Moody's Talks - Inside Economics - Crazy Data, Claims, and Cowbells

Episode Date: January 27, 2023

The Q4 GDP Report has been released and Mark, Cris, and Marisa analyze the weirdness surrounding the data. Colleague, Gaurav Ganguly, joins the podcast to give a European perspective and Mark continues his domination in the statistics game.Full episode transcriptTo learn more about Moody's Analytics Summit 2023 & register, click here.Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics. I'm joined by, well, I've got a few of my colleagues here. My two trusty co-host, Marissa D. Natali and Chris Territis. And also, Grogh, Ganguly. Grab, good to have you back. Good to be back, Mark. I understand you.

From cold, gray and fairly unimpressive London. Well, that's kind of typical this time of year, though, no? That's typical. time of you exactly yeah I understand you have a bit of a cold though good good to be typical yeah typical is not bad in this day and age typical's not bad in this day and age not at all I go for typical yeah yeah yeah well you may have noticed that I didn't have my

typical wah-wah coffee this morning oh yeah what is that I know it's a 7-11 7-11 remember 7-11 are you doing corporate sponsorships now are you I don't put it over on the side yeah no you know the the thing is this while I'm in I'm down in Florida Wawa has come to Florida I guess because so many folks from our neck of the woods in Pennsylvania have come to Florida and it is so popular that at seven in the morning like I was a little usually I'm there well below before seven in the morning today I was a little late seven in the morning is so crowded I couldn't even find a parking spot I'm not not kidding, it was like going to a rock concert or something.

Wow. Yeah. So I said, I can't do this because I have to prepare for this podcast. So, you know, I had to come back and had to settle for, well, not settle, not settle. It's good coffee from 7-11, but, you know, Wawa coffee. Yeah, Wawa coffee. You don't know what I'm talking about, Grav, do? You have no idea what I'm talking about.

Well, you're talking about coffee, right? Yes, yeah. Okay. Coffee in Florida. Do you have a place to go in the morning to get coffee or do you do it at home? What do you do? Yeah, it's called my kitchen. You're a kitchen?

I just traips downstairs, turn on the machine, get myself a cup of coffee, trips back upstairs and, you know, switch on my computer. You're in fine form for not feeling so well. I don't, yeah, you seem like you're in a good mood. Yeah, it's this podcast. It brings out the best of me. So that's what it is. Okay.

Well, we got an action pack. We just completed or we're in the process of completing an action. action-packed week when it comes to economic data information events. So I thought the headline number here in the U.S., let's start there, GDP came out for the fourth quarter of 2022, the gross domestic product, valuable, the services that we produce, goods and services that we produce. And maybe to give us a rundown on that, I'll turn to you, Marissa. You want to give us a sense of that report? Sure. And anything else you want to talk about, you know, your, your, your Coffee habits are, you know, go ahead.

Free form. The Eagles. Yeah, we could definitely, that we could definitely talk about. I don't really have much to contribute on the Eagles front. Okay. Sorry. Fair enough. Fair enough.

Well, now you're drinking coffee when you're on the, well, yeah. I mean, it's six o'clock in the morning. Of course, I'm drinking coffee. What's that all about? Come on. Yeah. Oh, here we go. She's, she's preparing.

I'm ready. It was like an aria. She's going to sing an aria to us now. Go ahead. Go ahead. Okay. GDP. GDP came out yesterday morning for the, it's the, it's the, uh, preliminary release for the fourth quarter. Wait, wait, wait, wait.

Yesterday morning? Oh yeah, it was yesterday. Yeah. Go ahead. Go ahead. Go ahead. Take another sip, Mark. Okay.

All right. Go ahead. So in the fourth quarter, uh, GDP grew 2.9% annualized. This was a little bit under what we were anticipating and a little bit. more than consensus, so kind of split the difference. And over the year, GDP was up 1%. If you do fourth quarter 21 to fourth quarter 22, if you take the average of the entire year, 2022 GDP rose 2.1%. That follows an annual average in 2021 of 5.9%. So we are seeing some slow down here. The, if you look at- Can I say just just, just

to interject to put context. So the economy's so-called potential rate of growth, that rate of growth, consistent with enough jobs to maintain stable unemployment, is we estimate, most people estimate, to be about 2%. So in calendar year 2022, the economy grew pretty consistent with its potential. And you saw job growth, pretty solid job growth, but sufficient to absorb the growth in the labor force. and unemployment for the year was basically stable, maybe down a little bit through the year. But on a fourth quarter to fourth quarter basis, you got that 1%, which is half the potential growth of the economy. And if that kind of growth rate continues around 1% or less, you would expect to see a steady

further slowing in job growth and unemployment starting to notch higher. Just for context. And I guess we should also say for context that, GDP fell in the first half of 2022, right? So the first two quarters of the year, GDP was negative, and then in the third and the fourth quarters, it was positive. In terms of the components of GDP, consumption, so spending by consumers contributed positively in the fourth quarter. It grew at a 2.1% annualized pace, which is kind of on par of where it's been the past three quarters or so. Government spending, government consumption expenditures also contributed positively for the first time

and actually for the first time in a couple quarters. Investment, so the drags, notable drags on GDP growth were residential fixed investment. So this is the housing market, it's not surprising given what we know is going on in the housing market with rising interest rates. So residential fixed investment was a drag on GDP growth, whereas non-res fixed investment contributed positively. Inventories, so the inventory swing, the change in inventories in the fourth quarter contributed almost one and a half percentage points to that growth rate. So that was a big contribution to GDP. growth in the fourth quarter. Net exports also contributed positively to growth. So both imports and exports fell over the quarter, but imports fell a bit more. The value of the dollar has been

quite strong, so that's been hurting exports. Let's see, what else? The personal consumption expenditures deflator. So that's that. came out this morning that's that is derived from the same data set the national income and products account data set so that showed a 0.1% increase over the month in December that this was for the month of December um this is related it's not in the GDP report but there's you know we got a fourth quarter read on on pCE in the GDP report but i just wanted to mention this um that's the same increase in December as we got in November But the core PCE, so when you strip out energy, increase 0.3%.

