Moody's Talks - Inside Economics - Gangbuster GDP

Episode Date: October 27, 2023

The inside Economics team takes up the gangbuster GDP growth in the third quarter. Marisa walks the group though the GDP identity C+I+G+net exports and concludes that while the report overstates the case, it makes a strong case that the economy is on solid ground. Cris gives Marisa an A+ for her exposition. Good thing given their history. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Talley and Chris Doretti's. Hi, guys. Hi, Mark. How things? Okay. Okay. Good, good. You know, this is a little unusual for us because it's late, well, not late, but early evening on a Thursday. We typically record our podcast on a Friday, but we're doing it late Thursday because I have a board meeting all day tomorrow. Can't do it then.

But, you know, we could have done it Saturday. Why did we do it? You tell me. You chose it. I chose it? Yeah. I think we're doing it next Saturday. Oh, is that what it is?

Okay. We can compare. Okay. Very good. But here we are. And this is an important day because on this Thursday, what is this? October 26th, we received the GDP report for the month, for the quarter of, for the third quarter of 2023. the GDP being the value of all the goods and services we've produced.

And it was, I don't think there's any other word for it, but gangbusters. I mean, guys, have any better word for it? I mean, pretty amazing kind of growth. Yeah. Okay. Yeah, it's a good word. It's surpassed all expectations. All expectations.

Okay. Well, let's dive into it in some detail. And hey, Marissa, maybe I can call on you to do a deep dive here. Give us a sense of the numbers and your interpretation of the numbers. Sure. Yeah. So well above expectations growth in third quarter, growth was 4.9% Q2 to Q3. And we were expecting something in the high threes. And most forecasters were not expecting something of this magnitude. So this is the strongest rate of GDP growth that we've had since the end of 2021. You have to go back to the fourth quarter of 21 to see growth this strong. And it was really quite broad-based amongst all. all facets of the economy and I'll go through what those are. C plus I plus G plus net exports,

right? So we'll go in that order talking about the different components of the contributions of GDP. Is that econ 101? This is this is macro 101. Macro 101. When I was in university college, it was econ 101. Was that when you were there, it was econ 101 or it was called macro 101. I think we had to take macro and micro were separate. I don't think we had a general econ. Oh, is that right? Yeah, for me, it was econ 102. What happened to 101? 101 was micro. Oh, okay. Well, that makes sense, actually. You should do the micro before you do the macro. You'll zoom out, right? I'll let them know. Okay. This is a, was this at Johns Hopkins? No, you got your PJ. Oh, that was at Michigan State. Oh, that figures, Michigan State. Oh, so you're a Wolverine,

Aren't you? No, not, well, don't know, wait, a Spartan. You're a Spartan. You're a Spartan. Sorry about that. I know. That's, I could care less. Oh, yeah. Did you know that Chris was my econometrics professor at Johns Hopkins? I know. I didn't know that. You didn't? No, that is really amazing. Yeah. John Hopkins? Mercer? Yeah. undergrad? No, no, no. Graduate school. Oh. Master's program. Oh, you went to Masters? You got your master's from Johns Hopkins? Yeah. Yeah.

I've known you for so many years and somehow I didn't know that. That is bizarre. Go blue jays. Go blue jays. Was Chris a good professor? He was great, yes. He was great. I can imagine that.

Yeah, that I believe. And Chris, was she a good story? He probably doesn't even remember me. Absolutely. Absolutely. Yeah. A liar. So then the addendum to this story is that I show up for a job interview at

Moody's Analytics, years later, and who's in the room interviewing me? Oh, no. That is so cool. That is so cool. What a great story. How did he do in his interview? It must have been pretty good. Oh, yeah. He must have, he wowed us, I guess. Yeah. Yeah. I will say he gave me an A minus on my econometrics final paper. Don't say Marissa holds a grudge, Chris. Wow. Remember the minus. Where that minus comes from? That's probably because you've got the C plus I plus G plus net exports. Anyway, all right.

