pen up demand. Does that make sense? Am I making any sense at all?

But the pandemic is different because we didn't come in, at least I don't think we did, came into the, come into the pandemic with spent up demand. The level of sales was roughly consistent with where you'd expect them to be. Maybe a little higher, but not a lot higher. What do you think of that logic? I think this is a good experiment to test that. I would say going into 2007. He's good. He's good. He's good. That was a great answer.

That was a great answer. But I would think that 2007 would be an example of maybe spent up demand because vehicles were being purchased at a rate of $16.5 million going into the recession and then it started to come down in 2008. But if you consider a trend to be 16 or 158 at the time, then there was a little bit of spent up demand before that. And that's why we didn't get even half of what you would consider a $16 million trend going out over the next five, six years. It took us five years to get back to the pre one month of the pre pandemic level, let alone coming above it for a significant

amount of time. So we didn't even cash for clunkers. We only got above $14 million seasonally adjusted annualized rate. And we were above 16 going into the 2009 recession. Okay, Brad, let's just have a bet. So next five years, what do you think average annual vehicle sales will be? 17.2. 17.2. Because of rising population, I think. Yeah, well, that makes sense.

That makes sense. And you're also saying we also lost some sales. I didn't ask you this, but I'm making a statement you tell me if you disagree, that we're going to lose some sales because of the chip shortage. So we've got to get those back, right? So there's got to be a little bit of a lift from that. Yeah, I'm sure people want to hear about that. Yeah, so what's your number?

How much are we taking off because of the chip shortage? We've knocked off 770,000 sales from this year that would have happened without the chip shortage. And so what's the average annual growth sales level for 2021? Do you remember? It's probably south of 17 million. It's a 16.9.17. It always ends up at 17. Yeah, always ends up at 17. Okay.

Well, you take 17.2. I'll take 17.7. Okay. Price is right, rules. Because that's, you know, $500,000,

$500,000 unit difference times five. That's $2.5 million. That's Penn Up Demand. Okay. So, okay. All right. Hey,

oh, you don't need to write it down. This is enshrined in podcast history. Okay, very good. That's very interesting, though. You make a great point about that.

I have to think about that more deeply in terms of the amount of, it's just, that's not my experience because I buy cars every, I get at least every three years, right? It doesn't really matter how much I drive. Not everyone's about Sandy.

I'm different. I'm different. I know. I'm different. To that point, just if I can ask real quick, does work from home factor into this at all? If we were leaving less on average. I'm keeping a close eye on it, on the miles driven. It comes out about two and a half months lagged. Ooh, that could be, according to Mike's theory, a big problem. I could bring it down.

Yeah. It's good for my bed, though. And the bigger issue would be demographics, baby boomer. He always goes back to this whole demographic thing. Come on. No, never mind. Go ahead. You just,

you don't want a graphics is destiny. We just had a whole podcast. Over a 10-year period. But in the next five years, we have a tremendous number of baby boomers that are going to be entering their 80s. So you're saying that's even more of a drag on vehicles. Correct. Yeah, I think if, though, if you look at the same,

the driving age population, correct me if I'm wrong. I can't remember, but I thought that was pretty stable, you know, throughout the next five, 10 years, I think. It is. Yes. Yes, pretty stable. But of course, the other thing is the relative cost of gasoline that I presumably that matters, right? I mean, so, but we're assuming that's constant over time. And the driving age population, we look at as 15 to 65, so apologies. Yeah, right. To anyone that's It's over 65. I know you're still driving out there. Yeah.

You might be understating. You might be understanding. I know. Yeah. I'm sure he factored that in, though. Sounds like he did. Okay. So we're getting short on time.

There's a lot of different things to talk about. Maybe quickly, tell me a little bit about, because we have a lot of folks that are interested in the auto loan market. What does this all imply for what's going on in the loan market, in terms of quality, in terms of lending? It's been excellent, right? I mean, Oh, yeah, this has been the best time to be lending.

