Moody's Talks - Inside Economics - Firewall and Faltering Feelings

Episode Date: July 22, 2022

Mark, Ryan, and Cris welcome colleague, Scott Hoyt, Senior Director at Moody's Analytics, to dissect the state of American consumers and how they are the firewall to avoiding a U.S. recession.Full Episode transcriptFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by per usual, my two co-host. Ryan, Ryan Sweet. Ryan's the director of real-time economics. In Chris DeReedys, Chris is the deputy chief of economist. How guys? How are things this week? Hanging in there? Hanging in there. You always say that, Chris. You're always hanging in there. You know, it's someday I'll be on one extreme or the other. But today it's hanging in. Okay, zero is bad, 10 is good. Where are you, where are you this week? I'd say a nice six.

A nice six, okay. I'm going to ask that every week and see where he lands. He's normally probably out of five, you know, because he's middle of the road. I know. He wanted to say five, but he knew we were going to rib him if he said five, so he said six. Is that, am I reading you right, Chris? I mean, I come on here for the therapy. Right.

And of course, the fellow who's chuckling over there is our other colleagues, Scott, Scott Hoyt. Scott, good to have you on. Thank you. My pleasure to be here. This is your first time on Inside Economics. Yes, it is. Well, good luck with that. We'll see how that goes.

Well, you know, Scott is a consumer expert, an expert on, particularly the American consumer. And you've been with us for how long, Scott? A little over 20 years now. Is that right? 20 years? I did not know. I thought somehow it was like 10, but it's not. Oh, my goodness gracious.

Did I hire you? Who hired you? You did. I hired you. Of course. That was a great hire 20 years ago. And you came from J.C. Penny, as I recall. That's correct.

Is anyone remember J.C. Penny? Of course. Come on. Really? There's still a few stores around. Are there really? I did not know that. Is there?

Yes. They're still kicking? I thought. they went bankrupt for some reason. Well, they did, but they've come out of it with new ownership and they do still exist. I did not know. Any J.C. Pennies here in the Philadelphia region? I'm not sure. There's certainly none particularly close. So I haven't been to one in a long time, but I read about them periodically. I kind of track how they're doing. So they're definitely still around. So Scott, there was this, your boss at J.C. Penny, he was a.

really good economists. I can't remember his name. Who was that? Ira Silver. Ira Silver. Ira. Right? Yeah, you've chatted with him at all? Or is he? No, I've lost touch with him. Yeah, lost touch. Yeah, good guy. Very good guy. But it's good to have you on because we're going to talk about the American consumer, the, in my mind, the key between continued expansion, growth, and a recession, the firewall, so to speak. So we're going to talk about that in depth. Just as a Side point. We were supposed to have Princeton University professor Alan Blinder on. Great guy. I've done a lot of work with Alan over the years. And he lost his voice or came pretty close to it. And he has a sonorous, sonorous. That's a word, right? Sonoris.

I don't know. I had to Google that. This is another zandy word. No, but it's a real word. It's a real word. Yeah, sonorous. He's got a very sonorous voice. And we want the world to hear that. So we postponed until next Friday. So next Friday. And we're very much looking forward to that. You know, I think I may have said this in the past. But, you know, there's some economists that no matter what they say, pretty much I disagree with.

You know, Ryan's. Me. That can't. Number one. Only kidding. Only kidding. And there's some economists, no matter what they, almost no matter what they say. I say, yeah, that makes sense.

That's right. And Alan Blinder is like, I don't think I've ever. heard him say a thing that I disagree with. You know, it's really weird, bizarre. I don't, I don't know if he would take comfort in that or not, but it's true, you know, and I can't wait to have him on. It would be really fun to have a conversation with him. But let's talk about the American consumer. And maybe can I do it this way? Can I hog the mic for, of course, I've been hogging a mic, but can I continue to hog the mic here for just a few minutes, lay out a case? And then, turn to each of you guys to, you know, push back, you know, disagree, agree, you know,

provide color, flesh it out, you know, all those things. Sound okay? We say no. Yep. You can't tell us. Because I don't have a plan B. You got a plan B? Okay.

All right. I go to plan B. What's your plan B? Okay. But, of course, we're going to do the game, the statistics game. And I think we should spend, you know, a little bit more than we typically do on recession, probabilities, I'm just getting a little nervous. I should be.

But, you know, it depends on the day and the time of day, you know, how I feel about things and recession odds. But, yeah, let's talk about that. And we'll, I think we need to resurrect. I think maybe it was you, Ryan, he suggested we resurrect some of those statistics we've been looking at back a year ago or so when the podcast started to gauge where we are in the business cycle. That would be helpful.

Okay. All right. Here, this is the case. So, you know, my view and the baseline outlook that we continue to hold to, the baseline scenario in the middle of distribution of possible outcomes is a non-recessionary scenario, right? The economy, the U.S. economy, and we're focused on the U.S. economy here, is obviously going to struggle. Already growth is weakening, but it's going to make its way through without going into a full-blown outright economic downturn.

And there's a number of arguments as to why that's the case, but the argument at the top of the list is the American consumer. And the consumer is the firewall in my mind between continued economic growth, albeit weak, and a recession, an outright recession. And a firewall, the consumer feels like they're in good, shape more or less. I mean, yes, the firewall is on fire. That's the inflation, high inflation is cutting into real incomes, people's purchasing power. And most times that would be a real problem. 8, 9% inflation would be wage growth 5%. That would be pretty tough to digest. Consumers would be

pulling back. But less of a problem in the current context because households, consumers have a lot of extra savings, excess savings. You know, savings they built up during the pandemic, either because if you're on the high-income side, you were sheltering in place and not spending a lot of money or as much money as you typically do. You couldn't travel. You couldn't go to ball games.

You couldn't go to restaurants. You saved it. And then for lower-income households, low-middle-income households, you have excess savings because of all the government support that was provided during the pandemic. $5 trillion worth, stimulus checks, three rounds of stimulus checks,

unemployment expanded enhanced unemployment insurance rental assistance you know a long list of things uh also uh the firewall feels strong the consumer because uh job there a lot of jobs uh we're still creating at least through the month of june a lot of jobs and we should come back to that unemployment is low three six we know wage growth has not kept up with inflation but it's not it has accelerated you know It's five, six percent. So depending on, and for low wage workers, the lowest wage workers is actually has kept up with inflation. The wage gains there have been more significant.

Leverage is low. Households de-levered, reduced their debt loads during the financial crisis and the post-crisis period. You know, leverage is starting to pick up again. People have been borrowing, but pretty consistent with incomes. And nothing, you know, kind of, you mean, if you look at household debt relative to income, It feels declined after the crisis and now pretty stable. And debt service is very low because, you know, interest rates up until recently have been very low.

Consumers have done a good job of locking in the previously low interest rates, record low interest rates through refinancing waves. So if you're a homeowner, you probably have a mortgage with a three and a half to four percent mortgage rate. And that's 30 year fixed or 15 year fixed. It's not going to rise. So leverage debt service is low. And yeah, the stock market is down, although I don't know if you guys have noticed, but it's had a good couple of weeks here, come back a bit. But say it's down 20%, but the house prices are up 20%.

So the net is consumers are as wealthy today as they were a year ago, and they're a lot wealthier than they were three years ago or five years ago or 10 years ago. So you add it all up, and it seems to me that it suggests that the consumer is going to hang tough. you know, they're not spending with abandon, you know, they're not going out there and partying hard. In fact, you remember back about a year or two ago, there's a lot of speculation that they would be at this point in time because they have all that excess saving. That doesn't seem like what that's what they're doing. They're just doing what they do.