And energy and food. And food. Yeah. Sorry, increased 0.3% in December, which was a slight acceleration over the 0.2% increase in November. Let's see. Anything else to add on GDP? Well, that's a great rundown, kind of the nuts and bolts of it. Chris, what's your interpretation of it?

How did it make you feel about, you know, where the economy is and where it's headed? Concerning, right? Top line looks good, 2.9% growth. But as Marissa mentioned, a lot of that is inventories, exports, and government spending. You strip that out and look at just private domestic demand, and it's 0.2%, right? So I think for, you know, earlier in the, earlier in 2022, we, we, we put the caveats about inventories and exports when we had those negatives, saying, oh, no, the economy is fundamentally stronger than that if you look at consumption and investment. So I think we have to keep that same

caveat here. And if you do that, you can see that there is, there is weakness here. The inventory build for me is a bit of a red flag. I think that is. consumers pulling back on their potential spending here. And we're also seeing some of those billwip effects still playing a role here. The weaker imports that Mercer mentioned, I also view that as consumers being more cautious in their spending. So it's okay. I mean, fourth quarterfying.

We performed, but going forward, I'm certainly a bit nervous about the future here in terms of what this means for the ongoing trend. Not surprisingly, I disagree. Disagree. Yeah. Yeah. I think as I would say, write down the strike zone, right? It's weak, but that weak is what we want, right?

I mean, if the underlying trend in GDP is 1%, you know, Q40, Q4, and in the fourth quarter, if you abstract from the inventory gain and the trade, because as you say, that swings up and down and all around, it's still 1%, you know, one to one and a half, I think it was one to one and a half percent final demand. Isn't that what we want? We want below potential growth because we want inflation to sit. We want unemployment to notch higher. We want inflate to get wage growth down and for inflation to subside.

So if you were writing on, if you were the Federal Reserve trying to write it again, you know, what do I want exactly what do I want in terms of growth? Wouldn't you want 1%? No? You want, well, again, it's about the trend and the speed. Yeah. Right. So things are coming in here pretty fast in my opinion. Really?

Oh, okay. I mean, I go, man, this is just like, this is what I want, exactly what I want. Now, you know, it feels like going into 2023, it's going to be soft growth or, you know, the economy is going to struggle. out about it. But again, isn't that kind of sort of what we want? I mean, to get inflation back down. If the economy continues to grow two or more than two, then that means unemployment's not going to notch higher. It means it's going to be much harder to get wage growth down. It means that inflation is going to be more difficult to get back in the bottle. So I don't know. It feels like we're threading the needle. I mean, it's almost like you couldn't ask for a better number.

What do you think, Rob, I mean, from the perspective of Europe, if you have a perspective on this? So I'd be concerned about things that's sliding pretty rapidly at this point. Oh, so you're on Chris's side. Damn. Okay. I'm just going to take a European view of it, because it looks like things have just started looking a bit better for Europe. In confidence was just so low in September, August, September, October over the summer months.

everybody was so concerned about Europe not even being able to make it through the winter without having to ration gas supplies. So things have just started to turn up. So what Europe needs now is to get through winter. Weak growth is just fine. Weak growth,

moderating price pressures, that'll all be good. And it'll help Central Bank. It'll help DCB. Now, the US being such a big support to global growth, if the US starts to slide, that is pretty negative for Europe.

Yeah, if it goes into recession, I mean, yeah, Exactly. I mean, 1%, yeah. I mean, if it just motors along, one-ish percent, that's fine, I think. Right, right. In all fairness, I guess there are parts of the numbers we got last week that made me a little nervous about, and I should say, not surprisingly nervous, because all along, you know, even under the best scenario, most optimistic scenario, 2023 is going to be a tough.

2022 is a difficult year. 23 is going to be a tough year. So, you know, under any scenario. And in that kind of environment, there are going to be points in time where you're going to think, oh, my gosh, this thing is falling apart and we're going to go into recession. So it's not surprising to me that we're starting to see those kinds of numbers. But those are the kinds of numbers we actually have to see to avoid recession because we've got to get inflation down without the Fed having to jack up interest rates more, you know, more significantly.

But there are a couple of numbers that made me a little nervous about the way things. are going. So, for example, a good example, that would be in the data on today, this is now Friday, we got the income spending and consumer expenditure deflator information that, you know, Marissa, you were talking about. But the one thing you didn't mention was spending by consumers on a real, after inflation basis, actually fell in December, on top of a decline, a decline, another decline, but smaller, declined in November and basically flat in October. So it feels like consumers were starting to pull back as the year, you know, came to a close. And so that means coming into 2023, we're starting from a, you know, kind of a soft spot.

So the key to avoiding recession here is consumers hang in, hang in tough. The other interesting thing, though, the positive I saw was that real disposal, income, which is gotten, that's after tax income after inflation, you know, that got creamed last year, right? When inflation took off, it completely undermined people's purchasing power, and that was represented in a decline in real disposable income. That's actually now turned definitively positive over the past, you know, three, four, five, I think even six months, because inflation is now coming back in and we are getting, you know, still solid wage growth. So we're starting to see some real gains and incomes.

And that augurs well as we go into 2023, that, you know, their purchasing power, consumers purchasing power is no longer being eroded and, you know, is actually, you know, turning positive again. The other thing I saw, I think also important, is the personal saving rate that actually rose in December. You know, it's still, you know, three, four, but, you know, it feels like, it feels like the, the decline in saving is over. Actually, the saving rate for November got revised higher from 24 to 29.

