Moody's Talks - Inside Economics - Dreadful Debate, Good Data

Episode Date: June 28, 2024

The team gives their impressions of Thursday night’s Presidential debate (hint: it involves existential dread). Then, the focus switches to the latest inflation data. Matt Colyar joins to give an overview of May’s encouraging PCE deflator report and what it implies for Fed policy. The episode closes with a roundtable discussion about the long and variable lags in which Fed policy effects the economy, and whether that means the central bank should start loosening policy now. Guest Hosts: Matt Colyar - Assistant Director, Moody's AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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 my two trusty co-host, Chris DeReedies and Marissa Dina Talley. Hi, guys. Hi, Mark. Hi, Mark. And let me introduce our other colleague who's become a regular Matt Collier, Matt. Happy to be here.

Hey, everybody. How did I do? That was good. That was good. I know. I had a pause there, but I got it, right? I nailed it. Yeah.

Appreciate it for the thought. Appreciate it. At least I could do, Matt. At least I could do for his pronounce your name. Literally the least he can do. Five years that we've been working together. But how long have we been working together? That's pretty close right before the pandemic's hit.

So I started January 2020. Yeah. Right. Yeah. Well, I finally got it, got it right. Yeah. We got a lot of data, but I hesitate with this question, but I'm going to just throw it out there. This is Friday, June 28th.

the day after the presidential debate. What do you guys? Any comments? What do you guys think of that debate? I'll call on you because you won't answer otherwise. Chris, what do you think? Oh, you didn't even watch it. I did not watch it.

You were at a client meeting. I saw the excerpts. You know, it doesn't sound like I missed much. Probably a good decision. Yeah. I didn't hear a lot of economics. Or I didn't see a lot of economics and what I read about. So, yeah, Marissa, did you watch?

I did, yeah. What do you think? That was a somber tone. Yeah, I'm sad today. You're sad. You're sad. And you know what guys? That's a big deal because he's never sad. I have a deep sense of existential dread now.

Right. Right. Well, any comment on the economic commentary in the day? date? I mean, there were there were only two parts where they discussed anything related to the economy at the very beginning when Donald Trump said that inflation was Joe Biden's fault, and they argued over that for a while. And then there were a number of policy questions that could be related to economics, but were never answered. So, yeah. Yeah. Yeah. Yeah, not much, very light on the policy front overall and not much on economics at all.

I like that. Well, I don't like the, I find it interesting the turn of phrase existential dread. Existential dread. It characterizes it. Hey, but actually, that's an interesting question. Who's to blame for the inflation? Is it President Trump? Is it President Biden?

Is it something else? actually I have a view on that but do you have a view? Marissa? Yeah, I mean, I think we we kind of spoke a little bit about this when we talked with Brendan and just in the other day, right? When we're in light of the presidential election model and the paper that you guys wrote on Trump's policies versus Biden's and FYI, we just recorded a bonus so-called bonus episode a couple days ago that will, I guess, play next week where we went over our. a white paper, our study on the macroeconomic consequences of Biden v. Trump. That's what you're referring to. Yes, right. Yeah. And, you know, it's always this knee-jerk reaction to either blame or

give credit to the person who's in office when things happen, events happen or economic events happen, but a lot of these things are a long time in the making, right? So, I mean, you had the pandemic. inflation was below the Fed's target up until the pandemic and then inflation, obviously during the teeth of the pandemic, those few months fell. And then you had the bounce back from the pandemic,

which started to ramp up inflation again. Donald Trump was president through all of 2020. Joe Biden was in office only, what, a month before Russia invaded Ukraine? No, no, no, no, no. Oh, 2022. Sorry, a year later. A year later.

Right. So there was some talk last night about how that was Joe Biden's fault. You know, Trump put that on Joe Biden, the invasion, the Russian invasion of Ukraine. So if you believe that, then that's what really sparked. That's what really kicked inflation into a higher gear after February 2022. Right. Inflation was headed up prior to that. but it was after that invasion that we saw gas prices, commodity prices spike, supply chain

got even more gummed up. So I don't think it was either one of their faults. I think it was these exogenous forces, both the pandemic and then you have geopolitical things happen that contributed to inflation that was already well on its way up. Yeah, that's where I would land. I don't think it's either of their faults. You know, I think it's the, you know, the pandemic and all the disruptions that caused supply chains and labor markets. And that bled into, began in 2020, but it really went into full swing in 2021 when we saw the shutdown of the vehicle industry, the chip industry, lots of other things.