You know, spending at a pace is consistent with a more typical kind of economic environment, kind of the pre-pandemic environment. You know, not too much, not too little, just enough to keep the economy going. Okay. So as long as that continues, as long as the consumer hangs tough, that firewall stays up, the economy should continue to navigate through because the consumer drives the train. They're the biggest part of what goes on in the economy. And if they're doing their thing, we should be okay. By the way, just as a side point, then I'll stop, get your reaction to all this, is that it feels like the American consumer is driving the train for the entire global economy, right? you know, they're buying everything we produce here in the U.S. and a lot from overs.

Cs the U.S. trade deficits been gaping out. In fact, the biggest drag on GDP growth in the last, certainly since the beginning of this year, probably for the, for the, since this time last year, is the gaping out of the trade deficit, which goes to the American consumer hanging top. Obviously, the strong dollar also is contributing to that. But the consumer is driving is a firewall for the, for the U.S. economy, and it's kind of driving in the train for the global economy. Very different than what was the case during the teeth of the pandemic or back in the financial crisis when China, Chinese businesses were kind of driving the

train. That's that's China has been struggling because of the COVID lockdowns, but the U.S. is kind of leading the way here. Okay. I just, uh, I just laid it out there for you, that a long soliloquy and, uh, maybe not Shakespeare soliloquy, but, you know, Zandi soliloquy. and what do you think? And let me turn first to Scott, because he's our guest and the consumer expert. What do you think, Scott? I think fundamentally I agree with your conclusion, although I'm a little concerned that you may be downplaying some of the risks. And I guess I'll start with your discussion of debt because.

I was looking at that recently, and if you look at the trend in the growth in consumer debt prior to the pandemic, and look at the level now, we're actually above where that trend would have suggested. Now, debt burdens are very low because the composition of debt has changed a lot. During the pandemic, credit card balances, which are among the highest interest rate debt and out there plunged, and more than, mortgage debt started taking off, which of course has relatively low required payments because it's lower rate and longer term. So debt burdens are low, but the level of debt is actually, if anything, a bit lower or a bit higher than a trend analysis prior to the pandemic. Wait a second.

So Scott, so you're saying you agree with the conclusion that the American consumer is doing and what they need to do to keep the economy moving forward. You agree with that. Yes. But you're saying there's a lot of risk to that. And the first thing you go to to highlight the risk is debt, the borrowing, the leverage. Yes. Well, a lot of it ties back to inflation.

I mean, we'll obviously go spend a lot of time on that because, you know, the inflation is now forcing a big increase in credit card borrowing. And we don't know for sure yet how much of that is transactional and how much of it is actually evolving. But, you know, if we shift the composition of debt back towards consumer debt, when the level's already high, then you potentially do run into a rapidly rising debt burden. Let me turn to Chris, because Chris spends a lot of energy in his time on consumer credit, household credit. Does that ring true to you, Chris? I mean, of all the things I just laid out, the thing I felt most strong and good about was debt in leverage. That was not

where I would have gone if I was going to push back on the kind of the narrative laid up. But what do you think? Is that something we should be concerned about, the household leverage and debt? I think I tend to agree with Scott. And I think my perspective and just kind of more generally with your comments, I think it's a bit sanguine in terms of looking at, yeah, the aggregate, if you think of the consumer, a kind of aggregate consumer, you know, it obscures a lot of things that are going on underneath. And I think the debt issue is particularly heartfelt by the lower income part of the population. So you do see debt rising. You do see bank card usage, what, up 16 percent, year every year. We have another category in our Equifax credit forecast database called Consumer Finance, which are unsecured

loans. That's up 22%. Yeah, but that's $100 billion, right? But that's where a lot of those lower income households are in terms of accessing credit. If you have a lower credit score, if you don't have all the ability to access, say, a home equity loan or even a credit card, you go to these other debt sources. So seeing that rise very rapidly, I think is an indication of the weakness, certainly of that part of the consumer segment. So you're focusing on, and we have great data here. So the data is fabulous, right? We get data from Credit Bureau Equifax every month, all the credit files in the country.

So we know exactly, you know, for the month of June, how much debt is outstanding. Much better than the Fed's data, by the way, which, you know, if you want to get into the weeds and Chris can do it. Our data is saying something different than the Fed data, right? The Fed data has been showing very, very strong increases in consumer credit. revolving credit. And our data shows an increase, but not nearly the same degree as the Fed data. Is that correct?

Do I have that right? That's all. You're talking about the G19. The G19. The Federal Reserve Series. Yeah. Yeah. I mean, trend-wide, they're both showing increases.

Yeah. But in terms of the levels, yeah, there's some differences there. And I think ours is because we have a little bit more detail, we're going back to the actual source of credit report information. I do think it's more accurate from that perspective. Let me post way back though. I'm going to push really hard back on this. All right.

So if I add a total revolving credit, revolving is bank card debt, retail card debt, and then I throw in your consumer finance, just for you, I'll throw that in, you know, $100 billion.

Is it $100 or maybe it's $200 billion? I can't remember. For context, a listener, you know, total household debt is $16 trillion, right? So we're talking, you know, very, very, yeah, you're throwing a mortgage home equity. Yeah, yeah, the whole shooting match,

the whole shoot and match. But, okay, but if I take, all revolving bank card, retail card and consumer finance. The level today is only now back to pre-pandemic, right? If you take a look at that chart, it's only, so the level is no higher than it was in early 2020 before the pandemic. Here's a second thing. But it's rising rapidly, right? Well, okay, but inflation is rising rapidly. So if I'm just buying the same stuff that I was buying a year ago, it's going to be up in the eight, eight, nine, it's going to be up nine percent by definition,

right? Because inflation is, up 9% I'm paying 9% more for gasoline, food, rent, airline tickets, you know, that kind of stuff, right? But incomes are not up 8, 9%. Oh, that's a different story. That's a different story, though. Well, I think it's germane to the story, right? Yeah, you're right.

If prices were going up, that should go up at the same rate, no problem, as long as incomes are offsetting that as well. The disconnect is the problem, right? You do have accelerating inflation. That's going up rapidly. It goes back to real income shock. It's not leverage per se. It's the fact that my purchasing power is reduced, right?

So I guess, I guess, okay, they're related. But here's the other thing. And Scott alluded to it, how much of what we're saying is simply I'm borrowing or simply I'm revolving more. You know, I'm just using my card more. You know, I've got a lot of cash in my bank account from the excess saving. and I feel more, and I'm now spending more on things that would require or you would generally use for a card. Like if I get on an airplane, I'm going to use my card, right? Because I want those miles on my card.

Yeah. So at the higher end, we do see a credit card accelerating there as well. But I'm not as concerned about that population. I think it's for the reasons that you mentioned, right? People are going back to business travel or personal travel. They are using their credit cards more at that end. But the nice thing about our data is that we can break it out by credit score, ban.

And so we see that not only is the debt rising rapidly in that category, but it's also rising very rapidly at the lower end of the credit score distribution, right? And that I associate with people, not so much using the credit card for these other discretionary items, but because of necessities, right? Prices are going up and they have to tap into credit because their incomes are not sufficient. Here's the other thing I've heard is just anecdotal. and maybe we have data, and I'm just not aware of it, the payment rate, that is, what percent of the card bill you get every month you pay back or you, you know, pay back. And that's been very, very high. People are paying back on their cards.

And at least through the month of May, June, and this is anecdotal that just talking to people in the industry, those payment rates remain really high. You know, for the folks in the industry, uncomfortably high because they want people to revolve, right? That's how they make a significant way how they make their money. When they lend you money at a high interest rate, that's where they're making money. So they don't, they would, they don't wait to default. They don't want that. But they love for you to revolve that, that, that amount outstanding so that, you know, you pay interest on it. Is there any data out there?