Well, we're going to test you now. Okay, let's go back to C. Let's go back to C. Let's go back to C. Okay, so over half of the growth in GDP in the third quarter came from personal consumption expenditures. So personal consumption expenditures grew 4% on a quarter over quarter basis. And again, you have to go back to the end of 2020.

to see growth in consumer spending that strong. We talked about this on the last podcast, right? We did our whole podcast last week about how strong the consumer is and how strong spending has been. And here it is, in black and white in this release. You see spending on both goods and services by consumers was quite strong. So, you know, we've had this sort of, we've seen that consumers were spending very strongly on goods during the pandemic

because they couldn't spend on services. And this was starting to sort of come back to some normalcy with more spending on services. But they're still spending quite strongly on goods, both durable and non-durable goods. So two of the categories within good spending that were strong over the quarter were on the durable side, recreational vehicles, which are RVs, right? I don't know. Is there anything else in that category? like jet skis and things. Yeah.

And then on the non-durable side, spending was very strong on prescription medications. Services spending was also quite strong. You have to go back to the third quarter of 2021 to see spending on services that was this strong. And that, you know, if you go back to the third quarter of 21, you're talking about sort of that post-pandemic, post-COVID lockdown, reopening of the economy, right? So service spending was strong. Service spending was strongest on housing services, on insurance, and on health care spending. Those were the strongest service categories. No Taylor Swift effect? No, no Beyonce. Oh, actually, yes. Yes, there is potentially a Taylor Swift effect. So spending on leisure goods, leisure hospitality, entertainment was also

one of the very strong components. Yeah, you think that's what it is, Chris? You think it's Taylor Swift's tickets. Did you go see her, Chris? Are you a fan? I did not. See how he's a Swifty. He's blushing.

I think he actually did go see her. Like you're like a serial Taylor Swift fan. You go to all their concerts. All their concerts. No? I wish I had the time. For the money, apparently. I don't, versus that, that felt a little disingenuous that laugh.

Yeah. What do you think? He's hiding something. He's hiding. He's definitely. Adding to the Chris Lour, lover of cryptocurrency and Taylor Swift. Yeah, we haven't talked about crypto in a while, but never mind. No, please don't.

Please don't. Okay. All right. Well, the consumer obviously is hanging tough. Hey, Chris, remember last podcast you were kind of worried about the consumer? Any feeling better after this report? or not so much? Feeling better that last quarter, the consumer was having time.

Right. Last quarter. Great news. That last quarter was great. Got it. Let's see what happens next. Okay, so C, now we're on to I invest. Yeah, let me just say one more thing about C, which is the only category that actually

declined in terms of consumer spending over the quarter was gas and energy goods. Ah, okay. And that's on a real basis. So that means the actual amount. I guess gas prices were up and we just conserved. We drove less or something. Okay. All right.

Got it. Yeah. Okay. So now we're on to I. So private investment was up 8.4% annualized over the quarter. Again, the fastest rate of growth in that category since the end of 2021. Fixed investment was up just under 1% over the quarter. non-residential fixed investment was just about flat.

Residential fixed investment, however, was up for the first time in nine quarters. So the non-res fixed investment, that's investment done by businesses, right? That's right. And the residential obvious is housing, single-family, multifamily housing, and home improvement. And within, if you want to break down the spending by businesses, Spending on equipment by businesses declined over the quarter. And spending on equipment has declined in two of the last three quarters. So it was up in the second quarter, but it also declined in the first quarter of the year.

But spending on structures, so buildings and spending on intellectual property were both up. So it was pretty much a wash between the structures and the IP offset the spending on equipment. which was down. I think that... Sorry, go ahead, Chris. Do you think that's Chips Act related, some of that non-resi structural spending or building semiconductor plants and whatnot?

So I could be a contributor. Yeah, absolutely, right? Because that's manufacturing construction and that's in the non-res structures. So that would be, I think that's the Chips Act. I mean, I think if you look at manufacturing construction put in place, So that's nominal dollar actual value construction and manufacturing facilities, factories, which would include fab plants, chip plants.

I think if you go back a couple of years ago, it was $75 billion per annum. That was kind of roughly where we were. I think we're now over $200 billion annualized. And it's still going up. So I think that's the big part of it. Yeah. Yeah. I was going to say on the equipment side, I think one thing,

to note, and I think I had this right, I haven't looked recently, but if you take a step back and look at a chart of that business investment spending on equipment, so that's computers and that kind of thing. It surged, as you would expect in the pandemic, because of remote work. We all bought stuff, and businesses bought a lot of stuff for their employees to do remote work. And even though things that kind of leveled off here more recently, the level of investment spending is still quite high by historical standards. It doesn't feel like it's normalized back to what it would have been if there have been no pandemic. That's in my mind's eye.