And that goes right back to the pandemic. Hard to blame that on anybody. Right. You can't. And then the Russian war in Ukraine. crane. I mean, I don't, you know, that wasn't even on the radar screen. I mean, I can't, hard to blame that on anybody. So if those are the two main causes of the inflation that we, the acceleration and inflation that we experienced in second half of 21, 22 into 23, hard to blame

that anyone. If anyone's got some blame here, and I even hear I hesitate, but I'll just say it, is the Fed, right? Because, you know, they're the stewards of, low and stable inflation, and they botched it. I mean, I don't want to cast aspersions because it's pretty difficult to manage policy in the context of the pandemic. And at the time, the Fed was reasonably concerned that the pandemic was still playing out. And policy 101 says if you're uncertain about something, you err on the side of doing too much. And they did. But at the end of the day, they did too much. They waited too long to start raising interest rates. And that exacerbated the inflationary pressures that developed, you know, in 2022. But,

but you know uh trump and by and i don't i would not pin the inflation on either of them uh and and to to just reinforce the point that it was the pandemic and russian war this inflation problem is not a u.s problem it's a global problem it's all over the planet you know it's everywhere and it actually the moderation in inflation as the pandemic and russian war effects have faded has been the same across the globe you know what's going on in europe or canada or Australia, very same things happening here in the U.S. The only differences are based or due to measurement differences. But that's just testimonial that the inflation has nothing to do with, with policy.

It has to do everything with those two shocks. Chris concur. I was going to go there in terms of. You're going to go there. Yeah. If it truly was policy, you wouldn't see it in Europe and other countries around the globe, right? It is a global phenomenon. on, right? So it must be, ergo, it must be due to some other factor here, the external shocks we mentioned.

Right. Matt, any— Sorry, go ahead. I was just going to say that Trump, you know, did insinuate that all of the stimulus put out under Biden contributed to that as well, or exacerbated it. Yeah. I mean, I don't buy into that either. I mean, it clearly the American Rescue Plan, which was passed in March of 2021, one, you know, a couple three months into Biden's term, that was large. It was deficit financed. It was COVID relief, you know, $2 trillion, roughly speaking. And that did support demand. I mean, consumer spending came right back. The economy came roaring back. And inflation did pick up at that point in time. But as you pointed out, that as after a period when prices were very weak and falling and suboptimal, the Fed was for a decade trying to get inflation back up. And here it was. It was

back up. And it's hard to remember back in that point in time. But at that time, that inflation that we were getting was deemed to be good inflation because, you know, we were riding the ship on inflation because inflation had been too low for such a long period of time. So no one was complaining about that inflation. It was only when the Russian War kicked in in early 2022, and oil prices, natural gas, agricultural food prices all jumped and when it became, you know, real problem. So I, in my view, the American Rescue Plan is neither here nor there. Certainly not playing any role in the last couple, three years at all in terms of inflation. Matt, any views on any of this? I'm in agreement. I think if we need a villain, the fact that the Fed is still

buying long-term securities in early 2022, I think in retrospect is, yeah, inexcusable might be too strong, but I mean, that's a real mistake that kept financial conditions looser than they very obviously needed to be. But the thing they say about NFL quarterbacks, too, they get too much blame and too much credit or presidents and gas prices, inflation economy. I think that's all very consistent. I'm not sure that I agree with that statement. I, you know, I think QBs matter a lot.

Sure do. But if the defense is just letting, it's just switch cheap. I mean, there's, it's good commentary. It's easy. but I think it's overstated a lot in presidents or Nixon's similar. Okay. Any other tidbits? Matt, you watched the debate?

I wish I didn't. Right. Yeah. Anything else that you want to bring up, particularly from the context of the economy? No, but I was thinking, because if you remember, recall four years ago, some of our work, yours and Bernan, Ards was cited explicitly on the stage for the vice presidential debate. And one of the first few questions about tariffs and Trump's policy proposals, I thought we might get another nod there, but it was not to be. There was reference to the 16 Nobel laureates that signed on to a letter

stating that Trump's policies would be inflationary. I think that's what, I think that came up a couple three times. It did. Yeah. And Trump said that Joe Biden made that letter out. Oh, did he? I missed that. I was, I don't know what I was doing. Head down, though. Probably crying. What did you think about it? Yeah, what's your take me? I thought it was a train wreck. Yeah. On, you know, very disappointed and disheartened. I don't have existential dread. I'm just inherently, I just don't go there. I, you know, I'm inherently optimistic because I think we've, as American people have overcome so much over the, you know, our history. And I don't see any reason why that won't continue. you because, you know, there's so much good about what our system is about. But I have to say, I was very disheartened, very, very disappointing. But anyway, and again, just to reiterate,

we did produce a study, different scenarios around who's president and the makeup of Congress and what it means for policy and ultimately what it means for the economy. That way paper is out there in the public domain. And we had a podcast, a bonus podcast that will air. I think on Monday or Tuesday next week. So, you know, I think listeners will appreciate that. But let's go to the good news. And that's the economic data. My goodness.

Matt Collier, Matt Collier. I tell you guys, you got to forgive me here because I think I have a condition. I don't know if anyone in the house has this condition. I have a name dyslexia. I literally do. I really have this problem. Sometimes I can't even pronounce my own kid's names right. You know, it's like, I don't know what, I don't know what it is.