The banks missed out, finance, captive finance, eight market share up, lending like crazy, growing at 7% per year. As the delinquency rates just came sinking to all-time lows. And I mean, you have a combination of you don't have to pay your student debt. You don't have to pay your mortgage. Well, I'll go pay my car loan because I'm getting unemployment insurance even if I don't have a job. And so everyone's paying off their car loans. and it's a great time. And those people that even face hardship and don't want to get accommodations

and they go and say, oh, I can just go sell my car for even more than my loan is because use vehicle prices are so high right now. So it's a great time to be a lender last year and get out there and make those loans. But as prices come up, I mean, you think that the opposite side of the coin would be right around the corner. So if I'm lending right now and vehicle prices are, say even 20%

higher than they are going to be at the end of the year or use vehicle prices. If you make a use vehicle loan, then that loan's going to be underwater very quickly. And so if at once, as soon as that person faces a hardship, they can't go and sell the vehicle and pay off their loan and your collateral is worth a lot less than it was. So loss has become a lot higher. Have you seen more or less subprime lending? Much less subprime lending. Everyone got much more conservative as the pandemic hit and they've remained there. So, so are, by, Bottom line, the outlook here for lenders looks good. The quality of the loans looks very good.

How much of that is credit score migration is another story. No, but not going too deep into the weeds. I mean, at the end of the day, we're going to have more jobs. We're going to have lower unemployment. We have high vehicle prices. We have good underwriting. The market's solid. You expect 17.2 million a year.

it feels like a pretty sanguine kind of backdrop for the for lenders right now yes but there's a lot of risk in these high prices that's all I was trying to say oh I see what you're saying so if they come way down you might get somebody might get caught yes depending on the lending that they're doing everything's great right now but there's more risk than there was six months ago okay got it because prices it's like a housing market they've gone straight up so if you buy a home or a car at these prices and then a crater and you have a disruption to your income, you might have a problem. Correct. We'll undermine the problem.

He's calling it top. You're calling on top. Yeah. Very good. Hey, so, you know, the other thing, nice, interesting thing about the vehicle market is technology. There's just so much stuff going on. Electric vehicles and driverless cars, and I'm sure there's stuff I don't, because I'm not, you know, really into cars. I don't really know what I'm sure you, you have many anecdotes to tell us about the

vehicle market but what what do you want to tell us about about these new technologies how are you thinking about them how do they enter into your perspective on the on the market the vehicle market so electric vehicles are here i mean this is the year electric vehicles really break through i know u.s was only 2% of the total sales last year but in the whole world it's almost 5% of total sales this year and you have all of these OEMs coming out with new models. They've bought in. California is saying you're not allowed to sell any internal combustion engines by 2035. You have other countries that are saying this as well.

And so the manufacturers are buying into electric vehicles. The tables have turned. Consumers are starting to buy in because they see that, oh, people have Tesla, people have electric Mustangs and they have electric ice. F-150 is the highest selling make model out there. I think this is a turning point for electric vehicles. So what percent of vehicle sales will be EVs? I guess, what was it in 2020 or 20?

What do you think it's going to be in 2021? What is the percentage? 2021. In the U.S., I'd say it's closer to 4%. 4%. And what do you think it is 10 years from now? I'd say it's depending on, it's highly dependent. on political subsidies.

So subsidies for vehicles, if you buy a Tesla or a GM, you're not getting any subsidies towards that right now because they've maxed out their cap. They don't get any subsidies anymore. You're only allowed to sell 200,000 electric vehicles. Other companies, you get a $7,500 credit on your taxes. So it's a pretty big chunk of change that you can get for buying an electric vehicle from another brand. So if Biden is able to pass his bill back better plan, I don't know the specifics in there

for each car, but if subsidies are able to be in place for charging as well as purchases of vehicle, I could see in 10 years more than 25% of vehicles, 30% of vehicles being battery electric. That feels like a game changer, doesn't it? I mean, in terms of the energy, climate change ramifications of that, that feels like a big deal. Do I have that right? Agreed.

Yeah. All of the climate scenarios that come out from NGFS. they assume by 2050 there won't be any ICEs sold. The national greening financial system. Yeah. Right. The folks that right now people are using for scenario construction. So, okay.

So you think this is in train now. This is happening. How fast it all happens depends on what policymakers do or don't do with regard to the subsidies. Correct. Okay. It's a good time to start a charging station business. Yeah. And anecdotally, do you see the charging stations when you drive around? I don't see them, but I'm not looking for them. I see electric cars. I see a lot of electric cars places. I see charging stations at malls. So you go over to by your King of Prussia Mall. There's charging stations right over there by the Dix. You have charging stations. You go down to Delaware. There's the big rest stop there when you get off 95. and there's 20 charging stations there.