So I'm not sure if that's exactly right, but I think it's pretty close to it. Yeah. Now with the shift. That is right. That is right, Marissa. Yeah. I mean, if you go back and you look at what equipment, spending on equipment, and especially computer equipment was like in 2020, I mean, it was off the chart, right, in the third quarter of 2020.

So once we realized everybody would be working from home for some time, businesses exactly right went out and spent. And so there's been recent weakness over the past year in equipment spending. That could just be this cycle of not having to replace stuff you just bought two years ago. Yeah, exactly. Anything else on the eye? Oh, I meant to ask on the residential investment, single family, multifamily, home improvement. It was plus an aggregate. Was there anything going on underneath?

I mean, what was driving that? Do you know, Chris? I don't know. I didn't have an opportunity to look it up. Okay. All right. Maybe I'll do that as we move along here and try to figure that out. Okay, so that's I.

So basically see big time source of growth. A source of growth in aggregate, not business investment, but, you know, in aggregate. In aggregate, it added one and a half percentage points. Oh, it did. That also includes inventory investment, right? It does. That's true. Yes, it does.

And inventories were a positive contributor this quarter for the first time. Do you want to explain that one? You know, inventories? Yeah, so inventories, it's the change in inventories that matters to the calculation of GDP growth. So the change from the prior quarter. This is the first time in three quarters where inventories have contributed. positively to GDP growth. So last quarter in the second quarter, it was flat, no contribution. In the first quarter, it was a fairly big detractor, took about 2.2 percentage points off

of first quarter GDP growth earlier this year. So this time, it added 1.3 percentage points to GDP growth. So businesses have a lot of inventory, even though people are spending a lot and buying a lot of stuff, right? We see that with the consumption of goods, but nonetheless, they have a lot of inventory, and that inventory grew over the quarter, which implies that production has been strong, I think. Yeah, I'm so weirded out by that because boom time consumption, uh, inventories increase. That implies, as you say, a big increase in production, but actually manufacturing industrial production has been pretty flat, you know, it's not like it's booming. It could also be imports, you know, we're importing stuff that goes into inventory before

it was sold. And imports were up, but, you know, it didn't feel like it was up a lot. That just feels weird to me. You know, when something feels weird to me, generally it's revised. So I'm just thinking this might be revised. We'll see. We'll see. But I guess the point is we get 4.9% GDP growth. What was the contribution from inventory investment? Was like one three? 1.3. Yeah. Okay.

So that subtract that. That's three six. So even if that's the reality of what happened, three six is. That's still pretty good. That's still really. Right. By the way, that was pretty close to our estimate for the quarter. Right.

We are tracking. That's right. But okay. So that's C plus I. Now G. So G, government spending was also a positive contributor. to growth over the quarter. So government consumption added about, let's see, an eighth of a percentage point to 0.8 percentage

points to GDP growth over the quarter. So it was both federal spending and state and local spending grew over the quarter. Within the federal spending, defense spending was up very strong. It was up 8% over the quarter. You have to go back to the end of 2020 to see defense spending that big. Non-defense spending was also up. That was up 3.9 percent. And state and local government spending was up 3.7 percent, which was a bit softer than

it's been all year. But still, all branches of government spent out there spending money and adding positively to GDP growth. So, and that goes to Chips Act, the infrastructure law, maybe the inflation reduction act, although it might be premature for that. And of course, defense spending, it feels like that's going to continue for some time here, given geopolitical events. Right.

I mean, we've had a lot of aid going to Ukraine, and now we're likely to get even more of that with Israel. Israel. Yeah. Okay. Yeah. Okay. So a lot of juice from C, some juice from I, bare amount of juice from G.

What about net exports? That's the last term in that identity. So net exports were the only detraction here from growth. So of all of these categories, net exports were detracted. A very small amount, though, we're looking at 0.08 percentage points from growth. 0.08. Yeah, 0.08. I think I'd run that to zero. Just saying. You could, yes.

Okay, fair enough. Okay, got it. So this was the only category where this wasn't a help to GDP. Yeah, yeah. And it was, is it imports plus, I mean, both were up, exports were up, imports were up, but the net of that was no change. That's right. Okay. Yeah. Okay. So that's the nuts and bolts of it. What's your interpretation of it? What does it mean, you know, for the, where the economy is and where it's headed?