Have you seen any data on that, you know, particular statistic? I just, I don't think it's in our database from Equifax. Scott? Do you know? I thought it was. I haven't looked at it recently, but I did. Oh, is it? It was in the Xfax database. I mean, I think that was one of the ones that, at least back in the day when I followed it more closely, was perhaps viewed as with a little more suspicion, less reliability than some of the hard numbers. But because they were estimating it. They didn't, they didn't, they didn't, they didn't, the, Equifax doesn't receive payment data. They have to estimate it. Yeah. Oh, yeah. So, you know, Chris, do you know that,

you know that data really well? It is in the, I haven't looked at it. You haven't looked at it either, but I will take it. It wouldn't surprise me though. It wouldn't surprise me if up till now, people are, you know, to your point, if you look in aggregate as well, right, people do have savings, right? At the higher end, certainly. And a lot of it is going to be at the high end. I mean, the folks on this call, for example, we're all probably spending more at the gas pump and we're paying it all off. Not me.

I'm not driving at all, you know? I got my, I got my least car telling you, I got it. I'm telling like 20 months ago and guess how many miles I have on it. Just guess. Typically, $20,000, $12K a year or something, I believe, right?

You can drive up to $12K. Are you taking this one up and back from Florida? I have not. No. This is, that changes the calculation right there. But even that, even that,

I mean, my other car where I haven't racked up a lot of miles on. So this is your thing. 7,000 miles. 7,000. That's it. So this is the daily commute to Wawa to get the coffee and back? That's it.

That's it. Yeah. Or, you know, I might, one sundry, I have to get wine, you know, every so often. So I do that. What else do I do? I go to the gym, you know, I go to the gym. I'm constructing your CPI basket. Right.

On the fly. On the fly. Just don't add hoagies to it. So some of us still have kids that were either taxiing or who are driving themselves all over creation and on our, you know, and then using our credit card when they go to the gas pump. So I can tell you my, my transactional balance is up a lot from a year ago just for that. What was that whole thing about hoagies? I missed that. I was just saying not to include that in your basket for the CPI since you are anti-Hogi.

Well, I'm not anti-Hogi. I just can't eat hoagies. I'm very pro hoagy, actually. I just wish I could eat them, you know, but they don't agree with me, unfortunately. Anyway, back to leverage in debt. Okay, so you guys are saying that maybe the firewall, the consumer isn't quite as strong as I think.

Oh, here's the other thing on debt I want to just throw out. Delinquency rates are low, right? I mean, they're going up, but, you know, there is what I consider to be normalizing back to pre-pendemic because they had fallen dramatically during the pandemic because all the government support, right? All of the forbearance and, you know, student loans and mortgages and rental payments and, you know, all kinds of things that allowed people to not pay on their debt. And the result is delinquency rate, measure delinquency rates, at least from the credit bureaus because you couldn't report someone on forbearance as being delinquent on the credit file.

they're just normalizing or am I missing something? There's something in the data that you're observing that I'm not observing on the delinquency side, which would be a real sign of stress, obviously. They are low, but they are rising. And I would point out the denominator effect, right? We just said that their bank card balances are going up to 18, 20%, right? That's going to suppress the delinquency rate. But we can look by vintage.

I have not done that. You know, like what is the delinquency rate on all loans originated, you know, in 2019? have you been looked at that, anyone looked at that, we probably would be a good thing to take a look at, just to see. But anyway, I mean, they're a little across the,

it's not like anything is really screaming at this point, but just something to bear in mind that it could rise. Hey, Ryan. Oh, sorry. Go ahead. Go ahead, Chris. Anything to add to that, Scott? I know you look at the data pretty carefully.

Yeah, well, I guess my thing with this, like so much else in the economy today, is can we make the smooth landing or, as the delinquency rates, rise, are they just going to, you know, blow through equilibrium and turn into a problem that that's going to be a threat, you know, say sometime next year? I mean, I'm not, I wouldn't worry about, you know, credit quality this year, but, you know, how, how much room do we have and can we really, can we really level it off, you know, and again, it's going to depend to some degree on, on

inflation relative to incomes and how that plays out over the next 12 months. But, Yeah. You know, you know, relatively high. If inflation remains above, you know, incomes, then I worry. No, I worry about the strength of this, this piece of the firewall over time. Totally. Totally. In my mind, that is the chink in the firewall.

I mean, if inflation doesn't come in, you know, if it stays high and real incomes remain under pressure and, you know, low middle income households run out of that excess saving, then we got a problem. But that, you know, that that's not our baseline, but that is definitely a problem. Yeah. But you put your finger right on it, I think. That broadly, why am I feeling about what's going on ebbs and flows daily, you know, hourly month, a week, minute by minute. Because it's, you know, the plane is coming into the tarmac. Is it kind of, you know, it's coming in. It's coming slow.

Growth is slow in as scripted. You know, that's exactly what it's supposed to. to do, but is it going to actually land or is it going to skid off the runway or crash or what, you know, and that's where we are. And it's kind of, and the winds are blowing, you know, the cross currents are blowing here. So it makes it very, very nerve-wracking. Hey, Ryan, on this debt issue, any anything else want to add on that? No, I think we covered it all. I think the key thing is inflation. I mean, it's $493 additional cost for the average household to buy the same basket of goods, year as they did last year. That's an enormous burden, particularly on Chris pointed out,

lower income household. So I think, you know, in aggregate, it looks like everything's okay, but I think with up and down the income distribution, there's some stress points. Okay. So, okay, so going back to the frame, you know, there's the consumer, the firewall, the things that are supporting the consumer. We just talked about debt and leverage. And that's the last thing I would have gone to, but that's the first thing Scott went to. but okay, fair enough. The first thing I would have gone to is what you just did, and that's real incomes, the high inflation rate. So if inflation stays at 9 on CPI, and wage growth stays at 5, and that's where it feels like it roughly is in aggregate, that's minus 4 real income.

You can only do that for so long. We're fortunate that households, including low income households, have a lot of excess saving built up during the pandemic. So they seem to be supplementing the hit to their real purchasing power by drawing down. down on their savings and that you can see kind of see it in the data in terms of of saving rates but you can only do that for so long and so this feels like the the most serious thing but on but on that front so let's think about let's talk about that for a second because I think that's key that goes to the rate of inflation you have this great chart that decomposes or great data that decomposes actually I will say Chris improved on your on you do

It was a good point to add rent. Now I stole Chris's chart and I tweeted it. Did you guys notice this? You didn't find my Twitter feed, Twitter feed. No. I'm having Twitter problems. You're having Twitter problems? What do you mean?

I can't get it. I can't post. Oh, you got to apologize to everyone who's tweeting. I can't actually respond. Oh, that's right. It's all over your Twitter feed. I've noticed. You know, now my work is doubled.

I've got to keep up with both of you on Twitter. I know. It's crazy, this whole thing, this old Twitter thing. But where was I? Oh, so the decomposition of inflation and, you know, take the 9% CPI inflation through June. Actually, just to be precise everybody, 9.1, but let's just say it's nine to round. Of that five percentage points roughly is energy, right? And then you got another percentage point or so that's food, which is also mostly energy because of diesel prices.

Then you got another one and a half percentage points due to supply chain disruptions that still are creating havoc in some industries like the vehicle industry and high vehicle prices. You net all that out. You're down to two and a half percent. And that's the Fed's target, two and a half percent. So if energy prices simply go flat, they don't even have to decline. They go flat. And food prices go flat, which, you know, seems more than likely if energy prices do.

And the supply chain disrupts, I know there's a lot of ifs, but just go with me. I can see everyone. It's like a volcano ready to burst. You know, the supply chain issues continue to improve, and they've been improving. They are. Then we go to two and a half, right?

No. I mean, that's, okay, so that's the baseline forecast. What do you think of that? and, you know, obviously, the risk around. Chris, let's go back to you because you're the ones who's most, I think it seems like you're the most skeptical of that outlook. We will get back to two and a half. I'm not doubting that.