And I had a real problem with Greg and Craig. I don't know. Am I alone in the world with this problem? No. No. Okay. I hear you. I hear.

If anyone out there is listening and has this problem, please write to us. Mark doesn't feel so alone. I just, I have to know. I mean, I got all kinds of weird things going on. I can't smell. I can't smell. I can't smell. I mean, maybe a lot of people can't smell, no, with the COVID, but I can't smell.

I have a preaching to the choir. I haven't been able to smell for two, three years now. All right. We'll move on. What was what we were talking about? Oh, the good news, the economic data. Tell us about, and we're going to really soak this baby in. Tell us about the inflation number that came out this morning, Matt.

So soaking in probably means two, three decimal point type of analysis. Is that what I think? I'd go to eight if you need to be. But yeah, yeah. So this morning we got May's personal consumption expenditure deflator. It's the second inflation report that comes out each month. It's the one often referred to as the Fed's preferred measure, but comes often with a little less fanfare because we already saw the CPI.

We saw PPI. We have a sense of what a given months inflation. or change in prices looked like. So we had a good idea of what happened in May, and the actual data comes in, and it was really good. It was better than even expected if you look into the details. So the headline PCE deflator was flat from April to May. If we do look at those second, third decimal points,

it was actually a slight decline, so 0.01% from April. Oh, I didn't know that. They actually had a negative sign attached to it? Yeah, deflation in May. Oh, okay. Yeah, which comes with its own. So that's, we expected flat growth. That's what the CPI was.

They don't always move the same way, but directionally, they're often the same. So 0% growth for the headline PCE that lowers the annual rate from 2.7 to 2.6%. Again, in line with expectations. But the real story, and it's the inflation metric that the Fed cares the most about, is the core PC deflator, which ignores any changes in energy and food prices. And there, there was a 0.1% increase from April to May. Again, in line with expectations, but also rounded up here, we're 0.08% on the month. 0.083, just to be 0.083.

That is. I think it was, I'm making this up, but I think it's right. 0.0827. Okay. Okay. I'm making a .0827. No, I don't know what the next. It was whatever. I soaked this baby in.

Yeah, there was no existential dread in this report. No existential bread, no. The annual rate lowered for core PCE. So the Fed targets 2 to 2.5%, 2.5% is kind of the range held out. It's what the Fed wants the target for their price stability mandate. Wait, you said 2 to 2.5%. That's how I typically reference it. Is that too ambiguous?

US? Well, I didn't think there was a range. I think it's two. It's two. Yeah. Well, okay. It's two on the top line PCE. I mean, at least officially, it's the two on the top. I think, correct me if I'm wrong. But you go look at the Fed's policy framework, I think circa 2020, it targets two percent. Oh, there they had, they have this whole language around if inflation has been below the target of two for an extended period, then you need a period of above target going back to my earlier point about the American Rescue Plan and its inflationary effects. But I think it's a, correct me if I'm wrong, Chris, do you know? I think it's, I'm pretty sure.

I think it's two. Matt's making me the range. Yeah, okay. Yeah, I often, yeah, so maybe I've gotten too fast and loose with that. Okay. Let's just go with two. Let's go with two. It should be two to two and a half.

Maybe. It should be two and a half to three in my view, but okay. You're getting towards the range. Yeah. Either way, the. The step in the right direction, no matter. So 2.8% was the year-over-year growth in April, now 2.6% in May. So a really healthy step in the right direction, still above the Fed's target and my target.

But the improvement is the moderation and price growth there. I mean, that's the story, seeing prices start to moderate. Within core PCE, there's very similar to the consumer price index. There's certain components we look at, what's housing doing, what's helping, health care, housing, similarly, and then a lot of the same methods are used. Shelter prices, housing services, and the PCE deflator rose 0.4%. So, Matt, if you do the harmonized PCE deflator, harmonized meaning exclude this wacko owner's equivalent rent, the cost of homeownership, the implicit cost of homeownership, what was it?

It would be lower, but all of our kind of nitty-gritty data. that goes into that calculation isn't ready yet for me to have that figure. But as I recall right now on a year-over-year basis through April, because we just got the May data, it was around two. It was like, I think it was exactly two, wasn't it? Yeah, it was a little bit lower, so one seven for April. Yeah. Okay.

Okay. So now with the May data, it's probably going to be still below two. Yeah. Both of those poor, I mean, looking at the core or headline figure, if you take away owner's equivalent rent, which is. is given less way in the PC DeFleiter, but still a significant component. That rose faster. So removing it, you can see a swifter deceleration.

Can I also go ask you, because you know, you do this great work where you try to predict what the number is going to be beforehand based on all the other data. In the cases, the consumer expenditure deflator PCE, we do have a lot of data. We have the CPI, we've got PPI, I guess, import prices. And so you've got a pretty good fix on what's going to happen here. But you were saying it was going to come in at 0.13. And I know I'm parsing the data a lot, but I'm just curious. You said 0.13, and you're very accurate.

