Moody's Talks - Inside Economics - CPI Silver Lining, Debt Limit Timing

Episode Date: May 12, 2023

Mark and team do a deep dive into the inflation numbers and consider prospects that inflation will continue to moderate. After the statistics game, they turn to their latest research considering the economic fallout of what could happen if lawmakers fail to increase the debt limit in time. It isn’t pretty.For more on the debt limit breach scenarios, click here.For the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by a bevy of my colleagues. Of course, my two co-hosts, Chris DeRides and Marissa Dina Talley. Hi, guys. Hi, Mark. Hello. Good to see you. And we've also got Bernard, Bernard, Marcos. Bernard is our Renaissance man, speaks 15 languages as a guru, a squash guru. What else? Bernard, should I tell the word about you? You're just, and I'm not joking. I'm joking. I'm not joking. Real Renaissance, man. Good to have you. Thank you.

Mr. Kamens, every time I see Adam on Zoom, I think of Dr. Zeus. See those two doors in the back there? I don't know. It looks very Dr. Zeus. I don't know. Really? Chris, you don't see that? Wow. No, not at all.

What do you see? I see two doors. Okay. It's like a Roershock inkplot test. That's right. I don't know what I'm talking about. Everyone see something different at my basement here. Yeah, very much so.

Hey, and I'm a little remote. I forgot my microphone, which is, I can't believe I forgot my microphone. But I'm here in New York. I spoke at the RMS conference, a good group of folks, So several hundred people. And I had influence. So I did a poll at the beginning of my talk. And I said, how many do you think the probability of recession over the next 12, 18 months is greater than 50%.

And I tell you, 95% of the hands went up. I gave my talk. I said, okay, let's do the poll again. How many of you think the probability of recession is greater than 50%? And I think I got him down to 30% of the hands went up. You know, so I don't know. What do you think? I didn't realize I was that persuasive.

These were all risk guys. So maybe he's really persuadable. I'm not sure. But they definitely changed their mind. You skeptical, Chris? Was there lunch or happy hour after you? Yeah. Yeah, does that what you think it was?

I don't know. Get that guy off the stage. Let's get going. Let's get going. Make them happy. Make the economist happy. Let's just get going. I should say we have our own conference, right?

The economics team has its conference. And that's coming up June, when is that? June 20th, I believe. Is that right? Yes, that's right. And it's in Wilmington, Delaware. Of course, we picked Wilmington because it's very close to our suburban Philly office. Well, former office, right, because we are now fully remote.

but it's equidistant between D.C. and New York, and also, of course, Wilmington has a pretty sizable group of financial institutions. They're mostly consumer finance. And so we thought that'd be a good spot. But we love to see you there at that conference. And if you're interested, let us know, we'll make sure you get an invitation to that because that'll be very good to have you. And I think we're all, are all you guys speaking at, Chris, you're speaking at the conference. Yeah. I am. You are. Okay. On house prices, I believe. Yes, housing generally. Housing generally.

Yeah, very good. So that should be good. Okay, we've got a lot to talk about here today. We've got a lot of inflation used this past week. Of course, the all-important consumer price index. I thought we'd run that down a little bit and talk about inflation, inflation prospects, what it all means for monetary policy and the economic outlook. I also want to talk about the debt limit.

We talked a bit about that last week, but Adam and Bernard did a lot of, lot of really good work here trying to understand what the potential impact of a debt limit breach might be on regional economies, state economies more specifically. I want to go through that. And then, of course, I want to play the game, statistics game, and we've got a lot of players, so that should be fun. And listener questions, as you may know, we've been collecting questions from folks out there, and Marissa's been compiling them, and we're going to go through a few of those if we have time to do that. Sound like a good game plan?

Everyone's good with that. Okay, very good. Okay, let's go. This turn to inflation. And I guess the headline is the consumer price index for the month of April. Marissa, you want to give us the rundown? Sure. We also got the PPI last week, but people really care about the CPI, right?

So let's do that first. So CPI rose 0.4% month over month. that was true for both headline CPI and for Core CPI. On the headline, that was a little bit softer than we were expecting. We were expecting it to tick up half a percentage point. Core was right in line with expectations. The increase in CPI and the acceleration over the prior month when prices advanced in March, 0.1% was expected because we knew there was a tick up in gasoline prices over the month.

and indeed that's where most of that increase comes from. Core, on a month-to-month basis, stayed the same pace as it was in March. And it's really been averaging that 0.4% month over month for about the last nine months. It's been in the 0.3.4.5 range for the last nine months. Core being. Core excluding energy prices and food prices is what core inflation is.

And we strip those out because they can be very volatile from month to month. On a year-over-year basis, however, total CPI fell to 4.9% year-over-year down from 5% in the prior month. And that's the slowest pace of growth since May of 2021. Core advanced 5.5% over the year. And that's also a 10th lower than it was in March, the year-over-year reading. it's been pretty much 5.5% year over year since the start of this year. And just for context, it peaked the peak in core year-over-year growth was 6.6% back in September. Getting into some of the details about these movements, food prices were flat over the month. Grocery prices declined,

but that was offset by an increase for the second month in a row. in food away from home. So dining out kind of food. That keeps rising. Grocery prices are falling or flat. Energy prices rose 0.6% in April after falling in two of the previous months. However, that was all in gasoline and motor fuel prices, utility prices, energy services fell over the month. Core goods prices were up over the month thanks to a very large increase in the price of used vehicles.

So used vehicle prices were up 4.4%. And that was the first time used vehicle prices have risen since June of last year. On the other hand, new vehicle prices fell a bit, 0.2% over the month. And that was the first monthly decline in new vehicle prices since April of 21. I think probably the most interesting thing to delve into in the report was the prices of shelter. So shelter prices make up a very large portion of the overall CPI basket. They make up more than 40% of the CPI basket. And we've been talking about this on the podcast because it's really key that we start seeing some deceleration and shelter prices in order to get the CPI inflation kind of back down close. or to the Fed's comfort zone. So shelter prices decelerated for the second month in a row. So they rose

0.4% month over month, but that was slower than in March, which was slower than in February, which sounds good on the face of it, but if you dig into it a little bit more, the only reason that shelter prices decelerated was because hotel prices had a very big drop. So included in shelter is rents, owner's equivalent rent, which is the implicit price a homeowner pays to him or herself to basically rent their own home. And then there's lodging away from home. So the lodging away from home prices fell 3% over the month, whereas owner's equivalent rent stayed the same at 0.5% month over month. And rent prices actually ticked up a 10th of a percentage point from 0.5% to 0.6% in April.

Other categories, medical care services and transportation services fell over the month. The prices of those things fell. And then finally, something we're watching, and Bernard, I know you calculate this, and the Fed is keyed in on is so-called super core inflation, which is core inflation. So again, stripping out energy and food prices, but also stripping out rent prices. Those rose 0.3% month over month for the second straight month.

Supercore is up 5.1% year over year. That's the slowest pace of year-over-year growth since May of last year. So a bit of a mixed bag, mostly good, I think. I don't think, you know, curious to hear what you guys think, but I don't think this is anything that's going to change the Fed's mind. in their coming actions for the rest of the year. And I'll just briefly tell you that the PPI came out as well for the month of April. That was a 0.2% month on month in April.

