Moody's Talks - Inside Economics - Debating Jobs, Debating Forecasts

Episode Date: November 4, 2022

Mark and the team dissect October's employment report, the Fed's most recent rate hike, and what it all means for the prospects for a recession in the coming year. Full episode transcriptFollow 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 my two co-host, Chris DeReedys. Chris is the Deputy Chief Economist and Marissa Dina Talley. Merissa manages our global forecast process. Hi, guys. How's it going? Hi, Mark. You're doing all right. Yeah. Before we begin, I was wondering if I could ask you something, Mark, because I think it's important we get this out of the way here. I know you're a big Phillies fan. So will you be willing to accept the results of the World Series? Should, in fact, the Astros win more games than the Phillies? That is a really difficult question to answer, Chris. Yeah.

I did take some real satisfaction, though, in the Phillies being able to figure out the signs in that game where they had five home runs. I think they figured out the signs between the pitcher and the catcher, unlike the, you know, the, the, the Astros back in the day, stealing the signs. I think they've actually, you know, figured out this time. So some, some satisfaction in that. But yeah, I mean, the Astros are a great team. Come on.

All right. Gee whiz. Their pitching is unbelievably good. All right. I don't need any contest. What about you? Are you still in? I'm a fair weather fan.

Yeah. I want the Phillies to win because all my neighbors want them to win. Right. What about humorous? Are you a Phillies fan? Not so much anymore. I mean, when I lived there, I was, it's harder out here to follow them. You know, I've actually probably not going to like this.

I've actually become something of a Dodgers fan since moving out here. Oh. I know. I know. I know. But I am definitely rooting for the Phillies in this. World Series, absolutely. Yeah. Well, I think all of America is, except for people with... I would imagine, yeah. A few miles of Houston. Yeah, I think. Yep. Yeah, but doesn't look good.

You know, we're down two. No. Three, two. And the last two games are in Houston, right? So, it's going to be pretty tough. That's right. Yeah. Anyway. But a great question, Chris. Really good question. And I should say we're all out and about. I mean, it's interesting since really over the last three months it feels like we're all back on the road again traveling and you can hear i'm away uh right now and marissa's away and chris you've been on the road a lot yeah yeah yeah you told me yesterday you're in west palm palm beach out in down in florida day before that i was in new york city so yeah yeah yeah everyone's very busy everybody wants in person they want they want they want to see absolutely absolutely yeah well i had my phone each other in person the other night

Oh, yeah. That's right. That's for the first time in years. Yeah. Since the pandemic or even before? Well, I can't remember last time, Marissa, can you? The last time we saw each other in person? I mean, it must have been 2019.

Yeah, must be. Wow. Yeah. Maybe 2020. Actually, I think I came to Westchester, February of 2020. So perhaps then. Okay. Okay. We had a great dinner with clients in San Francisco. Marissa and I, we had a dinner. I think there was, I don't know, 12, 15 clients there.

And I have to say they're pretty lugubrious, meaning pretty pessimistic. Wouldn't you say, Marissa? They were really pessimistic, yeah. Yeah. We asked them what their own, you know, subjective odds of recession were. And with maybe one exception, everybody was like well over 60%. Yeah. Somebody was like 85%. Yeah. I mean, I was the most optimistic.

Well, I wasn't the most out. There was one other person there that was more optimistic than me, but they were pretty down. I mean, obviously, San Francisco, I think one could argue is the weakest large metro area economy in the country. right it's getting creamed by tech layoffs yeah it's the only place where it's the only industry that are really suffering layoffs up to this point well mortgage oh yeah yeah yeah that's small but yeah uh and house prices are down a lot in san francisco right i mean by our measure 7 8% already so i think i think kind of coloring people's view but nonetheless they were they were pretty pretty pessimistic.

They were pessimistic down in Florida, too. I'd ask the same question down there. You know, 80, 90, the 90 to 100% category for probably a recession was the most popular. Oh, wow. A lot of, but they're risk managers, right? That's by nature. They never go below 50. Yeah, yeah.

Good point. But still, wow. Still, still, they're convinced next 12 months we're going in. going into recession. Well, let's get down to business then. I mean, today's Jobs Friday, we got the jobs numbers for the month of October. And you want to give us a rundown, Chris? That gives us a sense of the numbers?

Yeah, I'd consider this a bit of a cloud employment report. You can see what you want into it, most overall. Good. We added 261,000 jobs to the economy or to the payrolls. Unemployment rate did tick up to 3.7%. So payroll growth is still positive, it's still stronger than what we need for population growth, but it is slowing, right? So that downward trend and that you could argue is by Fed design, right? So I don't think the report itself changes policy.

I think it's well within what the Fed's expectations were or what other investors were expecting. It was stronger than consensus, but I think the consensus range was fairly large. There were some parts of the report that were more or less positive than others. Again, depending on what your point of view is, the labor force actually declined by 201,000. So, you know, you have an unemployment rate that is going up maybe for the wrong reasons from that standpoint. The employment to population ratio. When you say wrong reason, you mean just a weaker job market. weaker job, well, you have people actually stepping out, right?

Yeah, which that's the bad news is good news, though, right? Yeah, but you could have people coming in and just not finding jobs, right? Or you could have them stepping out, right? Yeah. Yeah, but in this case, but we had participation rates decline, the labor force participation in unemployment actually rose. And it goes to decline in household employment in the month. So employment by the household survey measure, that decline.

Correct, correct. So in most times, you'd say, oh, that's bad news. Jobs decline. Yeah. But in the current context, you say, that's good news because. Then the Fed won't. Yeah, it means the land market's easy and cooling off. And obviously, we need that for inflation to come back down.

So that feels like bad news is good news. Exactly. Yeah, exactly. It depends on your perspective. Just to clarify. Yeah, yeah. No, thank you. So you also had the employment population ratio for prime age workers falling to 78.

79.8. And that's the biggest drop since was it 2017. Right. So again, good news or it's bad news type of situation there. No, no, bad news is good news. I know it's my number. Bad news is good news. So, you know, typically if employment to population is declining, that means there's more slack

in the labor market. Typically, that would be, well, we don't want that. We want a full employment economy. But in the current context where the labor market's very tight, wage growth is strong, and inflation is high, you go, okay, that bad use typically is now good news. I know, very mind-minded. Yes, yes, indeed. And then I think probably that perhaps the most important number from the Fed's perspective is actually the wage number, wage growth.

And we've mentioned multiple times on the podcast, the issues in terms of average hourly earnings and whatnot. But nonetheless, it is a number that folks do focus on. And that actually was up 0.4% on a month-over-month basis, right? It had been growing at a 0.3%. So that may be a case where, you know, good news for the household is actually bad news for the Fed, right? So on a year-over-year basis, yes, correct, 4.7%. So it is coming in on a year-over-year basis. But yeah, it's month-to-month trends.

