Moody's Talks - Inside Economics - Economic Threats and Opportunities in 2022

Episode Date: December 29, 2021

Mark, Ryan, and Cris discuss the reasons to be concerned and optimistic about the U.S. economy in 2022. 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 Sandi, the chief economist of Moody's Analytics. I'm joined by my two colleagues, Ryan Sweet, Ryan's Director of Real Time Economics, and Chris DeReedy, Chris is the Deputy Chief Economist. Hi, guys, how are you guys doing? You're all right. How are you, Mark? Good. I'm good. This podcast is one of our special podcasts. We did one, I guess, a week or two ago on inflation, the history of inflation.

And we did that for the Thanksgiving week. And I got rave reviews for that. Yeah. Did you hear a lot of people love that podcast around the history of inflation? Yeah, same here. People have reached out on LinkedIn. Really? Interesting.

That is interesting. So we need to digest that and continue on with that. And that's what we're going to do here. A similar kind of podcast for the, this is for Christmas week, because we're not going to tape live. So we're not going to do any statistics in this podcast. podcast. We're just going to focus on the topic at hand. And what we decided to do, I think it's apropos, given it's the last week of the year, is to consider 2022 the, we provide a little bit of context what we think the most likely scenario is for the economy, the kind of the baseline

economic outlook in the middle of the distribution of possible outcomes. Then we're going to really focus on the risks and downside, maybe upside, but we'll see where people's minds are on this one. But that's the plan here for this particular podcast. So who wants to lay out the baseline case? You know, what's the most likely scenario? Chris, do you want to do that? Or Ryan, who you want me to do it? Who wants to do that? Anybody? You should do it. You just did the forecast. Yeah. It's all fresh in your mind. Did I just do the forecast? What are you talking about? Oh, this weekend, this past weekend. Yeah. I guess I did, yeah. Yeah, you might tweak it. Oh, the caveat is.

Yeah, has the forecast changed? Is the question? Yeah. I shouldn't be laughing. It's so depressing. And we are recording this. I guess we should disclose. This is prior to the Jobs Friday.

So this is before November's report is coming out. Yeah. And also, because this is going to air in a couple weeks, maybe now three weeks, what we know about Ammocron will be hopefully well advanced. compared to what we know today, which isn't very much, actually. All right, here's the baseline as we know it. Just quickly, a couple numbers. GDP growth, calendar year 2021.

That was going to be coming up about 5.5%. For 2022, we're expecting 4 to 4.5%. So another solid year. So that means a lot of jobs. We're going to average monthly job growth between now and the end of next year, probably close to $500,000 per month, you know, maybe a little less than that, because unemployment's going to come in pretty fast. The unemployment rate is $4.6, and I would expect the unemployment rate to be well below four, maybe closing in on 3.5%, which would be kind of consistent with full

employment by the end of next year going into 2023. Inflation, consumer price inflation right now, obviously very high, over 6% year over year. I expected to be about half that by the end of 2022. Of course, the Fed's target would be something around 2.5%. The Fed will be normalizing monetary policy, so they'll end their taper sometime next spring, early summer, begin raising short-rate soon thereafter, probably two, three rate hikes next year. I think we have two in the forecast. we might have to put three in, depending on how things go here. And for the Fed to normalize short-term rates by mid-decade, that would be around a two and a half percent federal funds rate target.

Ten-year treasury yield, our favorite forecast to debate. Right now, we're sitting at 1.5 percent down because of this Omnichron scare. And we expect at the end of the year, about one in three quarters, at the end of the years in a few weeks from now, so I don't know if that's going to happen, given what's going on with the virus. See, Chris, that's an admission. Well, geez, it is. Okay.

And then I'd say by this time next year, you know, at least two in a quarter, you know, maybe a little bit north of that. So that's kind of the numbers. And the idea is that, or the kind of the basis for that is that, well, here's the key, here's the key assumption, the pandemic. We are assuming, or I'm assuming, we are assuming that the pandemic will more or less continue to wind down. That doesn't mean there won't be more waves of the virus.

There will be. Amacron is, I keep saying it's Omicron, right? Omicron. Omicron. Omicron. Omicron will, you know, seems like that's going to be a wave that we're going to have to deal with. Not that there won't be future waves.

That would be polyanish. think not, but that each wave that we suffer will have, will do less damage to the health care system into the economy than the previous wave. That, you know, vaccinations continue to improve, boosters, antiviral drugs, other mitigation efforts limit the impact. And that we adjust economically, you know, supply chains, you know, we've kind of figure out where the worst bottlenecks or are we kind of work on those, fix those, or at least navigate around them more gracefully. Labor markets kind of repair themselves. You know, we're just better at, we don't have to shut down, you know, we're just better at navigating through. That's a key assumption. Also assuming we're

going to get another fiscal package through Congress and the administration here, we'll probably know that also by the time this air, you know, we're assuming 1.75 trillion in additional support. that's the package that's before Congress now on increased social spending and tax credits on social programs that's roughly paid for with the tax increases mostly on businesses. So that's the other key assumption that goes into the forecast. A lot of growth from consumers. There's a lot of pent-up demand still, and there's a lot of excess savings, so that should help support things. And if the pandemic does wind down to script, that means supply chain should iron out, and we should see some inventory rebuilding. So,

you know, you kind of add it all up. It makes for a, I'd say, you know, a good year. 2022, we're looking for a relatively good year. We'll be back to full employment, you know, if not by the end of the year, certainly by early 2023. And we can debate what that means, but, you know, roughly speaking. So I'd say that's a pretty, how does you characterize that? I characterize that as a pretty optimistic forecast. What do you say? Optimistic, but realistic. You, okay. All right. So you feel pretty good about that forecast right now. sitting here today, even with the omicron?