It's just a question of timing and how, right? Right. You know, those are a lot of ifs, and I think there are other ifs that are not included there, right? You're assuming everything moves in that one direction, but, you know, another disruption, ECB hikes 50 basis point. There are lots of things going on here that can impact the outlook. Is that consistent with high rent inflation?

Because, I mean, rental price inflation tends to be persistent. And house prices haven't, house price growth hasn't come in yet. I mean, I'm sure it's going to, but it hasn't yet. So, you know, it needs to come in. And then that's going to take some time before it feeds through to rent. So, you know, rental price inflation is going to stay high for a while. And doesn't that, can you really get to two and a half if you've got, you know, rent price inflation at, I don't know what, four or higher?

Five. It's five and a half, isn't it? Okay, five. Yeah. Well, I miss. Yes, that's a good point. So rent inflation is a CPI of shelter, which is tied to rent growth, has been accelerating and adding more and more to inflation.

going back to the low vacancy rates across the housing stock, this severe shortage of homes. But in that decomposition I just did, that's through June, and it includes the contribution of higher rent inflation to CPI. So I'm assuming that that remains the same going forward, about the same. And it probably will rise a little bit more before it comes back in. But my guess is by, you know, 2024, it will start coming back in and be pretty consistent with where it is.

say still contributing a lot to inflation, but still consistent with 2.5%. And by the way, 2.5%, that's kind of the high end of what I consider to be the Fed Struct. They never said two and a half. They say two, which is the core consumer expenditure inflator, but given the COPS is mostly around housing, you know, it's much higher weights on housing. And other measurement issues, you know, two and a half seems to be the high end of the range. That's kind of my take on things. But, you know, just so yeah, I am counting for the higher rate, inflation. But Chris, back to you. Yeah. Okay, you're right. I mean, there's all kinds of risks to what I just said about where inflation is headed. But those are risks, right? You're not, you can't forecast those things, right? You can't, I guess you can forecast there's something that by depth, you know,

for some period of time, there's something else is going to go wrong by definition, almost by, you know, probability draws. You're going to get that. And therefore, you're going to get something along the way. And therefore, we're not going to get inflation coming in as fast as we think. Yeah, I don't know where the next disruption in the oil market is going to be, which specific country, which specific area, but

pretty good chance there's going to be one in the next six, 12 months. That's my heartening. Well, I was just thinking that you get a big hurricane in the Gulf that, you know, disrupts production for a while. And I think they're forecasting an active season.

Yeah. Okay. All right, fair enough. So that's an interesting problem as a forecaster, though, right? Because your baseline can't include or should it? Could it or should it? It should. How? I mean, because you don't even know what it is. If it's one thing, if it's a hurricane that wipes out a refinery on the Texas coast, it's another thing if the EU decides to actually implement its sanctions on oil, it's another thing if the Russians stop shipping natural gas to, to, or stop, you know, ag shipments. coming out of Ukraine and Russia. So how do you account for that? Well, implicit in your oil price forecast, you're making some assumptions about those other, you can keep the forecast oil prices higher than what you would otherwise expect, assuming that there will be some other, you attach some high probabilities to one of these other events. Well, we're basically doing that, though, right? Because we have, we're at $100 oil, and that embeds market expectations for

all the risks you just articulate. right so presumably you know maybe maybe it doesn't capture it fully but presumably they attach some traders are attaching some probability to you know all those different scenarios right that's right that's right yeah i guess i'm attaching an even higher probably probability yeah all right okay okay okay i mean i that that to me you're right i that is the biggest chink potential chink in the firewall and that is, you know, inflation remains higher for longer. Yeah. Because if that, if that's the case, then we blow through that excess saving and, you know, consumers have to pull back and the firewall comes down. All right. Okay. So we talked about leverage and debt. We talked about real

income purchasing power inflation. What about, Ryan, I'll turn to you next. What do you, You brought up the real income. I should turn to Chris next. Chris, what is, which would you point to? Well, of all those things I just said, in my rank ordering, the least thing I'm worried about is leverage. The most thing I'm worried about is inflation. What about you?

Or did I even miss something that you would point out when thinking about the consumer and how consumers are going to spend going forward? I think it's a question of timing, right? In terms of the most immediate threat, I would agree with you. If inflation remains high, real wages are low or negative, consumers are going to pull back in the short term immediately, right? But I think Scott is thinking three steps ahead of us here with the debt, saying, you know, even if we get through this patch here, on the other end of this, as we get into early 2023, when you may still have a debt issue, right? If consumers are piling up all this variable rate debt, interest rates are rising, that's going to put even more pressure on the, our balance sheets later on. So I think both matter. I think it's a question of which,

what's your time horizon, what your most focused on. Oh, interesting. So your inflation and leverage would be kind of at the top of your list of concerns, but depending on your horizon, your timing. That's right. Inflation most immediately. And then if you look out a year or two, leverage becomes more of an issue. If current trends continue. Correct, right. Because it takes times for the, we're talking about leverage in terms of the problem. You can put on some additional debt now. You can keep making your payments for a while. But when it becomes an issue, we'll be later on when things slow down perhaps and when the rates are continuing to rise. That's when the debt burden will become more.

And when you've flown through your excess savings, which at the low end particularly probably isn't going to take that long. Well, I don't know about that. So let's turn to excess savings. I mean, we do our, you know, obviously, it's hard to estimate, right? But we do our calculation. You do them, Scott, right? You and Matt Walsh do these estimates based on the survey of consumer finance and the financial accounts, the Fed data. And we, you know, it's lagged because the data here is lag. We have data through the first quarter of 2022.

So let's say March, because I think it's year, it's a month ending data. So it's a little bit lag. But when you look at that data, it gives you. the sense that people have a lot of excess saving across the income distribution, even those folks in the bottom part of the distribution, I think the bottom quintile, we estimated excess saving at about $5,000. So if that, just take that group, which is a little, it's a group of, it's a little bit weird to look at that group because I don't know that that, there's a lot of things going on.

There are retirees and students and other stuff. Let's just use that group, 5K. If, you know, Ryan's calculation is that, you know, the higher inflation is costing, the typical household, $500, $500 more a month to buy the same goods and services as they were a year ago. That's probably on the high end for those folks in the bottom quintile, but let's just go with it. That gives them 10 months of cushion until hopefully inflation comes in. And then they start to have a real problem. By the way, guys, that's what economists or listeners.

That's what economists call a back of the envelope calculation. But would you concur with that kind of analysis or anything to say about that on the excess savings side? And by the way, just to round it out, for the typical American household, so kind of in the middle of the distribution of income, excess saving is probably closer to, you know, $7,500,000. And for folks, it's the high end, it's like crazy high. It's like the top quintile is like 100K in excess savings, so a lot of savings. But is that the way I characterize things on the excess saving consistent with the way you think about it, Scott?

Yeah, I think that's fair. I guess my concern, though, is that, I mean, your 10-month number is on average. You're going to have an increasing share of consumers that have used it up as time passes. And when you get to that average number, you've probably got something on the order of half or maybe even a little more because we know distributions tend to be skewed. So, you know, you're starting to see folks in trouble, you know, well before that. And I also, you know, while I think our excess savings estimates are good, I do worry about some of the underlying assumptions. And I wonder if we may not be, you know, overestimating how much the low income folks have because, you know, a lot of our assumptions are that, you know, shares that we're in. place in 2019 have been maintained and um you know nothing much was maintained in 2020 from 2019

so you know and although we know the aggregate we know the aggregate we're pretty well yeah we're pretty comfortable well well even there maybe yeah because given given the magnitude of revisions to savings um historically it gets revised up not down but regardless we're 2.5 trillion in overall excess saving yeah That's a lot of excessively. No, I agree. I agree. I think that's a huge buffer.

