Moody's Talks - Inside Economics - Debt Limit Relief, Labor Market Disbelief

Episode Date: June 2, 2023

The group dives deep into the jobs report for May. They dissect the cross-currents in the numbers, and consider what the report means for financial markets, monetary policy and the macroeconomy. The economic fallout of the legislative deal to end the debt limit drama, including the end of the student loan payment moratorium, are also part of the discussion. And of course there is the statistics game.For the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a group of colleagues. Of course, my two co-hosts, Chris D. Rides and Marissa Dina Talley. Hi, guys. Hey, Mark. Hi, Mark. Good see you. Hi, Chris. Jobs Friday, May, oh, no, this is now June, June 2nd, 2020, so we've got a lot to talk about on jobs. And to help us with that. We've brought in Bernard, Bernard. Bernard, good to see you, Bernard. Hi, Mark. Good to see you. Say something in Arabic. Just anything quickly. Ahlalan, wasa-lahlan. That's hello. Oh, I thought it meant, Mark, you know everything. I thought that's the thing. But that's good. That's pretty cool. It sounded exactly on point. And Matt, Coliard, Matt, good to have you. Matt, have you been on Inside Economics before?

No, this is the inaugural. Oh, really? Yeah, so this is nice. Nice to be here. So we have to haze him. Oh, I was going to say, watch out for Marissa. He goes right for the jugular every single time. It's good to know. Yeah.

I'm ready. I'm gun shy now. I need backup. All right. Good to have you on, Matt. And of course, Matt and Bernard along with Dante, Dante is AWOL today on Jobs Friday. He's generally with us. But the three of those guys manage economic view.

So really following the economic statistics real time. Good day to have you back on. Just got back from Toronto. with clients, at a dinner with Canadian clients. I will say, surprisingly more optimistic about things. I don't know if we remember back,

but we had a dinner in Toronto back last fall, and they were darn right pessimistic. And, of course, I might have a compositional bias issue because, you know, people at the dinner may have changed a little bit,

but I'm saying they felt a lot more optimistic than, than they were last. time. But we're going to find out how optimistic you guys are too, because at the end of all this, we're going to talk about probabilities recession, and somewhere along the way, we'll do the stats game as well. And there's, I almost feel like, I don't know if you guys feel like this, but I feel like there's so much to talk about. No? Absolutely. Yeah, there is. I don't know if we're going to get to it all. It feels like a two-hour podcast, but let's dive right in. Okay,

Marissa, we're going to turn it to you. Can you give us a rundown on today's May 2023 jobs numbers. Yeah, it was a very interesting report. So non-farm payroll employment rose by 339,000. That blew all the forecasts out of the water, right? We were only expecting about 215,000 and we were on the high side of consensus forecast. So a significantly stronger report than we were expecting. Add to that that the previous two months of March and April both saw upward revisions to job growth that amounted to 93,000 combined. So almost another 100,000 on top of that 339. That significantly moves up the three-month moving average of job growth. It is quite a large increase in employment. It's the largest since we saw since the start of the year. Job growth on the payroll side, it was pretty

broad-based. The diffusion index moved up above 60%, which is the percentage of industries that are either holding employment steady or adding to payrolls. We saw some big gains across many industries. Government had quite a large gain. They added 56,000 jobs over the month. In the private sector, job games. Can I ask, was that state, local, federal? What was that about? I think it was, let me see. Bernard, do you know, ballp hand?

I think it's generally more of state local. State local? Yeah, yeah. Well, it was everything, but local government was the biggest addition. So it was both local education and non-education. That was like two-thirds of it. But federal and state at it as well. Got it. Professional business services had a very large gain. Education and health care had a large gain. And so did leisure hospitality, although the gain there was, I think, 41,000. So that's a little bit smaller than we've seen in some of the previous months, but still quite large. The only major industries that, oh, and I should also mention the construction industry, added 25,000 jobs. And that was more than double the gain in the previous months. So, does.

Despite, you know, we had seen a couple months ago that the industry lost a small amount of jobs and we thought, okay, maybe this is the higher interest rate environment and the slow down in the housing market starting to kick in. But construction is really, really resilient. And that also was across the board, across residential, non-residential contractors, building heavy construction, kind of the whole gamut within the industry. manufacturing lost jobs, and that was in non-durable good manufacturing. And then the other industry to lose jobs was information. This includes tech stuff, it includes media, entertainment, telecom, that kind of thing. And pretty much every component within information lost jobs. Everything else added, at least on a broad-based industry basis. So if we're thinking about this from the perspective of monetary policy, this is obviously really, really strong.

That's not what the Fed doesn't want to see a strengthening job market, but some good news, at least on the payroll side that came out of it is that earnings growth moderated a bit compared to the prior month. So two things. Wages. Average hourly earnings. That's right. Average hourly earnings growth was 0.33% up over the month.

Over the year, it was up 4.3%. So those are both slower than we've seen in the prior month. The other thing is the work week fell. So the number of hours work ticked down by 0.1 hour. And this is pretty low. If you look at it historically, it's the lowest, it's the smallest, shortest work week, I guess, that we've seen since the pandemic. So that's, I think, what I want to say about the payroll survey. we can come back and fill in whatever I forgot.

It's important. Okay. Did you want to go into the household survey? Yeah. So the interesting thing to me about the report is that the household survey shows almost the exact opposite as the payroll survey. So on the household survey side, and just so everyone is, you know, we know what we're talking about here, the household survey is a survey of households that the Census Bureau calls people up or visits them in their home. It's a much smaller sample size. It's about 60,000 households. So the estimates of it are less reliable. However, this is where the unemployment rate comes from labor force data. So the

unemployment rate rose three-tenths of a percentage point from 3.4% to 3.7. 3.7% is still a low unemployment rate, but that's a big movement in one month. I mean, even just a movement in either direction, that is quite large. You have to go back over a year to. to see a movement in one month of 0.3%. Unemployment rose by over 400,000. The number of unemployed people rose by over 400,000. And employment, the number of employed people fell. So it was really like the opposite of what the payroll survey showed. And at the same time, the labor force held steady. So the labor force increased modestly up by a little bit over 100,000 people. And the labor force participation rate held the same as it was over the month.

So nothing strange was going on with the labor force. It really was an increase in the number of unemployed people. And you can see that in some of the detail. So if you look at how long people have been unemployed, there were a lot of newly unemployed people over the month. People unemployed less than five weeks. and also the reasons people gave for unemployment. Most of the increase in unemployment came from people who said they had permanently lost a job, you know, not quit.

Actually, the number of quitters fell according to the household survey. So really very difficult to reconcile this survey with the very, very strong payroll survey. I mean, it happens. It happens. It's not that uncommon for them to kind of show different things. I was looking at the magnitude of the difference between the two, and it's enormous. You have to go back to 2010 to see a difference this big between just the employment change in the two surveys. So just a couple things before we move on. I thought, and I haven't had a chance to look,

but I thought if you look at the household survey reconciled to the payroll survey, so they're different, conceptually different. And BLS, Bureau of Labor Statistics, Keeper of the data, does publish the household survey, more apples to apples, the payroll survey, that that actually showed a pretty sizable increase. Is that right? Do you know? Bernard, do you know?