Omicron, Omicron, Omicron, Omicron. I gotta get that in my mind. Omicron, variant. You still feel variant, you feel pretty good about this. Yeah. Okay. I mean, the end of the year might not, end of this year, may not end on a great note.

Maybe we get off to a slow start next year, but once we get through this wave, we'll be off and running. Yeah. Okay. And Chris? Yeah, I think that's, I think it's a good forecast. I think it's certainly faster than the average, right? So it's still a very strong year by historical standards.

Yeah. And I guess it's the other point to make is we really have not, that's been our forecast for like a while, right? I mean, really our forecast for 2021 and 2022 has been pretty much unchanged since the start of 2021, I think, more or less. you know, maybe took a little steam out of 2021. We were, didn't count on Delta way doing as much damage. Maybe a little stronger for 2022 because we would expect some catch-up.

But, you know, really broadly speaking, the contours of the forecast have been, I think, largely on change for a while here. Yeah. Okay. Okay. Anything else about the baseline? I think we should point out any other numbers, any other aspects of the outlook that we should point out to people? No?

No, I think you covered it all. Yeah, I think it's some moderation in prices, so inflation, and then also some moderation in asset values as well, right? So growth in house prices and stock prices, it's also baked into the baseline as well. So kind of a glide path towards an equilibrium. So that's a key assumption, I would say. Yeah, that's a good point. So stock prices, housing values.

credit spreads in the bond market, you know, asset markets are pretty, feel pretty juiced, and we're assuming that as interest rates slowly rise as the Fed takes its foot off the accelerator, that essentially these markets go flat for a while and let everything catch up. Corporate earnings catch up with stock prices, incomes and rents catch up with housing values. But we don't see any, there might be a correction, but it's not going to. the last very in stock the stock market but it's not going to last very long and there might be some price declines in some of the really juiced up markets you know like a boise or a phoenix where prices have risen by a third over the past year when i see some price declines as you know

work from anywhere kind of unwinds a little bit here um yeah okay that's a really good point do you know where we are relative to consensus yeah yeah where are we relative to 2022. The consensus is 3.9% for GDP growth. Oh, okay. So we're about half a point above that probably. Correct. Yeah. Any other consensus? What about inflation? What's the inflation? Inflation consensus. Do you know? 3.7 on the headline CPI. 3.7. That would be pretty consistent, I think. You know, we were at six and I said it's going to be at three by the end of the year. Yeah.

Yeah, maybe we're a little on the high side relative to consensus. Unemployment rate, 4%. Average monthly job growth, 314,000. Okay. Oh, that's a little less optimistic. Yeah, a little less optimistic. Yeah, a little less optimistic. On jobs.

Unemployment sounds about the same. Maybe a little less optimistic. A little less. Yeah. Yeah. Okay. So not, we're, I guess, it feels like, I guess, broadly speaking, you'd say we're a little more optimistic on growth than, then the consensus view. But really, you know, not much more.

Not much more. Yeah. Not material anymore. Okay. Okay. Okay. Good. All right.

Okay. So that's the baseline. That's the most likely scenario. And, of course, boatload of risk around all of that. So I think the way I would like to do this is just might one of us go and. identify, I think we should, you know, my, let me ask, let me have, before we do this, let me ask you the question, are the risks to that baseline symmetric, meaning are the downside risks?

Okay. So what are they? Yeah. Downside risks or greater? I don't know if we have enough time for this. Really? We're going to need a long time. Really?

Why? No, because I can just, we can just, between the three of us, we could probably rattle off five. 10 key downside risk. Oh, I see. Right. So you're saying the risk, you're saying that the downside risk predominate compared to the upside risk. Yeah.

Okay. And the reason being the pandemic fundamentally. Yeah. And all the downstream effects of the pandemic. So you can go a pandemic to supply chains, to inflation, to Fed policy errors. There's lots of downside risk. And four and a half percent grows under the baseline is already quite optimistic, right? So can I really get much better than that?

That's a great point. Because we're assuming we get back to full employment. You can't beat that. It's pretty hard to beat that, actually. Right? Yeah. Almost by definition, you can't. I mean, you could, but that means then you got higher inflation.

Exactly. By no reigning economy. So you're kind of limited. You're kind of limited on the upside here. That's right. Okay. Well, think a little longer term. Yeah, yeah.

So then the risk become more symmetric. Well, I think there are some upside risk to next year that we can talk about. Certainly, certainly. You can come up with a lot more downside. No, yeah, exactly. Yeah, right. By the way, with this pretty cool risk, what I call risk matrix, because it's so hard to keep in my, at least in my mind, all the downside risks.