And I think that's, and that's why I said at the start, I think the risks may be higher than what you portrayed in your opening monologue, but I agree with your forecast. Because I do think, Scott, not monologue. I'm sorry. Soliloquy. Forgive me. But, I mean, that's why I agree. Respect, please.

I do think consumers. A little modicum of respect. You know, I don't get it from my two co-host, but, you know, I guess, please. Yeah, my quibble is more, is more whether you're underplaying the risks than with the baseline. I, because I agree, I agree with the baseline. I think there's a lot of excess savings out there. And I think that, you know, will under baseline assumptions that will cushion us through. So I'm not, I'm not challenging the baseline.

I'm just questioning whether you're underplaying the risks. Got it. And Chris, you did some, some, you looked at the, which goes back to this question about how much excess saving is available for low-income households, particularly the bottom quintile. You looked at the distributional financial accounts. You want to explain that analysis? Because I thought that was pretty cool.

Yeah, so it's a bit of a narrower definition that I use, and it paints a different picture here. So the Fed Reserve does put out a dataset of distributional accounts where they go through, They have a process for taking their income product, the national accounts, and distributing them across different deciles of income, of wealth, by age, cohort, by race. So there are a number of different cuts that they provide. If you look at the income distribution, and I focus just on the liquid assets. So look at checkable deposits and currencies. How much people do actually, how much cash on hand do people actually have in their accounts?

If you look at that series and you break it out by income, you actually see that the bottom 20% of households have less cash on hand than they did prior to the pandemic. So that's where I come up with the conclusion that that group is really suffering much more than what you see at the other end of the distribution. And it also explains why they would be going out and getting more credit, accessing more credit to supplement income. because they don't have the buffer that the other groups do. Yeah, and that was a really cool analysis because you're just looking at things that deposit accounts, you know, as you say. And you can measure that, right? The banks report that and that that brings that into the data. Yeah, it's hard data, if you know, hard, quote unquote, hard data.

But across all the other income groups, you know, the top 80% or quintile, yeah, 80% of the distribution, the amount of cash sitting in those accounts is higher, much higher. Much higher. Much, much higher. Especially the top. Really, that bottom 20% is what you're saying is it's actually lower than it did rise. Because you did look at a year ago and it was higher a year ago and it has come in over the past year for that bottom quintile. That's right.

So that's different than what we or Scott and Matt figured out using the other methodology. that, of course, you're looking at the pot liquid accounts. Exactly. That's, yeah, there are other. Yeah, they could pay down debt. They could have paid down debt. They could have, who knows, you know, but nonetheless. So they're not, they're not necessarily inconsistent.

Correct. We just don't know. We just don't know. But, yeah, that's a good point. The other thing I'd point out in this regard, because we're focused on the income distribution. And I agree, I do think low income households are, you've got to be under pressure here, right? Particularly if you're not working, you know, if you're in,

got a fairer folks that have been pushed out of the workforce because of the pandemic and other things, you're really having a hard time here, no doubt about it. But, and this sounds a little cold-hearted, but the vast, vast majority of the spending that's done is done in the top part of the distribution of income. You know, I think the top, correct me if I'm wrong, Scott, and this is kind of a heuristic, a rule of thumb, the top third of the income distribution accounts for almost three-fourths of the spending, I believe. Yeah, I think I had two-thirds in my head. It's definitely something. I haven't checked that number in a few months, but yeah, it's definitely something like that. But, yeah, it's very disproportionate. But I guess that brings up another issue that I've been wondering about.

And that's, I'll probably tie two things together. One is the stock market and the other is confidence. Because we know the confidence has come down. Stock market has come down. And especially, I mean, I was just looking at your forecast for the stock market and you do have it rebounding at least a little bit going forward now. It's basically excited though, Scott. I wouldn't characterize it. It's basically, we're down to 4,000 on the S&P, which by the way is where we are today.

And it basically goes sideways or for a while until the Fed stops raising interest rates. But if that's the case, if the stock market goes sideways for a while and then stock market gains, go further and further into the past for high-income consumers. Does that, especially in an environment where confidence is falling and it's falling, I mean, probably more at the low end, but across the income distribution, do we have to worry about the high-end consumers continuing to draw down their excess savings and spend as opposed to saying, okay, the rest of my excess savings is my retirement savings or my kids' college savings or some other long-term savings that I may not have done enough of

prior to the pandemic and I'm going to tighten my belt and, you know, pull things in a bit. And, you know, again, that's probably not my baseline forecast, but, you know, I really, I worry about it. Yeah, you're a worrier. I can tell you. Yeah. Well, yeah, that makes a lot of sense. there's two things.

One, if you go back to Chris's data on what's sitting in deposit accounts, it's shocking how much cash is sitting in those deposit accounts. And my get, it's not like it's gone into another asset, right? A home or it probably has done that too for the high income ounces because they've had so much cash. But they got a lot of cash sitting in the bank account. And my guess is if you get into a scrape, or your income is impaired, you will draw that down pretty quickly

because you don't need to sell an asset. You don't need to sell an asset. You don't need to borrow money. You got the cash sitting right there. Right, but I guess my feeling is that spending by high income groups is never a question of access to cash. Right. They always have that.

It's a question of confidence and desire to spend relative to concerns about future needs. Yeah, but even high-income assets go get cautious, right? I mean, it's not like they don't get cautious. And I just said, I just wonder. I guess if you look at your bank account, you've got so much cash sitting there, it's less likely you're going to turn cautious. Unless you're putting that cash into a different bucket.

If you're saying, yeah, if you're saying, yes, I have this cash, but I consider this cash my retirement savings and the only reason it's in cash is because I'm scared the market's going to go down more and interest rates are going to go up more and I don't know where the heck to invest it. So I'm going to leave it in cash until I figure out where to invest it. But I don't consider that part of my cash. I consider that part of my retirement fund. Yeah. Yeah. Is that how you think about things? That is to a fair degree. How it is. Yes. I do bucket money. I do tend to bucket money. that. Even in your checking account, you're bucketing that money. Well, I tend to have a separate

checking account for each bucket. Oh, okay. And it won't be a checking account. It'll be an online savings account so I get at least, you know, an epsilon of interest, but a tiny bit of interest. And, you know, after 20 years of working with you, that sounds like Scott would do that. Right? Right. Yeah, smart. It's actually smart, very smart. But you brought, the other thing I wanted, you brought up in we should explore and may I'll turn to you, Ryan, is consumer sentiment. I, you know, I didn't bring that up in my frame. You know, I was kind of going to the fundamentals, but people are really dower, down, pessimistic, blue. Maybe you can think of a few more words to describe how they feel, but it's pretty bad.

Myasma. Oh, there's a good one. Oh, that's a great one. There's a asthma hanging over consumers. How do you think about that? I mean, in the context of their spending. The firewall feels like it's pretty strong, but you've got pervading all of that this pessimism.

What do you think about that? How do you think about that in the context of consumers hanging tough? So I'm less worried about sentiment because the relationship between consumer spending and sentiment is pretty loose in the short run. So people can say one thing, but they do another. And also, it depends on what measure of confidence you're looking at. So the conference board consumer confidence index, which is very sensitive to labor market

conditions, is holding up relatively well. It's not as, you know, it's not, you know, as depressed as the University of Michigan survey. And that's the one that gets all the headlines in the press. And that one's sensitive to the stock market and gasoline prices. So, you know, last month, gasoline. gasoline prices peak, stock market was tanking, and it fell to the University of Michigan area fell to a historical low. So that's not too surprising, but in the end, in the short run, people can say one thing

and do another. So that's what I prefer to watch what they do rather than what they say. Yeah, I got a theory for you guys. I'm curious what you think of it. my sense of it is that if consumer sentiment was more typical, it is bad, it is really bad. I mean, conference board survey better than the University of Michigan survey, but, you know, it's still pretty low. Yeah.