That's correct. The adjusted household employment figure actually increased $394,000, which would be consistent with what we saw with non-farm payrolls. And I guess the reason why household. employment fell, and this goes to the measurement differences, is self-employed. The number of self-employed fill. Yeah, there was a big, yeah, yes. Yeah, okay. Okay, so that helps reconcile it a little bit or somewhat. I mean, based on the gain in employment, they're both pretty strong apples to apples, right? Would you say that? Right, right. When you try to make the definitions the same, yeah.

Okay. Second question goes around unemployment. That did increase. And the fact that a lot of it was because of a sharp decline and self-employed might suggest maybe there's noise in there, right? I mean, going back to your point, it's a small sample, and I'm not sure I read too much into it. But where do you think underlying unemployment is, abstracting from the monthly vagaries of the data, you know, up 3-7, down 3-4? where do you think we are? I think we're kind of in the middle of that somewhere, probably around 3.5% somewhere. I mean, the other, and I know we'll get into this,

you know, the other thing is if you reconcile all the other employment data and all the other labor market data that came out this week, that's more in line with what we saw on the payroll survey side than on the household survey side. Yeah, it feels like to me unemployment is a rock solid, three and a half percent is, and that's where we've been for more than at least a year. It hasn't, you know, one month it might be a little higher.

One month, like today it was a little higher, one month a little lower, but net, about three and a half percent. Okay. Okay. Let me turn to you next, Bernard, to fill in the gaps there. Anything you would call out that Mercer missed in her rundown? I think one thing that I've been looking at in recent months has been the composition of those unemployed. So the BLS does provide the composition of unemployed.

persons who are either on temporary leave, whether they're on permanent job loss, whether they're re-entrance into labor force or new entrants, others who are completing seasonal work. And one thing that was concerning towards the end of last year and early into this year was the rising share of unemployed that were on permanent job loss that rose from about 21% in towards the end of the third quarter and rose to nearly 27% earlier this year. But that has since started to tick down. And in this job report, it was roughly flat. So I don't see any worsening in the, I don't see any worsening in the composition of

unemployed persons nationally. And it would be, you know, even though we're looking at a low level in the aggregate of the aggregate number of unemployed is low, but it would be concerning if you start to see a growing and growing share of that being permanent job losses. Yeah, but you don't see it. You don't see it. Yeah. Yeah.

Okay. Matt, anything you want to call out in the bowels of the numbers? I know you dig deep too. I think that 3.7 unemployment rate, like you guys, I think it may be a little bit misleading. This isn't this big uptick of people coming off the couch to now look for a job, which pulled us from 3.4 to 3.7. It's unincorporated self-employed people. That's a definition that could be unpacked a bit more, but they were working. They were doing something, whether that's not viable for them anymore. It's not this 400,000 plus increase in a labor force, which is, I mean, that's the balancing that the fed's looking for. So it kind of diminishes that increase for those who are really

leaning on the unemployment rate to say, okay, here's, the loosening has arrived. So maybe a little bit of a false, false loosening there. Okay. So, so Chris, let me turn to you. And if there's anything they want to call out, that'd be great. But more significantly, what's your broad takeaway here in terms of what's going on in the labor market. You know, taking all these discordant kind of pieces of information coming from the report, all the cross currents, you know, how are you reading this? And then I want to ask you how the markets are reading it, because that seems interesting as well.

Absolutely. Feel free to take any of those questions in anywhere you want. Sure. I'd say, first of all, I think this report underscores the number that's in every report, which is plus minus 130K. You know what that is? That's the 90% confidence interval around the payroll. Right? So for that reason, I don't think we want to read too much into any given month here, especially given the differences here. I think the report does suggest strength still,

certainly in terms of hiring. And we had the Joltz report earlier. I won't reveal any numbers for the statistics game, but it does suggest that the labor market remains quite resilient. right? We can, to be determined how resilient it is and what the specific number is, but I don't see any question that things are falling apart here. They're not falling apart. They're resilient. And to Matt's point, I don't see 3.7 as really being truly underlying unemployment here, that there's a lot of noise in the data. So that's my take in terms of what the Fed does with this. I don't think they, I think they take that into account. I don't think they'll overreact to this report. in one direction or another kind of a little bit here for everyone to enjoy. It doesn't suggest

that things are particularly overheated or that things are falling apart as well. So I don't know that this report makes the difference in terms of their call. I think they'll wait for inflation, other measures before they decide what to do here. Can I ask you? Before we go to the market, just one quick question. So we kind of came to the underlying unemployment rate. rate is about three and a half percent. That's kind of sort of where we've been for a year, a year or so. In the day's numbers doesn't sway anyone's thinking around that. What about underlying monthly payroll employment growth? What do you think that is now? Is it 300K? Is it 250, 200? Do you have a sense of that? It's hard to really pin it down. But I think it's probably

between 200, 250 would be my, you do, okay, my guess. When everything is set and done and the revisions come in, but that's my sense of things here. Right. And just for context, right now it feels like that's consistent with stable unemployment because labor force is growing 200 and 250K as well. Right. But that's not sustainable though for long, right? Given underlying demographics does them feel like we can sustain labor force and job growth of 200 to 250K, meaning if we if labor demand remains that strong, if job growth remains that strong, at some point labor force isn't going to be able to keep up. Unemployees going to start declining again. Wage growth is going to start accelerating again. The fit's going to start raising rates

again, right? That's right, although it's been, at least as you say. They could keep showing up. So, you know, I don't want to, I'm not confident in terms of the timing of that. I agree with you, certainly at some point, right, got to run out. But is it an excellent? The month after, I don't know. I've been burned now a few months in a row here. It's pretty incredible, actually. Yeah, it is.

Yeah. Let me ask you one more question. And I've asked it before, but I keep asking it. 3.5% does that feel like full employment or are we beyond full employment? Is the full employment

unemployment rate than Nehru higher than 3.5% is, you know, what's you're thinking around that? So I think it's right around there. Right around 3.5. Right around 3.5. Maybe 3.7

If that's, yeah, okay. At the end of the day, that shows up. But, you know, I keep pointing back to the wages, average hourly earnings, which of course, isn't the best measure, but still a reasonable measure. It's still on the high side, so it would suggest a little bit of heating up there. So maybe there's some, maybe we're just over full employment here, but tough to make a call. So 300% is a little out, it feels like it's a little outside the consensus, right?

I think if you ask the average economist, the economists at the Fed, they'd say closer to four, maybe even higher than that. Yeah, okay. Let me go around the home very quickly and ask. Same question. Do you think 3.5% is consistent with full employment or is that beyond full employment? Bernard? Yeah, I would say three and a half is consistent. Yeah. Okay. Marissa? Yeah. I mean, I think, again, I always go back to the job market we were in before the pandemic, too, right? And we had a very low unemployment rate. We didn't have an acceleration in wage growth. So I don't think that this is, we've overshot a ton. It was three and a half. Right, in the ballpark of

full employment is. Yeah. Okay. And Matt, do you want to take the other side? I dare you. I would. I was planning on it.