So it feels like the kind of the drawdown in the saving rate that we've been, you know, experiencing here for most of the past year as consumers have tapped into their saving to kind of supplement their, well, weakened disposable income to continue spending. That feels like it's now at hand or behind us. So, yeah, there's some things to be nervous about here. But, again, that shouldn't be a surprise. I mean, this feels like exactly what would, you know, you would expect to happen. But, but, you know, I hear you.

Anything else in the data that this week that, you know, supports or doesn't support your view, Chris? About the economy, about, I guess. To level set, obviously. You know, listeners to the podcast, no, but if you haven't been listening, you're very bearish on the economy in 2023, recession in 2020. So anything else in the data that would be consistent with that kind of forecast or and of course, I'm looking for things that aren't consistent with that forecast in the week's data?

Yeah, it's mixed. I agree. We are on a knife edge here, right, in terms of the direction. And to your point, the data we're seeing would be what you would want. in terms of a soft landing would also be consistent with an economy that is slowing down. Slow session. That's your, that's your term, slow session. It also would be consistent with an economy that's about to go in recession as well, right? So that's where it's tricky.

But a couple other numbers that came out this week were the leading economic indicators from the conference board, still down 1%. Yeah, that's clearly, that is consistent with previous recessions. So that's concerning. That's largely due to new orders, consumer confidence, or expectations, I should say, manufacturing, employment, right? Those are all dragging on those leading economic indicators. The Chicago Fed National Activity Index came out this week as well, also down negative. 0.49.

That's also in recessionary territory as well. And again, points to some of the weaknesses we have in terms of new orders and some production consumption. So there certainly are some signals out there. On the more positive side, I'd point to UI claims, unemployment insurance claims, new unemployment insurance claims, still down at very low levels, 186,000. Right. So that's, that is not consistent with recession. but on the flip side, continuing UI claims actually rose, right? So a bit about saying they're in recessionary territory,

but it does suggest that people are, maybe they're not a lot of layoffs, but people who are losing their jobs aren't finding new jobs right away. They are lingering a bit longer than they were just a few months ago. So again, I view it as kind of mixed signals there. Yeah, I guess we should get used to this. I mean, I think while we're going to be in this world of lots of economic cross currents, hard to interpret, you know, which way the winds are actually blowing.

Marissa, I did want to ask you about the UI claims, initial claims for unemployment insurance. They're just so low. I mean, of course, that's a window into layoffs. And we've heard all these announced layoffs in tech and media, financial services, housing. Now I see it in retail, just a lot of announced layoffs. There's always a lot of announced layoffs, but maybe we're hypersensitive, sensitive to it now. I'm not sure, but probably, but nonetheless, it does feel like a lot. And it's just not showing up in the UI claims data, meaning, and that's, that would be definitive, wouldn't it?

Is there anything in the day, is there any reason why UI claims would not be representative of the reality of what's going on in the labor market? I mean, we're below 200,000 easily in initial claims of weekly unemployment insurance. claims, and that's consistent with just a really strong, I mean, really strong labor market, no layoffs. Anything, is there anything out there that would suggest that maybe the data is misrepresenting what's going on? If people are filing for unemployment insurance, it should show up right away. Now, there may be in certain parts of the economy where people get severance packages,

and that's probably true in tech and finance, depending on the law. law in each state, you know, each state runs its own unemployment insurance program. It could be that people aren't able to file for UI until their severance is depleted or for a certain amount of time after they've received severance. So it could be, this could be a delayed reaction. I was looking yesterday, though, at, I mean, could it just be that the job market generally is, we're hearing about all these announced layoffs. Of course, they make headlines. But it could also be that the job market is strong enough that people getting laid off are able to find work quickly enough that they're not filing, they're not having to file for UI. So I was looking at the flows, the labor force flows data, which breaks down the household survey between people moving between various statuses of employment and unemployment and out of the labor force each month.

And the number of people moving from employed to employed each month, right? So they're just changing jobs. We don't know if they quit or they got laid off. That's still, that's incredibly high relative. I mean, it's back above or near where it was prior to the pandemic. So that's the largest share of employed people is people that are switching jobs, not leaving the labor force, not being employed. So it could be that people are getting laid off, but they're finding work really quickly.

I guess that makes sense. I mean, that's intuitive and certainly in the tech sector, right? I mean, because most companies that are not in the technology industry have the need for tech workers couldn't fill those open positions because the demand for those workers was so extraordinary from the likes of Google and meta and Microsoft and Amazon, so forth and so on. And now that they're laying off, they're just quickly finding jobs in other companies like a Moody's or something. Yeah. Yeah. The number of people moving from employment to unemployment is very low and it's actually, I believe, fallen in the past few months. So despite all these layoff announcements, it's not showing up in the UI claims and it's not showing up in the household survey unemployment data either. That's not to say it won't, right? I mean, maybe there's just a bit of a delayed reaction here. And as you have an accumulation of more and more layoffs, it's going, as Chris's point with continuing claims, if employers are pulling back on hiring, then eventually you have this backlog of people out there looking for work and not enough hiring to keep pace with this. So it certainly, I think, could be a harbinger of

things to come this year. But to some degree, again, we want to see that, right? I mean, anything below 200K, it suggests labor market is not going to cool off sufficiently to get the wage growth down to be consistent with inflation back in the bottle, back to the best target. So, you know, it's almost like I'm rooting for you. Like, it's weird. I don't like layoffs, but, you know, we don't want to, we don't want to overheat and actually go into recession. Then we get a lot of layoffs.

So, you know, in a kind of a typical well-functioning economy, my rule of thumb is weekly unemployment insurance claims about 250. So we're sub 200. That's rip-roaring. We need something closer to 250. That's a pretty significant increase. Yeah. And I would expect it to increase.