Oh, and I should also say year over year GDP was up to 0.9%. So we're looking at growth that is well above the economy's potential here. My interpretation is the same, kind of the same thing we were talking about last week, right? I mean, consumers, still have a lot of spending power here, and they are propping up much of the economy. I think the fact that inflation is on a clear downward trajectory and has been moderating for now the past year plus is giving them more of a wherewithal to spend. And I think that's what we've seen over the last couple quarters here. I mean, even just compared to where we were a year ago or at the beginning of this year, inflation is down significantly. So you're just to summarize, you're saying, okay, inflation was a problem. It still is a problem,

but it's much less of a problem. It's come in. And that's helped to support the purchasing power of American consumers, and they're using that to continue to spend. And they spent strongly in the third quarter. And that's the key reason why, and really in the first half of this year, the key reason why the economy is growing as well as it is. That's the most, that's the fundamental reason for that strong growth. That's what I believe. Yeah.

Yeah. Okay. Okay. Fair enough. Chris, what do you think? Do you want to fill in any gaps there in the, in the, Marissa's rundown of the GDP? And what's your interpretation of the numbers? Well, first of all, I think was the A-plus report.

There you go. Oh, not an A-minus, huh? And I honestly do agree that it reflects the strength of the consumer. Consumers really are continuing to drive the bus. The inventories number kind of mentioned, it's a little bit of noise to me. Even if it's right, it tends to be volatile. I worry about the shopping cycles being scrambled here. So who knows, right?

What's going on there? Right. Clearly, relying on the consumer here. The investment, I thought, you know, that's somewhat troubling, I guess, in the sense that you do want investment to pick up more of the water, carry more of the water, I guess here. So, you know, I don't see that as a negative, because the residential investment actually picked up after a long string of negative growth. So something to watch.

but if we're thinking about more of a sustainable growth path, right, you do want to see investment kicking in a bit more. So because we are so heavily leveraged on the consumer right now. Right. So, so. So good report. Yeah. Absolutely.

Right. But it does hang very heavily on consumers. And, you know, was the third quarter summer of spending, right, where we did go to the Taylor Swift concert. and do a lot of other spending. And that will pass now as we can start to face more and more headwinds. I think that's the case. This is, for me, it's a one-time burst of activity here. We should be prepared for some slowing, not negative necessarily, but certainly a repeat of this would be heroic.

That's a good way of thinking of the good frame in terms of thinking about it. I mean, obviously, to see, the consumer is the key, right? 70% of the economy, that drives the train. So if that's consumers are doing their part, the rest of it doesn't matter nearly as much. I mean, it's a necessary condition. Okay. And on the eye, the business investment, that does feel flattish. Not sure we're going to get a lot of juice from there one way or the other.

And so I think that's, from memory, 10% of the economy, effectively, so relatively small. part. The G, though, that feels like there's some more something there. Yeah, that's not over. I mean, because that goes back to the infrastructure legislation. That goes to the Chips Act. That goes to the Inflation Reduction Act. I mean, I think, you know, we've done a lot of work in this area that the maximal impact from those pieces of legislation on the economy on GDP isn't for another year, maybe even, you know, as you move into 2025. So we're, it, that could be a pretty significant tailwind, you know, for most of 24 going into 25. On the net exports, that I think is a wash. You know, one quarter might be up a little, one quarter down a little bit, you know, maybe because

the U.S. economy is so strong and the rest of the global economy, not quite so much. And the U.S. dollar is very, very strong against most currencies. You know, it might be a small drag on growth. but I don't know that it's going to be a factor one way or the other in driving things. So going back to the G, I'm going to the government side of this. I believe it was about a 50-50 split between federal and state and local contributions to the 0.8% growth. Given your analysis here of the federal contribution, do you expect, so that's what, about 0.4%. Do you expect that to actually increase going into 2024 here substantially? Yeah, meaningfully. I think we're going to get more.