There's lots of movement. You don't want to read too much into them. But nonetheless, it is something to note. Would you say, though, Chris, I mean, just taking a step back for a month-month movement, it does feel like, and also bringing in all the other wage data that we were in employment cost index, everything else we look at, feels like wage growth is topped out. It doesn't feel like it's accelerating anymore. Yeah, I don't think, I don't think it's accelerating.

It might not be going down as fast as we otherwise might like. That's the, that's perhaps the bigger issue here. But, yeah, I don't see many signs of it continuing at the pace it was. previously. Right. Beyond that, what can I say? There were some revisions for August and September, right? So some movement around.

So net, we actually added more jobs and we had previously thought. In terms of the sectors, the wage or the job growth was actually fairly widespread. Leisure hospitality rose by 35. which is positive, but that industry in particular is still low relative to what was pre-pandemic. So we're still about a million or so short relative to February. So we might have expected a little bit more growth there, but nonetheless, it was positive. The only negative that kind of took out was warehousing, but I don't think that's terribly surprising in terms of what we're hearing from Amazon and others in terms of the overhires.

they may have done previously and now shutting some jobs given the overstock or the shift in demand really for services versus goods that is going on. So there was a job law, a net job loss of about 20,000 in warehousing. But that had been a very strong grower to begin with. So I'm not terribly. Any sector, I haven't a chance to dig deep. Any sector showing any declines, any major industry that showed declines in employment? Or it's just slower job growth? Correct. The warehousing was really the only one that showed anything of significance in terms of declines. The others were, yeah, just not growing as quickly as they had it in the past. Yeah. Okay. Hey, Mercia, anything to add to Chris's prissy of the report?

One thing that stuck out to me in terms of the sectors was construction. It had a very small job gain of 1,000, which is tiny compared to what it had been doing. And there were actually job losses throughout some of those subcomponents of construction like contractors and residential, non-residential contractors. But I think I, you know, I agree with the overall take. I mean, it's still a pretty solid report. It was better than people were expecting. I don't really know how much stock or what to make of the household survey side of things, right? Just the big loss in jobs. And actually, if you adjust the household survey to the payroll survey definition and

methodology, you would get an even larger loss on the household survey side. So it's a much smaller survey. The sampling error is much, much larger. So it's hard to know if we should put a lot of stock in that, especially because this is the first month that that's happened. But yeah, I mean, it's still, at least on the payroll side, looks pretty solid, right? Yeah, one thing that the BLS did mention that I want to call out because I know you're down in Naples, Florida, is Ian, the hurricane that kind of blew through. According to BLS, it didn't have any impact on the job. I think that's what they said.

Yeah, they did. And we might see it when they release the data for states and metro areas, you know, later. Maybe there's something there. And you do see a little bit of it in the jobless claims data, right? In the initial claims for unemployment insurance, we saw some effect of Ian there. But, yeah, I mean, according to BLS, it had. know their exact words where it had no discernible effect on this report. Interesting.

Well, you know, my take is that it definitively shows the labor market is cooling. I mean, you know, if you go back to the beginning of the year, the economy was creating 600,000 jobs on average per month. This would indicate, even with the revisions and everything, it feels like we're at 300K. So a halving of the job growth. Now, still more, still stronger than what we need that we'd like to see to make sure that we start generating some labor market slack and allowing wage growth to moderate more sufficiently, which is critical to getting inflation back in. You know, the kind of rule of thumb is 100K per month. So if you're north of 100K, say we're at 300k, if you're north of 100K,000, then in typically, then in typically,

Typical times, given typical labor force growth, you would see unemployment continuing to decline. If you're below 100K, that would be slow enough that you start to see some slack develop unemployment more than higher. I will say, though, that threshold feels a little higher to me right now because underlying labor force growth feels like it's more like $200, $250K. Maybe look at overall labor force growth, even with the decline in labor force participation this month, it's almost 2% year over year. So that's more than double the growth in the labor force typically. And so it feels like we're getting really good solid labor force growth here. That goes back, you know, if it's not the labor force participation rate, that goes back to working age population.

In fact, it goes more specifically in foreign immigration. If you look at the employment of foreign-born workers, that is now rising very rapidly and continue to rise in October. So it feels like the threshold for getting unemployment moving south in the context of current labor force growth is higher. It feels like it's a couple hundred thousand, maybe $250,000. I think we're pretty close to that if we're not there, you know, already. The other thing I'd say is household employment.

And, you know, generally I agree we should be focused on establishment employment. But I wouldn't just point out household employment has gone nowhere since the beginning of the year. It is, it has flatline. So no growth. you know, that's more volatile because it's based on a smaller survey of households compared to the establishment surveyed and surveyed businesses. So I don't want to put too much stock into it, certainly not on a month-to-month basis. But, you know, if you take a step back, it really hasn't grown at all, increased at all

since the beginning of the year. And that goes to labor demand. So labor supply is pretty good. Labor demand feels like it's weakening. It does feel like we're starting to see some signs of slack building into the labor market. I mean, the unemployment rate did rise. You know, it's no longer falling. That's for sure. You know, from 3-5 to 3-7, that may overstate the case, but it's definitely not falling. And employment to population, which you pointed out for prime age workers, that does feel like

it's rolled oak. It's now, it's below that key 80% threshold that we consider, at least historically, to be consistent with poor employment. We're now at 79.8. Still very high, but definitely definitively, you know, moving down. So, uh, and then the wage growth, yeah, I mean, I don't think it's rolled over, but it's definitely stopped accelerating. I, you know, we're, we've seen five percent seems to be kind of the ceiling for wage growth. And, you know, if anything, it feels like it's, you know, starting to top out and start to come coming down. So I don't know. I look at this and I, I come away with this, you know, it's not where we need it to be. It's not where the Fed would want it to be.

So more rate hikes coming. We need to see more slowing in growth. But it feels like it's moving definitively in the right direction here. And I wouldn't be surprised if we have a labor market that's kind of where the Fed would want it by early next year. At least that's my take on it. So how would you guys, Chris, how would you react to what I just said? I saw you when I said labor force growth. I surprised you with that.

You're going, that can't be right. I saw it on your face, but it is right. But the household? Yeah. Labor forced, labor force growth. Think the labor force. That's labor supply. Just look at the year over your growth.

It's a rock solid 2%, you know, give or take. It might be, I don't know, one, nine or whatever, but it's 2%. And typically, in a typical economy, it's no more than one. You could argue given demographics, it should be closer to a half a point. Right. Right. So something like that. So we're getting pretty sizable labor force.