Oh, they're okay. Oh, baby. Okay. I'm going to step away from the unemployment. I mean, 3.5, yes,

2019 tells you that's probably not an overheating U.S. economy. But if you look at like prime age, labor force participation, all those type of metrics, I don't know where else you're getting. You're above, but you were in 2019.

I don't know how many more people can be relied on to keep coming into the labor force. So to me, that seems like it leans towards the overheating side of things. 77.6, that's women's prime age labor force participation rate today. And that's the highest ever. So I stole somebody's number. You still? Maybe we should stop this line of questioning. Yeah, maybe. What about, can I ask you, Although, and I've wondered about this, overall employment to population is still below pre-pandemic levels. And that goes to, you know, one of the reasons why participation hasn't recovered is older workers. Folks that are over the age of 65, they kind of stepped out and haven't come back in.

But maybe they're starting to come back in. That's where we're getting, I don't know, I didn't look at that labor before. It did not. Chris is saying, no, that participation rate did not rise. Actually, you dipped a little, I believe. Oh, did it really? Okay. Yeah, I mean, the only age groups that aren't at or above in terms of participation and employment,

where they were prior to the pandemic, are 20 to 24-year-olds where participation is a little bit below where it was prior to the pandemic and people 65 and older. Yeah, 65-node. Every other age group is. So, yeah, I mean, the 65-and-old accounts for the lion's share of the missing. workers, right? But if the question is, as Matt posed, where are those workers going to come from? That could be it.

It would have to be them. Yeah, that is, I'm agreeing. It doesn't have to be, but most logical. Yeah, I mean, that's where most people are out of the labor force. Right. I'm wondering if we should do, well, before we, I was going to say maybe we should do the stats game before we keep going. But before we do that, turning back to you, Chris, the market reaction.

Holy cow. I mean, the equity market is taken off. Now, I know the debt limit agreement's got to be playing. a role, but it felt like, I mean, I've been watching it. It took off after the employment report. I mean, really took off. I haven't looked last minute or so, so maybe it's backed down again. But I saw the Dow up over 600 points. And the bond market also sold off in that long-term treasury yields, 10-year treasury yields were up five, six, seven basis points, which is a pretty big move in a given day. But what's- Not anymore, right? It seems like you go five, six, you know.

Oh, that's true. The volatility. And the bond market is incredible. That's a topic for another podcast. Yeah, that's right. But have you looked at the futures market for Fed funds? You know, what are markets discounting, has the discounting with regard to a Fed move at the next meeting change? Yeah, it's two-thirds, two-thirds of participants suggest a pause or skip. Pause.

Okay. And a third, say, a hike. Okay. Well, that's interesting. Right. And what, last week, it was the reverse, right? People were, the majority were saying hike and a minority were saying pause. So clearly things are moving.

Yeah, what do you think is going on there? You know, why? I mean, given that, if you, taking a face value, that employment number would say, hey, well, I guess there's a lot of cross currents there, but the top line payroll employment number would suggest, hey, maybe they would tighten. but that's not what the market's thinking at this point. Yeah, well, my interpretation, the market's thinking, this is a confusing report. Okay. Right.

I'm not sure how the Fed's reading this. I think the Fed's going to wait. They don't have a strong case to be made here to hike. I'm assuming that they'll wait and see at this point. But those futures market, they turn around pretty quickly. So, you know, a few more. Yeah, for sure. Yeah, they swing wildly in any given hour.

they can swing pretty widely. Yeah. Yeah. But again, I don't see this report as being proof positive or definitively moving the Fed towards a hike. Okay. Bernard, do you have it? Yeah, I know you follow the futures pretty carefully.

Any view there on what, you know, what's going on? The market reaction was, is that surprising? Yeah, I think it's just, it's just confusion and they probably just, Marcus could just be seeing this, uh, this confused report as just being further sign of resilience and further odds of a soft landing. That's probably it. Interesting. Okay, well, why don't we do this?

Let's before we play the stats game. Let's now talk about the debt limit, which is now deal, which is now, I guess, President hasn't signed the piece of legislation yet, I don't think. But it's gotten through Congress, House Senate, and it's going to his desk, and he's going to sign it just in time. And then we'll come back and play the stats game and then go on to some other topics. But I'll turn to you, Bernard, because I know you've been doing, you and I've been doing a lot of work here along with Chris. What do you think the, maybe you can just quickly summarize, don't spend a lot of time summarizing the deal because it's all over the place. But more importantly, the macroeconomic consequences of the deal.

Yeah. So without going into all of the details, it's still important to say that the most important piece of the Fiscal Responsibility Act, which is the debt ceiling deal that will suspend the debt limit until January 2025. So it'll effectively remove the debt limit as an issue until after the debt. presidential election next year. The biggest component of this are caps on federal defense and non-defense discretionary spending next year and the year after. So as the law is written, the non-defense budget should shrink by about 8% next year. And in the following year, growth in non-defense and the non-defense budget would be limited to just 1%. On the other hand, the defense budget will be allowed to grow by 3% next year. But in the following year,

its growth will also be limited to 1%. So these caps on discretionary spending are going to forecast to reduce budget deficits by about $170 billion over the next two years. These caps are only for two years. And after that, the assumption is that spending is just going to grow in line with rising prices in the economy. An important point, though, before I get into the macroeconomic

consequences, is that there were lot of side deals made between negotiators and that are not explicitly or that are not written in the legislative text, but they're going to come into play once we actually, once lawmakers start writing up the fiscal 2024 budget later this summer in early fall. And so there's a lot of side agreements that essentially shift around money and, you know, allow appropriators to adjust non-defense appropriations higher to be more consistent with current levels. So in reality, when we look at the nominal non-defense budget next year, it's probably going to be slightly lower or flat relative to current levels. So depending on what you assume, you do get different

macroeconomic consequences. So if we take the Fiscal Responsibility Act at face value, I would expect that you see a reduction in real GDP by about three-tenths of a percent. The unemployment rate would probably be higher by two-tenths of a percent. And non-farm employment would be reduced by nearly 200,000. And the peak of these impacts would be late 2024 for early 2025. So this would be the upper bound. But if we include the side deals, which are going to mitigate the impact on non-defense, then you're talking about even smaller impacts.

I would say, you know, real GDPs reduced maybe closer to 0.19% of a percent increase in the unemployment rate and a reduction in non-farm employment by closer to 130,000. So it's a headwind, but we have to consider this against the alternative, which would have been a treasury default on the government's obligations and an almost guaranteed recession later this year. So any of us, I'm sure, would take this deal over the alternative. Yeah, I think it's about as good a deal as you could get from a macroeconomic perspective. I mean, this is really not much of anything. And the fact that both sides were equally angry at it is a good sign. It just shows that it was a straight down the line. In my sense, if they had gone through the normal budget process, they might have landed pretty close to where they landed anyway.

