Moody's Talks - Inside Economics - Ho-Hum Savings and Happy Holidays

Episode Date: December 23, 2022

Colleague, Scott Hoyt, joins to discuss where the American consumer stands and how that differs by income group. A shrinking savings rate and sputtering retail sales won't break the American consumer or Mark's good mood. The group differs on the odds of recession, but is in agreement a slowcession is underway. Happy Holidays to all our listeners.Full episode transcriptFollow 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-hosts, Chris Doridis and Marissa Dina Talley. Hi, guys. Hey, Mark. This is the Friday before Christmas weekend, and I can see we're all very festive today, especially Chris. Look at that. Wow. What's that all about? You got, oh, there are Christmas trees. They're blinking Christmas trees. Blinking Christmas trees, yes. Thanks to my son. Thanks to my son. Was that a Christmas present? No, it was school play. Oh, school play. It comes from the school play. Okay.

So is that battery operated or are you plugged? It is. I'm not plugged into the wall. No. Don't worry. Okay. You're climate change compliant. That's good.

Yeah, very good. And of course, Marissa, Dean Attali, did I introduce you already? I think I did, didn't I, already introduced you? I'm all punchy. Let me just say up front. I had a really tough day yesterday. Tough in the sense that I drove from my, from the suburbs of Philly to South Florida. And it took 20 hours to drive.

I'm not kidding. And I drove the entire way. All the way through or did you all the way through, all the way through, all the way through, all the way through. Arrived at 1 a.m. last night. So it was, and you know what? It was bizarre. It was just bizarre. You know that we had this, I'm sure you're getting the bad weather.

You got the bad weather or PA, but I drove right into it. And it was a real, no snow or anything, but it was just, you know, downpour. And traffic was horrendous. But it got to South Carolina. I don't know if you've ever been on 95 in South Carolina, but it's pretty bad. You know, it's not, you know, two lanes each way. It's really, you know, these guys need to invest in their, their highways. But anyway, there was just a string of accidents, overturned tractor trailers,

and it was just, you know, a nightmare, you're getting through all that and getting down here. So I'm pretty punchy, you know, at this point. But here I am. So you're delirious is what you're saying. Yeah, I really am. I'm a little delirious. I'm a little delirious. But Marissa, you, you, you, you're look festive there too. You got your, yeah, I got my Santa hat on. That's very cool. And you were telling me your Game of Thrones Christmas garb? That's right. That's right. What does that mean exactly? It's a, it's a, it's a Christmas sweater that says Christmas is coming and it's got some various Game of Thrones house emblems on it. Yeah. You can't see it, but trust that it's there. Yeah, yeah. Well, did you see the prequel that the, the HBO series that I think it came out

this year. Yeah. What'd you think of that? The House of the Dragon. The House of the Dragon, yeah. It's okay. It's okay. It's no Game of Thrones. Nothing's going to be. It ended interestingly enough to make you want to watch the next. Yeah, exactly. Right, exactly. And we've got Scott Hoyt.

Scott, welcome. Thank you. Pleasure to be here. Christmas garb, my friend. I didn't get the memo. I'm sorry. I didn't get the memo to put that on. So at least I have a green sweater.

So that's true. That's true. It looks very Christmas treeish. Yeah, very good. So if you, we had given you the memo, What would you be wearing right now? I'm not sure. I think we have a hat like Marissa's around the house somewhere that I might have been able to find.

But yeah, I don't have too much that type of festive attire. So I'm not sure. Oh, well, we'll have to, hey, Chris, maybe you can donate the blinking trees. Yeah, next time. I'll ship it over. Ship it over. Yeah. FedEx needs the help.

Yeah, so very good. Well, this is a great time to have Scott on. We're going to be talking about the American consumer. And Scott is our resident subject matter expert. Scott, you came from before you joined us, just to remind everyone, J.C. Penny, right? You were in their economics group. Correct. Yeah. And how long were you there? I was there for just about five years, exactly. Oh, is that right? Five years. Oh, yeah. I remember. I remember having this conversation, Iris Silver, he was the chief economist at the time. Yeah, really nice man. Yeah, very big guy. So we're going to talk about, you know, Christmas sales, consumer spending more broadly, and what it means for the economy and the economic outlook, you know, that kind of thing. And this is a, I think this is kind of key to the economic outlook. Correct me, any of you push back. And, Scott, feel free to push back, you know, as much as you want. because depending on your views, I'm going to be either very easy on you or very hard on you. I'm not sure yet. I have to figure that out. But I think it's fair to say that at the end of the day, the key to whether the U.S. economy suffers a recession in the next few months, next year, depends on the consumer.

The American consumer hangs tough and continues to just do their part, continues to spend. Nothing crazy. They don't need to spend with abandon, but just kind of do what they typically do. We can talk about what that means. It feels like we're going to be able to navigate through without recession. But if consumers pack it in, go into the bunker and stop spending, that, you know, there's no way out. We're going into recession. So the consumer feels like they're key here.

Would anyone disagree with that? Is that controversial? No, no. I'm just laying around. It's just laying the ground. economy. So yeah. Just laying the groundwork. You know, people say often the consumer accounts for two-thirds of the American economy. Is that kind of sort of roughly right, Scott?

It is if you look at it as the components of GDP. Okay. Certainly. I think actually in real terms, it's a little higher than that, maybe closer to 70% right now. But yeah, if from a C plus I plus G plus net exports basis, then it's correct. Now, obviously, if you're looking at it from income or some other way, then it differs. Yeah. Okay. Let me ask you this.

Bottom line, is the American consumer going to hang tough or not? I am not worried about the next nine to 12 months. Nine to 12. That's pretty precise. I'm worried about late next year and maybe even early 24. Oh, interesting. Okay. All right.

Can you give us a sense of as to why that's the case? Yeah, I think the saving rate is low right now. We're burning through the excess savings. Consumers are borrowing more. Can I ask, just define terms. Just pretend that you're talking to not me and Chris, but excess saving. What the heck is that? Why is that important?

Access savings is the savings that was done. by the consumers during the pandemic when they were getting lots of stimulus and they weren't able to spend because of restrictions on their activities. And so they saved a boatload of money. I think that our number was, what, $2.6, $2.7 trillion more than they would have normally at their peak, at the peak. And that was back in September, about a year ago, in September of 01, right? Correct.

And so now they're starting. to burn through that savings. And the saving rate in recent months has been near its record low seen prior to the financial crisis. Now, that's not causing any great concern because consumers have all this excess savings that they can draw down. So consumers aren't overextending themselves now like they were in 2005, 2006 today. But the question sort of is, do we get, we start down that path, you know, in the second half of next year. What path? You mean, they've blown through all their saving and therefore they have to stop spending as aggressively? Or they stop spending? They either have to stop spending or they start

overextending themselves. They start borrowing more. They keep going if lenders will let them. And they keep spending and they start getting themselves into the financial difficulties that there's absolutely no signs of today. Okay. So I, asked you about the consumer broadly, and there's many things that influence the willingness and ability of people to spend money. The first thing you went to to explain your broad view of the consumer, no problem next six, nine months, but maybe a year from now going into 2024, we got a problem, is excess savings. So they build up all the savings during the pandemic because they couldn't go out and spend. And also we got a lot of government support that was helpful

to people, and they put some of that away, sock that away, and put it. in their checking account. And we got two and a half, two six trillion at the peak back a year ago. We're down to $1.7.18 right now, a trillion dollars, which is still a considerable amount of money. And you're saying if you kind of do the arithmetic, the trend lines a year from now, maybe it's down to a trillion or something. If it's the same rate of burn, which we can come back.