And again, it's not because of participation, because that declined. And it's still more than a point below it was pre-pandemic. It's all about working-age population right now, all about foreign immigration. So how would you react to it? Well, I guess I come back to the cloud. You kind of see what you want to see in it. Do you see something different? I mean, you're right.

You see what you want to see. But it, you know, I mean. It's still quite strong. I mean, it's still quite strong, right, in terms of the payroll growth. And although I don't, again, I don't think this changes the Fed's decision at this point in terms of a 50 basis point hike in December, but it's not helping the case either. I think the preference would have been something softer here. Yeah, yeah. But, you know, here's the other thing.

How can we expect the labor market that's Rip Warren coming into the year, creating 600,000 jobs a year? It's not going to, you know, it's just not going to turn on a dime. You know, so, I mean, it's hard to, yes, we want to slow even further, but is that even realistic or reasonable to think that that would be possible? Oh, I think we've been at this for a while, right? We would have expected that these mega rate hikes would have had some more pronounced effect. I think, right? No, I'm not, no. I mean, what was the funds rate at the beginning of the year?

Zero. Zero, zero, zero. And they were QE. We're not even a year into these rate hikes. When did they start raising rates? It was probably, I think it was March. Yeah. We're seven months in.

I mean, come on. But at a very aggressive pace, right? Well, yeah, sure. But still seven months in, seven months in. You take and take these, well, here's the other thing. Companies, particularly large companies that employ a lot of people, you know, where the bulk of the labor market is, they don't. They don't, it's a, it's a, it's a, what's the word?

It's a, it's a, it's a container ship, you know, it doesn't, it's not a speedboat. It doesn't, you know, you go this way and then you go that way. It takes time to move the ship and you, so you're telling your HR department at the beginning of the year, you know, let's hire and we're full bore higher. You keep, it's impossible to say now stop hiring and now start laying off workers quickly. It takes time for that to happen. And in my sense is if you're listening, you know, talking to clients and talking to everyone else, that is happening. So we will see this more clearly going far.

Job growth will slow. It's just it does, it's just we're expecting to happen way too quickly. I mean, seven months into the rate, I don't know. It just doesn't feel like that's realistic to think we'd be seeing something meaningfully weaker than this. You know, at this point. I don't, Mercer, what was your, given the, given this conversation, how do you react? Yeah, I mean, I think that, right, we started at zero on the Fed funds rate. So, I mean, even though they've been aggressive, it's taken time to get to where we are now.

And I think now we're really seeing, I mean, even in the housing market, right, that was the most sort of immediate impact of the rate hikes that we saw. And we're still not even really seeing layoffs related to housing yet, at least not significant ones. It seems like we're at an inflection point, I would say, in terms of the labor market. I mean, I think it does seem like wage growth is still solid, but it's not accelerating. We want to see it slow down. I mean, we saw it a little bit with the last release of the employment cost index, right? But, I mean, it was a touch slower. And certainly, yeah, job creation, job growth is slower than it was much slower than it was earlier in

the year. But again, still pretty decent, right? In normal times, if you get a gain of 260,000 on the payroll survey, that would be considered a boom report, right, prior to the pandemic. So I think the Fed keeps doing what it said it's going to do and is going to keep raising and is going to be aggressive about fighting inflation. Oh, yeah. Yeah, no, no, no, no. No. No. No argument there. But I'll just keep pushing a little bit more. Going back to labor supply, if it's 2% growth, that's $3 million added to the labor force every year, divide by 12. What is monthly labor force growth? It's pretty close to what we got for the employment number today, 260,000, right? Yeah. So we're all, I mean, by that,

measure, we're there. We're already there. I mean, labor demand is already now on top of labor supply. And given the trend lines, it's very clear labor demand is going to weaken. I don't know what, you know, I'm assuming labor supply remains, continues to remain roughly where it is for a while. And we're going to get higher unemployment. We're going to get lower employment to pop. We're going to get more fewer unfilled positions. Here's the other thing. I'm just curious in your reaction. all of this slowdown that we've observed so far is on the hiring side, right? We know layoffs are not up. Right.

We know initial claim for unemployment insurance are, you know, just over $200,000 per week. That is, that is record low. Despite tech layoffs, there's no layoffs in mortgage finance, as you pointed out. Right. It's obviously nowhere else. I mean, we're not seeing layoffs yet. We're not even seeing typical layoffs yet. You know, typical would be UI claims that, what, $250?

$250,000 per week, something like that? Yeah. So all of this slowdown that we've observed is around higher. And so we know the layoffs are coming. They're definitely coming. You can see, for example, the Challenger numbers, which has announced layoffs, their rise, they're starting to come in. They have the strongest increase last month, you know, in a long, long time.

And, you know, that's going to start showing up in the data. So it feels, it just feels like to me, labor demand, which has been growing much stronger than labor supply, is now pretty much closed the gap because we've gotten some proven and supply and demand is definitely weaking and they're going to cross now that we're just going to see labor, see layoffs start to kick in into at least, you know, normalized to something we've seen in store. Okay, I'll stop again. I'll turn it back to you, Chris. What do you think of that? How can I dispute it? It's such a beautiful story. The only thing is that I worry again that the Fed is

going to overstep here, right? That's not fast enough that they, the inflation doesn't come in fast enough. The wage pressures continue for a while and they overshoot, right? That's the fear to my mind, right? Yeah, sure. You have this nice glide path, and I believe the glide path, right? And if we didn't have this inflation issue in the background, very, very likely that we could, that we could land this plane so gently on the tarmac. But I just see an overreaction being a likely scenario. Well, let me, that's a great point. Okay, so, you know, obviously all this conversation is around, can the bed land the plane on the tarmac?

Can it soft land? Actually, that's a bad description because no one's saying soft landing under any scenario, it's going to be uncomfortable, an uncomfortable land. Soft-ish, I guess, is the- Yeah, just less bad than, you know, hard landing, a freshman thing. but there's three ways it feels like we can land in recession. One is if the economy doesn't cooperate, if I'm wrong, you know, about the story, as you put it, that I describe is incorrect that, you know, we're not going to see the labor market ease sufficiently to bring in wage growth

and well inflation. That's one way, right? Because then at that point, the Fed's not, the Fed's making a mistake. They have to get inflate. It's not a mistake. It's, they've got to push a similar. It's a reaction. Yeah.