The producer price index, right? So this is sort of like before the prices get to more wholesale type prices before they get to final sale. So those rose after they fell in March and they were unchanged in February. So this is the first increase in producer prices since January. But over the month, producer prices are up 2.4%. And that's the slowest rate of growth since January of 2021. And for context, they peaked at 12% in March of 2022 right after Russia invaded Ukraine. Great.

So that's a lot of great detail. Big picture, consumer price inflation, CPI inflation, peaked in June of 2022 last summer. around 9%, depending on whether you seasonally adjust or you apparently don't seasonally adjust, but let's just say 9%. As of April of this year, that's year over year, it was 9%. Year over year, as of April, the last data point, we're down to 5. And in our forecast, our baseline most likely outlook for the economy, we have CPI inflation going back to the Federal Reserve's target, which we estimate for CPI to be 2.5%.

So we go from five to two and a half percent, roughly over the next year. So when we have this conversation a year from now, we'll be back close to the Federal Reserve's target, at least as measured by the consumer price index. Obviously, there's the other index out there that the Fed focuses on the consumer expenditure player, and that's where they spend most of their energy. That's a 2% in target. I'm not going to go into any detail here. We've done that before on the podcast. But that's the baseline. So Marissa, that outlook feel right to you? Is that consistent with your thinking? I think it's according to script, as you would say. Yeah. I mean, yes. Yeah. The only thing that we have to start seeing is rental prices start to come down more, right? They've kind of

not moved very much for several months. And that's key, I think, to this forecast is that we get the price of housing in the CPI to start moving downward, which we're expecting will happen pretty quickly. I mean, this report was for April, right? And we've been predicting that we would start seeing some of that downward movement around June-ish, right? So middle of this year. So we still have a little bit of time to see if that forecast comes to fruition, but we want shelter prices to move lower, since there's such a huge component. Okay. So let me, color, provide more color there in terms of the baseline outlook. And then I want to turn to Chris and Bernard and Adam to get their reaction to it. I thought the CPI number was pretty darn good.

You know, inflation is too hot, no doubt about it. But it's cooling. And it does feel like it's headed back to the Fed's target here to script, as you say, by this time next year. And I feel like I can say that with more confidence, because I feel confident to your point about the cost of housing services, that is going to decelerate. I know that it's going to happen because that's tied to rents, ultimately, with a long lag. And rents have gone flat to down since the end of last year through the early part of this year for good fundamental reasons. There's a lot more supply coming into the market as the supply chains ease and labor markets normalize on the other side of the pandemic. We're just going to get a lot more multifamily rentals constructed. And there's

less demand because the previous surge in rents, young households can't afford the rent. Households aren't forming. That's demand destruction. I feel really very confident in that. And that's a third of the plus of the CPI index. I also feel very confident in further declines in vehicle prices. I mean, that decline in new vehicle prices that happened in April, we've been waiting for that for quite some time. And that feels like that's a start of a trend of negative monthly price numbers here going forward because we're getting more supply there too. Japan, Germany couldn't produce enough vehicles because of their supply chain issues, which were more pernicious than the ones here in the U.S. But they're figuring it out now.

And we're getting more supply, more cars on dealer lots. We had Mike Brisson on with Jonathan and smoke and they're on board with the idea that we're going to see vehicle prices decline. I feel very confident about that. And the last piece of the puzzle is that Super Corps you mentioned, which is very tied into labor-intensive service activities from health care to hospitality to personal services and education. That's labor-intensive. That goes to wage growth.

That goes to the Fed's efforts to slow the economy's growth rate down, ease the labor market pressures, get unemployment moving a little bit further north, getting wage-grossed. growth down so that inflation on the service side of the economy can come in as well. There, I feel less confident, but I'm feeling more and more confident that that's going to happen, given what's going on in the rest of the economy, labor market, wage growth dynamics and everything else. So I feel pretty darn good. And by the way, that's all going to happen in my view without a recession and without any further increases in rates by the Fed. The Fed, I think, is done that the federal funds rate target is now just over 5% given the last rate move that occurred a

week ago, and that's the end of the story. Okay, I just said a lot. It feels like a pretty sanguine, reasonably sanguine outlook, a slow session outlook, not a recession outlook. Let me turn to Bernard, because I'm letting Chris kind of gear up here to respond. Let me go to Bernard, what do you think of that what I just laid out there for you? Are you on board with that? Or would you push back on that? No, I'm definitely on board on that. And I think we're not getting enough credit to where we are starting to see some signs of housing disinflation. So if you look at the year over year growth in the CPI for rent of shelter, so that includes the rent that tenants are paying as well as the owner's equivalent rent, which is the hypothetical rent that a homeowner

would have to pay themselves to, pay themselves to, you know, to stay in their home. That has already peaked. It peaked in March. And for the first time ever since early 2021, it's no longer rising year over year. And this is important. This is not a, I wouldn't say that this is a fluke because rents are sticky. Once you have a trend, once you see a trend in rental prices, that has staying power. So, so I would expect, we are starting to see the whites of the eyes of, rental disinflation, that's going to continue. And it's going to be an even larger source of disinflation on the overall CPI and especially the core CPI, just because of its, the new weights or the new relative importance ascribed to shelter and especially to rent of shelter is the largest

it's been since at least the late 1990s. So that's really going to help bring us, you know, I think that's going to help contribute to the sanguine inflation outlook that you laid out. I would also like to make one point about used vehicles. Used vehicles were a major sort, you know, they put, they added about 15 basis points to the month over month gain, the core CPI. Point five percent. So, you know, that's a pretty big number. It's a big number. Yeah, yeah. Okay. And I, I would expect in the next month or so, we're probably going to get a few more hot prints for used car vehicles, but it's not going to persist for that long because we're already

starting to see wholesale used vehicle prices, which tend to lead retail prices by up to three months. Those have started to fall, at least starting in the month of April. And then I'd say the other big statistic we got this week was the senior loan officer opinion survey. And that also showed that over the first quarter banks were tightening their lending standards for new and used auto loan. and even auto loan demand weakened over the first quarter. So it just feels that used car vehicle prices are not going to be adding significantly for that much beyond the very near term. And then within core services excluding rent of shelter,

so this is the super core measure, there were a lot of pockets of weakness, rental vehicle prices were weak, airfares were down, and this actually comes as domestic airline capacity is finally rising above 2019 levels. the weakness in lodging away from home, that also was consistent with other data I've been looking at, such as average daily rates for hotels. So those pockets of weakness also make me feel comfortable in the super core measure, which the Fed is keyed into. We should see some further easing. And there, already we've seen a lot of disinflation, at least year over year. Got it. Okay, Chris, so where is this

forecast wrong, or is it? I mean, you're on board with this or not? I'm on board, certainly with the idea that inflation is going to come down, right? We have a lot baked in the cake that you and Bernard already mentioned, right? Housing is just going to take time. We can already see it, right, from other data. There's no question there. And I agree with the use car price is probably a little bit of a fluke there, and new car price is certainly on the way down. So I'm not not disputing that. I'll even throw you one more, and this will then lead to my next point. Big declines in lodging, right? What do we say? 3.6, what 3.4% on the month? Yeah, that was large.