So Chris, let me ask you. And Graeme, I'm going to come back. We're going to come back to Europe in just a second and also play the statistics game here. But if the adjustment in the labor market to the slowing that we need in the economy in the labor market, primarily and right now exclusively comes from less high, you know, to get, we're getting less job growth. Job growth is slowing. We know that. And it's not happening because of layoffs. We think we know that, right, from the data.

So that would, ergo, suggest that the slowing and job creation that we're observing is less hiring. You know, businesses aren't hiring like they were. And in fact, there's some evidence in that in the data, too. If you look at the job opening labor turnover survey data, that does show hirings have come down. And they're back to last I look close to pre-pandemic. If that's the way the labor market adjust, does that give you any more. comfort that we may be able to avoid recession. In my mind, it feels like there's a palpable difference between whether the labor market adjust because of higher layoffs or because of less

hiring. If it's layoffs, that scares everybody and they pull back on their spending. If it's like their companies aren't hiring as much, that doesn't feel as scary or spooky in consumers kind of hang in there. Does that resonate with you? Or do you have a different perspective on that. Yeah, it's certainly consistent or more consistent with the soft landing scenario, right? If we just pull back. Slow sessions, Chris, slow session. The irony is that's your term, slow session. Slow session. Yes, yes, it is consistent with the slow session. We pull all the openings, slow down the hiring, right? And we kind of make our way through this and then open ourselves up for some additional hiring in the future.

And that would be good for confidence. However, I do think, you know, if new labor market entrants are not able to to get in because the hiring slows substantially, right, you will have some negative confidence impact. So there's a balance here as well, right? You don't want to go too far, right? No one can get a job, but there's no layoffs. That's still not a great situation to be in either. So I think we still need to be nervous. Oh, yeah.

We're one shock away still from going right in. So that's the basis of my outlook here. Yeah. But yeah, definitely better to not have layoffs and just pull back on hiring than the opposite. Okay. But you always have layoffs. I mean, it's all about magnitude and balance, right? I mean, that's right.

There's always churn going on. There's always layoffs. There's always employers pulling back on hiring. It becomes a problem when the hire. hearing can't keep pace with the with the layoffs. So even if it's, even if it's a small, small-ish number of layoffs, if hiring slows below where it normally would be at that point in the business cycle, you're going to have negative job, right? You're going to have net negative job loss. So it's, it's just about these, these things have to be in balance. I think.

I mean, you always have this sort of churn in the economy. It's just can the hiring absorb the people that are being laid off, regardless of how many people there are? Yeah. Yeah. Yeah. It's a question of a degree, right? Yeah.

Hey, Karav, you know, one thing that I've always found kind of fascinating is the conversations that we're having here in the U.S. around the economy are almost always similar to the conversations you're having there in the U.K. Are these conversations we're having similar to the kinds of conversations you're having there about the economy and what's going on in the economy? Probably a bit more somber. But I think before I even pick up, before I pick up on that question, I was just say, you know, just tell you what I'm thinking right now. Yeah, sure. Give you a bit of emotional outpouring from listening to you guys speak almost.

I spent all of last year worrying about, you know, NATO being dragged into a war, about geopolitical fallout from the Russian conflict into main. land, Europe, about changing political tides and a new cold war emerging. I worried about Putin weaponizing gas, Europe actually running out of gas, a really cold winter, people freezing at homes. I'm now worrying about, what's that word again? Slow session. Slow session. Slow session. I've got to try and see that. No recession. No recession. We're not going backwards. We're not a broad-based decline in activity, but the economy is really not going anywhere fast. Therefore, for slow session. So slow session.

So if I now have to worry about slow session, perhaps getting a little bit worse, and those wins buffeting Europe, I think that's okay. Yeah. Yeah. It's all relative, right? Yes. Yeah. Yeah.

So that's what I wanted to say. That was really the emotional outpouring from listening to you guys speak. Well, that I think that's actually quite a positive. I expected tears or something. I mean, that that wasn't that emotional. You know, that's a British emotional. Maybe it's British emotional. Yes.

I'm just an understanding of this sort of guy. I'm crying on the inside. That was emotional. I'm just choking up. I'm just choking up. But yeah, you're right. Going back to your question about the similarity between, I guess, the UK and the US, it's a bit more somber here, right?

And that also relates to the legacy of previous administrations and the messes they've left behind. The policy mistakes that have occurred, not just in 2022, but going back to the Brexit referendum. All of that sort of really taken a bit of a sledge hammer to the structure of the UK economy and knocked off a bit, knocked a bit of potential growth and made the UK that much weaker. So right now, looking at what's going on, on the one hand, it feels, yes, it's a bit similar to the US. We could survive all of this without too much damage. So it's not so much a slow session as perhaps, it's a bit south of slow session, if you like. It may not be terribly bad. So the Bank of England,

in its November monetary policy report was, you know, just forecasting doom and gloom. It was going to be a eight-quarter recession, right, from 2020, end of this, end of last year, out to sometime in 2020. Can I say that's just, that's just an amazing thing that the central bank, the Bank of England, has a explicit, we're in recession and we're going to be there for a long time. For a long period of time, exactly. So it actually made that call. Now, part of it was probably communication about other.

policy actions that it would prefer to have seen. But that was the kind of message coming out. In fact, I was in a client call just this week and people were asking me if I was still thinking about a two-year recession. And I said, well, I'd never been in that camp. I don't think it was ever going to be that bad. Certainly not after the administration changed. It sort of became pretty apparent pretty quickly that a two-year recession was perhaps not on the

cards. But I did think that the UK would have a fairly shallow recession that could last about three to four quarters starting from the third quarter of last year. And surely enough, in the third quarter, GDP contracted. I thought GDP'd contract again in the fourth quarter, maybe then slightly start to stage a comeback at Q1 and Q2, you know, be marginally negative. So that kind of a recession. And now it looks like, well, we might just escape some of that. It might, Q4 might be flat, Q1 might still be negative. PMIs came out earlier this week and UK APMI showed the service sector plummeting again. People are still feeling the strain from the very high energy bills over winter.