We should talk about because I don't think that's going to be the case given the path for inflation. But anyway, we still have a trillion in excess saving. And you're saying, oh, at that point. Maybe that's not enough to kind of cause consumers to stay in the game that they're going to pack it in at that point? Well, at some point, I mean, consumers are not going to spend all of the excess savings that they accumulated. Some of it is going to be set aside for longer run purposes, baby boomers retirements, education for children, emergency funds that consumers may have see a greater need for now than they did prior to. the pandemic, those types of things. So I don't think we're going to burn through all of the excess

savings. I think some of it's going to go into long-term savings that consumers are not going to view as spendable. If you recall, you know, prior to the pandemic, there was periodically articles you'd see about the adequacy of retirement savings by baby boomers. In fact, I saw a Bloomberg piece just in the last week, or, no, it wasn't Bloomberg. I saw a piece just in the last week that said that the majority of baby boomers still feel their retirement savings is inadequate. So some of the excess savings is going into long-term savings. They're not going to spend at all.

Yeah, although they could. They could, yes. Pretty easily because it's cash. It looks like, based on data we're getting from the banking system, it's all sitting in people's checking accounts, right? It's not like they put it into stocks or bonds or housing. It's very liquid. It's sitting there.

Today it is, yes, although with the markets down over the next year, they may see a buying opportunity and that may change. Oh, well, okay, good luck with that. Yeah, yeah. I don't know anyone's calling for the stockmurter to come back very quickly. But okay, okay, fair enough. So, yeah, Chris, I was going to bring you in. So how would you characterize this?

And what do you think about this? I'd agree. One thing I'd underscore from Scott is that last point about the wealth. Right? People have lost a lot of stock wealth. Housing wealth is, if you believe our forecast is destined to decline as well. So with that loss of wealth, the excess savings is going to be used to plug some holes here. I don't see certainly the higher end consumer homeowners being terribly excited about spending if they're at simultaneously seeing the value of their homes dwindling here. Yeah, although we've not seen if that's the so-called wealth effect, right? My wealth is, I'm less wealthy because stock prices are decline, housing prices are declining.

Therefore, I save more to cushion the blow. I spend less. But so far at least, there's no evidence at all of that. In fact, saving rate continues to decline, right? I mean, it's a very low level, Scott pointed out. So maybe that's going to happen. But that definitely has not happened yet. You know, it hasn't happened in 2022, just the opposite, right?

That's right. But I think that that argues why that $1.8 trillion that Scott mentioned, I don't see all of that as being really available for spending, right? People are going to start increasingly look at that and say, well, this is now, I have to take more and start to expect that trend to. But what you're saying is that $1.7.8 trillion isn't going to continue to decline. It's going to start to rise, is what you're saying. That's right.

It's not going to, yeah, that's right. Yeah. At some point, people are going to change the behavior. They're going to add to it is what you're saying. That's right. That's right. Okay. Well, yeah, I'm not so sure.

I'm not so sure. What do you, mercy of you? Why do you think they're going to add to it? You think, why would they add to it? Yeah, I mean, yeah. I think the argument is to put the, to put words in their mouths. They're going to restrain their spending. Yeah.

Right. At some point. and that savings rate is going to start to climb up once again, right? Well, Scott said it. Inadequate savings. So boomers are saying, you know, I have inadequate savings. And, you know, and it's even going to be more inadequate now that stock prices are down at this point 20%. I think that translates into $10 trillion from the peak in stock market valuation to the current valuation.

And if house prices decline, that's going to be additional. trillion. If it's 10% decline, that's five trillion that's going to come off. So the argument is that, oh, I'm worth a lot less than I thought I was. Therefore, I need to save now to rebuild that stock of wealth. So I am prepared when I go into retirement. And they'll rebuild savings. I just, that just does not, I'm not sure. I mean, who knows. We'll see how consumers behave. just feels like to me, if it's sitting in the checking account, very difficult not to spend that money to simply do what you typically do. Well, I really think that will also vary across the income distribution. Absolutely. Absolutely.

You might find that high income households view that as saving and they don't touch it for those reasons you just laid out. but at the lower end of the income spectrum where you're more likely to have renters, not homeowners, they're less likely to be exposed directly to stock market wealth or even indirectly, frankly, that's where I think they're going to spend, if they haven't already spent all of that, which I think there's low income households. I think that's coming next year. So I think there's going to be very different behavior across the income spectrum. But I think that's the key, though, to some degree.

The low-income households are going to burn through it. They already have, haven't they, to some degree? Although we're now a little confused by that because the data we just got is hard to know now. Right. But I think we're not really sure. Yeah. Presumably, if the low-income households haven't burnt through it, they're going to by, let's say, the middle of next year. So they're not going to have any more than they can. By the way, I'd even push back on that, but I'll just put that aside for a second.

Go ahead. Okay. But I guess my point is, but then the higher income households, those are the ones that are going to be subject to the wealth effect and are going to want to hang on to some of what they saved during the pandemic for their retirement, for their kids' education. I'm not sure I'd go as far as Chris and to say that they're going to necessarily add to it. But I think we, I think by the end of next year or early 24, we're going to have to get the saving rate at least back to an equilibrium level, that they're not going to be drawing down anything that was built up during the pandemic any longer. Well, I mean, at 2.3 percent, they're still, we're still saving. It's not this saving, right? So we're not. No, but that's not, I mean, our assumption of the equilibrium saving rate is over seven. Yeah.

Okay. So you're saying we go back from two, three, back to something close to pre-pandemic, you know, 7%-ish, something like that. Yes. Okay. Which doesn't, that doesn't feel like a recession that feels like maybe a moderation. It depends on the strength of income. Yeah. But, I mean, if you're trying to go from a two and a half percent saving rate to a seven and a half saving rate just to keep the numbers simple, at the same time, the job growth is near zero and therefore growth in income is very weak, then you're not adding much to spending during that period.

Hey, one more thing about the excess saving before we move on. Back to you, Chris, we have been calculating, and to you, Scott, we have been calculating this idea of excess saving by income, part of where people are in the income distribution. And this is based on data we're getting from the Federal Reserve. They're a survey of consumer finance data. Their financial accounts data. And I think they combine that into something they called the distribution. financial accounts.