That if it was more typical, that consumer spending actually would be, the counterfactual would be a lot stronger consumer spending. People would be spending more aggressively. but because sentiment has been so low, they've only been spending at a more typical pace, you know, exactly what they would have spent without the pandemic. I mean,

I could take real consumer spending, pre-pandemic up through this current time, draw a trend line through the spending before the pandemic and consumer spending today is exactly where that trend line is today. Does that make sense what I just said? Yeah. So they're spending, it went down, obviously, during the pandemic,

has come back up and it's like exactly where you'd expect it to be, which is weird given all the other things going on here. You know, the excess saving. We just talked about a lot of jobs, low unemployment, leverage is low. It's starting to rise, but it's low. People are wealthy. You'd expect a lot more spending. And that goes back to all the concerns about, you know, demand side inflation, that inflation is being driven by demand. And people were concerned that it was because the consumer had all this extra cash that they were going to spend. But they haven't done that. They have not done that. And maybe that's because of this low sentiment.

So what do you think? Does that make any sense to anybody that theory? I like that. I would push back. I would disagree. You would disagree. When you model like real consumer spending, you know, and you just, you know, you can look at leverage, real disposable income, include different measures of consumer confidence.

Sentiment explains very little of the near-term fluctuations in spending. It's real disposable income. That drives the train. No, I totally agree. But that's, you just estimated an equation over some lengthy period of time. And I would argue that there are periods of time when that matters a lot, particularly around recessions and, but in question points, right. Maybe, maybe, you know, I agree with you.

Typically, sentiment reflects the economy. It doesn't drive the economy. It doesn't drive consumer spending. But there are times when that's not true, the causality shifts. And maybe that's something, you know, that's kind of sort of what's going on here. It matters, but the counterfactual is we would have a lot stronger spending, if not for, you know, the very weak sentiment that exists. But I guess the concern then is that sentiment appears to be still declining, especially the conference board measure. I mean, maybe Michigan ought to be bottoming out just because it's...

I think it bottomed out. Well, yeah, it went up at a trivial, trivial amount in the last reading. But, I mean, if you do something like the average between the two or something like that, I think it's something that's a little more blended and sensible, then the trend is down. And so, you know, if confidence, if that trend remains in place, then don't you have to worry, if you are arguing that it's mattering, then you have to worry about that impact growing. Oh, yeah. I mean, I do.

But fortunately, gas prices are down. Ryan's right. That has a big impact on some. Stock prices are up that has an impact on sentiment. And that's why the University of Michigan probably will improve relative to the conference sport because the job market is definitely goes up. By the way, we should go to the job market. No one brought up the job market.

You know, are we all assuming that? I was waiting for the stats game because we know that's going to wait for the stats game on the job market. But one thing with sentiment, they break it up usually into consumers assessment of present conditions and expectations. And that expectations continue to deteriorate. And, you know, that's pulling down leading. indicators and then that's that's a little cause for concern yeah no no no yeah i mean at some point

actually just throw it out there uh the and hopefully hopefully i don't take anyone's statistic but uh one of the best leading indicators of recession is the change in the conference board survey of consumer sentiment if that falls by more than 20 points it's an index so if it falls more than 20 points in a three-month period, we always have recession. And it's never falsely predicted recession. And that, you know, the intuition is clear that again, back to the causality, at some points in time, particularly around recessions, causality shifts and sentiment drives spending decisions in the economy. People run for the bunker, so to speak, and stop spending because they're panicked by whatever is going on. And the Conference Board survey is down about 10 points

over the last three months. So I'm watching that pretty carefully as the job market is going to weaken here, right? By definition, it's going to be. But just to add to that, Mark, it's down all 10 points over the last two months. Well, I thought it was over the last three. I thought it was 10. But yeah, but two or three months ago, we're about the same. Oh, oh, I see what you're saying.

I see what you're saying. I get one more really bad month. That could be down 20 is what you're saying. Yes. Yeah. Yeah. You get a 10 point drop in the next month and you're down 20. Yeah, yeah.

And that leads recessions, by the way, just a point of interest by I think four, five, six months, you know, something like that. So anyway, all right. Chris, I have a feeling his probability of recession moved up. You would think. He's got to be consistent himself higher. It has moved up. Yes, it has. Yeah.

Do you view that as a victory, by the way? No, no, I do not want a recession. But he also wants to be right. Yeah, I also want to be right. I also want to be right. Okay, let's play the game. Unless there's anything else. There's a gazillion of things we can talk about the consumer,

but I think we've been at this almost an hour. We got the game and we've got to talk about probabilities of recession. So anything else on the consumer, Scott I missed or Chris, Ryan, that, no. I think we got it. You cover a lot of ground. We didn't talk about, we kind of indirectly talked about wealth. We didn't talk about house prices, but we'll save that for another day. Maybe that's part of the statistics game.

that's coming up. Could be, could be, because a lot of housing statistics came out this past week. Okay, the game.

Statistics game, I know you guys get annoyed when I repeat the rules of the game, but we have to do this because Ryan cheats. I know he cheats. You got to tell him,

you know, how this game is played. That is, you want a statistic that's not too easy so that we all get it all at once, not too hard that,

you know, forget about it. We, you know, of course, we're all, we all come up with the statistics and each of us

try to figure that out through deductory, questions and clues, that kind of thing. And you want a statistic, if you can, that's topical, recent last week or two, topical, which would be the consumer. Okay, that's the game. All right. Chris, you catch on to that? He changes the rule every time. Last week or two. Last week or two? Yeah. It's always been the last week. See, this is, he's ill prepared. He's ill prepared. No, and actually, he's right. He's bailing me out because I've been on vacation most of this week.

And so and I wanted a consumer related statistics. So the one I have in my hip pocket actually is from two weeks back. So you're the guy too much information. Way too much. Yeah. You just gave it away. Yeah. Well, baby.

I thought I should tell that. That was, that has nothing to do with you. You didn't know that, but you are bailing me out. That's so funny. Okay. All right. Who wants to go first? Well, let's go, let's Scott go first.

Okay, Scott, you go first. You know two weeks ago. Yep, two weeks ago, I have two numbers which are from different releases, but I think should be tied together. It's 8.4% and 13.4%. Consumer related. Consumer related. Is 1.4 mortgage balance increase over the last year? No.

I think it's close to that, though. I think it's close to that. Yeah, no, I think it is. It might be stronger, actually. 13.4 would be more like mortgage debt growth, I think. Over the last year? Okay, I'll bet you. Side bet you.

Side bet. Dollar bet. Above 10, below 10% bet. Year over a year, mortgage debt outstanding. Yes. Yeah, through the month of June. I bet it's over 10. Anyway, back to back back to the main show.

Is this related to buying plans in the University of Michigan survey? No. Okay. Is it, is it, is it related to jobs in any way? No. Is it related to spending, retail spending? Yes. Okay.

Are we looking at growth in specific categories of spending? No. Oh. That'd have been too easy. Is this a calculation? you got to do? Is it like above or below pre-pin? Both numbers are year-over-year growth rates.

And they both come from, they come from different reports. Yes. Is one, oh, and they're both positive, you said, 8.4 and 13.4. Yes, they're both positive. Yeah. I'm not falling into Marissa's trap. Right, the negative sign, because I was going to say like Walmart sales or something. Well, it could be.

Is it a retailer's sales growth? No. Oh, geez. Oh, man. Let me ask you this. Should we, are we being idiots? Should we know this? Do you have a chance?

The 8.4, I am very surprised you don't know. The 13.4 is a little more subtle. And that one, I would not. That one's hard. Oh, I see. Okay. All right. This is just a guess.