So possibly Q1 will be negative. But that just means sort of a bumpy economy bumping up and down, Q3 negative, Q4, probably flat Q1 a bit negative. That's a lot better. Can I say, Garav, that sounds like a slow session to me. That sounds like a slow session, yes. Right, Chris? It sounds like a slow session.

That's kind of what your slow session. That's kind of what you're thinking for the U.S., isn't it, Chris? something like that. Yeah. Yeah. Kind of bumping along, maybe a little bit more negative than positive. But at the end of the day, if it's a recession as defined by the National Bureau of Economic Research, it'll be a very modest one, you know, very by historical standpoint. Hey, Garab, one thing, though, that I have felt, you know, and this is Zandi emotion, is that the European,

in economic scene feels a lot better than it did just a month, two, three, four ago, that, you know, we're now even thinking that continental Europe may not even actually go into recession, right? I mean, do I have that right? I mean, that if things are feeling a lot better, I mean, they're not great, obviously. Things are, there's a, it's a struggle, but it's definitely not kind of the doom and gloom that, you know, seem to be pervasive just a few months ago. Is that the sort of doom and gloom we saw in August, September, October. That was really exceptional. The falls in consumer confidence, business confidence, tightening of credit standards,

the plummeting of people's intentions to buy houses a year ahead, all that kind of stuff. Every month we were thinking DCB would be more and more aggressive, would need to be more and more aggressive, and peaks in inflation were being pushed out every month and were higher. So that's changed. That's changed. I mean, inflation looks like it really has peaked. Energy price declines have been tremendous. It's just absolutely meteoric decline in energy prices. In fact, if I looked at European gas prices this morning, they were trading. The day ahead price was trading at roughly 55 euros a megawatt hour.

And that's below 75 euros per megawatt hour two days before the Russian invasion of Ukraine. Wow. And that's well below the 350 euros per megawatt hour at the peak in July when Nord Stream won a principal pipeline from Russia into Germany was shut down by Russia. So that's a tremendous decline in gas prices in Europe. And of course, as you know, the gas price in Europe trades quite differently to the gas price in North America because of the regionalization of these markets in Europe has traditionally relied so much more on Russia for gas. So Europe's managed to turn itself around. And it's pretty much offset the entire decline in imported Russian gas over the course of 2022 with LNG imports. So much so that right now it has a lot of gas in storage.

It pumps all that extra gas in summer into storage and draws down over winter. And it's got a lot of gas in storage. So yes, things feel better. You got a little, we all got a little lucky because the winter has been warm so far, not only in Europe, but here in North America as well. And that really helped out quite a bit, I think. At this point, I'm not going to complain about a little bit of luck. Yeah, November, November was pretty mild. There was a cold snap in December, another cold snap just now.

But none of that's dented gas storage. In fact, the way it looks right now, I would forecast that Europe will get through winter. So by the time it emerges from interspring in the middle of April, there could well be 40 to 45% of gas left in storage in the buffers. And that will make next year's replenishment so much easier. We also got lucky with China, right? Good point. Bad for them, good for everyone else.

As China reopens here and goes into gear, do you see that having impact on those energy prices? Once again, are we just delaying? To some extent, yes, but it would be much worse if Europe emerged with 25% gas and storage. Fair enough, yeah. Well, one other, and I think Chris has put his finger on the thing that makes me most nervous here in the near term is energy prices going back up. And one way that could happen is China gets back online, maybe the spring, summer after everyone, you know, if they get through this round of illness that they're suffering through the COVID illness they're suffering through. And of course, China is a huge consumer of oil and all commodities. and that would lift price.

So I worry about that. And then on top of that is, you know, Russia is still a problem. And, you know, the EU, the European Union, UK, US, Canada, other developed economies are still imposing different types of sanctions on Russia and Russian oil and natural gas. And what's coming up next, correct me if I'm wrong, but is this cap on prices for refined. product. So we now have a cap in place on crude that Russia produces. And that really has been digested by global markets, at least so far, reasonably gracefully. And again, that might go back to the lack of Chinese demand. But it seems so far that that's worked pretty well. Any concern, because this affects Europe more than it does the U.S. about refined product. You know,

diesel would be, you know, comes to mind immediately. Yeah, diesel comes to mind immediately. On the mitigating side, Europe's been buying a lot of diesel. Stock. piling a lot of diesel for the last few months, actually from Russia, well ahead in anticipation of the embargo coming in in early February. So that does give some cushion. And from what I can see, it's been buying diesel from other parts of the world as well, from Asia, from the US, and refining throughput seems to be up. So again, there's hope that actually this will become, this will be fairly graceful. Russian diesel might go to other places and diesel from other places might come to Europe. That said, I've no noticed in recent weeks that diesel spreads have started to rise. Some of that might also be to do with

dissipating nervousness around the European recession and the view changing to the European. What is that again? Slow session. Slow session. So it could be because of that. But it's not rising fast enough so far to cause immediate concern. Okay. Okay. So Europe, slow session, UK, may be ultimately defined as a recession. The continent, the European, the Eurozone, at this point, do you think we actually go into a full-blown recession or not? We're going to sort of skirt along here and avoid an outright economic downturn? Well, I've actually reduced, I'd reduced my, you know, subjective probability of Eurozone recession quite a bit. So I think two months ago, I would have said it's close to 75%, but the Eurozone goes into recession over the next.