We'll probably get less out of state and local. The state and local, I think, is benefiting from the American Rescue Plan that was passed back in the early part of the Biden administration. There was $500 billion in aid to state and local government, the $550 billion of which if memory service was for schools, education. But you still had, you know, a ton of cash going to state local governments that they could spend out, you know, through this, I think all the, way through, I think it's through the end of this year, maybe even to 20, 24. So I think that's what we're seeing in the state and local government numbers, but that'll start to fade. But the federal government, I think we got more coming there, more support coming there, at least through the end of 24 going into 25. Okay. You know, it just feels like a very, it's hard not to take solace

in the report, right? I mean, it's really strong growth. It's very broad. It feels like it's on pretty solid ground. You know, it just feels like we're in a pretty good place. The one potential concern is in the context of the worries about inflation and the fact that the economy is at full employment is actually now it's flipping around. It's not the recession immediately. It's the potential for the economy heating back up again, the Fed having to raise rates again. And, of course, that would be a problem down the road for the economy. But I don't think we're there yet.

I mean, because the inflation numbers were pretty good. They felt pretty good. So I took a lot of solace in the report. Of course, I've been taking a lot of solace in all the reports recently. But I think it's hard not to like what we saw here. You know, it was pretty darn good. Okay, anything else on the GDP report we want to bring up? Mercy, you did mention in our conversation before we went on about the income side of the GDP accounts.

We got some data with regard to personal income. Oh, that's right. Right. Did you want to just mention that before we moved on? The personal disposable income actually fell. Real. Real personal disposable income fell over the quarter, which, you know, seems to be somewhat at odds with the boom in consumer spending that we got. And this also implies that the savings rate, the savings rate also fell over the quarter.

Right. Okay. But you don't, I mean, because your argument was that real incomes have been rising, but that one quarter you're not putting that much weight on. Right. Yeah. Yeah. Yes. And I'll also say, you know, if you look at the personal consumption expenditures deflator, I mean, that if you strip out, again, if you strip out food and energy from it, that is, it's two, it was 2.4 percent. in the third quarter. So it is clearly on a downward trajectory, core inflation. So that's good news. Okay. Okay. I don't know if I mentioned this up top, but it is, I did say it was Thursday evening and we're all pretty hungry. I don't know. Did you guys eat dinner yet? I'm Mercer's early for you. Yeah, it's not. He's European. He's at 10 p.m. anyway. So No problem. Let's keep going. But I'm starving. Let's go to the distance. And I know Franco and Sarah are Like, what's going on?

This is crazy. You know, you guys are doing it this late. So we'll keep this to be, we'll keep this as a short podcast. So let's move on to the, to the game, the stats game. So we each pick a statistic for the rest of us figure it out through cues and deductive reasoning and, and clues. The best statistic is one that's not so easy. We get it immediately. One that's not so hard.

We never get it. And one, if it's, you know, related to topic at hand, that's, that's great. And we always begin with you, Marissa. So, Marissa, you're up. What's your statistic? Okay. It's 3.9%. Okay.

This is definitely some kind of head take. It's in the GDP number. It is in the GDP number. And we talked about it. And we did talk about it, the 3.9%. 3.9% positive. That was our tracking estimate for GDP, wasn't it? It was, but that's not what I'm thinking.

That's something you're thinking. Is it a component of GDP? It is. A growth rate in the component of GDP. That's right. It is. Hmm. It's not in the consumer and consumption part of the accounts.

No? No. Oh, wow. That's where I was going. Yeah. Okay. We can do the C plus I plus G. Is it in the investment part of the account?

It is. Okay. Okay. Okay, 3.9%. Is it in business? We did talk about it. Yeah. We did. In the residential investment?

That's what it is, right. Oh, residential. Okay. Ding, ding, ding, ding. There we go. Yeah. Okay. Why did you pick that?

I picked it just because it was kind of this outlier in terms of recent history. It was strongly positive for the first. first time in nine quarters, you have to go back to the beginning of 2021 to get positive contribution from housing from the GDP report. So sort of, and I also picked it because we've gotten a lot of listener questions about housing and what our outlook is for housing. I mean, we've been saying it sort of looks like housing has bottomed and there's some signs of renewed strength in housing and perhaps we're not going to see a five to 10 percent decline in house prices and, you know, here's some, here's some confirmation that housing did perk up a little bit,

at least from where it was, off of the bottom over the summer. Got it. But this is definitely not going to continue, right, Chris? Definitely not. Yeah, definitely. What with mortgage rates flirting with 8%. Yeah, after we play the game, I want to come back and I want to talk about the outlook and the context of this.

Okay. Yeah, all this. Yeah. So, but that was a good one. Okay, Chris, you're up. What's your stat? 28%. 28%.