Yeah. So all that drama for nothing, really. again, going back to the points we were making a previous podcast, it might be a good idea to get rid of this thing, this debt link. Yeah, exactly, yeah. This is really not advancing the ball to any significant degree. That makes perfect sense to me. Thank goodness.

And one of the really positive things, just to reinforce it, is the limit is suspended until January of 2025. So we get this thing on the other side of the election, so that doesn't get involved. And it also provides some budget mechanisms, I guess that's the right way of describing it, to help make sure that the government gets the funding it needs at the end of this fiscal year, which is the end of September, so that there's no government shutdown, right? Exactly.

Yeah. So I would say the odds of a government shutdown later this year are significantly reduced. Because if they don't provide a full year budget for fiscal 2024 by the end of this calendar year, then you're talking about an automatic limit to all. discretionary spending, including defense to 1% growth. And that's obviously what, you know, that would be something that wouldn't be tolerated on both sides. Can you explain the side deals? They're not, it's not legislative. Are they binding in any sense? I mean, they're not binding. It's so it's just money that's good. So one example is that they're going to rescind about 20 billion

dollars that were in funds that were provided to the IRS under the inflation reduction ask. And part of that money is going to be just repurposed to other non-defense programs, which will alleviate the cut in the law itself. So it's like a handshake deal saying in the appropriations process, the lawmakers are going to do this. Exactly, yeah. Right. Okay. Interesting. One other aspect of the deal was around student lending.

and the president agreed to end the moratorium on student loan payments. I think that is as of September of this year. And there's some hand-wringing about how significant an impact that will have. Now, that doesn't affect the budget, the macro impacts you just discussed, Bernard, because we were assuming that was going to happen anyway. That was already baked in the – That was baked in. Yeah.

Yeah, that was going to happen regardless. if there was a debt limit deal or not. But let's talk about that because I know there are some folks handwringing about that. And Chris, you spent a boatload of time on student loan issues. Can you just explain this a little bit in more detail and what the macroeconomic consequences of ending the moratorium on student loan payments might be? Yeah, sure. So there are about 45 million borrowers with student loan, federal student loans, right?

So we'll start repaying come September 1st. It's about $5 billion. month in terms of remittances to the government. So that's, I guess, positive from the budgetary standpoint. Because just remind people that most student loans are now government directly from the government. Right. Okay. Yeah, over 90%. Over 90%. Yeah. So implications would be, of course, people have to start paying again. So that's going to cut down in terms of they're spending, I mean, they're saving activity elsewhere. But by and large, I suspect that most borrowers are prepared for this, right?

It's going to hurt, right? They're going to reduce some of their activity elsewhere, but I don't expect that all of a sudden we'd see a wave of delinquencies from them. Now, that's the majority. Even before the moratorium, there was always this pocket of students who got a loan, in particular, who got a loan and didn't complete their degree. agree, right? So they ended up with a burden that they really conserviced given their current levels of income. I suspect those people are going to be under pressure once again when the

payments restart. One caveat here is that there is, or the Biden administration is pushing this income-based or income-driven repayment plan that they have, which would reduce the amount that borrowers have to pay to 5% of their income and shorten the term for which they would have to repay as well. So to the extent that borrowers do take advantage of those programs, right, that could certainly help ease some of that financial stress that they're facing. So I see this as certainly, you know, having some drag overall on spending and the broader economy, but I don't see this as a triggering a wave of defaults or anything of that magnitude. Yeah, so $5 billion a month times 12 months, gets you $60 billion. You divide by $27 trillion.

GDP, that's two-tenths of a percent or something, my arithmetic is right. And that kind of feels like that might be an upper bound because, right, they're not going to, the student loan borrowers are going to cut all the way back on the $5 billion. They've got, you know, some of those folks have savings and other sources of income. And I also think the income-driven plan, they call income-driven plans now, right? Income-driven. IDR. I do payment plans. IDRs. Ida-D-Rs. change the name, but that may also smooth out some of these effects as well. It might not be exactly $5 billion. Certainly not right away. Five billion. Okay. So I guess it's kind of a headwind, but it's kind of really very modest headwind to the macro economy. That's right. The other wildcard

here is that the forgiveness program, the Biden proposal to forgive $10,000 of debt for most borrowers, $20,000 for Pell Grant recipients, that's still on the table. The Supreme Court will be deciding soon on the validity of that plan and we'll see what happens. Yeah, I guess the thinking is that the consensus view is that the Supreme Court's going to strike that down, not allow that to happen. Yeah, that's the... That feels like the current thinking, but... Yeah, it'd be a little bit of a surprise if they said, oh, that, okay, go ahead and do that.

Right. Yeah. Right. But if they did do that, that would even reduce the, maybe even completely eliminate the impact of the more, the end of the... payment moratorium on the economy, right? Because people's debt's forgiven. So that's got to have some positive effect. That probably will be equal. Yeah. That's right. Okay. We'll see how that plays out. Do we know when these, Bernard, you know when anyone, anyone know when that's been port court is thought to be able to

By the end of this month, it should be. Yeah. Oh, by the end of June. Okay. By the end of June. Yeah. Okay. Okay. Okay. Very good. Um, okay. Anything else on the debt limit? Bernard, Matt. Anything you want to bring up now? Okay. Fair enough. And, and, uh, just one last. point i just uh looking ahead to 2025 okay so 2025 is going to be a very busy year for fiscal policy because not only does the debt limit become an issue again the many of the trump tax cuts from the 2017 republican tax law are going to expire then and then you also have the expansion of the affordable care act under the inflation reduction act that also expires around that same time so there's it's it's very likely likely you're going to have a grand bargain between democrats

and Republicans that could potentially increase substantially non-defense spending in exchange for a permanent extension of the Trump tax cuts. And if that's the case, we're looking at significantly higher deficits and debt over the next several years and decades. Oh, wait. So when's that going to happen? It's going to be happening in the lame duck session after the election and before the new Congress.

It's going to be during 2025, calendar 2020. Okay. But the debt limit is January of 2025. 2025, yeah. So the debt limit won't be part of that grand bargain? Oh, it will be because towards the end of 2025, that's when the looming expiration of these other policies will be there. And again, remember, the debt limit will come into effect in early 2025, but extraordinary measures and cash on hand will push back, drop that date for that, you know, towards the middle of the year. So it, yeah, so it'll probably be in the middle of 2025 when we see something big in terms of.

of. Oh, so this election is huge. This election is like massively huge. And again, the calculus, it changes if it's a Republican sweep, if it's a Democratic sweep, or if it's divided government, yeah. That's like a, that's like a big deal. Trump tax cuts, debt limit, what else? You mentioned one other thing that's got the Affordable Care Act. Affordable Care Act, right. Yeah, affordable care act. Yeah, affordable care. Yeah, that would be, very interesting. Yeah. Okay, very good.