It tells. Big declines in car rental prices, down 3.2 in the month. Big decline in airfare, down 2.6% on the month. And sporting events. Also big, I can't remember, I think 7, 8, something like that on the month. Oh, is that right? What are all those categories have in common? They're all tourism, right? Yeah. All discretionary spending, right?

That's the first thing that consumers will be. By the way, that's not consistent with the cost of the ticket to go to see the Sixers play the Celtic. I don't know where that's coming from. Layoff tickets excluded. Oh, okay. Okay, fair enough. This is April, right? Or recreational service prices then.

That'll show up in May. Oh, in May. Okay, go ahead. It's seasonally adjusted anyway, so. Yeah. So I see a consumer that might. be a bit weak here, right? That's certainly helping with the inflation coming down, but, you know, my fear still is that we overdo it, right? Even if the Fed doesn't hike anymore, there's a lot of

weakness already built in here. Oh, so you're saying that yes, inflation down. But that's, it might be a window into some weakness in consumer spending on services, which has been kind of helping support growth here. Is that what you're saying? That's right. Oh, interesting. So we always talked about the consumer firewall, right? Yeah. Is that the first chink, perhaps? Oh, in the firewall? Okay.

Well, of course, it is important to put in a bit of context. And I don't know that data as well, but in my mind's eye, there were some months with some pretty large increases in all those, all those things. So it's almost like they're just coming a little bit back down to Earth compared to where they were. But very interesting. Okay. And are you also on board with the idea that the Fed probably has ended its rate hikes here? You know, given that inflation outlook, given what's happening in the labor market, you know, job growth is slowing.

We talked about that last week on the podcast. Given financial conditions, which have clearly tightened given the banking crisis, it feels like at least for the foreseeable future, we're not going to see any more rate hikes here from the Thursday. Are you on board with that as well? I am, especially given that last point because I don't know that the financial banking turmoil is over, right? It is over. Still some cracks in the foundation. Okay.

And so, you know, I take all that, what I just said with, and conclude, well, that makes me feel more comfortable that we're going to be able to navigate through without an economic downturn or recession. But you, that's not where you go. Your mind goes. It certainly is helpful, right? If we had seen a different report here, if inflation had been really robust and not showing these signs of weakness, then be a different story. So it gives me a little bit more hope, but I still see the other downsides here as well. Got it. Before we leave the topic of inflation, I want to turn to you, Adam, because you do a lot of work with understanding what's going on with regional economies. And inflation's been an issue across the country, obviously.

but it's been more in some parts of the country than others. Do you want to explain what you've uncovered there? Sure. So there's been some interesting dynamics there. So if you go back to what inflation really started to spike, it was pretty clear that the places where the demand side of the economy was especially strong, mountain west, southeast, they were experiencing especially high inflation. So we were seeing markets like Phoenix, Atlanta, Tampa, where inflation was, you know, twice the rate at some points, you know, compared to what it was in New York, San Francisco, some other markets along those lines. The last probably starting about six months ago, I would say, end of 2022 into 2023, we started to see some convergence there where, right, the, you know,

the economies that were struggling for a lot of the post-pandemic era were picking back. up. I think we were seeing the demand side strengthen their house prices start to maybe normalize a little bit more in some of these hotter markets. And I think you were seeing some convergence in terms of inflation. But interestingly, the last couple months, we've actually seen, you know, the Northeast in particular start to come down again a little bit more rapidly than the rest of the country. So we're seeing some gaps open up again where, you know, New York actually experienced a little bit above average inflation for a few months relative to the U.S. and actually has experienced, along with Philadelphia, disinflation now over the last couple of months. So prices have actually fallen in a couple of those markets. Where it's nationally, obviously, they're still rising. What do you mean? Disinflation or deflation? You mean disinflation?

Slower growth in, no? I mean, I mean that prices actually have declined on a month-over-month basis in New York and in Philadelphia just over a couple months. Oh, because of energy prices, I guess. No? Yeah. Yeah, and I think part of it just, there's volatility in the regional data, so I don't want to read too much into that. But yeah, I think part of that would be energy prices. The shelter costs measures, we don't have as much granularity in terms of, you know, whether it's driven by lodging or by the rental market or what segment of the housing market it may be.

But definitely softer of late in the northeast. And I think some of that reflects the fact that some of these broader headwinds around, you know, bank failures, tech layoffs. We're seeing that clearly in California and in the West, but also affecting office using markets, places like New York, Boston, D.C. I think all of that has been kind of a drag on the demand side of the economy. And it's pushing inflation a bit lower than elsewhere in the country. Okay. In my kind of my thinking about regional inflation, my sort of working thought is that the big differences are generally around the cost of housing services, which goes back to rents. And so if you're in a market where housing is very strong, absorption strong, rent growth very

strong that results in stronger race of inflation because housing is such a big part of the CPI. And that is a large reason for that, the higher rates of inflation in the housing parts of the country where the housing market was, it was juiced everywhere, but particularly Jews, like in the, in the western part of the United States, and you mentioned Florida. And now that the housing market's cooling off, that those differences are abating, generally speaking. Is that roughly right? that's roughly right but we've seen that start to kind of unwind a little bit the last couple of months

so something i'm watching now to see if that if that sort of those gaps reopen a little bit but everything you described i would say if you asked me that two three months ago i say that's spot on it's exactly what we've seen last couple months it's getting a little bit the story starting to change a little bit it looks like okay well stay tuned we'll see uh okay very good the one thing that people didn't call out. I'm just going to throw it on the table, not that we have to talk about it. The thing that really worries me about how I could be wrong, why the forecast of getting back to the Fed's target inflation rate of 2 and a half percent on the CPI by this time next year is medical care inflation. Because, you know, we've been getting a string of declines in medical care

service inflation for some wacko reasons going back to the way the BLS measures this thing. And that's going to reverse itself. And that's where I worry. Bernard, just say yes or no. Do I have that right? Yeah, you have that right. Yes. Okay. All right. Very good. But that's really going into the DNA, and maybe we'll do that next time. We'll do that next time.

Okay. Let's play the statistics game, and we've got a lot of players. The game is we each put forward a statistic. The rest of the group tries to figure that out with questions, the deductive reasoning, some clues. The best statistic is one that's not so easy. would get it right away, although Marissa's getting everything right away. I don't know, you know, how we solve that problem. And I won't say chat GPT, but I just won't say it. She's mad. She's upset. She's upset. She's still on mute. She doesn't know she's on mute. There you go. And not so hard that we never get it. And it's a plus if it's a relative,

statistic that came out this week irrelevant to the topic at hand. Okay. The tradition is We go with Marissa first, although I'm kind of starting to rethink that tradition. But I'll say at least one more a week with that tradition. Marissa, you're up. What's your statistic? My statistic is 46.7%. 46.7%. Is it a statistic that came out this week?

Yeah. A government statistic. Senior loan office for sure that. The Fed is a government agent. Yep, yep. Okay. See how she does that, Bernard. She does like a head thing.

She delays to make you think, oh, maybe it's not a government entity. Or it's ambiguous. Well, I have to pause because, I mean, they are independently. They have some independence. Yeah, okay. Okay, fine, fine. Yes. It's from the senior loan officer service.