And, you know, of course, a lot of the folks that we work with, they're primarily focused on the downside. I don't really participate on the upside, so they want to know more about the downside. And this matrix shows in the horizontal axis the expected severity of the risk, which I kind of think in my mind is like a kind of a present value of the economic loss if that risk were to come to fruition or shock would occur. And the vertical axis, the y-axis is the probability of that shock, and you can see all the different risks that are there.

I have that in my mind's eye. Maybe we can provide that on the YouTube or something with that. this video. People might appreciate that. Okay. That's on the Economic View website. Oh, is it? Do we it up there? Not my version, I bet. Not your version. I was going to say, I was a little nervous about this podcast because your risk matrix differs a little bit from, not a lot, not a lot, but I think I just have a lot more on there. You know, I spent a lot of time on that matrix. It really helps me think about, you know, what these risks are and where they kind of land in terms of, you know, probability of happening and what would the macro consequences be if they do happen?

And we update it every month. So it's very helpful to think, you know, how these risks are evolving. And so you'll see how they move on our website. So Chris and I will go back and forth. And recently one, this is not, I guess it could be a risk for 20s. You and Chris go back and forth. So you don't include me in this country. You're busy.

I don't want to bug you. Is that what's going on? No. All right. So we added cyber attacks recently. Oh, good one. Chris came up with that one. I thought that was an excellent one.

Yeah. I would have kind him up. with it if you had invited me. I mean, definitely control. Yeah, but you know. You're more than welcome. It's just an email. It's not like, you know, we're having coffee in itself. Okay. All right. I hear you. I feel like I'm being left out. I'm just saying. No, not at all. Not at all. Welcome to a party. No, don't worry. I'm good with, I'm good with you guys doing it. And I'll go down my own

path and we'll come together every once in a while and see. Because that might not be a bad thing to do anyway. I really don't think they're going to be that different. I don't think so either. Yeah. All right, well, let's, since the risks are, are indeed for 2022 skewed to the downside, let's begin with that. So, Chris, why don't you go first? What's your downside risk? And once you lay out for that risk, the, you know, kind of your baseline view and then what the risk is and, you know, how you're thinking about it. Well, I'll give you a meta risk. first. A conceptual risk that I think of, which is just the fear.

You know, nothing to fear about fear itself, right? So I see sight, and that's under the broader grouping of psychology. So consumer psychology, we could talk ourselves into more inflation. We could certainly, right, if that were to take hold, overreact to another wave of the pandemic. Right. So there are certain, there's a big psychological component I can see here. If we did start to see stock market corrections or house prices, right, you could have some feedback effects kick in, right?

So even though we're calling for mild to have corrections in these markets, or at least they're going flat, there could be some overaction that takes over. So I see that as a substantial risk to the outlook. So more of that psychological feeling of the economy going forward. If energy prices were to take off once again, right, you can. see that having a life of its own. So that was one kind of my overarching theme. But if you want a more specific risk.

That's a really cool one. That's a really cool one. I mean, I find it perplexing, somewhat perplexing, how just seemingly pessimistic people are. I mean, if you look at the economy's performance, it's actually been quite impressive. If you, you know, look at the numbers, job growth has been impressive. The decline in unemployment has been impressive. The recovery in output in GDP, the value of all the things that we produce.

That's been incredibly impressive. You know, inflation's been a bit of a disappointment, but that's been very recent. And, you know, we're going to talk about that, I'm sure, in terms of the risks. But stock prices are at record highs. Housing values are at record highs. Debt loads are in terms of debt. service, the percent of income going to servicing debt, you know, interest and principal parents on that debt.

I think that's at a record low. I mean, very close, yeah. Very close. People have locked in these low rates. They've refinanced and locked in 3 percent, 3 and a half percent mortgage rates. And then yet still, people are like, no, the economy stinks, right? But you still have a pandemic going on. That's clearly weighing on people's psychology.

And consumers hate inflation. So if you look at the really nitty-gritty of this. the University of Michigan survey, but more people are pessimistic that their incomes are going to exceed inflation over the next, you know, 12, or one to three years. So, I mean, that is really biting into people's psychology. Yeah, it's got to be that, right? It's got to be the pandemic, which it wears on you, right? I mean, just, gee whiz, it's like, we're ever going to shake this damn thing. Right. And then, because it just, it messes with. people's lives, you know, you know, we can see that just, you know, personal lives, we can see it.

And I think you're right. I think inflation, particularly gas prices, I mean, you know, I think gasoline just kills people. I mean, even though, you know, you think about it, like I just filled out my, my car, I needed 10 gallons of gas. And, you know, I had a choice to go to Wawa, which is $3,000, whatever, $45. I know Ryan's too high flutin to go to Wawa. I was told not to go to Wawa because he'd roger engine. I think I'm being lied to. I think you've been absolutely. Absolutely.

Duped. I told you and Chris, I think the car dealership and the gas stations are in cahoots. Those are fighting words, Ryan. Oh, boy. We're going to get some comments now. I can see it now. The FTC is going to be knocking on your door. What do you know that we don't know, Ryan?

Yeah. I think they're investigating that kind of stuff. But there's a local gas station here in Malvern. This is my hometown that is very convenient. But it's like, you know, it's not a, it's not a, it's two tanks or three tanks. And they charge me 375, right? So that's 25, I'm rounding. So that's 25 cent difference.