Hey, let's play the game, the stats game. The, hopefully people still have the stat they can use. I know I blew through one or two of mine already. The game is we all put forward a statistic. The rest of the group tries to figure that out through questioning and clues, deductive reasoning. The best stat is one that's not so easy. We get it immediately, not so hard that we never get at.

and his bonus if it's apropos to the topic at hand, which is, well, the labor market, I think, but we can go beyond that. So, Marissa, tradition, we missed you last week. You would have been very proud of me. I think I did well, reasonably well. Chris actually did very well. Our guest did very, very well. Ben Harris did very, very well.

Yeah, that's right. But we missed you. So what's your stat? Okay, I have two related statistics. 70.7% and 54.7%. Labor market related. Yes. Is it a participation rate?

No. Is it in the payroll survey? One of them is. One and the others in the household survey. Right. And they're related. Yes. Okay.

It's not a, participation rate, some kind of diffusion index? No. Okay. Guys, I'm already stumped. It's a tough one. It's a tough one. It says a ratio of something to something? It's a percentage, yeah.

I'm just trying to keep the conversation going. A numerator and a denominator. That's funny. Is it, can you give us a clue? Sure. So this is something that's released every month by BLS, but it's not in the employment situation news release. It's not published in that news release. Oh, is it in the Joltz release, the job opening labor turnover survey?

No, so it is the household and the payroll survey related. Okay. This is calculated every month, but they don't publish it in that news. release. Oh, I see. Wow, that's interesting. Is it the survey response rate? Yes. Oh, yes. Very good. Oh, man, explain. That's a great one. That is a really good one. Yeah, that was good, Chris. So, 70.7% was the percentage of the household survey sample that actually responded to the household survey in the month of May, 54.7% was the response rate for, this is the initial estimate, right? We're going to get three BLS conducts two subsequent revisions to each payroll number that they release. So, and the reason that they do that is

that each subsequent month, they get more and more delayed responses into the previous month's survey. So 54.7 was the response rate or the collection rate in the payroll survey for the month of May. So that should go up into the 90%, that response rate usually ends up being by the third collection somewhere in the 90%. But 54.7 is really, really low even for a first response rate. there was one that was lower recently. It was like 50% or 49% back in November of last year. But generally on the first try, BLS gets somewhere in the range of 70% of respondents. So this was very, very low on the payroll survey side.

On the household survey side, the 70.7% response rate is pretty normal recently, but just to give you some content, it was 75% last May. And before the pandemic, it was well into the 80s. So response rates for all of these surveys, particularly surveys of households, have really fallen to, in some cases, alarmingly low levels since the pandemic. Like in the Jolt survey, the response rate is down to like 33% or something. It's in the 30s, right? And so this just makes, to Chris's point about the statistical significance of all of these numbers, it makes those confidence intervals even wider.

So, for example, in the household survey, you need for significant job growth, employment growth on the household side, you need something over 600,000 in either direction for that to be significant. Oh, I didn't know that, really? Yeah. Wow. That's incredible. So the response rate for May was, it's been falling month for quite some time, but it was particularly low in May. For the payroll survey. For the household survey, this is pretty normal.

It's kind of what it's been since the end of last year. But it is repeatedly down year after year. You know, if you go back to, if you go back 10 years, the response rate was 90% on average. now the average is something like 70% in the household survey. So it suggests we might be in store for some meaningful revisions then to the day. Yeah, I think it just underscores, you know, as we get confused about how to interpret some of these numbers, you have to remember that these are coming from surveys and there's a response rate problem in a lot of these surveys now.

So, yeah, we have to take everything with some skepticism. Fortunately, the payroll surveys ultimately so-called benchmark to actual counts of jobs from unemployment insurance records, the so-called, what is it, quarterly census of employment and wages, QCEW. And that has shown some big differences, right? I mean, I think, I can't remember which quarter, but there was a quarter back in 2022, Q2, 2022.

We actually saw job loss. Yeah, that was in the summer of last year, according to the QCW, right? And that's not at all the picture you got from looking at the initial employment estimates. And that still hasn't been incorporated fully into the- That's right. So we will see some downward revisions probably. I think so. I mean, of course, who knows?

But based on that, all else being equal, we'll see some downward revisions. Interesting. That's great. Do you think there's a large firm bias for the first batch of reporting that of those 54%? I don't know. I don't know if that is a thing. I mean, I'm sure BLS has done a ton of research on response rates, so it could be. I mean, most of this is automated by companies now.

They don't even have to have a person physically respond to the survey. There's some automation, and that may bias it toward larger companies that have more infrastructure to do that than smaller companies. That was a great one. That was a really cool one. Matt, you want to go next? Sure. I kind of do want to make us guess how much PTO Bernard should be allowed to take in 2025

with all the legislation going on But no, I have one That's a good point That's good point Is Bernard ever take PTO? I don't think he's ever taken I am taking next week for my move to Philly Really?

That's disappointing, I'd have to say No, no, only He's got to be closer to you, Mark. Just be happy. Only joking, he deserve a boatload of PTO for sure. Yeah, yeah, and he's He's moving back into the neighborhood, into the hood. Yeah.

You're in Philly. Good to have him back. Yeah. So, Matt, what's your statistic? Let's go with 79. The number 79. The number 79. It's not a percent.

It's just the number 79. And it is my first time on here, so I got to shake it up. So keep that in mind. But I'm just- Market-related. All the way to say. What are the, oh, it is market-related? Navy market related, not a percentage, not an index.

Is there units to it or is just 79? You can't tell us the units. I can try to think of a way to do that, but you have to give me a second. I can do that without giving it away. You're saying it's like $79 barrel dollars per, that's not dollars per barrel. Okay. Because oil is it 76? Is it a statistic that was released this past week, Matt?

Um, today. Uh, yeah, it was, uh, it's, it's longer run. So n equals 79, but, uh, n equals 79. Yeah, it takes this morning's this report into consideration. Is it a labor market data? Yes. Does someone say that? Okay. Um, could we know this, Matt, or are you just like, um, oh no, we don't, we shouldn't know it. No, I mean, it's relevant, but it's not something that you would see referenced in the Wall Street

journal or anything. It's just, we know it. Should we know it or not? It would be difficult to guess, but I think it's relevant. I think it's interesting. Is this, you calculated it or is actually not? Yes, I did calculate it. Okay. Oh, 79, no units, labor market related, probably don't know it, but we should guess. It's interesting. Yeah. 79. Wait a second. Is it, it's not an index? of some sort. Is it an age? No, it's a number of times. Oh, oh, okay. That's a frequency. Okay. 79 times. The number of times the unemployment rate has moved more than two tens of a percentage

point. That's a good one. A single month or something. Exactly. So the number of times it's Oh, that is amazing. Way to go. Yeah. That is so cool. Yeah. There's the Cal bell. Boy, that's really impressive.

No chance. Yeah, that's great. So it's the number of times, not just in absolute terms, but a 0.3 percentage point increase in one month in the unemployment rate. 79 since the World War II era or post-World War II. and the follow-up would be how many of those of those 79 occurred either in a recession or immediately preceding a recession. Oh. Oh, that's a really good one. Most of them.