Pretty cool data. And through the second quarter of this year, it felt like, you know, we were seeing very low-income households, folks in the bottom quintile, bottom 20% of the distribution, that feel like they had blown through their excess saving. Then we get the, and then the folks in the middle and top part of the distribution, they still had a boatload of excess saving. Starting to draw it down, but still a lot of savings. And that was kind of consistent with, you know, what else?

we were observing, we were observing a pickup in credit card use, a pickup in the number of the outstanding of unsecured personal lines. And we could even see based on the Equifax data, the credit file data, it looked like folks with lower scores and potentially lower incomes were the folks that were taking on this credit card debt and these personal loans, which again makes sense. They had drawn down the excess saving. Their incomes were under pressure. The purchasing power was under pressure because of the high inflation.

they wanted to maintain their spending and they could turn back to their cars and personal lines because they had they had paid a lot of that off. I mean, they had come way down during the teeth of the pandemic. But in the data we just got Q3, things got really confused, right? Because the data we got, I guess. It changed their methodology.

It changed the methodology. So can we, is there any way to interpret that data at all? to shed light on this discussion around low income households and the savings they're doing? I guess I'll talk not really to the financial accounts. Scott has a little bit different methodology as well. But I was really, the problem with the distributional cuts are great. You can cut the data by income. You can cut it by age.

You can cut it by a number of different dimensions. And that's helpful. The problem is that with the Fed, combining categories, right? Now they've taken all cash and currency accounts and combined them with other other deposits. And it's now an amalgam of CDs and checking accounts and currency. And so when you do that, it mixes a number of life cycle effects as well to my mind. So in that lower income category, you have low income prime age consumers, households.

Plus, you have retirees who may be on fixed. The next income is low income, right? They may have CDs, they may have other deposits that get commingled here. And now it's difficult to understand if the deposit trends that we're seeing are a function of people really drawing down or is it a mix of a generational or lifecycle effects here with that older population still having a lot of savings. So the data in its current form makes it very difficult to understand what actually is going on. What's going on?

Bummer. We've got to talk to the guys at the Fed and say, hey, what's the deal? Why did they do that? I wonder. Why did they combine the deposits with the time to, you know, the checking accounts with the time deposits, the CDs, makes it really complicated. Scott, you also construct estimates kind of in this similar vein based on similar data. And you recently updated it for Q3. What does it show?

Does it shed any light on this question about what folks are doing across the income distribution? Not a lot. I mean, we're seeing draw down in all the income tiers. It does seem to be the highest in the top 10%, at least in Q3, and somewhat less drawdown at least relative to the amount outstanding in lower income tiers. We are seeing a fair bit still hanging around in the bottom quintile, but I think to Chris's point, I think a lot of that may be retirees rather than what we think of as low income because we did do, I mean, we're using the survey of consumer finances to allocate things,

And we know that that low-income tier has a very high share of retirees, higher than any of the other income groups. So there definitely is confusion in the interpretation of that bottom income group as to whether it's what you think of when you say low-income or whether it's retirees. The interesting thing is the quintile, the second from the bottom quintile, not zero to 20, but 20 to 40 to 40. 40, they still have access, at least by your estimate, significant excess saving, as of Q3, 2022.

Correct. Which is September, really, September of 2022. Yes. Yeah. Right. As did the middle quintile and the top two quintiles, and the guys in the top quintile have a lot of excess saving. Yeah.

Yeah. Okay. Here's a couple of other things I want to talk about in the context of this. idea of excess saving and what it means for spending is one reason, at least in my interpretation of things, or the drawdown in excess saving over the past year. Remember, a peak back September of 2001, $2.6 trillion, $25, 26, 27, I can't remember that kind of number. Now we're down to 17, 1,78 as of September of this year. So a drawdown of, you know, $7,800 billion. Of course, that was a period when inflation was taking off.

And inflation peaked back in the summer of 2022, a few months ago. And so people clearly, I think, were supplementing their purchasing power that was under a lot of pressure because of the high inflation. I got to pay more to fill my gas tank and put food on the table and pay my rent. But I want to maintain my overall spending. So they were using that excess saving, what was sitting in their checking accounts, to help supplement that. And that's why you saw that drawdown.

But now we're seeing inflation come in pretty quickly. And we've got another data point today, the consumer expenditure deflator data, which, you know, very consistent with the consumer price inflation data, pretty good. It shows a deceleration. And here's the thing that I saw on today's numbers. And I hope we're going to play this statistic game soon, but I don't want, hopefully I don't see anybody's numbers. But if you look at real disposable income, that's their purchasing power.

you know, disposable after tax income after inflation, that's now rising again. It's been rising for the past few months. And that goes to, you know, relatively strong wage gains and income growth, but in the deceleration, sharp deceleration and inflation. So it may very well be the case if that continues, which I would expect inflation to continue to throttle back, that real incomes remain positive and they don't need to draw down their excess saving. They can continue to spend like they typically spend because their purchasing power is now improving because of the improvement in inflation.

What do you think of that argument, Scott? I don't disagree with it, but I guess my concern is that you do have conflicting forces moving growth in real disposable income. I mean, yes, lower inflation is a clear positive, no question about that, but slower job growth is a clear negative. Because growth in wage and salary income and benefits and related things are going to slow. It may even affect proprietor's income. So you've got conflicting factors here that are going to at least reduce any additional growth and disposable income.

And at the same time, if you buy into my prior argument that the saving rate needs to rise, you need to have real spending growth less than growth in real disposable income in order to raise savings and get back to equilibrium. So, you know, yeah, the question is how do all these balance out and is it enough? And I guess to some degree, I come back to Chris's argument. Scott is in the last year, massive hit to purchasing power, massive, you know, almost unprecedented because of the surge in inflation. You know, go look at real disposable income growth back, you know, in the spring, summer of this year. It was getting crushed, you know, crushed. And now it's positive. It's positive. Not big positive, but positive. So you're right. There's a a lot of cross currents, but that's a very significant shift here going forward compared to where

we were over the past year. So maybe we get some excess savings drawn down, but it doesn't feel like it's going to be as big as what's experienced over the past year, which would allow the saving rate to easily normalize, right? The reason the saving rate went to 2.3 percent because of that huge drawdown in the cash. So if they're not drawing down the cash to nearly to the same degree because they don't have to, that saving rate will go right back up to that 7 percent pretty gracefully. No? I'm, I agree that's the baseline forecast. I'm very nervous. I think it's, I think we're on a knife edge. Sure enough. And I guess to some degree, I accept Chris's point that it wouldn't, if everything goes right, yes, but it wouldn't take much of a shock to push us over the edge. No argument there. Yeah, if we get hit by something else, then yeah, because we'll come back to consumer sentiment in a little bit.

but, you know. So Marissa, you just heard Scott's, my pushback to Scott on that. Do you have anything you'd like to add there? Well, so I agree. You have these cross currents with inflation coming in, but also job growth moderating and presumably wage growth will follow. It's moderated a little bit. No, we want that. That's really sticky. And inflation has been outpacing wage growth. the past year plus. So I think you can still see inflation come in without wage growth moderating. It's not like the two are going to be proportionate, right? I mean, if we think wage growth right now is 5% year over year and total inflation is something like 7% course sixish. I think you can get to three, four percent inflation by the end of next year. And I don't think wage growth is going to come in that much. As assuming,

we don't go into a recession. Well, it just sounds like you're supporting my perspective on it. I am. Yeah. Oh, okay. Keep talking. I just didn't want to say it explicitly. Very good.