10 gallons, it's $2.50. You know, in the green scheme, and I'm not driving that much. So it's not like I'm filling my gas tank once a week. It may be once a month. I don't know. And I go, that kind of was depressing. I had to pay $2.50 more for DeVillagat, which is kind of silly when you think about it, when you kind of think about it.

But that goes to the psychological impact of it. And for low-income households, that does matter. I don't mean to dress. It matters a lot. Absolutely. Yeah. In particular, if you're driving alive for commuting, then that can really be a problem. But for me, you know, why would that, you know, it shouldn't bother me, really.

But it's very visible, right? you see it. It's one of those prices that you are exposed to rarely, right? So I think that's why people experience the shock, right? Well, we're going to get a test of that pretty soon because have you noticed oil prices are back down a lot, right? They peaked at $85 a barrel, I think, on WTI, West Texas Intermediate, not a couple of months ago. We're down to a lot. I think I was looking today. It's 70, maybe lower than 70. I'm not sure. It's lower than 70. Is it 70? When I checked yesterday, it was less than 70.

Less than 70. Yeah. So that's 68. Yeah. It should come in, right? I mean, gas prices should start to come in. Yes. According to your forecast.

That's right. Yeah, yeah, your forecast. Well, we have a bet, right? We have a bet. I think I wanted the podcast. We have a bet on that oil prices. I can't keep track. No, I know.

Hopefully someone is. Ben, Ben better be taking, you know, notes here. So for where gas prices are headed, wholesale gas prices lead retail, retail by roughly two weeks and you know i don't have the exact where the retail price is going because i haven't checked recently but it's pointing down it is it's pointing down yeah so we'll get some relief at the pump soon okay we'll see how that what impact that has on the collective psyche here

but yeah that that's a good one chris that's a meta risk it's just yeah the psychology of all this you know are people just going to get have you also noticed people are just kind of maybe it's just me but I've noticed people are really they're just not quite as nice. Have you noticed that? I mean, everyone's a little on. Edge. Slightly nasty.

I don't know. No comment. No comment. Okay. Okay. It's Philadelphia. We live around Philadelphia. Yeah, it's got to be maybe.

We have a reputation. Yeah. But it's worse. I'm just imagining things. I can't imagine things. Okay. All right. What do you think, Chris?

I was going to say that the concern about fear and psychology also translates into other risks that we'll talk. I am worried about, say, the election, right? And I think there's some tribalism going on here as well. So that worries me that, you know, we get into the midterms next year and what's that going to look like. Is it mark on your on your risk matrix? Do you have social unrest? I do not. Do you have it on yours? Very low probability, but high economic cost. I think that's a good one.

I'm worried about the election. Yeah, the social unrest in the context of next year's election. Correct. Wow. Okay. That's interesting. But that even feeds into the sentiment indicator, right? So if you look at the UMish, I don't know if you've seen the University of Michigan confidence numbers.

They actually break it out by political party as well. And it's a very telling statistic, right? Right now, Republicans are depressed. Depressed. And Democrats are pretty optimistic. under the Trump administration, exactly the opposite. So not terribly. I have trouble seeing a lot of objective information coming from that confidence survey.

So I think you need to take that with a grand assault too. Oh, so you're saying the sentiment in general is maybe not as useful because it's colored by our own political, social, cultural kind of prison. Yeah, some economists have done work on this where they look at is their political bias in consumer confidence surveys and they found some evidence of it. Yeah. Yeah, I have noticed that the Ds versus the R's versus the I guess it makes sense to look at the independence and how they're thinking about things. Maybe that's the group we should be focused on. The line that they drew was that, you know, who's more likely to respond to a survey is who's more optimistic. So, you know, if a Democrats in office, then Democrats are going to respond.

If a Republican, then Republicans are going to respond. Yeah, right. So it was interesting. Total sense. It makes total sense. Okay, so, Chris, you had another downside risk, though. The meta was just an appetizer, right? That wasn't your real.

Yeah, yeah, that's right. I've got plenty of other ones. But my second one is housing. And we kind of touched on that. Some type of housing correction. Of course, I'm going to go there. Yeah. Right.

Okay, so what, just explain that. By the way, I'm writing an op-ed. for the post on housing bubbles. I need to send it to you so you can. Oh, okay. I'm writing the housing outlook for us, so we should coordinate. Let's see what we're saying. Yeah, that'd be good. So what's the deal on house prices? What are you saying? What's the baseline and what's the risk? The deal is that house prices are way up, right? 20% year over a year, right? They've been decelering a little bit over the last few months, but still we've got very strong year-over-year house price growth. much stronger than the 5% average that we have historically.

So that alone is a cause for concern about overvaluation or bubble. Anytime you see prices rising quickly just as we are concerned about inflation, it brings up a bubble concern, so some type of correction concern. So in terms of the outlook, we have moderation, right? Higher interest rates should take out some of the demand. It's going to increase the cost of borrowing, and that should take away some of the upward pressure on prices going forward. So our baseline has prices coming back down to that 5%, actually a little bit lower than 5% going forward, giving the market time to adjust, allowing incomes to adjust upward and match the house prices. So that's the baseline.