Two-thirds of them. Two-thirds. It has to be. Definitely most. Two-thirds is great. So it's a little high reason. Three-quarter. Close, Mark. Close.

Sorry, no cowbell. No cowbell. Hey, Matt, just a suggestion in playing the game. That was an admirable statistic, but you might just say this has happened 79 times. That, you know, that's fair. That would have been fair. No, it did just a little bit of a, you know, something. Yeah, I appreciate the uncomfortable.

But the fact that Marissa got like that, man, that is, that's scary good. Yeah, very good. That's a good one. Okay, very good. Bernard, you want to go next? Yes. So I have three statistics. They're all related to labor, and they're all related to each other within labor.

So it's 1.795 million, negative 110,122, and then a positive 199, 600,000, 670. The last two numbers are year-over-year differences, and the first one is a total. It's a stock. What was the last number you said, Bernard? So it was like, 190,670. Can you rant? I mean, is rounding going to mess up the? Oh, no, no.

I could just say 200,000, I guess. Okay, so round, because I can't, I'm not writing this down. Okay, so round for me. So the first one is 1.8 million. The second would be negative 100,000, and the third would be a positive 200,000. The first number is the stock, and the second to, are year-over-year differences. And is it in the house, like a, like a labor force statistic?

Like a household labor force. Is it from the jolts? No. Is it in the household survey? No. It's in the payroll survey. No. Oh.

Okay. Hmm. It's labor market related. 1.8 million. 1.8 million of something. Is it from the BLS? No, no. It's, is it UI claims related?

Yes, yes. The first, yes. Yeah, yeah, yeah, yeah. Continuing claims. Yes, that's the first one. Okay. So the last two, they come from the household poll survey. So they didn't necessarily come out this week, but they came out earlier this.

Boy, these guys are tough, man. Yeah, they're all. That man. Right, I like it. Yeah. And explain the household poll survey. We haven't talked about that in a long time. So it was a one time.

So the Census Bureau started this survey, which they conduct almost every month or every other month. And they've changed their questions over the course of the pandemic. But they ask a lot of questions about employment status during the, so in 2020 and 2021, when we had a lot of the federal pandemic relief, there were a lot of questions about stimulus checks, the child tax payments. that helped provide some granularity there. And they also ask a lot of questions about mental well-being during the pandemic and nutrition. So it really asks a broad array of questions at the national level and also at the state

and metro area level. So can you repeat one more time what those two remaining statistics from the House, from the poll survey are? So negative 100,000 and a positive 200,000. And they're both year-over-year changes. And they're related to UI claims. Is it the number of people who say they're relying on unemployment compensation to meet their monthly bills? Very close, but not the aspect of these people's is not, it doesn't have to relate with, you know, what needs they're meeting with by using.

Go ahead. So it's, all right. So obviously the first one is one point. $1,8 million, that's continuing claims which rose 6,000 in the weekend at May 20th, but more important, they're up almost 400,000 from a year ago. But there's a lot of shifting. If you look underneath that increase, you're seeing a lot of shifts as to who is receiving unemployment benefits. And that's where the last two statistics come into play. And the negative 100,000, that's the year-over-year reduction in the number of people receiving UI claims whose household income is

less than 35,000. And then the 200,000 year-over-year increase, that's the increase in the number of UI beneficiaries whose household income is 150,000 or more. So we've seen a top-line increase in continuing claims, but it's starting to really shift drastically towards the higher end of the income distribution. So the lowest income folks are really declining. You know, their share of total continuing claims is declining significantly, whereas those at the very top end, they're seeing their share of continuing claims increase. And this makes sense because you've had very high-paying industry such as financial services and tech accounting for at some point, you know, up to 70% of job cup announcements late last year. So these are jobs that are going to be skewed towards

the higher end of the distribution. And I would say the implications of this from a macroeconomic perspective are relatively benign. Lower income folks tend to have a higher marginal propensity to consume any extra dollar that they receive. So if more of them are exiting, the unemployment roles and are, you know, becoming employed, you know, I think that's going to be a good thing for consumer spending. And on the other hand, if higher income folks are accounting for a larger share of, of UI continuing claims, you know, I think they have the wherewithal to, to continue to spend more or less during any spell of unemployment, especially since they account for the lion's share of excess personal savings. Yeah, that's a really cool statistic. We never would have ever,

ever, ever, ever gotten that. But that's really, really cool statistic. We need to follow that on a regular basis. Can I ask, I look at the initial claims carefully in their, you know, 230, $23,000 per week, which feels, you know, it's up, but it's still low. It's still, yeah, yeah. It's very low. And our break even estimate is, I think Matt, you wrote this, 265,000, meaning you need 265,000 claims to be consistent with no job growth. I think recession would probably be closer to 300K, something like that, just for the 1.8 million continuing claims, that's up, you say, but is that high, low? How do you, would you characterize that number historically?

And then it feels low historically. Still low. Yeah, yeah, yeah. Okay. It's up, but it's still low. And it's coming from very, very low levels from a year ago. So I know people have said, look at how high the year-over-year percent increases in it, but it's coming from a super low base.

So I wouldn't read too much into your your changes. It's a normalization, not a red flag. I'll have to say I have a statistic, but I'm a Piker compared to you guys. Geez, you guys have some really good statistics. I mean, I'm not kidding. Those are good ones. Chris, do you have a good one? Not really, but I'll use it.

I'm going to be embarrassed? No, no. It's a decent one. A decent one, okay. About my best work, but passable. 25,006. 25,106. And employment related?

Yes. In today's job numbers? Yes. In the household survey? Nope. In the payroll survey. Yes. Construction employment?

Exactly. Construction employment. And what's the 106? They are related. Oh, there's separate statistics. Oh, I didn't realize that. Oh, sorry. Sorry. Oh, okay.

It's 101, 106, not 106,000. No, 106. Okay. So construction employment increased 25K, that's your first number. And now you're saying the next number is 106. What is 106? Exactly. And is that also in the employment report?

Yes. The payroll survey? In the Bowls, yes. Oh, really in the Bowls? Is it in... In industry? Is it employment gain? It is an industry.

It is the construction. construction industry. Oh, so it's some, is it, oh, is it like heavy civil construction infrastructure related stuff? He's got to be cute. It can't be, there's got to be some cute thing he's doing here. I got this cute bias. Yeah, yeah.

Well, because if it's 25K, that's pretty boring, I mean, for him to pick that one, right? So the 106 has got to be a little juicy in some way. Is that a month-over-month change? No, the month-over-month change is zero. So it was 106 this month. It was 106 last month. It's construction related. It is the one of your favorites, Marissa.

Marissa, what's your favorite? Something where the home improvement. What's that? What's that? What's that? What's that? Is it in the construction spending release that we got this week? No, no.

It's the index of aggregate weekly hours. Oh, yeah. For construction. Right? Oh, for construction. Employment went up 25K, but the number of hours. was flat. Oh, bad.