Okay, Chris, what do you say about all that? It's a nice, it's a nice dream. I want to believe the dream. I'm in the Christmas spirit here. Although you took a Christmas tree lights off. Yeah, it was a little distracting to me. Oh, I got it. Right.

Yeah, you got to be on your game. I'll put them back at the end. I'm at that. Yeah, I still see another shoe to drop here, right? Even what's already baked in the cake, as we think about some of these lower income, middle income households that have borrowed, right, rising rates, those debt service payments are going to start to come do as well. And that's going to put additional pressure that they're going to have to fight against, right?

the borrowing costs are only going up. I don't see any relief on that side. And that's another additional factor that's going to make it difficult for them to do any additional spending going forward. Got it. That's an interesting point, but let me push back again. And here I don't want to sound callous. I'm putting on my clinical hat as a macroeconomist and, you know, talking about

things in a very clinical way. You know, we're just talking about what it means for the economy. And obviously, you know, we've got a lot of pain, financial pain and suffering among low-income households. There is absolutely no debate about that. That's the case. But at the end of the day, and I'm going to turn to you, Scott, to give me a statistic to prove this statement.

The bulk of spending is done by the folks in the kind of the top part of the distribution And kind of the rule of thumb I've been using, again, you can correct me if I'm wrong, Scott, is that folks in the top third of the income distribution account for about two-thirds of the spending, about two-thirds of the spending. So even if low-income out, now clearly the economy can't flourish and it's not equitable and there's nothing to like about it. But the American consumer en masse in totality can continue to drive the economy moving forward, even if low-income households are struggling. True. Yeah. Oh, sorry.

No, go ahead. Go ahead. No doubt there. It's true. Middle high-income households certainly account for the high dollar volume of spending. But they also tend to finance a lot of that spending as well traditionally, right? So I still see that as being a barrier to them really opening up the blood gates. Even if they have a sufficient kitty in terms of access savings, they're still going to be very reluctant to, at least to my mind.

Right. I guess this is the debatable point, right? This is the crux of the argument. Can I toss another point in here that comes to the timing of this and why at the start I said my biggest concern was late next year and early in 24? And that is the remnant effects of the high inflation on income. I mean, we're going to get big government cost of living adjustments at the start of 2023. A lot of employers are giving bigger pay raises right now and early next year because of the

high inflation, because of the tight labor market, because they need to meet, they feel like they need to meet their workers' needs. However, come the start of 24, if you believe our forecast, the labor market is going to have be less tight. The unemployment rate's going to be a bit higher. Inflation will have been significantly lower. There's going to be a lot less pressure where we're going to get a bump that's going to help consumers probably particularly at the low end at the start of 23.

there's going to be no such bump to income, or at least it's going to be massively smaller at the start of 24. Right, right. Yeah, fair enough. I mean, it just feels like we had this massive hit to purchasing power real incomes. And, you know, that drag is, it's a debate as to how much, you know, how much it goes away. But there's no debate. It's not going to be what it was, you know, going forward, you know, just not going to be. Here's the other thing I want to talk about in the context of this discussion.

Right now we've been focused on the ability of consumers to spend. It's also about the willingness to spend. In one aspect of that is so-called pent-up demand. So here's what I can't get my mind around. Typically, a big part in every recession, a big part of the downtraft and consumer spending, and thus recession is a collapse in spending on vehicles. A big ticket item, people have to feel reasonably confident to go out and buy a car. At least that has been the case historically.

And also typically, not every recession, but most, leading into that recession, you had seen a period of very strong vehicle sales. And so you could argue people, and there was a lot of discounting going. on by the vehicle manufacturers to get people into cars and keep the vehicle sales numbers up. And you could argue coming into the recessions, you had what I would call spent up demand, meaning consumers had spent ahead of what they would typically, given where they are in their life cycle, you know, their age and, you know, if they have teenage kids, they're starting to drive and so forth and so on. And then when you get into the recession, because you had that spent up demand, that really

put into super drive, the decline in spending that occurred during the recession. You know, you work that off. Coming into this period, not only is there no spend-up demand, you know, there feels like there's a meaningful amount of so-called pent-up demand because of the pandemic and the collapse and the production of vehicles, and you can see that in the surge in new vehicle prices. I mean, vehicle manufacturers across the globe, U.S. Japan, Germany, everywhere, could not produce cars because they could not get the things they needed to produce the cars, from chips to equipment to everything in between.

And therefore, you've been seeing vehicle sales that are well, well below what we've long estimated to be kind of the underlying trend for sales, given demographics and incomes and everything else. So I suggest there's a lot of pen-up demand going into this period. And as supply chains ease and vehicle production picks up and new vehicle prices start to come down, feels like they're already starting to roll over, we're going to get an increase in vehicle sales going forward. Not a decline, not even a small increase. We're going to get a meaningful increase in vehicle sales in 2023, 2024, compared to what we've been getting since the pandemic. And that is a very large share of overall consumer spending and what it means for the economy. So that just feels like something that would suggest that consumer is going to hang tough and do their part.

What did I get wrong? Or what am I missing? What am I missing? Or maybe I'm not missing anything. What do you think? Not everyone drives 20 hours to go to Florida, right? True. I think there's actually some pullback now post-pandemic.

So I do agree you will get some increase in vehicle sales, but I think there are some structural shifts here where you might not see the bounce back quite as aggressively as you otherwise would expect. Right. So I think it's, it adds, but. So you're saying there's not as much pen up demand as, maybe some, but you may not be that much. Because of some structural shifts, right?

Right. I guess the other, the other question I would add to that is timing again. When does the supply come back online? My, and I haven't researched this carefully, I'd like to hear what, you know, Mike Brisson and some of our experts think. And I'll tell you what he tell. You go ahead and talk, but I'll tell you exactly what he told me.

I get it right over in the horse's mouth. Okay. My thought is that we get a lot of that in 23. And if anything, we're coming by the end of 23, early 24, we may be starting to come back off of it and come back down. Oh. That's interesting. There's definitely a theme in Scott's. It's a very consistent.

Interesting. Well, that's possible, but that's not Mike's forecast. Okay. I mean, sales do come back in 23, but they keep coming back in 24. Okay. So, and Chris, I agree with you. I don't think the so-called trend level of sales, you know, the underlying level of sales given demographics and everything that go into determining whether people should be buying or not. not is as high as it was pre-pandemic.

It's probably lower because people just didn't use their car, right, during the pandemic. So if you didn't use your car, you don't need a new car, right? So that definitely is brought down. So pre-pandemic, we would have said trend sales was 17 million units. By the way, we're like at 14 million. And we've been 14-ish since the pandemic hit. So if you do that, if you said 17, 14, three years, that's a boatload of pen up demand. I don't think that.

So maybe the trend level sales is 15 million. I don't know. Yeah. Just, you know, cut it in two thirds. That's still a lot of pen up demand, a meaningful amount of pen up demand over a three-year period. You know, that, you know, 2020, 2021, 2022, that is up to three million, you know, 15, 14 million sales, 15 million trend. one million in pent up demand over a three-year period. It's three million in pent-up vehicle sales.