12 months. I'd say that's come down by roughly 10 percentage points. Okay. So still more likely than not a recession. Still more likely than not. There's a lot of, so it's looking at credit conditions, credit conditions in the Eurozone this morning. It's still pretty negative. Credit standards for loans to corporates, housing related loans, unsecured credit, all getting tighter. So that's still the case. ECB is likely to set a terminal rate of 3.75% at least that's what we think. but it could easily be 4%. That's going to take a knockout of housing later on in 2023, early 24. So there's still a lot of headwinds to confront.

Yeah, okay. Hey, let's play the game, the statistics game. And of course, the game is. We all put forward a statistic. The rest of us tries to figure that out, questions, clues, deductive reasoning. The best statistic is one that's not so easy. We all get it immediately, not so hard that we never get it. and bonus if it's apropos to the conversation at hand, the recent economic data.

So with that as a preface, I think it's tradition for me to call on Marissa first. Marissa, you're up. Is it tradition? I think I made it tradition. It's tradition now. Yeah. All right. So my number is negative 287,000.

I know what it is. Do you want me to tell you? Yeah. And I want multiple cowbells when I'm, I tell you what this number is. Are you ready? Chris, do you want to bow to me right now before I even tell you what the number is? Oh, I hope you get it wrong.

I can see. What are you doing over there, Chris? Getting the cowbell. Oh, getting the cowbell. I have one too. Are you got a cowbell? Rob, do you have a cowbell? I have a cowbell.

I don't have a cowbell. Unfortunately. We got to export one to him. I can play a tune on my phone. Okay. It's the business. Employment Dynamics Survey decline in employment in Q2, 2022? You got it.

I don't hear cheers. I don't hear. I just. Okay. Okay. There you go. There you go. Okay.

That's actually, that's a really good statistic. But because that's been bothering me all week, as you can imagine. But, you know, go ahead. Let the group know what that's all about. Yeah. So this is, this is the business employment dynamics survey, which is, you know, a, it's taken from unemployment insurance records. So we've talked a lot on the podcast about when we talk about the benchmark revisions

that the payroll, the monthly payroll survey gets, those benchmark revisions come from a complete count of employment based on employers filing unemployment insurance tax records with the government. And the bed data are a subset of that. So it's pretty much the entire universe, except it excludes some categories like personal households, and it's just the private sector. It doesn't include government. So it showed that on net, employment fell by 287,000 in the second quarter of 2022.

So this was a while ago, right? This is a lag data point. But it's interesting because we talk a lot about this. How do we make sense of what's going on in the job market? Are the numbers really reflecting what's actually going on? I know the layoff conversation we just had is more about recent data. But this also is consistent with what we've seen from state QCW data, if you recall. We talked about this a few weeks ago that I think it was it was it the Philly Fed that did a report on state data from this data set.

and they also showed a decline in employment in the middle of last year. So this basically is a June 2020 count of employment. So if this is indicative of the way the job market had played out in the middle of last year, this would be the first net decline in employment that we've seen since the worst of the pandemic since March or April of 2020. So it's definitely something. something that makes me a bit worried about what the data will look like when it's revised. You know, maybe the job market isn't quite as strong as we think that it is.

Yeah, I'm so confused by it. I mean, I think the evidence is clear that the payroll employment data that we look at every month, It's been slow, the rate of growth has been slowing, the monthly increase has been slowing, but still very strong, that that will be revised lower. I think that feels like for 2022. Yeah. Well, in that period, you know, that you're talking about summer of 22. And by the way, that would be kind of lines up sort of consistent with the decline in GDP in the first quarter of last year. You saw that decline. And typically you would see employment.

weakness reflecting that, although this seems inordinate relative to the small decline in GDP, but nonetheless. But if you look at how the embeds data, the employment dynamic survey data gets to that number, it's because of a large increase in gross job loss. So the net change in jobs is gross job creation, you know, at new companies and at existing companies, and then less gross job loss at companies that are going out of business and ones that are contracting. And all of all of it was the number of gross job gains did not change in the quarter. That was, you know, typically strong. It's just so we saw this big jump in gross job loss, both at firms that are failing, but also

at firms that, you know, existing firms that are contracting their labor force. But then that with no layoffs? I mean, what? How do you explain? I mean, how do you square that circle? And here's the other thing. The unemployment rate continued to decline through that period. So how do you square that circle, you know?

It goes back to what we were saying earlier. The data is so, there's so many cross currents in the data. So I'm almost wondering, and I'm sure there's data problems. Every single data point we're looking at now has got a problem. There's a problem. There's a seasonal adjustment problem. There's a survey-based problem. There's a problem.

And so we've got to take everything with a grain of salt. But that particular number, I can't square it with all the other information in the labor market. Wrong, right? Am I missing something? Well, just to add a little bit about what you said about the gross job gains, gross job losses. So actually, the number of job gains at new establishments rose over the quarter. So the hiring or the job gains at existing companies fell. The job losses were widespread.

There was still a gain. It just wasn't as big a gain as the previous quarter. That's right. That's right. It's a slowdown, I guess, in hiring and job creation. That's right. Still a gain, six and a half million jobs, right? The thing I wonder about, and I haven't dug into this, and maybe we should, is the

account of establishments, you know, this opening and closing of new businesses that takes a little while to show up in the official government data. Could that be part of the puzzle? Are there more, you know, has there been a slowdown in new business creation or a pickup in closing businesses that's not being captured? The BLS has this birth, death model, is what they call it, where they try to impute the number of closing. and new businesses every month in the payroll survey. And we know that during business changes in the business cycle, that can be trickier to do.