Interesting. Yeah. Well, that reminds me, going back to the aggregate numbers, aggregate hours worked, which account for employment, inquiry, gain, and average weekly hours, I think was down in the month, I believe. Down point one. And that's told, that's an indication that it wasn't that strong when you think about, when you look at it.

that the at was a proxy for output for GDP it's suggesting a pretty weak number actually not a strong number that's right back to your point of what your observation of marissa the average weekly hours fell now to a level that is quite low yeah even pre-pandemic it's quite low so um that you know that takes an edge off that 30039k and payroll employment for sure uh okay that's good i'm not going to i'm going to be embarrassed If I'm going to do it real quick. Ready, you guys, lightning run. If you don't get it really fast, it would be very disappointing. Especially you, Matt, because you're the newbie. You've got to get this right. 80.7%. Labor Force participation.

Not labor force participation. E-pop. E-pop. Matt, where was your voice? Did you see what? I mean, come on. Yeah, I should have. You guys are quick.

You're very quick. See, this is what Marissa does. She goes right for the jugglers. She doesn't give you a chance. So it's employment to population ratio for prime age workers, which actually ticked down, by the way, and is, you know, it's elevated, consistent with a tight labor market, but not an inordinately tight labor market. This is kind of where it was, you know, pre-pandemic, going back to, you know, our observations about unemployment and labor first participation. So again, another statistics say, yeah, it's tight labor market, but not like screamingly overdone. And it's starting to ease up, which is what we need. Okay. we're running out of time. There's so many topics, as I said. I wanted to talk about AI.

We're going to talk about AI, but I think we need to do it at a different podcast because there's just so much to talk about. And Matt, I also wanted to, I'll get you back on because I want you to talk about the business-to-business sales data. And maybe real quickly, just summarize what that is and what it's saying,

because I think that's apropos here as well. But I'll have you back, We'll have you back on to talk about that in more detail, but just give us a sense of that B2B data. Sure. Coursely, it's tracking the spending that one business is spending to another. So B2B, and that's based off of really accounts receivable data. So if you can aggregate that, you can roll that up enough and you can also slice it and say what's happening in California or Pennsylvania. You can aggregate all of that spending up to the U.S. level and say, what does business look like?

What is a dollar amount happening? it's occurring month to month, how are businesses spending money? Even at a top level, that's a pretty good proxy for economic activity. So that was always our goal with trying to manipulate this data, to be able to tell a story about kind of the trajectory of the U.S. economy. There's some oddities to it and some massaging and some manipulation that we've kind of gone back and forth on. But what it is signaling and what we're confident it is signaling is kind of aligns with

with the story outside of the labor market. So what GDP is saying, which is this U.S. economy is slowing down, but it's not contracting. There's a deceleration going on. It's relatively timely. So it's a good way for us to kind of keep our finger on the pulse of what's happening in a pretty timely manner. So, yeah, I'd be happy to talk about it more. Yeah, we should come back because it feels, I mean, actually, the weakness in March, April was a little more than expected. because this is all nominal dollar.

So if you adjust for inflation, it felt like we were getting some actual declines in business to business sales and aggregate across the economy. But we'll watch that in maybe a month or so. Again, another month is worth of data. This is data we collect, Moody's collects, based on accounts for saveable.

We'll come back and maybe we'll spend more time on that. Okay, let's end the conversation, given all the data, our odds of recession again. And two numbers. What's the probability of recession starting this year in calendar year 2020. And what is the probability recession starting in calendar year 2024? Of course, 2020 is half, you know, almost halfway through the calendar year.

So probabilities are starting to come in, I think. But nonetheless, let's let's, let's, let's, let's, let's, let's, um, we're, we're, you know, we're, Let's go around the horn and get people's perspective on that. And, Marcia, I'll start with you. What are your probabilities? For a recession starting this year, I'd say 40%. Okay. For a recession starting next year, I'd say 55, 60, somewhere in that range.

Pick a number. You're on the record. Seven and a half. There you go. Okay. And why, can I ask? will probabilities be so much higher next year? So it's just arithmetic, I guess.

Yeah, I mean, this year's almost over. We just keep seeing strong economic data, really, right? And now we have the debt ceiling thing largely behind us. That was the biggest near-term threat to a recession. So I think it's pretty unlikely this year. But we don't think the Fed's going to raise rates again, but they could. I mean, I wouldn't argue too strongly if somebody said that there's, another one or two rate hikes this year. We're already in a high interest rate environment,

relatively speaking. Even if they don't raise rates again, we don't think they're going to lower them. Rates are going to be at the level that they're at probably at least until early next year. I think that's going to shake some things out of the tree. As we saw with SVB, I think that businesses and consumers are reacting and will grapple with the high interest rate environment. And I just think the longer this goes on without a recession, the higher the odds are that something else happens in this environment of high interest rates and kind of a cooling economy that could push the economy into a recession. So I don't think it would take much for something geopolitical or a spike in energy prices or something like that to come along and derail things. So 40% this year and 57.5% next year. Yeah.

And can I just ask, is your sentiment improved or darkened? I think my sentiment for this year has improved a bit over the past few months, just as we keep getting good data. And it's for next year, it's kind of stayed where I've been for the past. Yeah, a few months. Okay. Okay. Bernard, what about you?

So I would say 30% odds for this year and then 50 for next year. And it's not just a debt limit that's made me a bit more optimistic, but I'd say the one statistic this week that really made me feel good was the quits rate, which ticked back down to 2.4%, which is actually, you had a month in 2019, where the quits rate was also 2.4%. And the reason why I focus on the quits rate, I know the markets were a bit upset after the Jolt's report because they saw the increase in job openings. But for me, quits are just a much better indicator of the labor market. There's a lot of issues with job openings.

It's very tough to tell how aggressively firms are really recruiting for a given job openings. But for me, quits are really more of an unambiguous sign of confidence in, you know, in the labor market, in the economy, in the ability to find better paying jobs. And the fact that it's coming down is practically where it was in 2019. It suggests that wage growth should start to ease in the next quarter. So it's still going to take time, but wage growth is going to start to head in the right direction based on the historical relationship between the two. And I focus on wage growth because the Fed is saying they're also plugged into wage growth

as the key mechanism by which to bring down inflation, especially service sector inflation. So if we do start to see wage growth coming down as presaged by the quits rate, I think that reduces the potential for a policy area by the Fed. Yeah, I agree. That's a great statistic. Yeah, the quit rate's really important. And it feels like wage growth is already rolling over, but that should really help. Is it per seized?

Is it per seized or presaged? I don't know, previewed or, yeah. What do you think, Matt? I think he's got that wrong. But anyway, go ahead. Prezaged. It seemed very, I don't know. Sounds very French.

It's very French. Okay, go ahead. Bernard, you had something else you wanted to say? Yeah, and I mean, also, I mean, quits directly contribute to very strong wage growth, especially in this period because historically the premium, the wage growth premium for switching jobs is about 0.6 percentage points, whereas, you know, late last year it was, job switchers were earning two percentage points more in which growth compared. Yeah, Chris has got his headcock.