That's a lot of vehicle sales, you know, when the guys and the producers can actually produce it. What was the substitution of used cars, though, during the pandemic for new cars? Yeah. Yeah. Again, you're going to saying the trend level of sales is actually lower than it has been historically. Yes, but I'm also saying that perhaps the pen-up demand for cars, some of the, that was satisfied in the used car market. So it may not be as large, right? Exactly. Right. Another potential reason. I'm just saying, okay, okay, there's maybe, but instead of 17, let's say 15,

say 14 and a half. Say it's 14 and a half. You know, that's 500, which is kind of where we are right now. I mean, we're not that far from that right now. Yeah, right. 14 million. 14-ish, you know, it depends on the month, right. Right. Also, keep in mind, there was a period in late 20, 20 in early 2021 when we were over 16. Yeah, you had a surge. Yeah, we haven't been low the whole time. No, no, no. I can stress it. Trust me. Trust me. Trust me. Do an average monthly average annual average. Go calculate it. It's been about 14 million on average, 2020, 21 into 2022, up and down and all around. You're right. But, you know, something like that. Here's the other thing, pent up demand. You know, it feels like people are going to spend because they could.

for a long time on, you know, travel, restaurants, ball games. You know, we've been focused on the good side of the spending. We haven't really focused on the service side of spending, but there's a lot of, it feels like a lot of pen-up demand. People, I don't think people, when you say people, the wealth, the households at the top end in the income distribution, they view that as wealth and they're not going to spend it. Yeah, maybe. But I think they're going to spend a fair share of it because they, They've been bottled up for a long time, and they're going to spend it. You can feel it now, right? I mean, Christmas sales feel like they're punk, a little punk, right?

Correct me if I'm wrong, Scott, we don't know. It feels like data feels like basically flat on a real basis, probably. Yeah, yeah. After inflation, you know, no real growth in Christmas sales. But on the service side, we're getting plenty of growth, and people are spending. And I don't know. It just doesn't feel, maybe this goes back to Scott, this reinforced your argument. They blow through it by this time next year.

By next Christmas, they're done. They've done, I've traveled, I've gone to five, you know, five restaurant every week. You know, I say, okay. Yeah, I guess I'd make two, I'd make two points. One, in regards to services, I do think there is less of a degree that you can have pent up demand for services. I mean, you know, yeah, you could take an extra vacation, you know, this year to make up for missing one. If you've got the vacation time from work. and you can navigate it around kids schooling and all that kind of stuff, but it's hard.

There's a limit to the number of times you're probably going to go out to eat. You certainly aren't going to get your hair cut or your nails done or whatever, any extra just because you didn't do it a year ago. So there's less room for pent up demand on the service side of consumer spending than there is on the good side. The other argument I would make is back on the good side. X vehicles, I think you can argue that durable goods right now are spent up, that consumers bought like gangbusters during the pandemic. They did everything they could to equip their homes. And they don't need nearly as much of that kind of stuff right now as they would in a normal situation.

and so that while I won't argue that there isn't pent up demand out there in pockets, I think there's also spent up demand out there in pockets. And while there's probably more pent up demand than spent up demand, I think that's an empirical question that I'm not sure we can definitively answer. And I'm not convinced how big the difference is. Yeah, good point. Good point. You're saying, okay, Mark, Mark, fine.

there's pent up demand for vehicles. Fine, Mark, there's pen up demand for travel. But I'm not so sure about the rest of goods that I spend my money on clothing and consumer electronics, all the stuff we were spending. Certainly electronics, furniture, all the stuff that was in short supply because consumers were buying so much of it during the pandemic. Which, by the way, it brings to the fore an important point that we just should call out. And that is there's a massive shift.

There's been a massive shift in. the preferences of consumers during this pandemic. You know, early on, we were stuck home. We were buying stuff and couldn't travel, couldn't go see, you know, the Eagles play, you know, couldn't go to a restaurant. And now that's all shifting back. And that's why Christmas 2021, go back a year ago, Christmas 2021, that was gangbusters. That was probably one of the best Christmases we ever had in terms of sales growth.

And this one is, as I said, is punk because of the shift in preference. How is your exercise bike? Mark? I still, you know, I love that bike. Is it a Peloton? Yeah, the Peloton. I love that. Everybody bought a Peloton in 2020 and 21. Yeah. Apparently, I'm using them as much. And Peloton is having struggling now because everybody's got them. And so demand is so weak. And they're trying to sell them and get rid of them. Yeah. Yeah. Yeah. And they don't, mine hasn't, mine actually, I've been, I've had it for two years and it's functioning just fine. So now it's going to break now that. Yeah. Yeah. Yeah. Okay, one more thing, and then we're going to play the game.

We talked a bit about the household balance sheet from the perspective of what people own stocks and housing. And clearly, people are worth less today than they were a year ago. And probably barring a rally in the equity market, you know, a year from now, they'll be worth even less because house prices are going to come down. you know, they're still wealthier, much wealthier than they were before the pandemic hit. I mean, because asset values, stock prices, housing values went skyward during the pandemic. So we're retracing some of the increase in, at least on paper on wealth during the pandemic. But nonetheless, we haven't talked about, at least not head on, the liability side of the balance sheet, what people owe. and there we talked a little bit about low-income households in the borrowing they're taking on.

But if you look at, again, across all income groups, it feels like leverage is low, that consumers have been very cautious in taking on debt and that, you know, debt service burdens, you know, the proportion of income that's going to servicing their debt, at least what they need to to to remain current on that debt, is low. It's not at a precise record low, but it's pretty damn close to that. I take solace in that. Should I be taking solace in that in terms, again, of what it means for consumers and their ability and willingness to spend going forward? Scott?

I would say yes. I mean, you know I'm a big believer in the debt service burden, and that's the important thing to watch in terms of what debt means for consumer spending. So I totally agree with you, although, again, my concern is down the road. I mean, the debt service burden is clearly rising with interest rates up a lot. And so much of the debt right now that consumers have on their balance sheets fixed rate, as that debt rolls over, the debt service ratio is going to rise. You know, plus consumers are taking on more debt. I mean, Chris alluded to that earlier.

There's a lot more credit card borrowing going on. right now. And that actually is the one element that's variable rate. So that's getting more costly, very rapidly. So yes, debt burdens are low, but they're not going to stay low. And the question, I think is, and this comes back again to income as well, you know, how fast do they rise? And when might that become a problem? And again, I'm going to- Late 23 and 0.24. You got it. Interesting.

Chris, are you concerned about what's going on aside from the low-income households that we discussed earlier? Do you broadly have any other concerns about household liabilities that leverage debt service? No, as you mentioned, the debt service ratios are low, and that certainly is a positive. It is one of the reasons why I think a recession should it occur would be short and shallow, right? There is some room there to get the economy going in again as as credit would open up and start to spark the economy forward or spark spending forward. So I see that as a benefit, but it also, to Scott's point, things are moving and trending upward, right? Rates are only going up at this point.

and the borrowing for right should also increase here. So those debt service ratios are going to continue to creep up. If I can jump in for a second, Mark, if you're right about pent up demand for vehicles and a surge in vehicle sales that's coming, that's virtually all on credit and at high rates. Yeah, yeah. I just, okay, I mean, but debt service is very low. The other thing I'd point out is the share of household liability. debt that adjust with market rates, at least over a period of a year, is actually very low.