And it came in at 0.08. What caused that discrepancy? Do you know? Within goods, I haven't isolated it, but we didn't expect goods to fall by the 0.3 or 0.4% that declined from April to May. I know that was stronger than we anticipated, but haven't gone into, hey, is it? prices or non-durable goods within goods prices, but that explains the miss. Well, when you figure that out, I'd love to know. I'm just really curious, you know, why.

Why mean? And, you know, it's still point one. It's still rounds to point one. But instead of rounding down to point one, we, you know, rounded up to point one. So encouraging. Okay. Okay, anything else on the PCE that we're going to call out on the deflator? I mean, you know, it does.

Glenn, oh, I asked the question then I was going to answer it myself, but that's rude. That's rude. Let me turn it back to you. Go ahead. Answer that question. The only other component, I think, that's worth watching, and it's the only relatively concerning one, is healthcare prices. So healthcare is a bigger component within the PCE deflator relative to the CPI.

And that rose 0.7% from April to May, which is an acceleration. strongest growth in quite some time and, you know, labor costs for nurses, for other hospital staff. Famously, those hospitals had hard time staffing operations in the aftermath of the pandemic and just the way prices are set in the healthcare world. It means these things are starting to flow through to consumer prices now. It also means that it's not going to happen rapidly. This is slow moving. We don't expect healthcare prices to surge like used cars did in 2022, but it's, going to be a stronger source of inflation than it was in 2023, and we'll kind of stymie

a little bit of the improvement they were looking for. But as we see in May, not to the degree that progress will halt. This may be unfair question, but the weight of housing in the PC deflator is much smaller than the CPI. I think it's like 0.15, 15% of the index? I had 14% in that ballpark. So, yeah. And what's medical care? That's higher in the PCE than the CPI. Do you know that? Closer to 20, 21%.

20%. A little higher than the housing. So as housing inflation continues to moderate, that's a plus. But on the opposite side of that is this strong and last month's acceleration in medical care inflation. Yeah. Okay. Okay. I was going to say, you know, it does lend the data we got from May, CPI, PPI, and the PCE deflator we got to this morning.

In my mind, and this is a statement, I want to know if you agree with it, in my mind, this is strong evidence, not proof positive, but strong evidence that that pick up inflation we saw at the beginning of the year, that kind of fill up an inflation in January, particularly until us. February and March, that that was probably more measurement issue than anything else. Seasonal adjustment, timing, so forth and so on, not something like a fundamental re-acceleration inflation. Would you concur with that? I certainly would, yes. You would. Okay. So all the trend lines here now look pretty good in terms of inflation. We're on the on the on the thing the in the measure that the federal reserve is targeting the consumer expenditure deflator 2% target we are now at 2.6% that's where we are right. And I think if I'm just memory serves and here again I could have it wrong correct me.

I'm wrong at the peak of inflation back in 2022 when Russia invaded in Ukraine. We got that spike in oil and gas and agricultural prices. We were at 7% I believe you're over year. Right. So we've come a long way. And we're, I would say, it's fair to say we're within spitting distance of that target. And if you exclude that, that crazy OER thing, we're there. Anyone disagree with what I just said? No. Okay. All right. Fair enough. We're going to come back to the Fed. Oh, we're going to come back to the Fed and talk about what the Fed is doing, this higher for longer interest rate strategy. We're going to do that after the, we play the game. But before you play the game very quickly, there's a plethora of data. Oh, maybe this is a good time to play the game because there was a plethora of data. I was going to say, was there any of those data that you want to call out? But maybe you're going to call it out in the context of the game.

So why don't we play the game? Everyone on board with that? Okay. Yes. The stats game. We all put forward a stat. The rest of the group tries to figure it out with clues, deductive reasoning, questions. The best stat is one that's not so hard.

We never get it. And I should say we cut out. We played the stats game when we taped the Biden v. Trump macro bonus. But that was, that game was so bad. We cut it out. We don't really edit, you know, generally don't edit. We took it out because they were crazy hard, the stats that were people. I mean, like, they were like ridiculously hard.

They had Brendan on there talking about data in Canada. And orderly Canadian population data. Gosh, it was like insane. Although I did get one right off air, remember? I did get that one right, but no one heard that. So that was useless. But anyway, we cut that out. So we're going to play the game here.

And it was we don't want to be too hard, but we don't want to be too easy. And we want to be apropos to the topic at hand or consistent with recent data. So, Marissa, you're up. What's your stat? My stat is 3%. 3%. The economic statistics that came out this week? Yes.

In the GDP report? No. In the durable goods report? No. But I almost went with that. In the inflation report? No. Oh, my gosh.

All right. Consumer spending numbers that came out today? Nope. Income. Income. We're going to wear her down, baby. You're going to get it eventually if you just name every single release. Yeah.