And is that the net percent of senior loan officers? senior loan officers that said that standards for C&I loans, commercial industrial loans is tightening? Yes, but you need to be more specific. Okay, I'm going to be very specific for small banks. Yes. Small businesses. Small businesses.

Small businesses. Oh, sorry. I said small banks. Small businesses. Sorry about that. Small businesses. Bernard, do you see how that's done? I'm just saying.

See how that's done? That was masterful, right, Chris? You don't have to say it. Nice. You know that. But you knew that, didn't you? You let me do that on my own. You knew the answer to that question, didn't you?

No, no. Oh, you didn't? Okay. Great. Okay, very good. Now I feel better. Okay, explain, Marissa. Why did I pick this?

Well, I mean, Bernard mentioned it when he was talking, right, about lending on auto loans. So I'm looking at the senior loan officer opinion survey pretty closely for lending to businesses. And in particular, small businesses because small businesses make up account for a lot of the job growth in the country. And if small businesses who are much more likely to go to a bank for credit than a big business who can tap capital in debt markets, if they can't get financing, then they can't invest in capital. They can't hire. So this is an increase. Obviously, this has been rising now for some time, several quarters about the last year. We've started to see banks saying that they're tightening lending standards.

And this is the tightest that lending standards have been since we were coming out of the financial crisis. So coming out of the recession that started in late 2007 and ended in early 2009. So this is as high as they've been since then. And higher than any tightening on the series that we saw even during. the 2001 recession. So you have to go back after 2009, you have to go back to the 1990s to see a number this high in the number of the net percent of banks tightening standards on small businesses. I was just going to say, you know, following all the turmoil in banks with

SVB and First Republic, we've been waiting for readings to show us how lenders may have reacted to this if they're battening down the hatches, expecting tighter credit, or raising the cost of funds, and they are indeed doing both of those things. You know what struck me, and maybe there's a good explanation, the survey that you're mentioning was done after the crisis. If you go back to the survey that was done in January before the crisis, the difference between the two, not that big. maybe a little bit of an increase in the net percent saying they're tightening their underwriting.

And this is not just for C&I, but commercial real estate for credit cards, all types of lending. There was some further ostensible tightening and underwriting, but not as much as I thought might have happened, given just how significant the hit to the banking sector was. Did that strike you as well? Well, looking at this series in particular, I thought it was interesting that the jump was bigger in the first quarter report between the first and the fourth than it was between this report and the first quarter. So standards tightened more at the beginning of this year before the banking turmoil than they did since the banking turmoil. Now, of course, it's kind of cumulative, right? Because you're tightened in Q1 and now you're saying I'm tightening again.

Right. So the amount of tightening is quite significant. I'm not saying that, but I thought we'd see more of an increase. Chris, are you of the same mind? Were you surprised? Or is that what you expected? Well, I guess I expected it actually to be in this range because banks had already tightened so. Okay.

So how much more can you tighten? I'm more can you tighten, I guess. And I'm not going to lend. I can't not lend any more than I'm not, if I'm not going to lend. Right, right. And a drawback of the survey is that it doesn't really tell you anything about the magnitude. Yeah. Right.

It just tells you, I'm tightening, but is that a little? Is that a lot? It could range across different institutions as well. So it's a good measure. It's an important measure, but it's not a complete measure from that standpoint. Yeah. The other thing that struck me, and this goes to the Federal Reserve, H-8 data. This is the balance sheet information from the banking system. And you look at C&I loans

outstanding. You can see that how much commercial industrial loans. Those again, those are loans from banks to businesses that are on the books of the banks. That fell when the crisis hit, but it's been stable since then. And it doesn't indicate any further decline or weakening in C&I loans outstanding. And that's the case for both small business and for larger business. Have you noticed that as well? No, I didn't see that. You didn't see that, Chris? Oh, yeah. So I'm almost coming to the conclusion that the banking crisis is obviously an additional headwind, but it's not like a hurricane, you know, it doesn't feel, at least so far. At least not yet, right? It's not, it may not be over,

you know, for sure. The bank stock, the regional bank stocks are still, still under a lot of pressure, but so far, and there's a lot, you know, that we need more data and evidence, but so far it doesn't feel like this thing is as serious as it possibly, certainly as it could have been or is certainly what I was fearing. I think there's a demand response. Businesses, consumers just not applying for credit because they have a feeling they wouldn't get it in the first place. Well, demand has weakened quite a bit, right?

When you look across all these categories and the senior loan. officer survey asks not about tightening standards only, but they also ask about demand for all these kinds of loans and lines of credit. And that's, that's weakened across the board. So fewer businesses are asking for credit. Yeah. I mean, but I keep going. Well, the link between the banking crisis and the economy, at least in my mind, is banking crisis, underwriting standards, loan growth, economic activity. Banking standards tightened, but not as much as I feared. And then loan growth hasn't, you know, it's not growing, which isn't great, but it's not

bawling, which is good. So, you know, it makes me more comfortable that the banking crisis isn't going to undermine, you know, the thing that does the economy in, at least so again, so far. Yeah. Anyway, okay. All right, Bernard, you're up. What's your number? My number is 6.1%.

You know, the way he said that he was kind of disappointed in his own number, right? He goes, oh, 6.1, it's not really good number. Yeah. Is it from the CPI? From the what? Is it from the CPI report? No, no, no. No, no.

Is it a government statistic? Yes, it is. It came out this week. It came out just today. Oh, it came out today. What came out today? UI claims? No.

DPI. Oh. We don't cover it on EV. Oh, now that's an imitation to look at what's on EV. No, it's talked about a lot. I don't know, guys. Do you guys know? Is it a, is it a financial variable measure?

To give you a hint, it's tied to labor. Oh, what came out? It's not in the jobless claims numbers. No, no. No. Okay. Which were a little disappointing, weren't they? Or a little surprising, I guess, sort of, right? Yeah, they jumped up. They jumped up, 260,000 initial weekly claims, although that's pretty consistent where you'd expect it in a typical economy, wouldn't you? Bernard, or is that too high? Is that higher than you feel comfortable with? It's like 1,000 claims below the break-even point of no job growth. Really? That feels right. Yeah, there's been a quirk in a UI claims.

I think that's due to a bit. There's some quirk going on in Massachusetts. So UI claims non-seasonly adjusted have been doubled, I think, doubled over the past two weeks. Oh, so something weird is going on. It's not. And this has been, this has happened before in Massachusetts. I'm not quite sure what exactly is. Okay.

Yeah, the Massachusetts UI data has been squirms. A few times since the pandemic. Yeah, really weird. Okay, well that, okay, that's interesting. Okay, put us out of our misery. What release is it? It's the Atlanta wage growth tracker. Oh, that's a good one.