You know, about maybe 20% of, by my calculation, 20% of debt outstanding. That's because households refinanced and locked in and paid down with their mortgage, they increased the size of their mortgage to pay down their higher cost, credit card debt, or personal loans or things. That's why even today, if you look at the amount, of credit card debt plus all the unsecured personal lines outstanding, it, you know, it's, it's a little bit above what it was pre-pendemic, but not a lot above pre-pendemic. And we're talking, the numbers are, you know, maybe a trillion, trillion two, something like that,

which compared to, you know, outstanding mortgage debt, what's outstanding mortgage debt right now, 12 trillion, you know, something like that? And that's all 30-year, 15-year fixed-rate debt. So, yeah, it's going to go up, but, you know, it's a standard. from off of incredibly low levels and it can take some time for that happen. By the way, just as a point of interest, this is, that share of debt that adjusts with market rates in the U.S. is low compared to anywhere, most of other places in the world. If you go look at David Muir, one of our colleagues in Europe did a really good piece, looking, trying to calculate the

share of debt that adjusts throughout Europe. And it's meaningfully higher. Canada, it's much higher. just because we're very unusual here to have the 30-year, 15-year fixed-rate prepayable mortgage. It's a very unusual product across the world and makes us very different in that regard. Okay, let's play the game, the statistics game. Can I just want to make a couple more points here? I mean, you have to keep in mind that the term on consumer debt is a lot shorter. So, I mean, if you look at the Fed's breakdown of the debt service ratio, the consumer component is about a third higher than the mortgage component, even though mortgage debt outstanding is way higher than consumer debt outstanding. So when you're talking about payments, the consumer side is actually more important than the mortgage side, even though from a balanced perspective, it's much smaller.

So, you know, don't discount the impact of consumer debt on debt payments quite so quickly. Okay. You said you had a couple points. What's the other one? Well, actually, I've forgotten what the other one was. So I'll stop there. That was a good point. That was a good point.

So you're just saying the debt service burden is going to go up faster than, you know, you might think looking at the fact that only 20% of the debt is tied down to, to market interest rate shifts. Right, because I don't have the exact figure, but probably somewhere north of 60% of payments is on the consumer side. Got it, got it. Okay, the game. We each come forward with a statistic.

And by the way, I think I got a pretty good one here. It makes the statistic, we try to figure out the statistics by clues and questions and deductive reasoning. The best statistic is one that is not so easy. We get it right off the bat, not too hard so that we never get it. And one that's apropos to bonus if it's apropos to the topic at hand. Should guests go first here? Scott, you want to go first?

Okay. Okay, far away. I have a tricky one. Okay. So it's tricky. I have two numbers. They are both changes in rates. rates.

Changes in rates. So it's like a second derivative? Yes. Okay, go ahead. Okay. So one is positive 0.2 percentage points and the other is down 0.3 percentage points. Okay. Does it go to today's report, today being Friday, the 23rd, the BEA Bureau of Economic Analysis released

data on spending incomes and inflation. Yes. From that report. Okay. Yes, it is. Is that services versus goods inflation? No. No.

So in that report, something, a growth rate accelerated by 0.2. Point two and something decelerated by point three? Yes. Is that year over a year or is that month to month? their change, the percent change. Year every year or month to month? Month to months, although one of them is not a growth rate. One of them is a rate, but not a growth rate.

The saving rate went from 2-2 to 24th, so that's the one that went up 0.2. Yep. And what went down 0.3, would that be, that's a growth rate? Yep. You're over-year growth rate. No, period to period. Oh, I'm sorry, month-to-month growth rate. Goods prices.

Spending on goods. Spending on goods. Goods. Goods prices. No overall prices. The PC deflator. Yeah. From 0.4 to 0.1.

Yeah. Right. Okay. Interesting. Interesting. Were you surprised at how fast we got that, Scott? Yeah. Well, I gave you some good clues.

We really talked our way into it. Okay. So, okay. Well, okay. Why? How did you pick that? Well, my point is that over the last year, year and a half, consumers have been using their savings as an offset to movements in inflation. And there are a lot of months where you can see this, where if inflation jumps, the saving rate went down or down more than it had been.

If inflation came off, the saving rate either went down less or went up more. and this month fell right into line with it. So I thought it was a good thing to talk about that the, I haven't done. I haven't computed correlation coefficients, but if you just eyeball the graphs, the correlation between savings and inflation is stronger than the correlation between changes in real spending and inflation because consumers are using the saving to offset the movements in inflation. They're just smoothing their purchasing power, given the shifts.

And that makes sense, but that's interesting to hear. Yeah. Very interesting to hear. Okay, that's a good one. Marissa, you want to go next? We skirted around talking about this, so I think you guys will get it pretty easily. 14.49% in the third quarter. Now that she said, we're going to get it easily.

Is it from a release that came out this week? Yeah. the today's number by the way which it's hard to find a release that scott didn't write this right that's true that's true yeah i'm assuming this is in the the GDP release yesterday it's not it's not oh is it in today's it's not oh is it in today's consumer spending data no that was all monthly 14 point this is 14.49 percent in the third quarter it's a quarterly number Okay, quarterly number. It's not the GDP number.

It's not the spending number. Oh, vehicle sales. No, it's a percent. It's a percent. Oh, the financial obligations ratio. That's right. It's the financial obligations ratio that we were just kind of taught. We were talking about the debt service ratio.

So this is a broader measure that includes rents and car leases. So this is the highest. it's been since the first quarter of 2020 when the pandemic started. So it's kind of approaching its pre-pandemic rate. But to your point, it's still very, very low. And if you look at the average of debt service or financial obligations ratio, they were very low in 2019 relative to historical levels. Our forecast is that this is going to rise over the next year to somewhere around 16%.

which would be the highest. It's been, you know, back, you'd have to go back to like 2010 or something to get back to that level. So this is consistent with rising interest rates, people having adjustable rate, you know, credit cards and other shorter term debt that they're going to have to finance at higher rates, despite the fact that we think inflation is coming down. What is the average over, you know, over the entire, because I think this is data from the Federal Reserve, it's back to 1980. You know what the average has been over that? that period? I don't, but I mean, in the, in sort of the post, you know, inflation targeting period, it was much, much lower. If you look at back what it was in the 80s when we had very high interest rates

and very high fed funds rate and very high inflation, it was somewhere up in, I don't know, Scott, it was like 17 percent or something like that. So in the late 80s, it was around 17. And then prior to the financial crisis, it was way high. Yeah, over 17. Yeah. That also includes rent, too, doesn't it? That's right. Yeah, that's a big part of it does. Yeah. Because rents have gone way up. So that includes part of the inflation that we're discussing.