Well, 3% is a pretty common number, right? It is. Yeah. I know it's not the personal saving rate. That's 3.9. I've used this statistic before. Okay. Is it a government stat?

No. Oh, okay. Well, that helps. Oh, okay. Is it a house price measure? No. Okay. Because a lot of house prices came out this week, including our own, right?

And by the way, Vero Beach house prices are doing, I don't know if you noticed, Chris. I did not notice. You should go, look, they're still moving north. They're still moving north. Anyway. Do we covered on EV, Marissa? Yes. Yes.

3%. Not the challenge your report, nothing. No, that comes out next week. I don't think that that came out this week. That's a Marissa favorite, though. It is inflation-related. Okay. Well, no wage growth numbers came out today.

They did. They did. State wage. They did. State wage. But that's not what it is. Okay. Do you want to get us another hint? I guess we're stymied here. So can't give us another hint. All right, then put us out of my right. Why don't I just tell you what it is? Tell us what it is. Yeah. It is the one year ahead inflation expectations measure from the University of Michigan Consumer Sentiment Survey.

Of course. And the reason I picked this is because this fell pretty dramatically over the month. So in May, inflation expectations for a year ahead were 3.3%. And it fell to 3% this month, which is a pretty big decline and puts inflation expectations back to kind of where they were at the start of the year. Can I ask, is that number of 3% consistent to where we were pre-pandemic or is that still elevated compared to pre-pandemic? Do you know?

That's a good question. I'll look it up. Okay. I'm curious. It tends to be high, right? I think it's still a little on the high side. I would imagine just because this tends to lag actual inflation, right? So, yeah, I'll look it up.

Okay. Good question. Okay. Matt, you want to go next? Sure. I can't tell. Were you, like, implying that we should make this easier? Is that where you were with the presidential?

No, no. I was just saying how miserable the game was when we tried it, you know, we had it so bad that we cut it out because it was painful to listen to it. Wow. I enjoyed it. actually, but I don't think the listener would enjoy it. Yeah. I actually had a lot of fun. We were making fun of both Brendan and Justin because they're, I mean, that's,

Justin's statistic was equally as wacko as, as of Brendan's. Yeah. That's funny. Yeah. Anyway, go ahead, Matt. 0.5%. 0.5. Go ahead, Mercer.

Personal income growth. Okay. Maybe I went too easy. The, a little more specific. Compensation? No, Mercer's like there, but there's a few more adjectives, I think. Disposable personal income?

Yes. Inflation adjusted. It's a real disposable income, rose. Oh, yeah. 0.45, but 0.5%. Man, that was my hard one. 0.4. You're going with the double digits there, the decimal places today.

That's the thing. Why did you pick that one? I'm just, I'm, the Fed's second mandate or the other mandate of full employment. The whole timing of when they're going to cut rates is it's either going to look bad or good in retrospect based off of how much slack they allow in the labor market, how much pressure they allow businesses and consumers to come under before making a move. So I think that's an encouraging statistic that Real Disposable Income grew as fast in a month

as it has since early 2023. Strong job growth. We saw healthy income growth coming, but it's, you know, there's other data points that are suggesting that the labor market is softening. Income growth is slowing. Wage growth are slowing and people are coming under pressure. But I think that's a welcome contrast there. And unlikely to be sustained, but certainly a strong data point.

I have to say the economic data this week were like, you know, fabulous right down the fairway, right? I mean, we talked about the inflation number, but, you know, the income number you just mentioned, you know, the inflation expectations numbers back in GDP. I guess GDP was the one disappointment, but it was just a revision, you know, so no big deal there. Consumer spending, real consumer spending, I mean, because we're not talking two significant digits, 2.45% year over year, real consumer spending growth, that's exactly equal to the growth rate we've been experiencing for eight solid years, four years since the pandemic, four years prior to the pandemic. It just feels like really good data.

The numbers are really, really good. Anyway, Chris, what's your stat? Let me bring you back to reality. Oh, really? Okay. No, no, no. It's not, it's actually, I think of it as a good statistic as well. Yeah.

0.3%. This one's really hard. If you get close, I'll give you points. Okay. Oh, just 0.3? 0.3%. Yeah. Points 3.

Yes. Is that real, that's real consumer spending growth month to month. And that is 0.3. Okay, but that's not. That's not your point three. That's not my point three. Is it a government stat? No.

Okay. So it's a private sector stat. Yes. Came out this week. at this week. House price related? Oh, yes. RMA, Moody's Analytics, HPI,

no. Increased for the month of May? No, that was point two, I believe, so. 0.2. So it's another index, though, FHFA, purchase index. It's not an index. Oh, it's not, it's not, but it's related to house prices. Yes.

But it's not a growth rate in house prices? Nope. No. 0.3. Is it? Is it a new home sale? No, it's not a government state. It's not new home sales.