We, you know, another thing I think about is we talk about construction. Like, why don't we see job losses happening in the construction industry, given what we know about the massive decline in residential construction on the housing side, right? That's also an industry that, again, in recessions is no, notoriously has huge benchmark revisions because there's a lot of undocumented work. There's people working at multiple job sites. The record keeping in that industry can be bad. So there's things that we know that we've seen in past business cycles with the data that is sort of notoriously difficult to pinpoint. And maybe at some point next year,

this will all come out in the wash. But I don't know. I wonder if it's something about tracking openings and closings. Yeah, I mean, I'm sure that's part of it. I just can't square it with the, and of course the unemployment rate comes from a totally different survey, the household survey, but nonetheless, I,

you know, wouldn't we see, anyway? Yeah, yeah, I know. It's, it's,

it's, that seems marginal, right? No layoffs? Yeah. I mean, I mean, it's just, I don't know how to square all the day.

I will say, though, if I were at the Federal Reserve, you know, looking, all this data, I'd be saying to myself, hey, you know, I've been waiting for job growth to slow, and it probably has slowed pretty significantly here. And wage growth, the slowing in wage growth does now feel more consistent with this downward revision that we're going to get in the employment

data. So it's all that, that makes sense to me. So if I were sitting at the Fed, I'd be saying, hey, I'm pretty close to wanting to pause on interest rate hikes because it does feel like this economy is starting to, you know, come in here. And we don't want to the slow and we don't want it to go into, you know, negative territory. Anyway, that was a good, that was a really good one. Grav, can I turn to you next? I have a, I have a bad feeling about your statistic that is just going to be way too hard for us to figure out. You're on mute, by the way. Well, I can't give you the one I really wants to give you because I've given the game away already by talking about European gas prices. It was $55? That's $55.

I could have a excuse me, euros. Yeah, I could have made some points on currency, but yeah, so I was going to give you that one.

How about, how about 50 points to two, that's the number that came out, 50 points to two. Is that a PMI number? It's a PMI number, exactly, spot on. I just want everyone to recognize.

Anyway, go ahead. Actually, that's not that hard. Anything that is around 50, you go PMI. Yeah, exactly. Okay, explain.

I should have given it in natural logs or something. Yeah, you should have. Elucidate us. What's going on? What is that number and what is it saying? So that's the Eurozone Composite PMI, which came out earlier this week. PMI being purchasing managers.

Being the purchasing managers index and composite being the sort of the combination of manufacturing and services. So it's a forward-looking. view of, or rather mostly a coincident view of where the economy's at right now and somewhat of a forward-looking view of people's expectations. And the fact that it came in at 50.22 was notable because it declined below 50 in July of last year. And in fact, for the second half of last year, it stayed below 50. So this just goes back to that story. I've been narrating about how things seem to be on the up in the Eurozone, maybe not hugely up, but possibly the tide is turning.

Can I ask that 50.2? Is that both manufacturing and service combined? Yeah. That is manufacturing is still in recession. Manufacturing is still in recession, exactly. I mean, interestingly, if I talk about the UK very briefly, but service sector PMI improved in the Eurozone. It actually fell in the UK.

And so pointing to perhaps harder times ahead for the UK compared to the relative to the Eurozone. But yeah, manufacturing is still definitely. negative in the Eurozone. Things like car production, they're doing better, definitely doing a lot better, but still quite far below the averages. So monthly car production in Germany, for instance, it's still reasonably below the pre-pandemic average.

Still backlogs that have to be sorted out. And I think, Chris, because you've pointed to this statistic for the U.S., and it's actually weaker in the U.S. than it is in Europe, right? Yeah. I mean, it's below 50, which is the threshold, right? below 50, that's recession historically. And we're below 50 on this index, right? Correct.

In the U.S. Boy, that feels weird too, doesn't it? No? Yeah. Yeah, it just feels weird. Okay. There's so much weirdness. Maybe that's the title of this podcast.

We've got to get weird in there somehow. That's all weird. Anyway, let's do one more. This part of the podcast was supposed to be short, but, you know, it turned out to be a lengthy podcast. So let's do one more. Chris, you're up. 2.3%.

Okay. I got to make it hard for you, right? Oh, you're making it hard for me. Oh, okay. Well, it's a reported number. It's not that hard. Yes. Is it related to GDP?

No. Is it related to the data that came out on Friday morning, the consumer spending income data? Nope. No. Okay. It came out yesterday. Mercer, do you know?

What came out yesterday? GDP came at two point. It's not in the GDP number. UI claims. It's not anything related to UI that I can think of, right? Chris, no. Two point. Think of me.

Housing? Housing. Yes, housing. Something related to new home sales? New home sales. Month of, what is it? Monthly increase in new home sales. Percentage increase.

percentage increase. It's funny, I never look at the percentage increase in sales. Do you? I know. That's why. Oh, there you go. You know me well. If I said a 616,000. That I would have gotten. You got it right away, right? Yeah, excellent. So it's positive. It's a third consecutive month of a positive gain. So it's not huge, but, and year over year housing, new home sales are still way down 27%. But maybe it's a sign of some stabilization here, maybe the, we're reaching bottom here. And again, we'll bump along for a while. But perhaps it won't get much worse than this. Yeah.

Hey, that reminds me. We got the Moody's Analytics repeat sales house price index. This is a new index that we construct based on actual transactions. And we've got it early for the month of December. So we were looking at transactions, home sales through month of December. Do you want to let people in on that one? That I found a bit surprising. Yeah, positive 0.1% month over month.