Is it from the GDP report? Nope. Oh. Is it a government statistic? It is. Did it come out this week? It did. Came out today, if I'm, yeah, earlier today.

That's not fair because I've been traveling and board meetings all day. What else? The UI claims came out. Oh, durable goods came out. Oh, no, I'm sorry, yesterday. Not today. Oh, okay.

So it's fair game. Is it housing related? It is. Very good. 28%. What came out? New home sales and new homes sales? Right.

Related to new home sales. They were strong, actually. Very strong. It's not the increase in new home sales, does it? No, no. No, no. No, no. That'd be crazy.

Yeah. It's very specific. Do you give up? You got the new home sales. That's really where. No, you're not ready yet. Is it on the single family side? Well, it's in home sales.

It is. Yeah, it's new homes sales. By definition, yes, it is. Single. She's stalling. Can you tell that? I got it. I got it.

Is it the share of first-time homebuyers? It is a share. It is not first-time. time homebuyers. Is it a share that are original? Is it regional or is it a price point? Price point. Oh, 28% are above below.

Below, as I meant, below 300,000, 500,000. Very good. Perfect. You got it. You got it. 28% of new home sales below 500,000. That's up from 24% last year. Wow.

So we're moving in the right direction in terms of, you know, the new home sales we have, the new construction we have is shifting a bit towards the lower end of the market, which we absolutely need. So I found that the, I took some encouragement, some solace in that. Prices are coming down of new homes. Right. Well, the distribution is shifting. right, but yes.

But also prices have come down. Prices of new home, even on the same price, right, because of the higher interest rate, you do have more buy downs and concessions being made. Do you know, builders are using interest rate, so-called interest rate buy downs to try to sell home. So they take a point or two off the mortgage rate for a year or two to effectively lower the cost, at least initially to the borrower or to the buyer and try to sell the home. It's effectively cutting price.

Yes. Is that in these prices, do you know? Do they, there's the census, which is the source of the data, Bureau of Census, do they capture the buy downs in the price? Or is that, is this that the list, kind of the list price? That's my understanding that it is captured. Oh, it is captured. Because that the concessions are in there.

Okay. I guess I be controlled for, I should say. This might be a good time by Shandor, one of our colleagues, send an email today with our September each house price index estimates across states and metropolitan areas. Maybe you want to mention that, Chris? Yeah, showing renewed strength or continued strength in the housing market. What was it about up 0.99%? Yeah, in a month. And a month. And I believe on the year over year was close to 4.5% if I'm not mistaken. So you do have renewed strength in the housing market, given the limited inventories. I chalk it up to the very

low levels of homes available for sale. There are buyers still out there, of course, who may pay in cash or who can afford a higher interest rate, and they are still bidding up the prices for the homes that do hit the market. So it is a bit of this tug of war now between first-time homebuyers, there's other home buyers that are locked out of the market because of the high interest rate and those, the limited inventory because of the locking effect of homeowner. So you got these two forces playing against each other. I still believe that provided the interest rates remain elevated, that eventually you will see more and more sellers having to make price concessions because you just won't have the

pool of buyers out there willing to pay top dollar. So I'm still of the belief that we'll see some slowdown in home prices, but clearly right now you're continuing to see some strength out there in the current market. Okay. Okay. I'll give you my statistic. Two numbers, 4.9 and 2.4. 4.9 is the GDP growth rate. Is indeed?

Is that your guess? Yes. Okay. That's right. That's right. And 2.4, I think we mentioned, isn't that the core PCE? Yeah. Inflation?

Is that your guess? That is my guess. That's right. That's right. Yeah. I guess that was too easy. A little bit of a layup there, I would say. I'm getting tired.

It was so easy that it was difficult for me. It was right. That's the only way I can punk Marissa is like... It was totally stumped. It was totally stumped. Yeah, 4-9-24. Here's why I picked it. Strong growth, low inflation.