No. If we get close. You are so close. I'm just going to give it. Okay, go ahead. 0.3% is the discount that the typical home buyer is paying relative to the asking price of a home. Oh, that sounds like nothing. It's 0.3 or 3?

0.3%. 0.3%. 0.3. So there is no... But it, well, it is a discount. Below asking? This is the first time it's been a discount since the start of the pandemic. Last year, it was flat.

People were paying the asking price. Two years ago they were paying 2% on average above the asking price. So this is the first month, the first observation where we actually have a discount, right? People are actually paying less than the asking price on average, right? So that's an indication of a softening market here. Seems as though prices are turning here. Where do you get that data? I don't know that.

It's a redfin. Redfin statistic. Oh, redfin data. Oh, I didn't know that. So we have a time series of that? We don't. They do. Oh, they do.

I mean, yeah, we bank. It's in the public domain, though, right? It's in the public domain. We don't bank it. We don't bank it. Oh. Can you send me, I'd just love to see it. Can you send me the link to that?

Sure. Okay. Yeah, very curious. Was 2% the peak premium or above asking? Yes, that's right. Yeah. Of course, on average, right? So there's variation.

And did they have that across the country or is that just national stat? They do have it across the country. That's national. I think they have it by market as well. Oh, you really? I think they go down in the MSA with that. If we're looking at thinking about the same interface that they have, you can look pretty comprehensive.

Yeah, yeah, I think it's there. Oh, interesting. I guess going kind of in the theme of pricing and, you know, some softness here, I think. I view it as a positive that the housing market may be cooling off, right here, cooling off. Yeah. Well, we came out with the Moody's Analytics, the repeat sales, HPI House Price Index for the month of May. And that shows similar cooling, doesn't it? In terms of growth.

Yeah, yeah. That was 0.2% month to month, 5.77% Matt for a year over year. It's a pretty strong, yeah. Feel pretty strong, but it is, you know, decelerating relative to where it was. Yeah, and I met Matt Walsh, our colleague who puts that together. Of course, we do this for metro areas and lower geographies, and he was looking at it by state. And most of the strength, the strongest house price growth is actually in the Midwest and in the northeast, right? And so what's going on there?

Why is that the case? Seems like it's low inventories. Okay. That's not a lot per sale in those areas relative to the other parts in the country where also in the sell. You had some more building. There's more construction. Another statistic that came out this week is that supply of new homes is at a 16-year high. right so $181,000 home so you know in other markets there is growing supply right that's keeping prices perhaps from appreciating

okay that's a good one uh i didn't even know that data existed uh okay here's mine i don't think it's too hard two numbers 100.4 and the other is 68.2 confidence okay conference board and um michigan michigan Yeah, okay, that was too easy. That was too easy. But I have a point, and that is the 100.4 on the conference board survey of consumer sentiment is almost exactly equal to its average over time. And conference board has been doing the survey monthly back into the 80s, so for a long time.

And, you know, it's been bouncing a little bit above, a little bit below, but it's been hanging in there around 100. The University of Michigan survey, which is they've been doing this even longer. than conference board back into the 50s. 68.2 is really low. The average is 85. I did the calculation going back to 1980 to be consistent with conference board. And it's more than a standard deviation below the average.

The current... So if you looked at the University of Michigan survey, you'd say consumers are very pessimistic. I mean, it's consistent with sentiment that existed in the financial crisis is the teeth of the pandemic. It's been lower, but it's right in there with, you know, kind of those very dark periods. Whereas if you look at the conference board survey, it's saying, you know, consumers aren't feeling that great, but they're not feeling that bad either.

They're kind of doing their thing. And in my view, the conference support survey is much more consistent with the reality of what's going on, going back to consumer spending. Consumers are doing their thing. They're not spending with abandon. You know, they're not feeling fantastic. but they're not in the doldrums either. It's not like they're cutting back. And so I find the conference board survey useful

and the University of Michigan survey not at all useful. It's very counterproductive. And I think there's a couple things going on. One is that you miss surveys transitioning from a phone-based survey to an online survey, and that's complicating things in the recent months. And the other is that they do ask the respondents

whether the Republican Democrat or independent. Now, they do that after they ask all the other questions, but this is a rotating panel and folks that took the survey before, take it again. And my sense is that they're looking at things to their own political prison. Because if you look at the, you miss data releases the survey respondents, survey data based on party affiliation, if you're a Republican, and you're feeling a lot worse than if you're a Democrat. And that switched as soon as Biden became president.

And I'm sure it would switch back if Trump became president. So I just, I know people in particularly media, has focused a lot on you, Mish. I just, I wouldn't use it at all. I think it's close to worthless. So again, it's counterproductive in terms of trying to understand what's going on. Any pushback on what I just said there? I just said a mouthful. Well, conference is still well below 2019 levels, right?

Yeah, it's below 2019. Yeah. Yeah. Consumers may be okay relative to history, but relative to where they were prior to pandemic, they're still feeling pretty. Yeah, they're not feeling as good as they did prior to the pandemic.