So again, we're seeing a little bit of perhaps consolidation in the housing market there. It's always a bit of a push pull, right? Buyers and sellers react to each other as the market goes forward. So you wouldn't expect prices to go all straight down or straight up. There's always this tug of war that goes on. But, yeah, perhaps some improvement in the mortgage rates spurred some buying as well. But, you know, housing is clearly in recession, but the damage may be slowing down here. So our index is consistent with other house price measures peaked in July fell pretty significantly in August and even more in September.

but since then, October, November, December, it's been basically flat. The December number was a small. Point one is basically not going anywhere. So, and it's down only one, not even quite, but one percentage point since the peak in July. And in our baseline outlook, which doesn't even include a recession, we have house prices coming down, you know, I think not quite 10% peak to trough. Are you, does this recent data make you think that maybe perhaps we're overly pessimistic about what kind of house price declines we're going to get? Possibly, but I'm not, I'm not ready to make a revision because you do see certain states

are, you know, California and Arizona are falling pretty fast here. Texas had a bit of a bump in December. That's a reason that's part of the reason why the U.S. as a whole. improve. So I see it, I still, you know, subscribe to this tug of war story here. You know, there's still a lot of script to be written here. Rates are moving around, right? They've got some relief here, but there's, you know, a pretty good chance that rates may bump back up for a while here. And if you look at our overvaluation, then index the U.S. as a whole remains quite overvalued with prices substantially higher than incomes or that ratio is substantially higher than usual.

So I still think we're going to get some corrections here. But it is possible that they're not quite as large. So I look at the range. I think 5 to 10 percent range, Pictorov makes sense. It's possible that we are on the lower end of that range, but there's still a lot of a script to be written here. As we get into the spring selling season in particular, we'll get a better handle what the underlying demand and supply truly is. Yeah, I mean, I keep coming back to affordability. I mean, if you calculate the monthly payment on a home, if I'm buying the median priced home,

and I'm the household earning the median income at prevailing mortgage rates, the current monthly payment is still really high, you know, as a share of my total income, and to kind of restore affordability so that we get a pickup and demand home sales. Home sales, home sales, or rock bottom. Yeah. One of three things, or a combination of three things has to happen, interest rates have to go down. And, you know, maybe they go down a little bit,

but they're not too far away from where we'd expect them to be in the long run. Second, incomes have to rise. But that's a pretty heavy lift in the current environment with the job market slowing and wage growth rolling over. So we're going to, you know, even if we don't go into recession, if we're going to recession, incomes decline. If we don't go into recession, even then it's going to be weak. So that leaves you with lower house prices, right?

I mean, now it could take a while because there's no inventory because you got homeowners out there that have mortgages with a mortgage rate of, say, three, three and a half, four percent. It doesn't make much economic sense for them to move and go get a mortgage at six percent or six and a half percent. But things, life happens, right? You know, people do become unemployed. People do get divorced. People do. There's death.

You know, there's, you've got to change because of life circumstance. You're getting older. So those, at some point, those sales have to occur. And once that starts to happen and accumulate, and it may be even pen up life. Oh, that's a, that's a great term, I think. You know what I mean by that? Pen up life. People, life events are happening, but people don't want to put the home on the market now in this environment.

So they're waiting, they're waiting, they're waiting. And you got this pen up life happening. And at some point, they say, oh, my gosh, I, you know, I've just got to. I got to move and you could see inventories pick up and prices decline. Does that logic kind of resonate? It does. And if you look at our forecast, right, that peak to trough decline, you mentioned, is not immediate, right?

We have it extending out over the course of the next two years, right? So it's a process. Yeah, it's a process. It's a process. So we're sticking to our guns here still down, depending on the index, five to 10 percent, you know, peak to trough, you know, something. Yeah, okay. All right, let's end the conversation with our probabilities of recession just quickly. Grav, you gave us yours for Europe. You're at 65%. I said probability of Europe.

65, 67, yes. Of Eurozone. UK, we're kind of already in recession, sort of, I guess. Sort of, yes, exactly. I'm not going to change that yet. And do you have a view on the U.S. and you can't have a view on the U.S. if it's 50% or lower probability in the U.S.? If it's over 50%, you can't have a view. I'm just saying. All right. I think it's over 50%. I've got to say it. I've got to see it. Okay, fair enough. Do you have a view? Do you have a? Yeah, well, I'd place it at maybe 10 percentage points below the eurozone.

So 55 then? Yeah. Okay. Yeah, fair enough. Anything you want to add? Any color on that you want to add? Or just leave it as is. I'll leave it as is. Microphone drop. Yeah, it was pretty good. Okay. Our 55. Because I think that's where Marissa, you are. Are you still at 55? I'm at 50. I've been at 50 the past few weeks. Oh, you're 50. Oh, I'm sorry.

Yeah. Yeah. You're back down to 50. Okay, because at your peak, you were at 65, I believe. Yeah. And now you're down to 50. So nothing changed in this last week or so, because you weren't here last week as well, or the last couple weeks your views have not changed. No.

I mean, this week doesn't make me feel great. But I'm going to stick with 50. I'm not going to let one week of data with. on me. Okay, fair enough. And Chris, you are at 66%. 65. Yeah, two-thirds, one-third.

Two-thirds, one-third. And that, you're not deviated from that. Not budging there, but maybe I'll throw a wrinkle for next time. I think we're out of time here, but I would say let's go with three categories. Recession, slow session, and potential growth or normal growth. Okay. I don't know. Yeah, because you're going to say.

It's a slow session recession. I think that. It's hard. You see how he's trying to blur things here? You know, I feel it. It's more precision. I'm trying to get more precision. Well, let's talk that over because that, yeah, maybe we should do something like that.

And, of course, I'm still at 50% with a, with a bias towards below 50, because our baseline continues to hold slow session, economy going nowhere, unemployment, notching higher, but no outright. downturn, at least is defined by the National Bureau of Economic Research. Okay, anything else, guys, you want to bring up before we call it a podcast? Rob, anything? Yep, okay, very good. Well, thanks everyone for joining, and we'll talk to you next week. Take care now.