Yeah. Go ahead, explain. Yeah. So the Atlanta wage growth tracker, this is, it's tracking the median year-over-year percent change in the hourly wage of individuals. And this is the three-month moving average. So it's a bit smooth. captures it because the underlying data is quite volatile. And it's down only marginally from

6.4% in March. So this is still, you know, it shows that wage growth has peaked, but it's been pretty, it's been pretty sticky at the low 6% range. And this is still way too high of a pace for us to be really, you know, at a labor market that's consistent with 2% inflation. And for that, we really need wage growth to settle closer to 3.5% assuming underlying productivity about 1.5%. And I would say the big reason why wage growth is still too elevated is because there's still a lot of excess demand in the labor market. Nationally, labor demand, which we like to define as the sum of employment and job openings,

is greater than labor supply. the labor force by close to 4 million. And some of the past work that we've done shows that, you know, this excess of labor demand really needs to shrink from 4 million to at least 2 million for wage growth to settle around a target 3.5% pace. And because Adams here, you know, I'll add a regional angle. We've also estimated about three quarters of this reduction in excess labor demand really needs to come from the south.

And this is not just due to the to the size of the south population, but also because of how strong its labor market is. So in this respect, I would say the South is presenting the biggest challenge to the Fed as it's trying to restore balance to the labor market. You know, well said, but I don't buy it. I don't agree with it. I don't like this whole excess labor demand thing, but I'm not going to go into it here because that would take us down a whole other path.

I've got to have you on. I got to work on you, Bernard. I got to work on it. That's a different script. That's a different script. No, that's a different script, but I hear you. But that was a good, that was a good one. Good statistic.

Adam, you want to go next? Sure. Although I'll admit, I made the rookie mistake of blowing through my statistic when I was talking about the CPI number. So I'll give you a different one. It's not. That is a rookie mistake. Yeah, yeah. This is not from this week, but it's relevant to the topic at hand that we're going to talk about after this, okay, about the debt ceiling topic.

Oh, the debt ceiling. Okay. So the number is $662 billion. It's something in the budget, the federal budget. Adjacent to the budget. It's related to the federal government. Oh, okay. Ooh, and it's related to the debt limit.

Is it the amount of interest payments, the dollar amount? No, so it's a category, if you're looking at sort of what the federal government spends this money on? Benz money on, yes. Non-defense discretionary spending, XVA? You're in the ballpark. It's a little bit more general than that. Oh, because I think total discretionary spending is what, Bernard? Do you know that number?

Is it just non-defense spending? Yeah, 1.4, yeah. Non-defense discretionary spending? I think you guys are close enough. I'll just, I'll tell you what I'm getting out. It's government spending on content. contractors in particular. Oh, because that's important to the work you did on the debt ceiling.

That's pretty crucial to how we're thinking about the implications of the debt ceiling. I can hold off on that if you want to get to that topic. Okay, we'll come back to that. This goes to you regionalize the impacts of various debt limit scenarios. And this was an important piece of information with regard to how to do that. Exactly. And the way, one way to put that in context, right, that's basically $2,000 for. every American that's, you know, that's associated with government contracts to the private sector.

So it's a very significant part of the economy. Okay. Okay. Yeah, we'll come back. Chris, you're up. 4.4%. In the CPI report? No.

A government statistic. Yes. I'll take the MRSA path. It's a from a Federal Reserve Bank. Oh, Federal Reserve Bank. Is it related to underwriting standards? Oh, it's a delinquency rate? Nope.

It's not a delinquency rate? Is it something that came out this past week? It came out on May 8th. 4.4%. Is it a balance, something on the Fed's balance sheet? No, it's related to the CBI. Related to inflation. Related to inflation.

Is it, does the St. Louis, Fed have some sort of inflation? Oh, I know. It's the median. It's the median. You know, it's one of those wacko Cleveland Fed. No, no. The measures of dispersion of the mean, no.

The mean, the median, the 16th percentile. It's none of those things. It's none of those things. Inflation expectations. Yes. Oh, okay. New York Fed, one year ahead. Okay.

Consumer expectations for inflation. Oh, okay. It was 4.1? 4.4. Oh, 4.4. Okay. Is that up or down? Well, it's down from March. This is the number for April, down three-tenths, but still above where it was in February, where it had been down to 4.1. Oh, okay. Where was it at the peak? At the peak, it was something like six, seven, six. Yeah. Bernard, just to make the point, this is why wage growth is so high. This is the issue, in my view, not excess demand. I know you're listening to Cher Pall too much. You got to listen to Mark Zandi a little bit more. I'm just saying, I'm just saying.

I'm teasing. Oh, that was good one. Okay, I got a good one. It's hard, though. Is it going to be a set of numbers? No, it's one number. Actually, I ran across it today. 62.3%.

That is the percentage. of job satisfaction. Oh, yes. Very good. I was hoping you would say that. I could be the one. That was my backup. I knew it was.

Excellent. What is that? Oh. Job satisfaction where? Here? Okay. Go ahead, Mark. There's a survey, and they've been doing it for 30-some years,

where they ask a number of questions, I think 26 questions and all, about job satisfaction. you know, how do you feel about your job? That's basically, you know, the bottom line. And 62.3 percent, and Chris, correct me if I'm wrong in the way I'm articulating this, but 62.3 percent of respondents said they like their job. They're pretty good with it. They're satisfied. That is a record high. Really? Yeah. And, you know, the conference board, that made sense to me, ascribes this to, you know, the fact that wages are up across a lot of industries, where, you know, in the hospitality industry, for example, they're way up retail, way up.

The other is all the jobs switching that occur. Yeah. Allow people to get a job that's consistent with what they want to do in their interests and they're, you know, very happy with it. And I guess remote work probably has also played a role. People are pretty happy, you know, with the ability to get that flexibility from remote work. Yeah. I thought that was pretty cool.

That was the, that was a really interesting point in terms of, the satisfaction of people who like the flexibility who want the remote work, but also want the in-person experience. Yeah. It's that hybrid experience. The hybrid experience. Yeah. Remote work itself, but the combination.

The flexibility, really. Yeah. Yeah. I thought that was, I was surprised by that. That's interesting. Very different from the consumer sentiment surveys, right? Everyone says, everything's awful. Yeah. Miserable.

We're going into recession. But, you know, oh, I love my job. I love my job. That's like your, what's that, Chris? It's like your congressman, right? Or a congressperson. Yeah, exactly. Yours is great, but everyone else is terrible.

Anyway, okay, let's, that was a good, that was a really good one. A way to play it, man. I was waiting for you to say 60 points. How did you know that, Chris? Because you were going to pick it? It was in the paper today. Yeah, it was in the, I saw it on the, on the web somewhere, you know, somewhere on the web. Okay, let's go back to the debt limit, and Bernard and Adam and I updated these debt limit scenarios

where we've been examining what would happen to the economy, assuming we went down different paths for the debt limit, different types of breaches of the debt limit, there's different types of government responses to address the debt limit. And this time we not only refreshed, updated the scenarios, but we went and tried to figure out what the regional impacts were. And here we've really focused on state economies. And maybe, Bernard, I'll turn it to you and maybe you can provide more color around our thinking and what results we got. And then we could get down and dirty with this with Adam for a few minutes and get a better sense of, you know, what he learned from doing this work.

Sounds good. So we consider only two scenarios. So one was a short breach scenario. So this assumes that we arrive to June 8th, which is our estimated X date or the date at which the Treasury will run out of cash and no longer be able to pay all of the government's bills in full or on time. So in the short breach scenario, we hit the X date. Lawmakers do nothing. and a week passes by where the Treasury is scrambling to get enough, you know, scrambling to get enough tax revenue to pay the, it's incoming obligations.