Yeah. And what I'm arguing is, I don't think that right now, given the data we have to date, it doesn't feel like that's what's going to push us into recession. It feels like the economy is cooperating, you know, with what the Fed wants. But the second way you get into recession is the one you just said, the Fed can make a mistake. They could misinterpret what's going on or be impatient with what's going on. And then, you know, they don't pause at any point. They keep going and they push the economy into recession.

they didn't have to. Of course, we will never know whether that was a real mistake or not, because you don't look at the counterfactual if they actually knew that. And then the third way you go into recession is, okay, the economy cooperates, the Fed does everything right, but the economy is still going to be very weak and fragile. Again, it's not going to be a soft planning doesn't describe it. It's going to be uncomfortable. And when you're in that situation, you are vulnerable to anything else that can go wrong,

even a small thing. And that, you know, that seems very plausible. I don't know how to forecast that, but, you know, that's obviously, you know, significant person. Merceda, what do you think of that frame? What I just said. Yeah, I think that that makes sense. And I mean, the Fed has explicitly talked about this, too, right?

They have said that they would rather overdo it. They would rather overtight and monetary policy than not go far enough, because if they overdo it, then they can course correct pretty quickly, right? They can lower rates quickly. They can do QE again. I mean, there's a lot of tools that they can use if they over, overdo it. But if they underdo it, then it's harder to get entrenched inflation under control if they don't go hard enough.

So they've explicitly talked about this. I mean, I think they talked about it during, you know, like in the past week, right? So I just, yeah, I mean, I think that it, we know that monetary policy happens with a lag. It'll take time to show up. But it seems like it is. I mean, it seems like it's not happening quickly, but it seems like we're at some inflection point here with both inflation and with the job market. Right. So I think they stay the course.

Right. Hey, Chris, can I ask you? Because I, you know, I haven't looked, but maybe you have. It feels like the market, I saw the stock market. Stock market was up. It looked like bond yields, long-term bond yields were up a little bit as well. Yeah. What do you, how do you, what was the, what do you think investors' reaction was to the job numbers? How are they intrepresent? I think it's in line with the script that they had. they had in mind in terms of the Fed with a 50 basis point hike in December. I don't think this changes the direction one way or the other, right? Right. So right now in our forecast for the Fed, we have another half point, 50 basis point, increasing the fund rate when the Fed meets in December, and then another quarter point in January when they meet at the end of the month. And that would put the federal fund rate target at four point.

5 to 4.3, 4.75, the range for the fund rate. And then they, then we assume that they stop at that point and keep the funds rate at that so-called terminal rate that's the highest the rate will get during the cycle through 2023 goes into 2024. And by 2025, there's enough evidence that inflation is coming back to the Fed's target that they can slowly allow the funds rate to normalize beginning in the second half of 24 going into 2020. And in our baseline, that's the baseline, the baseline, the scenario in the middle of the distribution, the economy comes close to stalling out, but doesn't go into recession.

Not an actual, you know, broad-based, persistent decline in economic activity is defined by the Business Cycle Dating Committee, the National Bureau of Economic Research. What are market saying right now? You know, do you have a sense of what investors are saying about the terminal rate and how long the fund rate is going to remain at that terminal rate? Yeah, I looked at it. I looked at the futures earlier.

But, you know, these things are changing all the time. But a little bit of higher, right? So a terminal rate right around four and three quarter to five percent, I think, was the median, maybe a little bit higher than that even. Maybe the next one up, the five to five and a quarter. So what's that? Two more rate hikes than what, we have adding another half point to the potential.

Correct. That's the meeting. Obviously, there are investors. On the other side of that, they could even higher and others that are more aligned in line with us. Right. Do you know how long the markets are anticipating the rate to stay at that terminal rate? Before the FOMC meeting this week, when they raised rates three quarters of a point, I think markets were expecting the funds rate to start coming back down in late 20.

23. Do you know? Yep. I'm pulling it up right now. I see that the, it looks like December, they start to moderate a bit. Interesting. So, yeah. So I think the timing is actually quite similar to what we've, or what you've outlined here in terms of holding throughout 2023 and then a little reduction at the end. Right. as the economy is weaking. Okay. Okay.

So right now, and I think the markets moved with the meeting, right? When at the Fed meeting, the Fed announced the 75 basis point three, four point hike in the funds rate. In the statement they released with that decision, that actually felt, to my read, a little bit what you might call Dubbish, that they were going to start winding. They were going to scale back than future rate increases. And it felt consistent with our four and a half to four and three quarters. But then when Fed Chair Powell gave his press conference, he sounded a lot more, as they say, hawkish. And certainly that was the market's interpretation.

And they marked up the fund's rate to terminal rate to five to five and a quarter, another half point. Is that the correct interpretation of events? Yeah, that was, that's what I saw. And I think he's fighting a battle with the financial markets. I agree. Right. That seems to be his battle all year. No matter how hawkish he seems to come across, it seems that the markets digest that and then another rally ensues, right? So I think he's having to be even more hawkish than he otherwise would be to make sure that those financial conditions remain tight. Yeah, it seems to me, if I were, if I were, if I were. his shoes, I'd be doing the same thing, right? Yeah. I mean, I don't want the stock market to come back. Right. You know, I don't want corporate credit spreads to narrow. I don't want mortgage rates to

decline. You know, I'm okay with the strong value of the dollar. You know, I don't want banks to ease up when they're underwriting or, you know, I want them to be really tight here in your underwriting, to slow credit. So if I were him, I'd be talking a big game too. And regardless of whether I thought I'd actually get to that interest rate, you know, by the five and a quarter, it doesn't really matter. I don't care. I don't care about, I'm not worried about my forecast for the federal funds, right? But what I want to, the fact that he's talking as tough as he is now reduces the odds that

he actually has to raise rates that high in the future because he gets the tightening in financial conditions. Does that sound right? Yeah, that's right. He needs to, and I think he is sincere that he will, he will do what it takes. Yeah. I don't think he's bluffing here. But yeah, I think it's part of the narrative is to convince everyone,

establish that credibility so that he doesn't actually have to use that tool at the end of the day. Right. Okay. Hey, let's play the statistics game. You guys ready to play? Sure. So you ready? Yep, I'm ready.

Okay, just to summarize the statistics game, we each put forward a statistic. The rest of us try to figure that out through questioning and clues, deductive reasoning. The best statistic is one that's not so easy. We get it right away, not so hard that we never get it. And it'd be nice if it's apropos to the topic at hand, in this case, the market, or some economic information that came out over the past week since the last time we played the game. Okay, you're up, Marissa. What's your statistic?

29,000. 29,000. Is it in the employment report? Yes. Is it in the establishment survey? Yes. Is it employment in a sector? No.

No. Oh, it's not an employment in a sector or industry. No. Is it a change in something? It's not in the way you're thinking about it. Oh. Oh. Wow.

Is it, oh my gosh. Okay. Is it, it's not employment, some measure of employment? It is. It is, it is related to the measure of payroll employment. Okay. Is it a difference between? Mm-hmm.

Between what? I got that. It's a difference. That's important. We've established. I'm trying to go through the list of what could be 29,000. That seems so low for you. Can I, shall I give you a hint?