We can have both. Of course, we can't maintain 4.9 that I'm not arguing. But it does highlight why the prospects of recession feel like they're receding. And that is inflation is coming in. despite strong growth. We're getting pretty solid growth. You can see it in the GDP number. You can see it in the labor market. You can see a lot of different statistics. But despite that, inflation is coming in. And that goes back to something we've been talking about for a long time. And that is the reason for the high inflation was the supply shocks of the pandemic and the Russian war. And as those two fallout from the

economic fallout from those two shocks continue to fade, and, you know, people forget, there's still having impacts. I won't go to how, but lots of different ways. But they are fading. And as they fade, inflation can come in and we don't need to see a weak economy or even certainly not a recessionary economy or even a weak economy. And I think that's highlighted quite nicely in the third quarter of GDP report. Okay. Let's go back. And I know I did promise we're going to end this at 730 at the Eastern time. Let's just this is. power through for another five, ten minutes, because I do want to talk about what does this all mean, you know, for the future, the economic outlook. And Chris, let me turn back to you and let you

lead the way here. What do you know, you've been more worried about the economy's prospects and recession risks. Has anything changed here because of the numbers we've been getting in recently in the GDP? Are you still relatively pessimistic or nervous about the the economy's prospects going forward. By the way, I just wanted to point out this. I just saw this. Someone texted me. Do you remember back when Bloomberg said 100% chance of recession? Yeah, a year ago. Yeah, it was exactly a year ago. And it said in the coming year, there's 100% probability of recession. So we got to be humble, but, you know, definitely very wrong. So with that as a preface, turned back to you.

Just saying, is your thinking here changed at all because of the numbers we're getting? Or is it or are you still feeling like things could go off the rails here? There's clearly more resilience in the numbers than what I had seen originally. I think even more than the GDP report from today is more the what did we see in the income and the savings previously, right? We found that there was more income. There were more access savings out there. that would argue that the consumer is in better shape overall than what had previously even thought.

But I guess I still remain nervous. Delinquency rates, some of the other things we talked about last week in terms of, there are some cracks in the foundation here. And we are calling for a slowdown in the economy. And I do fear that it wouldn't take much of something else, right? So if nothing else changes and we continue on this path, no problem. But again, I come back to this idea that, you know, there are other things out there that could hit the economy. You don't have a lot of ammunition to fight them in terms of additional fiscal policy or monetary policy, really.

And so we are vulnerable over this next, say, six, 12 months here. So I would mark down my recession odds, but still, I think they're likely still a bit higher than yours. You know, here's the weird thing. You know, the concern that I had was, you know, coming into the current quarter, the fourth quarter, given those headwinds that are, you know, out there in developing. You mentioned student loan payments, UAW strike, potential government shutdown, the run-up in long-term interest rates, mortgage rates at 8%, you know, oil prices that fails a little less threatening at the moment, but, you know, that's always a threat. Yeah. And I think it out.

The economy would really slow here towards the end of the year going into next, and it would be vulnerable, as you said, to anything else that can go wrong. It almost feels like the risks are on the opposite end of the spectrum, that the economy, what if it stays really strong? Because things could break a different way. You know, there's some more positive talk coming out of the UAW, negotiations with the automakers. didn't they just come to terms with Ford or something?

Yeah, I saw that while I was coming while I was in transit. There may not be a federal government shutdown, you know, given the new House Speaker, you know, still a lot of risk around that, but maybe not. And so far, the student loan payments, that's, you know, that's been, that's happened or it's already happening. And you don't, I don't sense it. I don't see it. I don't feel it.

Now, maybe it's premature. It probably is. but, you know, maybe not. And I mentioned oil prices. They're back into the mid-80s, and gas prices are actually downed, right? Because of seasonality and crack spreads coming in. The only thing that's kind of moving in the wrong direction here

in terms of growth is long-term interest rates. But as we talked about last week, maybe it was a couple weeks ago, it feels like the economy is more resistant to, for lots of different reasons, to the higher interest rates, at least for a while. So maybe the worry, the concern shouldn't be that the economy kind of slumps here. Maybe the worry should be it stays too strong here.

We're not going to get four or nine in the fourth quarter. What if we got three oh? And an appointment started going down again. And the Fed felt like, you know, inflation kind of stopped improving and the Fed felt like I had to raise interest rates. It's almost like the risks are feel, you know, the kind of shifting here. But what do you think of that? Yeah. So still risk of recession, but maybe Fed induced at that point. Further down the road, maybe. Further down the road, right. Timing gets pushed out.

And all those economic forecasters, and you would have been one of them, my friend, would have had negative numbers that keep pushing them out, pushing them out, right? And that would have to push it. They'll also push them out some more. Hey, you either get the magnitude or you get the timing. Fair enough. Fair enough. Oh, I should ask, just to make it concrete.