8.4. Is that just total retail sales year over year? Yes. Oh. I think we're overthinking it. we were overthinking it so 13.4 comes from something different it's not retail says it's from a different

oh okay you were being a little sheepish because you thought that couldn't be the answer yeah yeah oh that's so funny and so what's the 13 point for is that I'm just I'm going to just the corollary is that

service is spending growth no we wouldn't have that yet actually Because I'm looking at June. Is it next week? Is it next week? Okay. Yeah.

But it's spending. It's growth in some form of spending. No. Oh, it's not. Is this something from Michigan? No. No. A lot of nose coming out of that.

Geez, Louise. All right. I don't know. What do you guys give up? You want to hear it? Because he said it is subtle. I think he used the word subtle. Yeah.

It's not a high profile. It's not a high profile. Are you? from the risk. It's not something like, you know, the, I was going to say Red Book. I was going to say Red Book. It can't be. No, no, no, because it's not a spending number.

It's not like a visa. Okay. It's a price number. Huh? It's a price number. Everything's up 13.4. 13. I don't, I'm tying, but I tie the two together.

Is that retail the, the, uh, inflation for retail goods? We don't have that yet. And what can, what came out last week? what you guys talk about last week so what component of the cpi would i be looking at some kind of retail good good cpi commodity cpi oh okay all right fair enough so but then the point i want to make is that that spending have a point i do have points in this game spending was up 8.4 percent prices oh yeah a roughly comparable basket of goods is up 13.4%.

What does that say about real spending? Yeah, that's good point. On goods. Yep, yep. But I got pretty close when I said inflation for retail goods, right? I mean, come on. You're in the ballpark. Oh, that's rude.

That's rude. But no, that's a great point. Real. So even though retail sales was, I think it was up 1% in the mean, nominal. So it includes inflation. You're saying real. after inflation, it was down, negative. Yeah.

Yeah. Yeah. But people took solace in the 1%. I mean, markets did because it was stronger than anticipated. Right. But the trend in real, obviously a lot of it is energy. I mean, if you do the same thing for core, the gap between the two is less than half a percentage point. Oh, okay.

So, okay. That's good to know. So it is, it's food and energy, but it's still taking a budget. out of consumers' budgets. Because the point I always make is that while economists care about core, consumers by food and energy every week. And that's what they care about a lot. So it really matters to consumers. Yeah, that was good statistic.

Okay, we better move forward. Ryan, you want to go next? Minus 18.6. minus 18 point came out this week not this week you did come out this week is it

it's not housing related it could be everything's down now is it from the Philly Fed survey it is close to our home it's one component

of the Philly Fed survey is down like negative 12 or something something. So it's not that. This is the lowest since 1979. And that survey has been done since 1968, I believe. Yeah. Yeah, give a good tip. Yeah. So a long time. It's a long time. By the way, on the Philly Fed, it used to be when I was a young economist, that that was the full proof leading indicator of recession. Because it, you know, Philly Fed is manufacturing activity in the third district of the Fed system, which is Philly. It's small, but, you know, it was a very good leading barometer,

and you had this long time series. And I think to this day, it's still excellent. You know, I think it has to fall more than to negative 20, though, for it to be a strong signal. The headline, yeah. Okay, so what's down 18 is one of the components? Is it orders? It can't be orders.

No. No, it's too much. Prices received, prices paid, still got to be high. but they're coming in. Supplier deliveries, they're coming in, but they're still high, I think.

Employment, no, can't be employment. I mean... You're getting really close. Dancing around it. Yeah, what else is in that survey that I'm missing?

What are the components? Investment, somehow, investment spending? No. Inventories, office space use, that's not... Remember,

the general business conditions index is its own question. Yeah, exactly. Right. So when you're thinking component, there's something else they ask that's the lowest since 1979. And it gets back to recessions. Expectations. It's an expectation.

Oh, yeah, it should have known that, right? Good job. Yeah. Yeah, expectations. They're down. Yeah. Like everything, like all these surveys, right? Yeah, it's really bad.

I mean, look at the NHB. That fell a lot this week. You know, across the board, confidence, small business confidence, our weekly business confidence survey, everything is just down, down in the dumps. Yeah, but a lot of, I mean, sentiment is down, right? I mean, this is, there's a lot of sentiment built into these kind of surveys, these diffusion industries, don't you think? It's generally, the question is, are we going up?

Are we going down? Are we staying the same? Right. Correct. Yeah. Specifically the regional Fed manufacturing survey. The ISM, you can break out the ISM into like the hard ISM component. So you can, you know, look at the details of the ISM and map it to like the hard manufacturing data and then back out the sentiment component.

But yeah, the regional, you know, Philly, New York, Richmond, all these are driven by sentiment. Yeah. I think the Philly Fed, again, was the first survey done, you know, back, first one done. And it really, again, when I back 30 years ago, that was like a really key indicator. People really made a lot of attention to it, much less so now. All right. We're going to do one more because we're going to move on. Let's go.

Chris, what's your statistic for the week? All right. Two for $824,000 and $800. Yeah. Stop. What's the second one? You have to give me the number. Wait a second.

Okay. 824,000 is the homes, single family homes under construction. Okay. Ryan, are you taking this in? Are you taking this in?

And then I'm going to tell you what his next question was going to be, $868,000. No. No, okay. $841,000. Huh? 841,000. Oh, that's multifamily.

Yeah. Oh, okay. Look. That's impressive. Scott, that's how it's done. It's done. That's like, what was that movie with Tom Cruise where he could predict the future? You know, the guy who's, you know, talk, yeah, it was a minority report.

Yeah. That was like minority report. They could, they should put like little electrodes on my brain, you know, because I could predict. You could swim in a vat all that. I didn't hear the cowbell. I gave a cowbell for the first one. I don't know why. I had to get my own cowbell out and do it.

Yeah. You can get it. Yeah. I'm sorry. I was just gloating so much. I blew by what the statistic was and why it matters. Go ahead, Chris. Fire away.

Yeah, so these are homes under construction, both single family and multifamily. They are still higher than last year, so they're still elevated. So I view this as a positive in the short term. There's still a lot of homes to be built in the pipeline. So over the next few months, that should continue to support the housing construction industry. and that offsets some of the negative sentiment we've been talking about here. But if you look deeper in the report, right, permits are down and starts are down. So longer term, there's some concern about the strength of the housing market.

I don't think that's a surprise given what's going on with rates and expectations for pricing. So, yeah, short term, housing is going to continue to support longer term. It's going to be not a drag, but less of a positive for economic. activity. Of course, one thing that I've wondered about, because you got a record number of homes under construction. Right. And they've been delayed, I guess presumably because of the supply chain issues around billing materials and labor issues related to the pandemic. And so as a, and by the way, in the Philly Fed survey, probably around one positive thing was supplier deliveries are improving here very rapidly. So it feels like the pressure is coming off. The supply chain is pretty quite fast.

So if that's the case, then you would expect these homes to go to completion. And it's really completion that matters most for output GDP and jobs, right? Because you're working on them. The starts and the permits, that's the future down the road. But these are here and now over the next few months, at least, over the next six, nine, 12 months. Do you know, do, presumably builders could stop building those homes, right? They could kind of put them in deep freeze and say, I'm just not. not going to go to completion because I don't know if I can sell it at the price I want it,

I think is reasonable on the other side of this. Yeah. Yeah. Right? They could do that. They do that with foundations from time to time, right? They pour the foundation and they stop for whatever reason. Once the house is underway, though, they're not going to do that, you don't think. You know, if they've already put up the frame insulation, right, then it's harder to mothball that. And they got money tied up, right? They had to. to, they're financing it in some way. Yeah. So you think they'll complete it no matter.