Yeah. Yeah. Chris, you talked about this when you gave the thumbnail sketch of the jobs report. You talked about this. Oh, revisions? Is that the? Yeah. Yeah.

Okay. It's the combined revision. to the August and September employment report. So August was revised down by 23,000, and September was revised up by 52,000 for a net positive 29,000 revision between August and September. Okay, okay. Nice. Okay, fair enough.

But why did you pick that? What's the, except that you wanted to stump us other than that? Why did you pick that? Which is a good reason. Which is a good reason. Yeah. The stumping. It also just shows more strength in the job market, right?

I mean, it's the revisions like, yeah, in August. Come on, hand me a break. 29K. September being revised up by 52,000 is pretty significant. So you went from a job gain in September that was under 300,000 to one that was over 300,000. Well, let me ask you this. Basically, 300,000 for those two months. What is underlying?

job growth. Abstracting from the revisions up and down in the monthly data, what do you think underlying job growth is now in the establishment survey, the survey of businesses? Now? Yeah. What do I think it is now? Probably 250-ish. Oh, really? Okay. How do you get to 250? Because we're, we got, we're at 260. And then before that, we were at 350. How do you get to 250. I'm just thinking of revisions that may be coming. And I think it's a little weaker than what we see now. I mean, now that we've seen this household survey data for the month and we've seen the unemployment rate go up, I would not be surprised if we get a downward revision to the payroll survey. Interesting. Interesting. And it'll get revised twice too, right? So. Yeah. You did say something

that maybe earlier that I didn't ask for explication, but maybe I should. You said that on the household survey, that's the survey of households, there is an adjustment that the BLS does to make it apples to apples with the establishment survey, because these are two different ways of measuring, you know, what's going on in the job market, and they're conceptually a little bit different exactly what's included in each. Did you say that the household, employment numbers are actually even the changes are even weaker once you, more recently, once you make that adjustment to be apples to apples with the establishment survey, is that right? Yeah, that is right. I'm trying to find what the number was, but it would be,

it would have been an even bigger decline in household employment if you do this apples to apples comparison. Right. So they don't, BLS doesn't publish this in the news release, but they do if you go to their website, they have a section where they make this adjustment, they go through how they adjust it. So, you know, they take, they add in multiple job holders, they take out family workers, they take out the self-employed, those sorts of things. And when you make all of these adjustments to make the concepts the same, yeah, it would have been an even larger decline. Yeah, and I think, I don't want to stretch this too far. I don't want to be. I don't want to make too big a case, but there has been academic research that shows that big movements in the

household survey tend to lead movements in the establishment survey, which is kind of saying the same thing you just said about future job growth, maybe revisions to the establishment survey. Is that, is that right? Do I have that right? I can't. I, yeah, I think it's, I don't know how much research there is out there that's really definitive that shows that household employment might be leading payroll. I haven't, you know, looked at in a while and I don't know what's recently out there. But yeah, I have heard that as well. Okay. All right. Chris, you're up. What's your number? All right. A little bit of a stumper, I think. 4.63 million. Say that again? 4.63 million. Okay. It feels like it's in the employment data.

It is. Is it in the household service? Pay? Not exactly, but... Oh my gosh. Not exactly. So is it in the BLS employment report that came out today? Yes. Yes, it was released today.

Is it okay? Is it... I think they, is it something related to COVID and the impact of COVID? No. No. Is it related to, there are a lot of people who are out sick. No, that can't be it. That was too high.

It's too many people. If I told you it came from the, it's from the current population survey. Okay. Does that help you? Okay. Yeah, but I asked that and you said not exactly. Yeah, that's the household survey. CPS, isn't that the household survey?

CPS? Yeah. Current population. As opposed to the CES, the current, what's the CES? current employment survey. Employment survey. Yeah. Okay.

So is it the number of, is it the number of people, is it, does it have something to do with category? Does it have something to do with unemployment? Does it have something to do with unemployed? Yes, the unemployed. Well, you're really hesitating on this?

It is. This is really weird. They are, I don't want to give it away. They have the number once again? 4.63 million. There are people who are not employed. How about that? Say that again?

People who are not employed or who were not employed. Is it something like the number of people that are not in the labor force, but who want a job. Oh, well, so close. I'll give it to you. They're not in the workforce. What's that? Marginally attached.

No, no. You're very close. People who were not in the labor force last month who became employed this month. Oh, okay. Well, that was different than I was thinking. Yeah. So, okay, that's interesting. Okay.

It is interesting, right? So it's a, it's larger than the number of people who go from being unemployed. to employed, which is about 1.5 million. So it's a significant chunk. And I wanted to highlight it, not because it changed all that much, but just to demonstrate how difficult it is to actually measure the labor market, because you have these fairly sizable group of people who just is not actively looking for work. They're not in the labor force. And then the next month they are, right? So they transition directly. Well, you know, that brings up an interesting point. I mean, one of the reasons for lower participation is a low level of a number of retirees coming back

into the workforce. So interestingly enough, when the pandemic hit, it wasn't, we didn't see a lot more people retire than typical, maybe a little bit more early on, but that didn't stand out. What stood out was the number of people who have retired. hired that actually come back to work, which is actually quite considerable in any given in any given month. And that has been very depressed, you know, since the pandemic. It goes a long way to explain some of the shortfall in terms of participation. And I've always thought it was unclear, you know, what's going on there. You know, some of it might have been stock prices were high,

housing values were high. And these folks felt like, well, I don't really need to go back to work. And part of it might be, might have been COVID. You know, I don't want to, I'm a little nervous about going back into the workforce and getting sick. But those are the explanations, then both of those seem less of a factor today, right? I mean, the stock market is down a lot. Housing values have rolled over. So people surely are feeling less wealthy and maybe starting to feel, oh, maybe I don't have the kind of nest egg I thought I did in retirement. And clearly, COVID still out there, but people likely are becoming less nervous about that, you know, given it's less

virulent and more people have vaccinations and that kind of thing. So it feels like the statistic, your statistic kind of highlights that we are starting to see some of those retirees that weren't in the labor, they're not in the labor force, starting to come back into work. Is that, does that resonate with you, Chris, that story? Yeah, I think, you know, that's, that that data is also reported by the, by the BLS directly. Oh, uh-huh. Right, just in terms of the number of folks in different age cohorts that are rejoining the labor force. But I think that's right, though. I think that the inflationary environment certainly is causing people the rethink and the

market's falling right. So clearly that is going to motivate more people to return to the labor force who may have retired early. And I also think they're more flexible work arrangements today as well. So it's not have to commit to a full-time job, necessarily. You can pick up some gig work. You could probably do some part-time or consulting work, right? Remote work.