Yeah. Yeah. Why does it? Miserables not the word, though. They're feeling like they typically do. I mean, if average is average. Across, yeah, across the span of history. And that's the other thing, you know, you,

people, when you look at like poll numbers and surveys of voters and what's bugging them, you get this, the kind of the conventionalism is that consumers are, you know, are very, have very, very upset. They feel, they feel like the economy's performing very badly and, you know, they don't like what's going on. But if you look at the conference board survey, it's saying, you know, it's, you know, not great, but it's not bad either. So, and that's, again, that is consistent with their behavior, right, with the consumer spending.

Okay. I did want to, and we're going to keep this podcast short, because again, we had that bonus podcast for people to avail themselves of, but I did want to go back to the Fed and, you know, the Fed's higher for longer strategy. They've been keeping the fund rate target at five and a quarter of five and a half percent now for, I think, almost a year. And now it came after a year and a half of very aggressive interest. rate hikes and quantitative, they went from quantitative easing to quantitative tightening,

which they're still doing to this day, letting the securities, Treasury and mortgage securities on their balance sheet kind of roll off and prepay. And, you know, one of the arguments, increasingly my view is that that's a mistake, that they've effectively achieved their target, full employment, a 4% unemployment rate. And we talked about inflation, how close that is to target and all the trend lines are pretty convincing that it's going to head back to Target in a, in a, in a, in a, uh, in a, uh, orderly way, in a timely way. Uh, but then the question becomes, well, okay, I hear you. But why should I cut the economy is fine? You know, you talked about how good the economy is. Why, what's the rush? Why not keep the funds rate, you know,

target here for a little longer and make absolutely sure inflation goes in. Uh, and I guess the question to the group is, what do you think of that argument? And how do you feel about that? You know, does this give the Fed latitude? Or is the Fed taking a real risk here in a risk that's increasing over time because these higher rates are weighing on the economy and, you know, what are the channels through which it's weighing on the economy? What's going on here? Chris, do. Chris, you have a view on that question? Yeah, I do. I think there is a risk. I think it comes down to your view on the presumed long and variable lags in monetary policy, right? So if there are lags, it takes time for these cuts or hikes to filter or make the way through the economy, then certainly the Fed should be looking ahead, thinking about the policy to come, rather than reacting too much to the current conditions, right? If they wait too long to really wait for the data to make. materialize and show the inflation rate that they're targeting, it may very well be too late

for the cut that then comes along to actually have a positive effect or a supportive effect on the economy. You may have already sown the seeds of weakness. Right. So I think that's really, and there's been considerable debate about the lags of monetary policy if they still exist, if to how long they are. So I think that's really where it comes down to the crux of the the argument. If you don't believe that there are lags in the monetary policy, then sure, you may very well say, what's the rush? Just wait to see what happens. Give us an example of why the monetary policy works with long and variable lags. Like, what's the mechanism through which that happens? Why will interest rate, interest rate hikes that the Fed engineer back in 22,

going into 23, still have an impact on the economy today and going forward? Yeah. I, I, I would say one example would be just the lags in business and consumer behavior, the planning that it's required for certain projects, right? If it could be a house in terms of the consumer, a big expense, right? It's not as though you're, that is an immediate process. You're going to start looking for a home. There's a, you know, time to originate a mortgage and whatnot. And so those interest rates that you see today and those that you anticipate are going to affect your behavior, certainly on the business side as well. right is not as though you snap your fingers and uh generate a lot of investment or move forward

with a lot of investment so there certainly are those lags in terms of uh the planning if you're looking at the interest rate environment today and you're seeing that it or you're expecting that it's not going to improve all that much uh in in the uh in the near term you may hold off on certain uh projects right so it certainly could uh impact that type of activity uh going forward Got it. What do you think? Are there long and variable lags in that the Fed's taken a risk here, keeping the funds rate as high as it is? Yeah.

I think that they are taking a risk. I think it's both from the consumer side. I mean, we see what's going on in the housing market, right? The housing market is pretty much frozen because of the high interest rate environment. It's keeping people from moving. that has implications down the supply of housing for people looking to buy first-time homes. They can't find any because people aren't moving to free up those homes. There's a lot of economic activity associated with the housing market.