And this is, you know, it lasts for a week. There's not too much of a direct fiscal contraction. So we hit the X date on June 8th. But then just a few days later around mid-June, you get another surge in tax receipts. So these are largely corporate. tax receipts as well as as quarterly estimated tax payments by individuals who don't have their taxes regularly withheld from their paychecks. And this provides a lifeline for the, for the Treasury in this case. It limits the direct contraction in federal spending that would

be required. But still, there is, I would call this very similar to the TARP moment back in 2008 when the bank bailout legislation failed and stock prices cratered that applied a lot of political pressure on lawmakers to reverse course and ultimately pass the legislation. So even though you wouldn't have a direct, you wouldn't really have social security benefits or other payments being disrupted, the financial markets would be very rattled and that would apply pressure on lawmakers to reverse course and raise or suspended debt limit. So here, just at the national level, you know, this would be a pretty, a recession would still result, but it would be relatively mild with a close to 1% peak to trough decline in real GDP. Employment would decline by 1.5 million jobs, and the unemployment rate would rise from 3.4% to almost 5%.

And just for context, a 5% of unemployment peak unemployment rate, that still wouldn't be quite as bad as what we saw during. more milder recessions like the bursting of the dot-com bubble. But you would still, you know, the wealth effects would really kick in. Stock prices would be lower. And that would, you know, and confidence would also be lower. So that would be enough to tip the economy into a mild recession, even though you have relatively quick action. We then considered a second scenario.

So this was what we call the prolonged breach scenario. So once again, we hit June. eight, lawmakers do nothing. And the assumption is here is that they wait all the way till the end of July to actually get their act together and raise or suspend the debt limit. And the reason why they wait this long, we assume in this scenario, is because as I mentioned, in mid-June, you have another surge in tax receipts. Through June, the Treasury is able to meet all of its bills. However, and so that reduces the urgency. for on law makers to, you know, to address the, to address that limit.

However, in July, they continue to do nothing. But in July, this is typically a month where the Treasury runs a budget deficit. So it's taking in much less revenue than it's spending out. And over this period of time, you get delays to all sorts of payments, build up, build up, until you have, the Treasury has to cut its spending to match revenues by about $140 billion. And for context, if you annualize that, that's close to 6%, 6% or 7% of GDP. So that's a not insignificant amount of money that's being taken away from the economy. So the direct fiscal contraction there is quite large.

And ultimately, we assume by the end of July, lawmakers get their act together, they raise us to spend the debt limit. It just wouldn't be tenable for this to continue much longer, especially once you start to have more than 60 million social security recipients, for instance, not being paid on time. But here, this sort of bookends the worst possible outcome. You have a peak to trough decline in real GDP by 4.6%. You have 7.8 million jobs that are lost. The unemployment rates rises to to 8% and you have stock prices lose about a fifth of, you know, declined by about a fifth, wiping, wiping out $10 trillion in household wealth. And, you know, right now there's a lot of debate about fiscal sustainability and, you know, the importance about reducing the federal budget,

federal budget deficits over the long term. And that's all well and good. But if we go down any of these dark paths, it actually leads to worse fiscal outcomes because of a weakened diminished economy and higher interest rates that result from this extreme political dysfunction, you actually have an even higher debt to GDP ratios 10 years from now. So in our baseline, we assume the debt to GDP ratio 10 years from now is close to about 16%, 116%, whereas in this worst case in area that we consider, we consider, or the prolonged beach breach, it's even higher at 136%. So it's really, you know, in terms of fiscal sustainability, it really backfires, you know,

going down this dark path. Of course, our baseline is not those two scenarios, right? That our baseline is that after a lot of drama, some volatility markets, some decline in its stock prices and gaping out of credit spreads, lawmakers will kind of figure it out, they'll suspend the debt limit until Matt lined it up with the decision around the 24 budget. They have to get this done to also keep the government open on October 1. So they have to raise the debt limit and they have to fund the government. They kind of marry those two things.

And by so doing, they can generate the kind of the rhetorical political victories that both sides needs to sign on a piece of paper and get this legislation through and get it done. it's not going to be graceful. It's going to be pretty ugly, but at the end of the day, they're not going to breach. But these scenarios were designed to say, hey, what if we're wrong, and they do breach, you know, what kind of, what it might look like? And we bookended it. The first one was kind of the least bad outcome. The second, the prolonged breach was probably as bad as it's going to potentially get. Oh, okay.

Great. And for folks that are interested, this is on a paper that's in the public domain. I think it's called Debt Limit Update, I think, something pretty simple. So you can find it there. Okay. As I said, we took this down to the state level, try to understand what all this meant for different state economies. Adam, you want to kind of summarize what you did and what the results are? Sure.

So what we did was really focused on both model-driven channels. that would transmit directly from our U.S. model to our state model, those would be things like government output and employment directly, financial services, and just the general cyclicality of some parts of the country versus others. So states that typically face more severe downturns, Arizona, Florida, Michigan, ones that are really cyclical Nevada being another one, also are hit harder. All of that transmits directly from the U.S. to our state model. And those channels are fairly straightforward.

forward. But that's not enough to really capture the idiosyncratic nature of this shock regionally. So we also hit a number of what we consider kind of indirect channels to state economies. Maybe the most important is the one that I mentioned earlier, which is federal contracting dollars, right? So we know that there are hundreds of billions of dollars at stake just from federal government jobs directly. Right. And so if those, are at risk, and obviously not all those jobs would be lost, but if a good percentage of those jobs are lost, that has a very significant negative impact on the economy. But we also have that, you know, $600 billion plus number of federal contracts that are out there that are going

into the private sector. So we looked at data from the government on where that money is going, and you can actually get this down to the state, even down to the county level, to understand where there is the greatest dependence. You can also look at that at, industry level. So we're able to determine, for example, that in Virginia, the white collar industries in Virginia are very highly dependent on the federal government. And I mean, that's no shock. We're able to quantify exactly how dependent they are and understand that, you know, to say it like Connecticut, which is a very big manufacturer of aerospace equipment, aircraft, shipbuilding, that goes right to the government as well, understand the degree to which the government is

contracting with firms in that state. And we were able to make adjustments to output employment in each state kind of based on those data. That was probably the most significant adjustment that we made. But then we're also looking at reliance on government support in terms of Social Security, Medicare, Medicaid, what that could mean for the economy. So in some cases, states that have higher levels of poverty and that depend more. on programs like Medicaid or on food assistance on the SNAP program, right? Those those face greater hardship. States that have a larger share of seniors could face disrupted payments to Social Security, Medicare. And it's important to note that even if payments are briefly disrupted

or even if they're not disrupted at all, just the uncertainty and the concern that that kind of will pervade consumers in these scenarios means that spending is going to decline, that healthcare usage could decline. So we look at, you know, healthcare systems, especially in rural areas, as being at particular risk as well. And then we're looking at financial markets and wealth effects and trying to, you know, make some adjustments to income levels and have that flow through the rest of the model. So we made all of these different custom adjustments. And where we end up is with kind of initial.