Remote work, exactly. So there's more flexibility there as well. That should lead to some opportunities. Right. That was a good statistic. That was a good one. No way we would have gotten that, though. That would have been pretty amazing.

I didn't give you a really fighting a chance with the hints. Yeah, but a very good one. Okay, I'm going to mix it up a little bit. I'm going to mix it up a little bit. That's a clue. Okay. Joltz. Joltz.

What's that? Joltz report. Well, there's a lot of that Joltz report we didn't talk about, which I'd like to talk about. But no, this is not an Joltz report. I'm going to give it to you. Ready? Yeah. 6%.

6%. And it's from the employment report today? It is not. It is not. I'm mixing it up. It's employment related? Nope. Labor market?

Okay. Nope. It's not employment related. Not employment. 6%. It is a statistic that came out this week, though. So it's not the topic at hand. But it, go ahead.

Is it growth in unit labor costs? No, that's actually pretty interesting. No, unit labor costs being compensation, growth, less productivity growth, which is very high because productivity growth has been weak and waste growth strong. But no, that's not it. But that would have been a good one. Yeah. I think that was around 6%. I think it might have been even higher.

Yeah, it's around six, yeah. But that's not what I had in mind. Okay, it's not it. Yeah. What's the other favorite market that we tend to always talk about? Housing. The housing market. Okay, that's a big hint.

6% came out this week. Came out this week? Mortgage the MBA? No, no, no, no, no. Yeah. It's actually a home ownership, vacancy. Exactly. So which vacancy?

I'm trying to remember which one. The rental? Rental vacancy rate. That is the rental vacancy rate. Wow. Yeah. Well, okay. Bonus.

You tell me what is the homeowner vacancy rate? Lower than six percent. Yes, indeed. Yes. I think that's a cowbell right there. It's a cowbell right there. Thank you. A mini cowbell.

No, it's 0.9. Is it like two? Okay. Okay. Yeah. And the reason I bring this up is they're both very low. The rental vacancy rate at 6% is well below what I would consider to be the so-called equilibrium vacancy rate. That's the vacancy rate that's consistent with zero real rank growth. So rent growth that's equal to inflation, zero real rank growth. That that vacancy rate is seven. So we're below that. So that's a very tight rental market and we're getting strong rent growth.

But it went from 5.6% to 6 in that quarter in the quarter. It came out. This is data for the third quarter of 2022. It does indicate, as we have been expecting, that the rental market is going to start easing up here because we're getting more supply. Because supply chains are easing and units in the pipeline going to complete. policing are starting to get completed and less demand because of the strong rank growth and the hit to the ability of households to form. So that, you know, is a good sign in the sense that, again, in the spirit of bad news is good

news, vacancy rate is up, but that suggests that we're much more likely to see more moderate rank growth growing forward. And that's obviously very critical to getting the cost of housing, the growth in the cost of housing down and getting inflation back down as something that's supposed to target. The point nine, that is the homeowner vacancy rate. That too is very low. I think the equilibrium homeowner vacancy rate is probably 1.3, 1.4. So it's still a tight single family market, no doubt. But that's up from where it was.

and was at a record low in the previous quarter. So the good news, the bad news, which is good news, is it feels like the housing market, which has been incredibly tight in generating these very strong rent gains, which is adding to the inflation rate pressures, is starting to move in the right direction in terms of getting those inflation, getting rent growth to slow

and getting inflation back to something that we can consume more. What do you think? That is good news. Okay. Okay. In the sense of the problem is the lags, right? Yeah. The lags are an issue, right?

Inflation's still going to be high. We're going to, I think this is going to be a shorter podcast because, as I said, we're all kind of out there running around traveling a little bit. But let me end, let's send the conversation like we've ended it a number of times since the beginning of the year. And that is, what does this all mean for recession? in the coming year. So what is your probability of recession beginning at some point in the next,

well, let's say through the end of 2023, a little over through the coming year. And what is it today and how has that changed? So Mercer, how do you handicap things? I'm at 60%. And actually, I've come down a little bit on that, I think, in the last few months. Mostly because, like I said, I kind of feel like we're at an inflection and we're starting

to see the results of monetary policy cooling things down, but not totally crashing it. So I feel inflation expectations are well-tethered. Yeah, so I'm at 60. Okay, so you said it's come down. So you mean you were at what, 65 or 70? I think I was it. I think my, no, I think my, yeah, I think my high point was like 65, 66 a few months ago. Oh, so you're coming back in.

So like everyone in the world is becoming more pessimistic. Yeah. You're becoming less pessimistic. Mm-hmm. Oh, interesting. Interesting. You've had an effect on her, Mark. Yeah.

You've had an effect. Oh, yeah. Finally, I've had an effect on somebody. no one's listening to me and the reason you say this is because you're to paraphrase what you said you're now seeing evidence that the rate hikes are having an impact growth is slowing which is necessary to get inflation back down and avoid a recession that that's what you're starting to finally see it that's making you feel a little bit more optimistic

yeah and i and i feel like it is going kind of to script the feds script, right? There is, of course, as we talked about earlier, there is, at least we're expecting three more rate hikes through the end of January. So there's a possibility that it could be overdone. I mean, there is a possibility that they, you know, depending on what the data look like, that they do send the economy into a recession or they have to send the economy into a recession in order to get inflation under control. So I still think that's a big risk, which is why I'm at six But so far, I think it's going the way they want it to go. Yeah.

Okay. I hear you. Chris, okay, where are you? I'm sticking with 70%. I've been there for a while now. So 30% chance that we navigate the narrow path that you've laid out. So I think that's still pretty high. Can I ask you this?

You know, when people put down like these probabilities, they have an arrow pointing up or pointing down to indicate where the risks lie with regard to that probability. So you're at 70 is the arrow pointing up, more risk that it's going to rise or pointing down more risk that it's going to fall? Up. Oh, okay. Up. All right. So you're you're pessimistic and the risk is that you're not pessimistic enough. Enough. All right. Interesting. And you don't take any solace in the numbers that they are not As Marissa said, they feel like they're sticking the script. That doesn't give you any souls. It gives you souls, but it doesn't really matter.

They are going to script, but I already had accounted for that script. It's not deviating from my thinking to this point. I didn't expect a very significant change in terms of the employment picture, for example. So it doesn't really influence anything. But I certainly react to the data, but I'm also looking at oil prices. I'm looking at the yield curve, of course. There are still many factors here that are dangerous in terms of recession risks going forward. And the wages are not coming in as quickly as I think would be necessary for the Fed to really take their foot off the brakes here.