So that's a chunk that's kind of taken out of the economy. And then businesses, business planning for investment and businesses that have to take out loans, right? they're looking at a higher interest rate environment. They may not need a loan or they may see that they're going to, you know, be able to refinance or a loan is going to come due in a year or two years. And now they're facing higher interest rates. So things don't always happen automatically, right? It's not like, like let's take on the short side, like a credit card where your interest rate can adjust very, very quickly, month over month, that can adjust. something that's a longer-term loan, you're not going to realize that adjustment until,

you know, that loan term is up, right? So a lot of businesses and households face this lag. I think as they're holding interest rates at a higher level here for longer, then I think businesses will come to realize this higher interest rate environment eventually. And the longer they're keeping them there, the more opportunity there is. for businesses, banks, the financial system, to start really facing these higher rates head on. So it's just about the volume moving through the system where, you know, I think there's this kind of trickle effect as it goes. But now that we're at, you know, a year of rates above 5%, the short-term Fed funds rate above 5%, more and more portions of the economy are going to be

facing these rates. Yeah, kind of the rollover risk that as debt starts to roll over, tourism has to be refinanced or you have to go get new debt. It's rolling over at a much higher interest rate. The longer rates stay up, the more pressure that puts on everyone in terms of trying to shoulder those higher interest rates and the higher debt payments. You can see that most obviously in commercial real estate, right? And we're starting to see delinquency rates and default rates finally significantly to rise, you know, for office and multifamily in particular, right? Matt, do you have a perspective on this? I mean, the long and variable acts do you agree that, you know, the higher rates here are, you know, increasing the risks that something goes off the rails?

Certainly. I agree that it's a debt maturity story. the low the share of debt that was at low locked in rates was never going to be higher than it was in late 2021 early 22 that that share has only gone down as debt matures and you have to uh roll it over at a much higher rate so that's happening every day and that makes that that's that's the long and the variable part um and also just add that similar to what chris said it's if you wait for for a downturn to happen it's it's too long it's too late. So for the Fed to wait for a spike in the unemployment rate, a spike in weekly claims for unemployment insurance. The momentum is already been zapped out of the economy. And it's a much more dire situation, especially if you contrast that with what we are saying about business and consumer sentiment.

There's, in my opinion, conference board is one thing. I think there's different elements where we really do see a kind of a pessimism to me that I think just suggests a brittleness. So once bad news does happen, I think there's a hunkering down that's going to be pretty dramatic and maybe underappreciated. So moving before that happens, I think is really important. Yeah, I totally agree. I think the Fed's playing with fire here and the heat is starting to build with each passing month. The pressure is building and, you know, something could go off the rails, you know, pretty quickly.

I think it can change very quickly. I mean, one area where you haven't really seen the kind of the effects, the long and variable lags, is in asset markets, right? You haven't seen it. Stock prices are at record highs, you know, credit spreads in the bond market or paper thin. We talked about housing values, you know, at record highs. And that's one reason why consumer spending is held up, right? Because the wealth effects that are playing a role here.

people have drawn down their saving rates below what they were pre-pendemic, in part because they feel wealthier. But those markets can move pretty fast, right? I mean, you know, stock market, the bond market, they move in an instant. The housing market more slowly, but the financial markets can move pretty fast. And, you know, at some point, the markets are going to kind of give up on the idea that the Fed's going to cut rates and say, oh, we've got a whole different view here, you know, this isn't going to happen anytime soon, and they, they could bail. And, you know, particularly vulnerable now because valuations are so high. I mean, if you look at any kind of pride and true measure of valuation, price earnings multiples or credit spreads, they're,

these markets are really richly valued. I don't, you know, even arguably, you can feel kind of speculation creeping in in in different ways, you know, kind of game stop. and Donald Trump's stock, you know, that's very speculative. So kind of feel it happening. And I think that could change quickly, you know, very, very quickly, if the Fed's not careful. And to what end? Where they've achieved their target? I mean, we're at a 4% unemployment rate, a 2.57% core PCE year over a year, exclude the wacko.

I'm going to call it a WACO-O-E-R, exclude WACO-E-R, and we're below 2% were there. We're done. We should move on. Anyway, okay, let's end it this way. I kind of threw this in in a podcast one or two, three weeks ago was, what's the probability of recession again? And I said my probability has started to move back up again. Probability is recession in the next year.

I had been as low as 20%, just for context, the unconditional probability of recession, is 15, so a little elevated. Now I'm back up to 25%. So very quickly, Chris, where are you on that probability of recession? I think it was at 33. I'm going to stick with 33. 33. Okay, Matt, what's your probability recession? I'll go right under that 30%. Just about where I've been for a while, for the six. Isn't the prices right or whatever? But I will, the consistency. I think of all those polls we do on our research or macromaties. I think I've been 30% for like two years. 30%. Okay. Fair enough. And Marissa? I'm at 25.

25? Okay. All right. We may have to start playing this parlor game again, just given the risks, I think, are building with this hire for longer strategy. And everything else is going on, including the existential dread created by the election. Okay. With that, I think we're going to call it a podcast.

Guys, any last words? You want to share it? You want to say anything that would cheer anybody up? We're a very lugubrious bunch. That's a good word. I'll say that I thought the PCE report was unambiguously positive. I'll just go on record. Oh, that's really a real stretch on your part, Chris, I'll have to say.

All right. Unambiguously. Unambiguous, unambiguous, possibly. Okay, with that, everyone have a good Fourth of July. We'll talk to you next week. Dear listener, talk to you soon.