The downside risk, though, is psychology again. I think if we do start to see those prices moderating, and in some markets, you actually see price declines like a Boiseo, like a Idaho, then you could see psychology take over. People get spooked and they drive prices down further. So that's what I see as a risk. I'm not terribly, I don't have a lot of conviction in that risk because I think we do have strong demographic tailwind still. We have a lot of millennials entering those prime home buying years. So that's going to provide a lot of support. But I think in terms of a 2022 risk, you can't discount it.

Yeah. So, I mean, on the list of the list of downside risks, would a more serious decline in house prices be at the top of the list or in the middle of the list or at the bottom of the list? I mean, did you pick this because this is really at the top of your list, or you picked this because you thought this was something we should be focused on because this is an important risk, but not necessarily one of the big macro economic threats. Yeah, so in terms of macro, I'd say it's a medium, middle of road, but it is a significant risk for a lot of households, obviously, homeowners, right? This is really important to them. So I think there would be consequences if we actually did. And certainly a large correction would have large consequences on the economy. But in terms of the probability, I put it in the middle.

Just to push back, excuse me, a little bit. Sorry, I drank some while while coffee went down the wrong pipe. So I apologize for that. To push back. So because, you know, obviously. you're going to compare what's going on now with house prices with what happened in the previous house price bubble back in the mid-2000s prior to the financial crisis. That, you know, that was obviously a bubble, that burst. Prices got very sharply. Right. One of the, there's a

couple big differences. One is between now and then. One is that today we have a very severe shortage of homes, the affordable housing shortage, just a physical vacancy rates are at record lows for single-family housing. Yep. Back then, we had a surfeit of homes. Vacancy rates were at record levels. Just way too many homes have been put up. You know, couldn't figure out how to fill them.

Second big difference is today, mortgage underwriting standards are tight. You know, if you want to get a loan. And by the way, the loans are plain vanilla, 30-year, 15-year, fixed rate, prepayable, you know, right down the fairway kind of mortgage, nothing fancy. You know, income is well documented, credit score. appraisal, well-documented. Nothing fancy here. But back, you know, in the bubble over a decade ago, you had a lot of adjustable rate mortgages. You remember the ubiquitous, you know, two-year subprime arm loan that exploded on people.

The 228. Yeah, the 228. And, of course, there's a lot of fraud in terms of the underwriting. People just lied about their income and appraised values. So does that mitigate the rate? You're not saying bubble like bubble circa 2006? No, no. So if we had a correction, I don't expect, well, first of all, I don't expect, and it's in the baseline, a national correction. I do expect to see some markets, right?

Certainly have small corrections. But yeah, there are a lot of positives, certainly, to continue to support prices. I don't see that type of radically. adjustment to equilibrium that we had last time around. There's a lot more, there's a lot of less leverage in the system as well, right? That's perhaps the key point. People don't have to sell in the event of a decline like they did during the housing bubble. But you do have affordability issues, right? So that's still going to weigh on demand going forward. So I think it's still a a risk that's out there.

And again, it could feed into psychology that spills over into other markets as well. Yeah, good point. I guess the other thing that is coming to the fore more recently in the last actually a few months that raises some concern is the increase in share of home sales that are to investors. So some data from Redfin, 18 percent of transactions, I believe in the month of September were to investors as defined by buyers that have a corporate name. You know, an LLC or some other corporate entity that made the purchase. So that's deemed to be an investor.

And that's up quite a bit from where it was just a few months ago. I don't know how many of those are flippers, you know, people coming in just thinking they're going to sell for a quick profit or these are longer term, you know, buy to rent kind of, you know, institutional investors. So I'm less worried about that. I'm not sure if we know that. But I guess that's another reason to be a, and also mortgage debt, the growth in mortgage debt is, is accelerating pretty rapidly.

It's pretty close to double digit year over year through October. So according to the Equifax credit file-based data. So I guess there are some reasons to feed into your concern. Yeah. I'm more concerned actually longer term because I think the demographics actually are less favorable, five, ten years from now. Right. Yeah.

You mean just because the aging of the population, millennials are already in, immigration is slower, just underlying demand is going to be weaker. Yeah, the falling birth rate. Falling birth rates down the road, yeah. The generation after the millennials is small or smaller. So demand's going to go down. Okay, that's a good one. Hey, Ryan, what is your downside risk?

So the tops on my list? Yeah. I mean, everyone's is a pandemic, but by extension, going supply chains. I mean, this is the biggest downside risk, probably with the most, uncertainty because we have a very difficult time gauging exactly when these are going to start to ease. I think the baseline assumption, correct me if I'm wrong, is by mid-year, we start to see some improvement or they're starting to ease noticeably. And that helps, you know, ring out some of the inflationary pressures. You know, that leads to this inventory bill that's

going to add a boatload to GDP growth in next year. If we don't get that improvement in supply chains, inflation is going to be higher, GDP growth is going to be lower. And we're going to see a Fed that's tightening rates more aggressively than we're anticipating. Yeah. I think there's some evidence, you correct me if I'm wrong, that the supply chain problems that became paramount when Delta was hitting its apex back a few weeks ago, a couple months ago, are past us, right? I mean, we are starting to see, well, factories have reopened in Southeast Asia,

So some of the shortages of chips and other materials that's abated to some degree. We're seeing shipping rates from China to the U.S., China to Europe. They're still very high, but they're coming in. The number of ships that are sitting in L.A. Long Beach Port, obviously pretty bad traffic jam. But that traffic jam is not quite as bad as it was a few weeks ago. You know, anecdotally, at least it feels like we're moving in the right direction, which would be consistent with the idea that it's the pandemic that, you know, in the Delta that's driving a lot of this.