Right. Let me ask you this. Going back to that frame I provided on how we get into recession. One way is the economy doesn't stick to script. It doesn't slow sufficiently. And wage price pressures remain intense. And the Fed appropriately pushes up interest rates and pushes into recession to get rid of that inflation. And there is no other way to do it.

The economy's not going. And you could argue, you know, that's an unreasonable scenario because to go into the job market, you know, it feels like businesses are very reluctant to layoff workers, right? They know that their number one problem now and for the foreseeable future through thick and thin is I can't find workers because it's just demographics, right? And, you know, I don't really, okay, you know, my sales are off. The economy's soft, and there's a lot of risk, but I don't want to, I all stop hiring, which is what we're observing, but I'm not going to lay anyone off because, you know, I know I'm going to need them two years from now, and I don't want to do, getting them back going to be very difficult.

Therefore, they don't lay off work. Right. Yeah, right. And they don't lay off workers. And therefore, the Fed says, oh, my gosh, I got to completely crush this psychology, and I got to raise interest rate. So that's one way we get into recession. The second way, again, is the economy is cooperating, but the Fed misjudges and keeps on raising

interest rates, doesn't pause and pushes us in or just makes a mistake. Again, it's hard to, we'll never be able to prove it because you can't, you don't know what the counterfactual is, but they make a mistake. And the third is everything sticks roughly as script or very weak. And then some shock comes along, you know, oil prices go back over 100, you know, because the EU botched its implementation of sanctions or something. You know, I'm just making that up. Or OPEC says, I'm going to cut another two million barrels from my production quotas,

you know, that kind of thing. So in my, what I heard you say is you don't think the reason we go into recession is for the first reason that the economy doesn't cooperate. It could be the case, but that's not the reason why you're saying this. Your probability is a recession are so high. You're saying my probability is a recession or so high because it's because of the economy. the other two factors. The Fed makes a mistake and or we get hit by a shock. Is that, am I saying that right?

Possible. I guess it depends where you put the investor community, right? If these, if indeed the financial markets, investors are not cooperating, they're not tightening the financial conditions. They keep rallying, right? Do you consider that the economy not cooperating and therefore the Fed has to be more aggressive or is that a that's tertiary at the end of the age the economy that matters you know what happens with financial condition doesn't you know that's a driver of whether the economy is cooperating so under the the first scenario financial conditions are sufficiently tight that the economy slows in a way that inflation is going to go back to the Fed's target in time one way okay so you would throw that into the third category

If investors just throw characters to the wind and they just are fighting the Fed at every instance and the Fed really has to. The economy doesn't cooperate, doesn't slow. That's number one. The economy doesn't cooperate. Okay. I guess it's the combination of both. Well, no, number three is a shock. It's a negative shock.

Yeah. But I guess you're saying the investors are not part of the shock either. They could be. If the financial condition. If the financial condition. It's sold off 40% for whatever reason. That could be, you know, that could be, but usually that there's a, there's a reason for that. There's a shock, you know.

No, I'm saying the opposite. Right. We've been talking about the need for financial conditions to come in. And if they don't, right, the Fed is going to have to come in harder, right? Yeah, but that means the economy is not slowing sufficiently because financial conditions are too easy. The only reason why it matters is because it matters what it means. for the real economy. Correct.

Okay. Okay. Yeah. So it's all part of number one. I mean, it doesn't matter. Okay. It is part of the number one. Okay.

Yeah, sure. I mean, the stock market can go up and down all around who cares in the context of what it means, you know, unless it, for inflation, unless it's influencing the economic conditions. Yeah, but it's not just the stock market, right? It's lending conditions are also easing, right? That's what I'm saying, right? If the, if the rest of the economy reads the situation incorrectly and,

starts easing, right, loosening up. Yeah. And the Fed is going to have to come in much more harshly. Because why? Because the Fed, because it's all psychological, right? But why? I mean, suppose the stock market rose 30% tomorrow. Why did this Fed have to respond to that?

Why? Oh, because other conditions are easy. The economy is not going to respond. The economy is going to not weaken, right? Oh, but I'm presuming that they're rallying because. policy because of what it means for the economy, right? Correct. But so lending standards are easing, right?

There's loosening going on in the economy. There's a, all right, that's going to create an inflationary pressures. It's going to add to it, right? Why? Why is it adding to inflationary pressures? Why? It's increasing demand. Stronger economic growth, right?

Correct. Correct. Okay. So the economy is not cooperating. Okay. Right? I mean, financial conditions only matter for monetary policy in that they're not affecting the, they're not weighing on the economic growth.

They're not, the economy is not cooperating with the feds, what the Fed needs for it to happen, right? I mean, financial conditions by themselves don't matter. What really matters is the economy, jobs, wage growth, inflation, right? But those all respond to the financial conditions, right? We just established that. If lending standards are easing, if we're putting more, uh, impetus into the economy, right? There's going to be faster growth. There's going to be higher. Okay. Maybe we're just talking over each other. At the end of the day, the reason we go into recession

on number one is because the economy doesn't slow sufficiently, for whatever reason, financial conditions, whatever it doesn't matter. But the economy doesn't slow sufficiently to bring in wage growth and inflation. That's number one. But you're saying that you don't think that's the case. That's not the reason why we go into it. I have a reason to press this because I have actually a question I want to ask you. Okay. But I'm just trying to understand, you know, you're thinking around this. I don't think it's the main reason.

I think it is a potential reason, though. Okay. There's that psychological piece of it that causes businesses to expand. The more likely reason we go into recession is not because the economy doesn't cooperate. It's because the Fed misjudges what's going on or that we get shocked. we get hit by another shock. Yeah, I would say it's more likely another shock. They could certainly be related, though.

Yeah, okay. So this is a reason why I'm pressing you. All right. And it gets down to the forecast, you know, the forecast philosophy. How do you, if you believe, if you're thinking is we're going to go into recession because we get a shock, another shock, how do you bring that into a baseline forecast? What do I do with that? I mean, am I just assuming? a shock occurs at some point in time and it's big enough that it's going to push us into recession,

how do I actually make that work operationally in terms of producing a forecast? Yeah, so I'm submitting that the economy is in a very vulnerable weak position. It's extremely sensitive to any type of shock. I don't know exactly what that shock may be, but the probability is pretty high will get some type of shock, right? Yeah. Most likely a supply shock of some sort. I can put that into the assumptions.

I'm going to have to choose something at the end of the day. So I'll choose an energy price shock here. Yeah. That would ultimately tip us in, right? Okay. So what do I say? That's going to happen in the second quarter, the third quarter, fourth quarter. You know, why do I, how do I, what do I do with that?

I mean, I'm just making some kind of assumption around that, that, you know, there's some event that I don't know what it is exactly, but it will happen. and therefore we're going into recession? Yes, that's right. So I'm going to make something, in the case of an oil, oil shock, what would you say that we generate a recession in 2023? And when would it generate it?