Initially, the shock that takes place, and that would be really concentrated in the second half of this year, is primarily, of course, Washington, D.C. is it harder than anywhere else. It basically sees an immediate or almost immediate spike in the unemployment rate by about five points, right? It goes from about 4% to about 9% right off the bat. A number of other states that are highly dependent on the federal government, so I mentioned Connecticut and Virginia, New Mexico. Alaska, Alabama, some other ones that just rely very heavily on government contracting or government payments get hit very hard immediately. And then as the recession evolves, what basically happens is that that recession begins to take on a life of its own. And it looks more and more in a lot of ways like the Great Recession back in 2008-09, where the states that are traditionally more vulnerable to a deep recession, again, the tourism and travel dependent states, the manufacturing independent states. They're the ones that have a much tougher time emerging. So in a Washington, D.C., for example, there's a very steep shock initially, but federal government payrolls go back

to basically what they were before the situation kind of worsened initially, right, and before the breach of the debt ceiling. And so you see those economies kind of get back to at least something resembling normalcy where the unemployment rate is still very elevated but kind of moving in the right direction. But the rest, these more cyclical economies have a much tougher time getting on track. And they don't until late 2024, even into 2025. Let me ask you this, Adam. Was there anything that really surprised you? Any state or region that got hit or didn't get hit that surprised you? You know, I was surprised and it seemed a little counterintuitive at first, but I think it made sense the more I looked at this, just the fact that these manufacturing-centric states in the Midwest

get hit hard, or as hard as they do. So states like Michigan and Ohio, where, you know, the way I was thinking about this initially was, you know, this is not a typical recession. It's not, right? I mean, I think there's this first phase that we're looking at where government contracting and reliance on the government is really central to what happens. But I think what really struck me is the fact that there is this much more rapid rebound in certain states that I would have thought would have sort of borne the brunt throughout. But when you think about it, I think the federal government still serves as a stabilizing force, I think, by the time you get to 2024 in those states.

And just the fact that this begins to look in terms of which states are hit harder, more like a typical recession. I think that that did surprise me at first. And, you know, I had, first I felt like I had to convince myself. But the more I think about it, I think that that is very intuitive. And I think that that actually does make sense. And it's the way that a situation like this would unfold. Excellent.

Well, thanks for all that. And interestingly enough, people out there in the world really found this very interesting. Got picked up in a lot of different places. So good work. Okay, we have a few more. I want to not be labor, the debt limit. discussion too much, one, because it's getting a little late in the podcast, but also we're going to come back to this. I have a feeling a lot over the next few weeks.

Could I ask one quick question? Yeah, yeah, far away. So it clearly laid out the downside risk. I'm wondering if anyone has looked at the other side of this. Could you argue the Republican stand? So it's a big game of chicken negotiation that's going on here. What if the Republicans actually get what they want? What are they? fighting for? What is the potential upside of the economy, if any, that you see? Have you? If they got the piece of legislation, the, what was it called the Limitsave Grow Act? Limits Save Grow Act, if that got passed into the law? Yeah. Okay. Well, we actually, that's the debate here. Actually, we did do that, and you can go see the results, but it just to summarize very quickly, it cuts the growth and discretionary spending,

going forward. It doesn't stipulate defense, non-defense VA, but in all likelihood, when you sat down and did it, it would be non-defense, non-VA, NASA, air traffic control, national parks, you know, all those are things that would be cut to some degree, along with a lot of other stuff, housing assistance and food assistance and so forth and so on. And a number of things sort of outside the budget process, you know, tax credits for green energy that was part of the Inflation Reduction Act, student rollback all the things that Biden, President Biden wants to do with student loans, easier permitting, cheaper permits for fossil fuels, clawback of COVID, a bunch of stuff. The thing that I'm not a fan, the thing that I'm not a fan,

two things. One, the budget cuts begin right away in the fourth quarter of 2023. What does everyone think might the world look like in the fourth quarter of 202023? According to you, Chris, we're going into recession in the fourth quarter of 2020 or close to. Yeah, especially if you're. Yeah. And you want to cut, a significant cut to government spending when the economy is already on the precipice of recession. I'm not a fan. Second thing is, I do think we need to address our long-term fiscal problems through restraint on government spending plus increased tax revenue. But I don't know that I would focus on poor old non-defense, non-VA discretionary spending to do it because under current law, that was going to fall anyway as a share of GDP. It's already nowhere.

It's not any higher today as a share of GDP than it was, I don't know, 25, 30 years ago. So if you want to solve that problem, you know, addressing our long term fiscal problems, you're barking up the wrong tree. That's not where you want to go. I mean, you want to focus on the obvious Medicare, Medicaid, Social Security. That's where you have to go. So I'm not a fan about the longer term implication, the longer term, the thrust of this. It's not, you know, getting to the meat of the matter or the heart of the problem. It's it's cutting where you probably don't, nobody really wants to cut anyway. So that's my view. But you can find it. in the paper. Bernard, did I get that roughly right? Yeah. Yeah, and in response to Chris's question, I mean, I think the... Are you saying I didn't answer his question, Bernard? No, no, no. You know, I mean, I would add to that that, I mean, you know, one upside could be if we actually do get some entitlement reform, but, you know, in the way that we did early on in the Reagan administration with respect to social security, again, that's a very long shot that we, that something like that actually happens. But if we were to get immigration reforms, entitlement reform, and, you know,

some tax reform broadening the base, for example, I think those would be very small, but, you know, they are upside risks and all this. I guess my question is even more direct or specific. What, you know, I agree. Lots of things need to happen. This is not the best way to do anything. But let's say, you just, you know, the Democrats concede for the greater good. And they say, okay, Republicans, you get everything you want on the in your plan, what happens to GDP unemployment, the economy over the next couple of years? Well, it gets hurt. We go into recession.

We go into recession anyway, right? Or we get pretty close. We don't actually go in, do we, Bernard? We get GDP growth is so slow that you get employment. Yeah, you lose jobs. Right on the edge. Yeah. In the near term.

The long run, it's not significant in terms of what it means. Yeah. I thought you were asking. Is there an upside scenario here? Could something actually turn out better than anticipated? And I'm not sure there's much upside other than this increase the debt limit. Let's move on and get to the next time we have to address this thing. That's probably the best scenario, but that's the scenario everyone's expecting anyway.

So I don't know that there's any upside. I suppose you could do the 14th Amendment. I'm not going to go down that path. But that could end up in a better place, actually, right? Because if you invoke the 14th Amendment and say, you know, the debt limit legislation effectively is not constitutional, I'm not going to abide by it. And the Supreme Court says, yeah, you're right. You've now obviated the debt limit as legislation and that goes away. I would view that as a major victory because the debt limit's becoming a real problem. It's going to become an even bigger problem going forward given the political kind of environment that we're facing and we'll continue to face it.

going forward. What do you guys think? Do we have time for a question or two, Chris, or you're saying no? Should we take a question or two? I'm always up for this one. Okay. It's a little long. If you guys, the listener out there is tired, you know, you want to leave, go ahead, but you're going to miss the best two great questions that Merce is going to pose. Or one question. Two great answers. We don't know what the questions are. She hasn't told us, but fire away, Mercia. Give us your best shot. Okay. This is an interesting question. in light of your statistic, Mark. And Bernard's.