Right. I mean, the supplier deliveries index in the ISM Manufacture Survey that was released today for November, it improved, it's still elevated, but it's moving tentatively in the right direction. Oh, good. Oh, good. Oh, good. So, but what you're saying is,

even with the pandemic kind of playing out the way we think it will, kind of receding, it could end up being the case that getting these supply chains back in a more reasonable place is going to be more difficult. So we still are plagued with shortages of product and high rates of inflation for those products as a result.

Because I agree with you that the economic cost of each wave in the U.S. from the pandemic will be smaller, but it's the policy response in APEC that's going to be really, really important. And, you know, if you get another wave in, you know, Singapore, Thailand, Australia, these countries have shown evidence that, you know, they'll tighten restrictions pretty quickly and that would exacerbate, you know, these supply chain problems. China. And China's another example. Good point. Good point. So if Omicron nails, of course, everywhere in the world, everyone seems to have their own way of dealing with the pandemic. In Asia, they tend to shut things down.

I mean, China shuts everything down. There's a no COVID policy. Even in Southeast Asia, they feel like they're relatively quick to curtail things, shut things down. Yeah, New Zealand and Australia, really quick. During the Delta variant this time around, they seem like they're going to take it a little bit more cautious, but they're not as lax as we are in the U.S. Right. So you're saying if Omicron shows up in Asia, China, and those countries respond in the way they have been so far during the pandemic, which is just very restrictive, shutting down travel, shutting down trade, closing ports, closing factories, that's just going to rescramble everything on this. It just kicks the can down the road further until we get that improvement in supply chains.

Yeah, it's a good point. That's a really good point. You guys are depressing me a little bit. I got an upside one. Okay, because we're going to definitely come back. We always end on a positive note. Yeah, okay. All right, those are all really good. And I think, you know, with the risk matrix, my risk matrix in my mind's eye, they all kind of are in that northeast part of the matrix, you know, where probabilities are relatively high and the expected loss, the loss given that risk are pretty high as well. You know, I'll point out another risk. Yeah. And that is,

that worries me, is China slows down more than anticipated. So in our baseline worldview, again, relatively optimistic, we're expecting China to growth rates to slow. They already have. So if you go back, I'm going to pick a date five years ago, the underlying growth rate in the Chinese economy in terms of GDP, it's probably 7, 8%, probably closer to 8% per annum. I'd say it's now down to about 5%, and we're expecting over the next few years for it to kind of glide a bit lower to about 4%. So still strong, you know, by our standards, you know, the developed world standards, but significant moderation.

But I'd say the risks there feel like they could come in a lot weaker than that. I mean, got a lot of things going on. You know, one, we talked about COVID in their COVID policy. They just shut things down. So if they get hit again, they'll shut things down, you know, quite dramatically. There is the fact that they're working to address some of the more structural, longer term problems they have, including very high leverage. They've been borrowing a lot of money, households and the corporate sector in particular,

and debt loads are now high. And I think there's reasonable concern. You could see that with the collapse of the Chinese real estate company Evergrand. You know, they defaulted on all their debt, I think was some $300 billion. So, you know, that kind of de-leveraging process, or at least that slowing in leveraging, that's slowing growth. And then they're focused on, increasingly focused on pollution and climate change issues. So they've been willing to shut down utility plants that are coal-fired and produced a lot of CO2,

if it's producing a lot of pollution. And that's caused them disruptions in the economy. You know, production has stopped. I mean, factories have had to stop because they can't get electricity. then you've got President Xi who seems to go, well, he is going in a direction very different than his predecessors. You know, his predecessors work to liberalize the economy to embrace the rest of the world, the rest of the developed world, the U.S. and Europe and engage and she, it opened up politically.

And that's not what she's doing. He's going in the opposite direction. And I can't imagine that's good for growth. And then probably most fundamentally the fact that the U.S. and many other developed economies are now confronting China on a lot of their policies that, you know, people just don't, and I think appropriately said, they're just not fair, you know, cyber issues and intellectual property issues and ownership rights and those kinds of things. And so China, which has benefited enormously from the global, globalization that's occurred since it entered into the World Trade Organization back in 2001 isn't going to benefit nearly as much. In fact, it could be a headwind because we're going to the other direction on globalization,

on trade, on investment, on capital flows. I can go on. Actually, we had a podcast on this. I highly recommend, you know, we talk to a fellow named Dan Rosen, who's head of Rodium group, you know, is a China bear, but he did a pretty good job of making a case here. So I think there's, you know, real good arguments that growth is going to slow, but it could slow much more than we're anticipating, particularly if tensions between the U.S. and China, which seem to be, you know, quite significant around a lot of different issues from Taiwan to the, you know, the South China Sea to, you know, lots of different points of tension could boil over. I think this could be a problem.