I think what he means is that the growth rate is, yeah, 0.6 percentage points higher for a switcher than a, for someone who doesn't switch jobs. Okay. And now it's 1.2%. It hit as high as two percentage points. Two percentage points. Yeah, yeah, which is just something that you've never seen. And that has directly contributed to strong wage growth recently.

Right. Okay. That makes a lot of sense. So you said 30% and 50%. Yes. Yep. Okay, Matt, what are your odds? I echo a lot of what Bernard said.

I'm probably a little bit less optimistic longer term, but near term, I'd put it at 30% or a third maybe chance. And that's a function of household balance sheets. That's the labor market, labor hoarding, all of those things that the firm seems to be doing to avoid any kind of mass layoffs. I think those things are real and they're a buffer on any downturn. Longer term, I am maybe a little bit less optimistic about wage growth coming down. So I would say the Fed may have to push the gas pedal a little harder or tap the brakes, I guess, a little harder.

So I'd put that at 55% in 2024. I think there's going to be real pressure to do what they said. And even if 3.5% wage growth is just an estimate about what's compatible with inflation, I feel like they box themselves in and that's where things need to be. And they're not getting a ton of help from productivity growth. So I think there's a lot of pressure to keep raising, raising rates and eventually, again, something breaks. Got it. Got it. Okay, Chris, I've been waiting for your probabilities with intrepidation. Go ahead. So for 23, I'm with Marissa. I think 40%. It's come down.

Yeah, but still some significant headwinds there. And then for 24, I'm sticking with 65%. Okay. You're still there. Yeah. It hasn't come in. You're still pretty much where you've been. Pretty much.

Yeah. And for the same reasons. Kind of what Matt was saying, that economy remains strong enough, that inflation doesn't come in fast enough and the Fed has to keep on raising rates or something else comes along and knocks us off kilter. Yeah, I worry about the consumer, right?

The student loan repayments are just another weight on a lot of consumer spending. And the excess savings that we've talked about in the past, they continue to dwindle. So I'm worried that we get through the end of the year and really consumers start to be tapped out, especially if interest rates are, even if they're not rising, even at this level, I think it starts to weigh more and more on housing and autos and other spending. Yeah. Okay. Well, I'm in a third for this year and a half for next year, 50% next year. So I think I'm, is that you, Bernard, I think are very close to. Very close to.

Yeah. And with a, with a bias to lowering it. You know, I hear you, 50% obviously is a pretty high probability. That's, you know, any scenario pretty high. And I do think the most likely thing that does us in is the Fed feels like it has to continue raising interest rates to bring in the slow growth and bring in wages and price pressures. And the current fund rate target of just over 5% isn't in their minds enough that they have to keep pushing rates higher. Our terminal rate and our baseline forecast is just over 5% where we are. So that's what we expect.

But the risk is that they will have to, they feel like they will have to step on the brakes harder, push rates up more. And at some point, you know, they push so hard that it pushes into recession, makes it so vulnerable to anything else that goes wrong. And we, we go in. I want to throw a couple thoughts out there with regard to the Fed, you know, what they will do. And this is as opposed to what I think they should do, but what they will do. And that may be that they might not be as aggressive in raising rates, even if inflation remains a bit elevated. So what I mean by that, suppose the scenario is that when I'm using CPI, because everyone's kind of uses that as the benchmark, it's right now just under 5%. It peaked at 9% back last summer that I feel pretty confident.

Actually, I'd say highly confident. It's going to be close to 3% by the end of the year going into the next. just simply because of the slowing in the cost of housing services, which is tied back to rents, which have gone flat to down. So say we're hanging at three coming into 2024. Here's the thing. Would the Fed actually sacrifice the economy at the altar of a 2% inflation rate? When my sense is if you ask them what inflation target they would pick if they could pick it today is not 2%?

is probably 3%. They probably want a 3% unemployment rate. The idea being that at 2%, given the slow real potential growth rate of the economy, if the economy ever gets into trouble, they have to lower rates so fast to get it back down to the zero lower bound pretty quickly. And if that happens,

then they've got some difficult choices around negative rates or more likely quantitative easing and they don't like to do that. So if 3%, they're actual, what they desire for their tartary, Would they actually worry too much about getting us down to 2% that fast? I mean, couldn't they be a little bit more leisurely about it? And here's the other thing.

That's an election year. We're talking about an election. And, you know, the Fed is independent, yes, but it's a very political animal, right, at the end of the day. And especially it feels like this presidential election is going to be highly politicized. And they don't want to get caught up in that in raising race and pushing the economy. in effectively, potentially deciding who the next president is, right? I mean, would they want to do that? So given those two things, my thought is they might be surprisingly dovish.

You know, inflation may not be coming in as fast as, you know, they would like, but they'd be willing to live with it because, well, for the reasons I just gave. What do you think about that, Chris? a nice theory okay but I can't see it may very well be the right thing it may very well be the right thing to do

but to your point I think they've committed to this 2% if they back off I don't know that there's yeah I guess it depends what the trajectory is right if you're saying are we are we is it or a

it's three and it's like it's three but with a downward downward bent you know okay it feels like at some point in the future I don't know when that future is. It's not the next six months, but some point in the future, it's going back to something less than three. And by the way, again, do I really want to get back to two? I mean, really? Two and a half percent, maybe on the CPI. You know, I'm not sure.

I don't know. Any other else have a view on that theory? I just threw throughout there. I think they'll look at the trajectory. So if it's three or close to three, but it's been, even if it's slowly moving lower, particularly if core starts moving lower, core's been stuck for the past few months. But if that really starts moving lower, then I think they can say long and variable lags, it's working. We can stay where we are. You know, I think if core starts moving higher or isn't budging at all, then I think

that they act. Keep going. Yeah. I don't know. Actually, the other thing I wanted to bring up, have you guys looked, and Bernard, maybe you have, because you look at these CPI numbers carefully, the CPI excluding housing services, just take the housing services out? Have you looked at that? So it's a CPI for core services excluding?

No, no. Overall CPI, just excluding services. That's a... Exclusing housing. Housing services, yeah. cost of shelter. Oh, okay. You know, if you look at it, you should look at it.

Look at the year-over-year growth. It's now into the threes year-over-year and headed south, which again gives me comfort because I feel very confident the growth in the cost of housing services, the cost of shelter is going to come in. It's going to come in. It's already peaked, yeah. Yeah, it's already peaked. Anyway, okay, that was a great conversation.

And anything else to add? I guess I'll throw out, we are having our conference, an in-person conference in Wilmington, Delaware on June the 20th. And we invite you up. So if you're interested in attending, please get in contact with us. And we'll set you up with that. I think you'll enjoy, Chris, you're speaking. I'm speaking. We've got a action-packed agenda as well, talking about lots of different aspects of the economy and different threats to the economy of commercial real estate, what's going on in the banking system, consumer credit. We talked about student loans. So I think people will find it interesting. Okay, with that, I think we're going to call this a podcast. Thanks, everyone. Talk to you

next week.