Although the interesting thing about that is that the debt service ratio actually reached its pre-pandemic level in the third quarter, whereas the financial obligations ratio was still a little bit below. So by that measure, we've had a full sort of return to pre-pandemic, which admittedly was record low in the debt service ratio, but we're not quite there yet in the financial obligations ratio. Yeah, it's a little hard to disentangle things in that one because you got the rent in there, which makes it a little complicated to interpret. But that's interesting. That's very interesting. Good one. Okay, Chris, you're up.

All right. This one's for you, Mark. Oh. $3.78. Is that gas prices? Nope. I knew you were going to go there. No?

Oh, because we're lower than that now. We're like at 312 or something nationwide, aren't we on gas? It's not diesel prices. Diesel is higher than that. No, higher. Is this something that came out this week, Chris? Oh, it's, yeah. Copper prices?

It's not copper prices. There you go. Oh, it is? Yep. Oh, so $3.38. That's still about $0.78.78. Okay, that's right. I thought you said $38. That's why I didn't get it, Chris. Right. Of course. You're right. You're right. 378. Okay. So the kind of the rule of the rule I often use, although I'm not sure it's good anymore, is three bucks. If it's over $3, we're okay. The global economy is not, you know, not. doesn't mean it's booming, but it's not going into recession. If it's below three bucks, that's recession-like. So why'd you pick that? Is that, is that rule of thumb still hold in your mind? Is that pretty good? I don't think it does. Oh, it doesn't. Okay. Well, okay. Well, it's to be

determined, right? Yeah. Right. The demand for copper is going to be higher, structurally higher. Oh. At least to my mind, right? Yeah. So that three, so the reason I chose is, clearly it's above the $3 threshold, which would argue for your position, right, that we're not going to recession, you're actually booming if that's the case. But I think that the goalposts haven't been reset here. And copper is down about 15% year over year. So how do you square that circle as well in terms of the future outlook? I think that's actually more telling in terms of the direction of the economy than the absolute level. Yeah, so the change in, it's actually decent, come down. It's still high by historical standards.

But you're saying it's high because there's now a new source of demand, and that's anything related to EVs and so, you know, any climate change related. Yeah, that's right. Got it. Interesting. Good. That was a good one. Any else you wanted to add there?

Nope. Yeah. So I don't know. I've kind of so-called Dr. Copper haven't really been focused on because I'm not sure what the right. kind of rule of thumb is anymore. Do you have any sense of, you know, if it fell below three bucks 50s? I was thinking 350 round numbers.

Who knows what the right. Yeah, who knows what the number is. Yeah, because we have to. Yeah. But clear, I don't think it's $3, right? We were below $3. Yeah. Prior to the Pan-down.

I think you're right. It doesn't feel like three bucks is the right number anymore. No. Yeah. Yeah. Okay. I've got a, a series of numbers. Of course.

Got a lot of time on the road. And these are growth rates. Which state had the cheapest gas, by the way? Pardon me? Which of the, which state had the cheapest gas in your... I think South Carolina did. Yeah. Yeah, they've got the worst highways and they've got the lowest cash prices.

I think I'm kind of guessing. There might be a correlation. there. I'm not sure. I'm just not sure. Frankly, my preference, I pay a little higher gas tax to get them, you know, that I don't spend 20 hours on the road, please, you know? So anyway, nothing at South Carolina. Come to California. You'll pay astronomical gas tax. And you still get bad roads. And really nice roads. Oh, really nice roads. Yeah. But horrible traffic nonetheless. Yeah, really nice parking lots.

Okay. Here's, these are growth rates. rates, and I'm going to give you, there's going to be three, I don't know I described this. So, I mean, we're going to give you three shots at this, three different statistics, all related, and you'll kind of, it should be, get a little easier as we go here. In fact, I'm going to give you the easiest one first. So here's the, here's the two growth rates for the first series that I would like you to figure out. Three point six percent. I don't know if that made any, sense whatsoever, but you'll get the hang of it here in just a second. 3.6% and 4.7%. What are those two growth rates? 3.6 and 4.7.

Came out this week. It did. 4.7 is the core PC year over year. Correct. So what's the first number? This is a little harder. It's related. The same is a core PCE, but over growth rate. over a different period of time. Is it the past three months? Got it. Ding, ding, ding, ding, ding. Excellent job, Marissa.

Yeah, so the core consumer expenditure deflator. Of course, that's the inflation measure of the Fed is targeting, and their target is 2%. It was 3.6% over the past three months annualized, and 4.7% over the past year, 3.6% is still, and 4.7 is still high, very high. That's well above the Fed's target of two, but that's down considerably from where it was. In fact, the last time core PCE growth over a three-month period was as low was all the way back in early 2021. So this is clearly definitively a slowdown, a turning point. I use a three-month percent change annualized because that gives you a real sense of turning points. The year over year number gives you a sense of the underlying, you know,

rate of growth, but it doesn't capture the turning points when you're going, when things are accelerating or decelerating. And it's very, it feels like increasingly clear, definitive that inflation is, is moderating. Still a long way to go to get back to Fed's target, but moderating significantly nonetheless. Okay. With that as a guide, here's the next two set of numbers. Ready? Yeah. We're ready. I'm gearing up for it.

Actually, I have two sets of numbers, so I was trying to figure out which one I would go with next. But okay, 2.5%, 2.5% and minus 2.5%. This goes to the conversation we've been having. Same.

Go ahead. Same report. Is minus 2.5%. 5% real disposable income. Oh, she's year over year. She's all. Yeah, way to go, Marissa. And what's the 2.5%? It must be the three, last three months. Three months. manualized. Okay. To my point that we had this massive headwind to consumer spending in declining purchasing power, which didn't completely undermine spending because of all that excess cash people had in their checking accounts. By the way, thank you, American Rescue.

I mean, that was really important to building those cash cushions to allow consumers to hang in in there, despite the higher inflation, although some people would argue the high inflation is due to the American Rescue plan, which I would definitively push back on, but nonetheless. And now 2.5% over the past three months. So we are now seeing, and 2.5% is, you know, right down the strike zone. That's exactly what you want to see in terms of real disposable income growth. that's consistent with consumers going to hang in it. As long as they spend that, they don't need to draw down any excess saving. They don't need to do any of that. We'll see reasonably good consumer spending.

I don't argue with that, Mark, but I do think the minus 2.5 is a little distorted because there was a level shift in disposable income in January of this year when all the stimulus and unemployment insurance benefits and stuff like that that had been being paid out last year ended at the start of this year. And so there's a bit of a cliff in real disposable income between December and January that I think is still distorting the year-over-year comparisons to some degree. Okay. I mean, but undeniable, real income's got crushed for lots of reasons,

including the winding down of the support, but also the higher inflation. Oh, yeah. No, I'm not going to argue that. It was trending low until through about June, and then it started trending up. Now in the last few months it's been positive. Real disposable income has been positive. Okay, here's the last one. 3% and 2%.

On the nose. 3%? Real spending. Real consumer spending. 2% is year over year or 3% is the last three months. 2% is exactly, exactly what you'd want to see, right? that's not too much, not too little. That's the American consumer hanging in there doing their part, you know, up through this period of time.