And, of course, China is a key source of global growth, is the second largest economy on the planet. the relationship between the U.S. and China on trade is fundamentally the most important relationship on the economic relationship on the planet. And that gets disrupted. You know, that could really slow growth and reverberate in many different ways across the globe, commodity markets, emerging markets, and ultimately back on us. So I see that as a significant risk. What do you guys think?

Did I nail that? Yeah, I think so. Yeah. I mean, are you arguing that there's a increased risk that just, China suffers a growth recession next year. And a growth recession is like when the economy is not growing quickly enough to prevent unemployment from going up and inflation from decelerating. Yeah.

I think that's, you know, growth could slow to such a degree that, you know, you see layoffs. You know, people lose jobs. And then I guess you can throw into the mix if that's the case. What kind of social implications does that have? Because I don't think the Chinese population, I think they've not experienced that. for a couple generations now. It's all in one direction. And, you know, what does that mean, you know, if things go in the other direction,

but for an economic perspective, but from a political and social perspective, you know, what does that mean? So, yeah, I think there's a reasonable probability of that. I think I worry about that. And, of course, then, you know, you can keep connecting, keep creating the storyline. I mean, if the economy starts to weaken, what does that mean with regard to how she approaches the rest of the world. Does that mean? Exactly. You know, right? I mean,

he's going to blame somebody, you know, so it stands to reason. You know, so, all right, now I'm getting really depressed. Yeah. Depressed. Yeah. Anything else on the China? Did I miss anything? Any other reasons?

Any pushback there? No pushback. I would say on top of that, they also have even poorer demographics than we thought. We see that the fertility rate was even lower than what we projected. They're likely in decline already in terms of population. So where did you see that?

That came out within the last week at the estimates. No, they're all estimates, right? But I think the original estimate. Do you know? UN or are these UN estimates? No, I think they're Chinese estimates? I believe so. Okay.

I missed that. I didn't see that. That's interesting. Okay. So assuming that's correct, that makes it even worse. And again, Ryan's going to tease me, but I worry about the property markets in China as a consequence, right? So how so if I think households are you on that? Oh, because it's not a policy.

Okay. Yeah, it's not domestic housing. Yeah. It's international. So if the household starts to see their property values actually fall, I think that that will create great social unrest. So that's more of a problem. Okay. Let's turn positive.

This is now Christmas week going into 2022. We're going to each of us come up with an upside risk to the outlook. And we can broaden it a little bit. It doesn't have to be exactly 2022, but you know, we can broaden it out a little bit. But what are the reasons to be optimistic? Maybe things turn out better than we're saying. So let's put the pandemic aside. You know, the pandemic has its own dynamic.

we, you know, who knows? It could end up being less, Amacron could be a nothing burger, you know, and we're fine. And there's, there are no more waves. I know you're smiling. Are you smiling because I use the nothing burger? Yeah, I didn't have thought Mark Zandi would use the nothing burger. Right.

I couldn't think of a better, better way of describing it. But let's put that aside. So that, you can't have that as your upside risk. That's not fair. Okay, given that, I'm going to go with you, Ryan, first, give you the first shot at this. What's your upside risk? All right.

So, since this is the week leading up to Christmas, it's the consumer. The U.S. consumer, like you mentioned, household balance sheets are in pristine shape. The job market is going to be booming next year. And throw on top of that, as of October, $2.6 trillion in excess savings. So if they treat that more like extra cash, just floating around in their pocket, in their couch cushions, that's a lot of economic juice that could come out over the course of, you know, a year or two. that's a good one right chris i mean absolutely yeah yeah i mean gee whiz i mean that's don't bet against them exactly never bet against the consumer i always said don't don't underestimate the hedonism of

the american consumer does that sound right i think it does yeah he says that's that's definitely my household yeah i have a quick question for you uh mark paul one time saw me uh quoted in a newspaper saying the American consumer and he said it's she. Is that correct? You described the American consumer as she. As opposed to he? Yeah. Oh, God.

We're getting in a place I have, I know. I'm treading on very thin ice here. I don't know. I'll never forget this. You walked by my cube. Paul, so anyone knows. Paul I and my brother founded Economy.com that we sold to Moody's analytics. So, and Paul has since retired.

So, but he, he's, it was an excellent economist in his own right. And so he, and he had very strong views on things like this. Yeah. Very strong. And you said the American consumer, he, and he was saying, no, it's she. She. And he put the paper where I was quoted, and he's like, nice quote, but next time, use she. Really?

And then he just walked away. I mean, Paul was, he was great. I mean, he is fantastic to talk to, but he's in. intimidating. And I just remember, like, oh, they have to make them around somewhere. They're around somewhere. Yeah, Paul would bring his dogs to work. And at one point, there were three problems, I believe. Yeah. Now, talk about intimidating. There's three dogs on the planet, but if you didn't know them, that wasn't necessarily the case. Well, I know what I don't go off topic, but when I interviewed with them, there was three of them and they were all surrounding me. Like,

one was in my lap, like, his head was like in my lap. I'm trying to talk to Paul, who, you know, is a very, very smart economist, and I'm distracted by these three Rottweilers. I had the same experience. You did? And then an ambulance passed by, and they started how it was a mess. But you passed, you passed. I'm hired. Well, that's a good one.