Oh, so we go through the winter. I think I've mentioned this before. Europe makes it through. They're trying to refill the tanks come spring and summer. Ukraine conflict is continuing. Oil prices, gas prices, energy prices.

is go up once again. That's sufficient, given the vulnerability in the economy, to tip us into recession, right? Combined with the fact that we are, we will have also increased the Fed funds rate, right? And you would slow down the economy. That would be your baseline forecast. You would say that's what's going to happen. And we're going to have that kind of a shock.

And that's what's going to push us into recession in the second quarter of next year. you would make that your base. Yeah, if press to say what specific event, yeah, that's what. No, no, no. Okay, but here, we have a forecast. Correct. We have a baseline forecast. And now, Chris, it's your job.

You are now. Yeah, yeah. You would do that. You would say, okay, we're going to have an oil price shock in the second quarter that would be sufficient to push the economy into recession. And you would have that as your baseline forecast. That's my most likely. Okay.

I'm just saying, but that's what you would do. You would actually have a forecast baseline that has a recession beginning in the second quarter of next year because of an oil pressure. Yeah. Your point is that there must be a narrative that. I'm just saying because I don't know what the narrative is. And you're saying there's going to be some kind of other shock. You're forecasting another shock. Or maybe it's something like it doesn't really matter.

It's going to be the economy is going to be so fragile. At the end of the day, it doesn't really. matter. And right now, the maximum vulnerability is going to be in the middle of next year. So whatever it is, it doesn't matter. That's when we're going in. That's what I originally was saying, yes. But you're not satisfied with that. You want something. I understand that you need to make it, you know, it's an actual forecast. It has numbers in it, right? You have to make something. You have to make it work, right? You have to make it. Well, it also is very explicit because now we're going to say oil prices jump. And it has very different implications for, you know, different industries, different regions. And, you know, we're saying,

this is how we get into recession, which, you know, feels like a difficult thing to do. You see what I'm saying. Yeah, but I think the, of course I see what you're saying, right? You have to, there's, but there's, but there's risks on the other side as well to assume, if you do believe that the economy is vulnerable to shock and that the shot, the likelihood of, the likelihood of, I'm saying that the probability of some shock is significantly high that it warrants being included in the baseline. And I totally get that. I totally get it. Except as if you don't believe it is you got to pick, you've got to pick a shock and you've got to put it into the forecast.

And you almost know by definition that that's going to be wrong. It may be maybe the highest probability, but it could be a gazillion other shots that come along. You know, it could be anything. It could, but if I'm thinking about the end user of the forecast, why are they consuming this? Yeah, right. They're trying to forecast some type of something else, right? A portfolio of loans, performance, or sales, revenues, what have you, right? To exclude that possibility that there will be a shock, a recessionary type of event, right?

I think you're biasing in any other direction or you're certainly running the risk that you're not putting enough. I feel there's a, there's a, it just feels uncomfortable forecasting a shock. I can sense that. And I can sense that. By definition of shock is like pretty hard to forecast. You know, maybe you can't forecast it. You see what I'm saying? But I hear you.

It's a very. I mean, we have all, in all fairness, our alternative scenarios do have shocks in them. Oh, no, no. That I get. Right. So we do forecast shocks. Alternative scenarios. Yeah.

You're just saying in the baseline, you're not willing. Yeah. You're not willing. All right. Okay. All right. We're going to, great discussion. But you see the, it's mind numbing how difficult this is, you know, to go down the path of, of,

forecasting recession based on a shock. Now, if you had said to me, the reason we go into recession is because the economy doesn't cooperate, that I get. You know, that's pretty straightforward. But a Fed mistake, that's pretty hard to do. And a shock is pretty hard to do. But nonetheless, a very good discussion. So I'm at 50%. And I was at 55. I'm actually growing more optimistic. And I do agree with Marissa. It does feel like we've been kind of forecasting. the script, but now it feels like the script is actually unfolding, and it feels pretty much to script. This is what I would have expected, you know, if you wanted a soft landing, again, it's not

the right word, but if you wanted a non-recessionary forecast. But obviously, the risks are very high because we could suffer a shock. And the Fed could make a mistake, because they've obviously made mistakes. But anyway, okay. I thought this was going to be short. Oh. So, go ahead. So inflation remains high, right?

In the first, for whatever reason, right? I won't even give, if you want a reason, I'll give it to you. Right. So mistake, I agree with you. Saying mistake seems as though we are, you know, really accusing the Fed of negligence, right? If they're reacting to persistently high inflation, right, for whatever reason, right? that's not a mistake per se. That's the right, that's the right response. You see that as a low probability type of event, though, that inflate, by your, by your forecast, inflation will

be coming down significantly that they will, the Fed will feel comfortable not having to hike once again. Yeah, I mean, we've got to be humble. I mean, this is, this is not easy. And in fact, when I talk about the economy avoiding recession, I say recession and risks are uncomfortably high and the only way we're going to avoid recession if we have a little bit of luck, meaning no shocks and some debt policymaking, no mistake. So you are incorporating into the forecast. You are incorporating a negative shock. No only because I can't incorporate a shock and I can't incorporate a Fed mistake.

I don't know how to do that. But implicitly you are. You're assuming there is, you know, a little bit of luck means no shock. Yeah. No shock. No shock. Because to say that there's going to be a shock seems, first of all, very hard to do say there is a shock.

And then the second thing you have to ask you said, well, what kind of shock? What is it exactly? Because that has very different implications for your baseline forecast, depending on what that. And when is it? What's that? Mercer. And also, when does it happen? Right.

Yeah, and when does it happen? You're kind of just picking a date. Yeah. But on the other hand, it argues for more scenarios, not. No. You can see I'm being tortured here. I'm being tortured. This is torturous.

Torturous. Yeah. But anyway. The problem is the risks are asymmetric, right? That's true, too. The risk is asymmetric. Absolutely agree. Yeah.

Absolutely agree. They're asymmetric. Yeah. But again, you got to pick a baseline forecast. Yeah. Anyway. It also depends on your, what are using this forecast for, right? Yeah, we fly this to death.

We'll come back to it. I'm tired. We will. Yeah, I'm tired. Okay. I thought this is going to be a short podcast, but it turned out to be a long way. Hopefully people find this, do you think, I hope they find this interesting because I don't know if it's too deep into the weeds, but.

Our bickering is, is entertaining. I guess. Oh, definitely. Okay. Anything else? The last words of wisdom? Okay. Marissa, thanks for joining.

I know a little bit more difficult for you on the road. Oh, sure. Yeah, no problem. Yeah, I appreciate that. With that, we are going to call it a podcast. Talk to you next week. Thank you.