It would be pretty, it had to be pretty bad for them not to complete it. I think so as long as they've poured the, if they haven't poured the foundation yet, then they could, or even if they have poured the foundation, they could stop at that point, cover it up and just wait,

but is there data on that? Do we know where in the pipeline those homes are? Can we figure that out? I mean, that'd be good to know. I mean, I think there's some private sources. I mean, yeah, there might be.

Yeah, that'd be really good to know. because that's really key to the near term here, which is, you know, important. Okay. There's a big risk of that, though, right? They're still. Yeah, you're right. Prices are still up. They're discounting, but, you know, they can make a good return on their investment, I think.

Yeah. I think later on, though, I think you're right. If things soften here, if demand falls off and they're in the middle of the permitting process, let's say, then they might pull back from there. Yeah. Yeah, okay. All right, we're going to move forward. I'm going to skip mine just because for sake of time, because we're getting close to time here. Let's talk about recession odds. And let me begin with you, Ryan. What are your probability of recession for the next year, next two years, and has that changed from last week? Hasn't changed. It's still 65%. For both one year ahead and two year ahead. Here's the thing I'm going to.

want to ask you, how in the world could this recession happen to, you know, if it's going to happen, isn't it going to happen? It feels like it's going to happen soon, isn't it? Next year. Even like the next six months, it doesn't feel like. I agree with you. Right? I mean, yeah, I mean, if we get through early next year, then we're going to avoid it.

But if there's going to be a recession, it's going to be soon. It's going to be short. But it just seems like everything. is pointing towards a recession on the on the horizon. You don't see the excess savings providing some lifeline here and pushing things out. It hasn't really come down that much, though. I mean, the last few months, I would have thought we've got high gasoline prices. You'd see that excess savings be worked down more.

No, but what are you saying is that that's a buffer. Yeah. It's a buffer. Yeah. It's a buffer. Yeah. It's a big push things out. The point is it could be worked down delaying things.

If, you know, if job growth were to stop or something, consumers could still carry on for a little while and delay you really entering the recession because of the excess savings. Yeah, well, that gets back to the argument. Do they treat it like cash or wealth? Right. No, it does. Yeah. So, Ryan, what's-

And then Scott's leverage point, right? If they build up the balances today, then the trouble may actually reveal itself. Some of it is not cash excess savings. It's that they increase their borrowing and get the balance. sells in trouble by mid to late next year. I think there's plenty of lifelines for the economy. I just think at the end of the day, it's going to come down to inflation and what the Fed does. And they could face Hobson's choice of, you know, rather, do they push us into a recession now

or wait longer and have to push us into a deeper recession? And I think if you ask Powell and twist his arm, he would say, I'll take a short recession now to break inflation. I think that's a great point. It's about inflation here or now. And if it doesn't come in, he's going to keep pressing harder or harder on the breaks and then the economy's going to break. But then again, Fed moves operate with long and variable lags. So how quickly can he bring us?

Yeah, that's what people say, but it feels like it's working awfully fast. Yeah, I think that's time horizon shortened. Yeah, the housing market's caving. I mean, you see, I mean, demand is caving. Existing home sales, 5.1 million units in June. that's that's all that's a that's a it was six and a half right start of the year and you know that that's it's falling fast here uh anyway okay what one statistic are you focused on when you say 65 percent probability like just give us one statistic you're looking at i don't want to steal chris's but

it's jobless claims okay so the trend not week to week because they're very volatile but the four week moving average in initial jobless claims So they are pretty telling. Yeah, but they're 250. They've moved up to where you'd want them to be, right? If you were the fed. They're 250 is roughly the average that you see before recessions. Now, that 250 isn't the line in the sand.

Actually, one number I was going to use is 275. That's the break-even level of jobless claims right now, which would be consistent with no monthly job growth. So we got a little bit of a buffer. But if we get up to 270, 275, then we got a problem. So we go north of 275, no job growth. We're going negative. And that's probably, we're going in. Yep.

Yeah. All right. Okay. Scott, do you have a probability of recession in mind? I haven't asked, you've not been on before, so I've not asked, but do you have a... I'm sort of struggling to come up with one. I think I'm probably a little more optimistic than Ryan is. Thank goodness.

It's not hard. It's not hard to be more optimistic. But I struggle with the timing. I'm really struggling whether to put it into the next year or the second year out because I think, I don't think it can, I don't think it's going to happen this year. I think I do believe the consumer buffer is too much. But I'm not sure if it can happen as soon as the first half of next year. What's your probability though over the next year? Do you have one or not? It's okay. I'm kind of, I'm almost talking myself through to try and get to it. I'd say probably a little under half, maybe 45% in the next year. And then maybe a little over half, maybe 55. Yeah. In two years, because I am, I am more worried about that sort of 12 to probably 18 month out horizon.

Right. Is there one statistic you kind of focus on, look at trying to gauge recession risks? I don't know that I have a single statistic I'd go say I'd go to at this point. Okay. All right. Chris, where are you? Unchanged from last week, 50% in the next year, 65% chance in the next two years. Right.

Okay. And there's only one statistic and you, it's the yield curve. Yeah. It's the 10. How are you not higher? Well, once I'm waiting for the 10, 10, 10. year three-month yield curve to invert once that goes, then I'll up my odds. Yeah.

Well, the difference between the 10-2 was the largest since the early 2000s. Yeah, and it's so narrow, though, it's only 15-20 basis points, 0.15.5.2 percentage points, right? I mean, it's not that big. It's been two weeks now, roughly. I think it's going on three. I don't think so. I think it's going to be two weeks today, I believe, inverted. Right, Ryan?

I'm just reading Ryan's. No, it's roughly two weeks. Work every day. He sends out a really cool missive every day. It's better than a missive. It's a, you can say it's an missive. It can be amissive. Okay, it's a missive.

And at the end, he does talk about the 10-year-two-year spread. And he says, for 13 trading days. I think today you're going on. Oh, trading days. All right. 14 trading days. Yeah. Oh, sorry.

Yeah, I was putting in the weekend. But that is about three weeks, right? Yeah. Because you have five trading days in a week. Oh, wait. Oh, yeah, you're right. Exactly. I was thinking two weeks.

Yeah, right. It is almost three weeks on trading days. Yeah, you're right. Sorry, Chris. Okay. What was what are you? This is the big reveal. Oh, yeah.

Yeah. So I had been at 40% one year recession odds and 55% two-year recession yards. And I'm now going up to 45% one-year, 55-2-year. I'm exactly with Scott, I think. Yeah. And I'm looking at the 10-year-two-year, and that's why my recession odds have gone up. If that doesn't write itself here in the next week or two, then, you know, I have to go up to at least 50%. And I do agree the 10-year-three-month would be real ratification of what the 10-2-year is saying.

I do look at the UI claims. And, you know, I thought 275 to 300 would be, you know, problematic. I mentioned the Philly Fed down 20. I think that would be an issue. The conference board survey down 20 points over a three-month period. That would be, you know, quite bothersome. We're awfully close, you know, to go in recession. But that's kind of sort of where we've been, right, that we're going to get right on the precipice

and pull back before we actually fall over. but and while while you're on the precipice, it feels pretty uncomfortable like you are going to fall over, but that's completely understandable. That's what you would expect. So this is to script so far. I will say I agree with you, Chris, that if anything else goes wrong, we're done. And the probability of something can go wrong here is not inconsequential. So, you know, risks are awfully high. So I agree with you. But the consumers, the, firewall, got to hang tough, and you're wrong about debt. That's all I got to say on that issue, at least so far. Any other pearls of wisdom before we move on, before we call it a podcast?

No. Okay. We're going to call it a podcast, and this was a long one. Come back next week. We've got Princeton Professor Alan Blinder. That should be a good conversation. But thank you. Have a good weekend. Talk to you soon. Take care now.