I like that. That's a good one. The American consumer could turn out to be more of a source of growth, you know, power things along here. 2.6 trillion. That's 10% of G. More, that's higher, that's 12% of GDP. That's a lot of cash. That's a lot of cash.

Yeah. And there's a fair amount of pent up demand, not for, you know, heater, outdoor heaters or, I want to say not blow dryers. Why keep, how come I can't? Power washers. Power washers. I can't remember.

Yeah, but not for power washers. In fact, they got one for sale if anybody's interested. Is that buyer's remorse? That you have two power washers and countless heaters and a deck? I was shamed by you. And one of these podcasts, you said, so I think you, or Chris asked, why would you have two power washers?

And you said, for one to watch the other. That's, I thought, you know, he's got a point. That's, you know,

what the hell do I have two power washers for? That's funny. All right, Chris, you're up. What's your, what's your positive risk?

Well, I'll go with the American entrepreneur then. Ah, small business, strong, lots of applications out there to start. new businesses. That's a lot of innovation, productivity gains, potentially. So I think that's

a source of strength that we could see some growth to the upside, stronger growth, if folks really do execute on these plans. And we get a lot more innovation, a lot more companies getting started. And that leads to more hiring, lots of good things, right? Yeah. Do you think, because you're looking at the taxpayer identification numbers, the applications by people who are starting businesses for EIN, so-called EIN numbers, you need that because you have to pay taxes if you start a company. And they're through the roof, right? I mean, this year, they've been skywarded.

And that's real, right? I mean, if you look across industry, across region, it's up everywhere, across everything. A lot of business are forming, right? Yeah, there are some regions certainly growing fast. Like South, the South has more applications. Retail actually has a startling number of applications as well. So there are some pockets, but I think it is fairly broad base. No industry, no region is lagging.

You think it's also remote work? I mean, the fact that people can, they feel untethered now, right? You don't need an office building with employees sitting at their desks. You can do it, you know, just with Zoom, you know, basically, in an idea, a little a capital. You think that's also playing a role in here in all these business formations? Yeah, I think it's all the above. I think it's the technology, the fact that people do have a little bit more cash, perhaps, on their balance. I think pandemic gives you time to think, reflect. I want to start a business and I'll give it a shot. A strong labor market too,

right? If the business doesn't work out, I can always find a job, right? So I think there's, the risks are favorable to starting a business, trying it out, seeing what happens. You know, and now I'm feeling really good. I'm feeling a lot better. Right. So what's yours? Yeah. You know, now I've got a bunch, actually.

You know, there's the potential for stronger productivity growth. You know, that is kind of a corollary with the business formation, but it goes well beyond that, right? Because business investments up very strongly, and that's going to improving productivity, addressing supply chains. I'm optimistic about policy. Maybe people would disagree with me, but I give a lot of credit to the Federal Reserve and lawmakers,

both under the Trump administration and under the Biden administration for coming up with the sources with support. No hesitation. No, I would have debate over some of the ways they use the money, I think that's everybody would but but probably speaking you got to give them a lot of credit for what they've done and that augurs well you know going forward that the policy makers are going to step up

if they need to step up they're going to step up and they're going to figure out how to you know thread the needle you know for this economy and get it through and navigate around the waves of pandemic and the impacts that's going to have but I'd say and I'm going to end because you ended on it you started with a meta negative meta downside I'm going to with a meta positive upside risk. And that is, you know, our economy is god damn amazing. You know, it adjusts to anything that you throw at it because, you know, people are, you let them have habit. We let them have it. You can make money. You can innovate and benefit from that innovation. We respond to the marketplace and signals that we get from pricing. You know, if the price of

Lumber goes up, we buy less lumber. We do something else. We wait a little bit by something else. We adjust and we're adjusting. You know, think about what we're doing now with this Zoom technology. I mean, it's just amazing how quickly we adapted and adjusted to, you know, the pandemic. And I think it's going to reap enormous benefit in the long run. We're only in version one of, you know, the Zoom technology and what it means.

you know, the future rounds of innovation are going to be, you know, I think, just take us to a whole other level. So I, I, I, and met a positive, just, you know, confidence in ourselves that, you know, we, we overcome. We really do. We got a problem. We, you know, we figure it out, because we have the incentive to do that, and we have the smart people that are willing and able to do it. and have the freedom to do it. Think about things, debate things, hit each other over the head, proverbially speaking, but ultimately coming up with a pretty good answer at the end of the day. So even in the legislative process, I feel the same way.

I mean, we hit each other, hit each other, bam, bam, bam, bam. Think about every possible way of doing something, look at it from every single angle. And then when it's all said and done, we kind of come to something and it's pretty good. You know, it's a pretty good product. So I actually, I have, I feel pretty good about things. I think we're in a pretty good spot. I'm a buyer. You guys sell, I'm buying.

That's all I'm saying. That's how I'm in this podcast. You convince me. You convinced me. Yeah, yeah, resilience. Ryan, how are you feeling? You convince me. Now it's going to be a good holiday.

It's a good holiday. Damn right it is. Okay. All right. Well, very good. I think we covered a lot of ground here. This is the holiday week, so we don't want to keep it too long. But hopefully you found this instructive.

and we'll talk to you in the new year. Take care now. Bye, everyone.