I think you've been at 45% probability, recession through the end of next year. Is that still the case? I would knock it down to 40. 40. Because of those timing issues. All right, Marissa, what do you think? It's been a while since you asked me this. Through

the end of next year. Yeah, that's not much harder than through this time next year. I'm just saying, I mean, something's going to blow up in December 2020. Let's see. This is right before an election. Oh, okay.

Yeah. I didn't factor that in. Maybe I need to factor that in. That's interesting. I may need to adjust. Yeah. I'll say 30%. 30.

Okay. And even that feels a little high to me. At this point, it feels high here. Yeah. Yeah. Right. All right. Okay.

Any, any, particularly, anything you're particularly looking at that has made you feel a little more confident or it's just kind of the plethora of data out there? Yeah, it's the plethora of data. I think the Fed is done. And the economy just seems to be just absorbing all of this with a ton of resiliency. It's pretty remarkable, actually. Now, I don't think that that's going to last, right?

Like, I don't think the growth that we're seeing right now, the labor market, strength. I don't think that that we're going to be talking about these same numbers a year from now. But recession, our outright recession just seems very, it's very difficult in my mind to get there from where we are right here in the span of a year. Yeah. Unless something really goes. Yeah.

Here's the reason for a little bit of opt. And by the way, I'm down to 25%. That's the lowest I've been in a long time. Yeah. It's still high. Yeah. You know, typical economy would be 15. You know, we get a recession once every six, seven years, but 25 is still high, but it's come in.

Here's the other thing. You know, we could be surprised on the upside here. You know, we've always, for, it feels like for the longest time, we're always focused on the downside risks to the economy. Could be the things turn out to be much better than anticipated. And it goes to the supply side. We talked about this, too, the supply side of the economy, you can. You can feel it, you can see it clearly in the labor supply data. Labor force growth has been very strong.

You know, about 250,000, 275,000 people every single month are coming into the labor force. That supports a lot of job growth and keeps unemployment low without, you know, labor markets tightening and wage and price pressure is developing. But take a look at that GDP number, 4.9, and then calculate the number of hours work. It's nowhere even close. That means productivity growth really increased pretty dramatically in the quarter. And that's on top of some better productivity numbers we've been getting over the past several

quarters. So it feels like we're getting some real pickup here in underlying productivity growth. And, you know, it may go to the fact that we saw so many people quit their jobs back a year or two ago and now they're in jobs that they're more suited to. You know, there's surveys from the conference board that show people are. are really happy with their jobs at the highest level of job satisfaction in the history of the survey. And that goes to people getting jobs that are suited to their skill sets and better pay. It may go to remote work. I know there's a lot of debate and there's a lot more data points,

but I just feel like that's got to be a productivity enhancing, you know, especially as new businesses form and they optimize around remote work as opposed to working in the office. And I know it's, I'm sure it's too early, but AI has got to also be important. And artificial intelligence also got to be important in terms of this. So this feels like we're getting some real positive news coming out of the supply. After all this very negative supply side of news because of the pandemic and Russian war, now we're getting some really positive supply side. And what that means is couldn't ask for better, right?

That means more growth without inflation. It means exactly what you want. So it's almost like we've got to start thinking about the upside scenarios here. It's not just about the downside. It's not just, it's not, you know, asymmetric risk. There's also a risk to our, in fact, it's so weird. For the longest time, I've been berated for being too optimistic. Now I'm starting to get criticized for being too pessimistic.

It's really interesting phenomenon. Really interesting phenomenon. Anyway, so I'd say I'm feeling pretty good about it. things at this point. I think we're in a pretty good spot. Okay. I promise this is going to be a short podcast. I am, I did, I did down this beer as we were chatting. So on an empty stomach. Yeah. And he can feel I was quite lugubriate, not lugubrious. So it's quite loquacious is the word. Lequacious. No? You think so? No? Yeah, in a good way. Okay. I'll get away. Okay, anything else you guys want to say?

You let me go on a bit of a rant there, but... Well, and the Phillies lost, so that's another... Oh, that's right. That's right. No recession. Another reason to be optimistic. Another reason to be optimistic. That's the reason that GDP grew.

Exactly. We're 0.9% in the third quarter. Yeah. Because we're not in a recession. Yeah, we could have predicted that. Okay. All righty. Okay.

Hearing nothing else, I think we're going to call this a podcast. Talk to you next week, dear listener. Take care now.