So they're coming. Ryan, do you have an EV? Are you thinking about getting an EV? My wife wants to get one. But you don't? A few years down the road. No, I want to get one. Why?

Because you haven't driven enough to Mike's point and therefore you have to drive more before you trade in your car. Is that what's going on? Don't tell me that that's what's going on. No, we need to get a really, I have three little kids. So, you know, the bigger the SUV,

there's not a big enough SUV out there. Like coming down the shoreway to take both cars. Oh, you did. One car was just packed with stuff for the beach. That's how much stuff. I remember those days. I put a bubble, one of these big bubbles on top of my, what did I have? I had a wind star.

Remember the wind stars? You know, Ford Windstar? By the way, I have a really great anecdote around the Windstar, but that'll have to wait because it's getting a little long in the tooth here. But Chris, what about you? Are you in the thinking about an EV? Are you? Not any time.

You buy Italian cards. You buy these little whatever they are. and they shake and they do all this kind of stuff. They've got diesel. They've got class. They've got style. They got style. Chris prefers to drive to the office in his Vespa.

You guys have a very... I wasn't wrong. He has a Vespa? No, no. Looking for one. Electric, but, you know. Oh, is that right? I have to wait.

No, I'm kidding. Okay, real quick, Mike, how do we, how do you think about driverless cars? I mean, that feels like that could be, that could upset All kinds of things we were just talking about in terms of sales, prices, all kinds of stuff. That would be game-changing. It's not worked into any of our models. It's not seen in the near or medium term.

But by 2030, we could have multiple cities with the robotaxies. We already have Phoenix that has a system set up. The real technological challenges come from weather. I think that's a large portion. you can't it's tough to drive or see in the snow as a person how's radar going to detect what's going on around yeah so mark next time you're in phoenix yeah the conference yeah a robo taxi pulls up are you getting in is is that actually happening if i go if i get it is that if i go to pho you need a membership but theoretically you could sign up beforehand and then

would i get in would i get in yeah i get i get in because i just just for the experience yeah i'd get in yeah Don't they still have a, like a safety driver? There's still a safety driver there. It feels like an Uber car. Oh, there is a safety driver, a real person. Who can pull the brake. Oh, I see. Okay.

What, you wouldn't, Ryan? Is that what you're saying? You wouldn't get into the car? Not yet. Yeah. Not yet. Maybe I'd wait, but it's Phoenix, you know? You're not walking.

It's too hot. Yeah. Right. Well, very good. Anything else that we should be thinking about, Mike, on the vehicle front? or we kind of covered a lot of land there. Anything else we should be thinking about? No, I think we covered a lot.

Okay, good. Very good. Well, you know, for me, the vehicle market, I love the vehicle market because it's a poster child for the economy, for markets broadly. And it highlights currently, you heard the debate between Mike and I about this, It kind of highlights the uncertainty we have regarding the economic outlook.

I say I'm very confident. The outlook is strong. It's good. We're headed in the right direction. We're going to see a lot of jobs. And employment is going to decline. But I think it's a fair debate whether it's even stronger than we're expecting or it's a lot weaker.

And that whether it's stronger or weaker depends on, of course, many things, but really depends on the kind of debate we just had around the vehicle market. You know, is it going to be 17-2, 176, 18-0, something less than that? That goes to, you know, how big impact will the chip shortage have? You know, how much pent-up demand is there actually out there? What are lenders going to do? So it, you know, just nicely highlights all of the things that have to go into are thinking around the economic outlook and the forecast and the uncertainty that's

involved. That's, you know, especially, you know, high now just because because of the very unusual circumstances we've been through and still going through. So we'll see. And I don't know how many bets I have outstanding at this point, but it feels like they're starting to mount here. But fortunately, their dollar bets. I will say, I am, it's a bit of an advertisement. I'm going to be on the Paychecks podcast. I think it's released on June 15th. That's managed by Gene Marks, very good investment manager and personality. And I really enjoyed that podcast. So please tune into that.

And we've got, I was kind of joking about the stump the suite. But I was only half joking. So we've got some changes we're plotting here at Inside Economics. And we'll let you know more about those in subsequent podcasts. So with that, we'll call it a podcast. Thank you. Take care. Have a great week. Talk to you next week.