I'm just saying, huh? So stop here. End the script here. I'm just saying, the more the data comes in, the more I feel confident that this comedy's economy is going to make it. It's going to be a tough year. I'm not arguing that. But it's going to make its way through without, you know, sinking into summer. And last, to everyone's point, and I totally agree.

great, something else goes wrong. If something else goes wrong, yeah, absolutely. You know, we go in. Is that a slow session? Oh, I've been looking for a word to describe how to- Yeah, I've been thinking about it. Slow session. That's a great way of describing it.

Slow session. It's not a recession. Recession is going backwards. Did you make that up, Chris? Yeah, well, I love it. I think I did, but, you should trademark it. No, I'm going to steal it, like immediately. I'm definitely going to steal it.

With or without attribution? It depends. Maybe. Depends if it's in the room when he uses. We're all a team here. That's a really good way of describing it. I think that what the next 12 months, not a recession. This is my view, my forecast, the baseline forecast.

No recession, but definitely slow session. Yeah, I like that a lot. Okay. I'm curious to know what Scott's odds of recession are. I was just going to go there. I was just going to go there because, you know, we all know yours. Well, it was, I think you're 55% right, Marissa? Yeah.

And you were a little higher than that in recent weeks and you've come down. It's come in. It's come in. Chris is 75%? Chris or 70? I'm going to stick with 70. 70%. Tempted by 75.

And the arrow is pointing up that you're, if there's any risk to that, it's higher than 70%. Yeah, another data point here. Yeah, yeah. Okay, Scott, and you know my view. My view is kind of 50-50, but as you can tell, I'm laying on the side of no recession. My error is pointing definitively down, you know, on the verge of dropping it.

But Scott, what's your probability recession? Well, maybe for Scott, he's going to say, look, it's the end of next year entirely. I was going to say over what time period. Oh, my varying odds. Okay, let's say over the next 2023 and then let's go to 2024 because to get the full picture of what you're trying to say. So what's the odds of recession in 2023? That's tough.

Okay. Well, give us the two years. I'm probably in your camp over through the end of next year, 4550. Okay. but if you add in the first six months of 24, then I'm going to go to around 60. Oh, you see how he does that? That's really sly on his book.

He's he getting his cake and eating it too, you know? That's interesting. Very interesting. All right. Well, it makes sense. You know, it's very consistent with all the things. Okay. Just an open-ended question, Scott,

because I kind of directed the conversation in a very deliberate kind of way, which is not entirely fair. You know, so I may not have allowed you to say something you wanted to say here about the American consumer. So fire away. This is your open end of question. Anything else you want to say about what's going on here? You know, it doesn't have to be. Maybe I got it.

I mean, I guess we've mainly, I got in the main point that I was hoping to get through through the game because that was the fact that consumers have been using their excess saving to smooth. their consumption through the inflation. That was kind of one of the main points I wanted to make. I guess the one thing that we haven't really talked about much. And I have, I'm not sure we should because I'm not a firm, big believer in it, but is consumer sentiment, consumer confidence,

and the huge gap between the two main measures that we see right now. Yeah. Which I think is fairly easy to explain. But just to sort of set the ground here, there are two widely followed measures of consumer confidence, one from the conference board, one from the University of Michigan. And they're telling vastly different stories right now. The conference board's measure is weak, but non-recessionary, kind of muddle through, consistent with a slow session to borrow from Chris. whereas the University of Michigan recently hit a record low, lower than the financial crisis, lower than the pandemic, lower than any prior recession since they started collecting their data,

and is only very modestly recovered. The seemingly obvious reason for this is that historically the conference boards measure has tracked the labor market. And if you look at their questions, you can kind of infer a labor market feel to the questions. Whereas the University of Michigan's questions are much more household finance oriented, and its index has at varying points in time

correlated closely with gasoline prices and the stock market. And obviously, of late, gasoline prices in the stock market have been terrible from a consumer perspective. Do you put any weight on one or the other in the context of, you know, is the American consumer going to pack it in? I think statistically the conference board measure correlates a little better with spending than Michigan.

But no, I'm not a firm believer in either. I tend to think that spending and confidence are driven by the same things, but they don't, there's very, there's only very rarely a causal relationship between the two. So I think they're more indicators of consumers' perceptions of fundamentals than they are anything else. And I think, got it. Got it. So that's a great way to end. Kind of geeky, you know, fits the group.

I have found, and Chris has also done some work here too, so I'll turn to you, Chris, after I say my, give my piece on this, that the, what matters, a really good leading indicator of recession is a six-month sharp decline in the conference board survey of consumer confidence. If that measure falls by more than 20 points, in the average, since it was started back, I don't know, in the 60s, is a hundred. 100, almost exactly 100. So if it falls 20, and right now it's at close to actually improve last month, right, like a 108. But if it falls 20 points in a three-month period, consumers have lost faith. They're worried about losing their job and they start pulling,

they're pulling back on their spending and we're going into recession. And that feels invariable. But right now, as I said, last month it was up. Over the last six months, it's flat as a pancake. No change. It's very close to the average. So my read of what that's saying is, and this is consistent in what you're saying, Scott, no recession in the next six months, you know, at least based by this indicator. I can't use it for after that, but over the next six months.

But Chris, you also did some work here and found another kind of interesting relationship. Did you want to describe that? Because I think it comes to a different conclusion. Sure. So just looking at the divergence or the difference between the conference. Board and the University of Michigan. So again, not not state anything about causality, but just correlation. Anytime you've had a very large divergence between the two, we have had a recession,

at least going back to the 80s. So right now we're close to the record in terms of the divergence between the two measures, even with today's numbers. So, you know, take that for what it's worth. It does, it's a, it's certainly. It kind of makes sense, right? because the University of Michigan survey is more based on equity market and financial conditions. And they tend to fall off first, right?

So the equity market goes down. The last thing to go is the labor market, right? So yeah. So it's not that's not a new. But interesting point. Yeah. The only caveat I would throw out in this is another part of the survey I follow is just the difference by political party.

It's incredibly wide right now. We got the universe of Michigan today, right? Democrats, you know, have a sentiment of 80 on the index. Republicans are at 40, right? So there's definitely a very different view depending on the political affiliation. To your point, Scott, maybe shouldn't put too much weight on these sentiment measures because lots of things going on there. Yeah, right.

Okay, we cover a lot of ground. And I want to thank you, Scott, for, you know, defending my side of my perspective. kind of, you know. I don't know, 60%. Yeah. I'm not sure I completely did. I know, but I, you know, I like to end it that way, you know, in my own mind. But I hope you guys have a wonderful holiday.

And you two, listener, I hope you have a wonderful holiday over the next week or so. And we have a podcast next Friday that we've already taped. That'll be out there for you. We are going to do listener questions. We did that for that podcast and going forward in calendar year 23. So if you've got questions, fire away, send them our way, help economy at moody's.com or just go to economy.com on the web and there's a place there to put in your question or you know how to get a hold of us through LinkedIn or Twitter. And we're going to take those questions.

That'll be a regular feature when we don't have external guests on. We'll have that as a regular feature of the podcast. But wishing everyone a wonderful holidays, take care. now, everyone. Talk to you soon.