Okay, this came to you on Twitter. To me? Personally. You personally. At Mark Zandi. Okay. Work from home and hybrid opportunities are expanding individual labor markets. There is the potential for quicker and better job matching.

Shouldn't we expect lower frictional unemployment with potentially lower structural unemployment too going forward if this is the new norm? That's my view. Yeah, I think that with remote work, as we kind of work, as businesses work through all the moving parts here to make remote work really work, that we will get better matching. You know, people will find better jobs. Businesses will find better workers. And that should lead to less frictional and structural unemployment. So the sort of the, natural rate of unemployment, the so-called Nehru, I think will be lower. I think that's a long time in coming because to make remote work as we, you know, our economics group within Moody's is figuring out because we went remote. There's a lot of things you have to work through and make work well to fully empower, you know, this as a tool for better labor

matching. But my sense is that as we work those things through, and we will over time, that indeed, and I do think this will be adopted more widely across the country because I do think, you know, I think workers want it and they'll ultimately get it. And as it becomes more, and as new businesses form, I think they're going to form not based on some office using experience, but on a kind of a more remote work experience, maybe a hybrid kind of model, that these problems will be addressed and we will see better matching and the natural rate of unemployment will be lower. I don't know that, I mean, we're not talking at a percentage point lower. We're talking a 10th or two, maybe three, something like that. So kind of on the margin, meaningful, not inconsequential, but I'm not saying

we're going from 4% to 3. I think we're going from 4% to maybe at 3, 6, 3, 7. you know, something like that. Chris, what do you think? I agree with that. I'd emphasize the degree of the A. The degree. To my mind, is going to be pretty small. Most jobs still can't be done remotely.

Good point. So, yeah, we'll get some better matching, but I wouldn't expect a significant or very large decline in the next. Can anyone channel Dante? Because I think Dante has it, Dante, Deontini, or other colleague who's a labor market economist, really good one. Doesn't he have a different view on this, a different take? Does anyone recall?

No? Okay, we'll have to get a back on. A different take on productivity. Yeah, I know on productivity. I thought on this labor matching issue, too, he had a different perspective. But no, okay. All right, let's do one more, so that was a good one. Well, there's one person who wants to know what they should write their thesis about

if we have any ideas for them. And there's another person who would like to know if they should buy a house now or wait till next year. Well, I guess the question is, can you find out. Yeah, that's right. Yeah. The thesis one's an interesting one, but maybe for another day. Not really. Yeah. I was more joking. I mean, those are actual questions, but we're not going to tackle these. Okay, this is one related to inflation. Okay. And this is something that we hear about all the time. I'm going to paraphrase this question. So the question is about corporate profit. And, you know, this is, this has become very political in my view from what I've seen is sort of blaming corporations for sort of taking advantage of supply chain problems and keeping prices elevated even after supply chains have eased, right? So how much do you attribute to that? Is there any way that we can measure that? What do you think about that argument that there are

companies sort of bilking people taking advantage of higher prices. And sort of corollary sub-question is, as people get used to a certain price level, right? Consumers kind of get used to just paying more for a hotel or airline tickets or whatever, does that make prices stickier as well, just because psychologically people are sort of resetting their expectations to a different price level? Chris, I've got a view, but do you want to take a crack at it? Sure. So on the first one, in terms of the businesses, and are they, is there profiteering going on? Yeah.

Is the inflation because of wider margins effectively? That's the way you might couch it. Right, right. You know, it comes down to monopoly power, right? If you have, if you can exercise that power, hard to make that argument, if it's a true. competitive market that businesses are able to, an individual business could, you know, get away with that type of inflation increase. So, you know, I think we, I think there certainly are structural issues in parts of the economy. I think you can make some of that argument, but I don't see that as the major driver of

the inflation that we've been experiencing. Still quite competitive overall. So I think you can find isolated incidents, but I don't see that, you know, it's the corporation's really taking advantage of the situation and keeping prices up or actually accelerating price growth. Yeah, that's my take. Yeah, yeah, I'm in complete agreement. Chris, can we, let's shake. Let's shake. I felt good. It felt really good that we're on the exact same page. Of course, the listener is saying, damn, I wish they were in the agreement here. But if you, you know, what I look at to gauge margins is profits, total corporate profits, divided by corporate GDP or value added. To me is kind of an economy-wide profit margin, right? And that's publicly traded companies, privately held firms,

small companies, big companies, you know, the whole shoot match. This is data from the Bureau of Economic Analysis coming out of the National Income and Product Council. Okay, I'm, I'm going to, I'm throw this at you. What do you think the margin was in 2019 by that measure? Total profits divided by corporate GDP? What do you think the economy-wide profit margins? This is this is a before tax, not after tax. 40%. Hmm, that's a little high. 20%. Actually, 19.6%.

Because ironically, I just calculated this afternoon, 19.6%. Guess what it was in 2022? 19.6%. Really? Not, they're off a little bit on the second significant digit, but no change. Now, I've always, I'm always getting a little nervous about how do you measure corporate profit margins? So maybe I'm not, this may not be the exact right way to do it. But again, it's total corporate profits divided by, you know, basically output.

You would think that that would be a good measure of margins. And they have not changed. They have not changed. And that's economy-wide across all industries. Economy-wide, in aggregate. Can you do that by, you could do it by industry, too? Well, I don't think, maybe. Oh, the corporate profit data is broken down like that.

Well, maybe you could. Maybe you could. Yeah, I take that back, because you do have value. added by industry. And you do have profits by industry. So yeah, we could take a look at that, see what's going on. But I don't, you know, there's a long list of reasons for the high inflation. You know, I don't think corporate, so-called corporate profiteering is, if it's on the list, it's at the very bottom. And to Chris's point, I think it's, you can find a case or two. You can find a company, maybe a small industry. Maybe you could argue the fossil fuel industry.

industry profiteered a little bit, you know, but that's nothing new. It goes just to the, they just take global prices. And so when prices go up, they benefit when they go down, they don't. So I'm not sure I'd read it too much into that. But might be some of the regional. What's that? There might be some regional dominance. I don't know if Adam would speak to that. So maybe a gas company that is. Yeah, maybe. Yeah, maybe. Right. The monopoly power essentially could be concentrated in a region or two. Yeah. Okay. Well, I think that was a good question. Those are all very good questions. And just to the listener, please fire away. We love the questions and we'll definitely come back and try to answer as many as possible in future podcasts. Okay. I'm going to call it a podcast unless I hear an objection to that. I know Bernard wants to keep on going. He wants to do the whole thing over again. I think he speaks. I think he speaks. Urdu or something.

You have a forecast for the 76ers that we can... They play tonight, man. Good, good game. Very good game coming up. You know, I'm a Philly fan, and Philly fans never believe. So it's hard to believe that they're going to win. It's the curse of being a... Because they always get, you know, kind of there,

and then they can never quite get to the finish line. So, yeah. So what about you? You have a view? you? No, I'm totally. Yeah, you're, you're not, you're, totally uninterested. Totally uninterested. You're, you're a botchy ball kind of guy. Yeah. All right. Very good. All right. We're going to call this a podcast.

Thank you, dear listener. We'll talk to you next week. Take care now.