Moody's Talks - Inside Economics - Inflation - Could've Been Worse

Episode Date: May 17, 2024

Jonathan Smoke from Cox Automotive and Mike Brisson of Moody’s join the crew for a discussion of inflation and autos. The team dissects this week’s CPI report, which while not great, at least wasn’t worse than expected. Mark argues that the Fed should be looking through the inflation data that’s mixed up with the problematic measures of housing inflation and start lowering rates immediately. The team is mostly on board with this view although Mike convincingly argues that it may be better for the Fed to be “credibly wrong” than incredibly right.  Guests: Jonathan Smoke – Chief Economist, Cox Automotive, Michael Brisson – Director, Moody’s AnalyticsHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn for additional insight. For more on Jonthan Smoke Click here Related Research: The article referenced in today’s episode Lags and measurement issues with OER is available on Economic View: Real Time. The Economic View-Real Time information service is the single web-based source that covers the global economy and financial markets around the clock. The service provides real-time analysis of key economic and financial market developments along with analysis of more than 250 economic releases. Economic View enables users to easily access data, analysis of economic events, trends and risks. Read Full Analysis With A Free 14-Day Trial.    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, Merced Dina Talley and Chris Doretties. Hi, guys. Hi, Mark. You guys notice I've got a formula now for starting the podcast. What do you think? Yes, we're trusty co-hosts. As opposed to untrusty co-hosts. Yeah. That would be a problem. Yeah. How are things going? Anything going on this week?

A lot going on on the economic front. but yeah, lots to talk about. Good. Yep. Yep. Okay. Good. And we've got two guests.

We've got one of our colleagues, a regular Mike Burson. Hey, Mike, how are you? Good, Mark. How's it going? Good. Good. Are you hailing from Rock. I keep saying, Syracuse.

Sanctuce. Damn. Spring is in the air. It's Friday. Does that make you upset when I say Rochester and you're from Syracuse? Is there like some rivalry between those two places? There is, but I used to live in Rochester, so I have love for the area. Oh, maybe that's why I keep saying Rochester.

You look like you from Rochester. That's what it has to be. Yeah. I'll be a look, you know. It's got to be. Yeah, spring is in the air, really? Oh, yeah. In Syracuse. In Syracuse, got up to 70 yesterday.

Oh, we're heating up. Well, you know, I take that in Philly. I mean, we've had kind of a really cold, wet, right, Chris? Rainy. Yeah. Rainy. Yeah, I'll take 70. And we got Jonathan Smoke.

Hey, Jonathan. How are you? I'm great, Mark. It's good to have you on. We were just chatting. you, you, I think, are the most popular guest of all our inside economics. All of your outside guests, maybe. Outside guess, yeah.

That's an honor if that's the case. That is indeed the case. I think you've been on a number of times now. Maybe it's because there's been more questions about the automotive sector than anything else, but I'll take it. No, I think it's your scintillating analysis. Yeah. Cogent, scintillating, insightful.

And of course, you're with Cox Automotive. Yes, that's right. Actually, since I was last on, my scope has been expanded to, I oversee all of Cox's businesses. So I'm having to dust off some understanding of other sectors like communications. And we have a lot of very interesting clean energy and farming, controlled agriculture. There's a lot of new things I'm learning. So there's nothing. Wait, wait, wait, that sounds like a massive, like I'm running the entire show.

Yeah. That's like a big deal. Are you CEO of Cox? No, no, no, no. Just I formally got added economic advisor for all of them. So. Cool. So your portfolio has expanded quite dramatically here.

My portfolio has expanded, but my team has not yet. So, you know, that's corporate America, you know, they used to it. it. Suck it up. That's right. Yeah. I demand more of my partners now. So.

All right. Are you, are you in Atlanta? I can't remember. Yes. You are in Atlanta. Yeah. Well, very good. It's good to have you on.

And obviously, you know, with Mike and Jonathan, we're going to be talking about the vehicle industry. Lots to talk about, particularly in the context of vehicle prices, they finally seem to have rolled over. Guys, am I right about that? They've rolled over. They're starting to decline. Yes. Yeah. One could say that we're on the precipice of maybe a deflationary spiral.

Ooh. Whoa. Oh. Oh, we're going to see for that, baby. That sounds, actually, that's music to my, well, if you're, I guess you're in their industry, it doesn't sound so good. But you're trying to get inflation back into the bottle, that sounds pretty good. Yeah. It does.

All right. Let's come back to that. Okay. Well, inflation is on the mind. a big week for the inflation statistics. We got the consumer price index, PPI, I think we got import, export

prices, a bunch of price information. We usually have Matt Collier, Matt Collier, another one or her colleague. I always get his last name wrong. I got to remind myself, it's Collier County, and then I say, I get his name right, but Matt

Collier, he's out today. So, Marissa, would you mind doing the honors? Would you kind of give us a rundown on the numbers. Sure, big shoes to fill, but I'll try. Yeah, try. All right. So, yeah, as you mentioned, we got several different reads on inflation.

Obviously, the biggie was the consumer price index for the month of April. Came out the other day. Good news for a change, right? It did not surprise to the upside for the first time in several months. So headline CPI rose 0.3% over the month, which is what we were. Can I say, Marissa, you know, as per month? normal working arrangement, I just interject what I'm, you know, at well here. But I find your introduction so interesting because you said it was, what was the words you

use about the report? It was good. I don't even remember what I said two seconds ago. Yeah, very good report. Yeah, but, you know, it's not because it was a great report. It was only because it wasn't a bad report. I guess what it sounds like. Right.

That's right. Yeah. Right? I mean, it wasn't like it was this great showing inflation's coming in in a significant way. It's just that it wasn't a negative surprise. It didn't come in stronger as happened in January. Okay. Yeah.

Continue on. Right. So, yeah, it wasn't worse than we were expecting for the first time in a few months, right? So, yeah, headline inflation was up 0.3%, which was in line with our expectations. That follows two consecutive months. of 0.4% increases. This puts year over year total CPI up 3.4%, which is actually 3.36% unrounded, so really under 3.4%. And that's down from 3.5% in March. Core CPI, so excluding food and energy, did the same thing, rose 0.3% after rising 0.4% for three

consecutive months. It's up 3.6% year over year, which is the slowest pace of core inflation since April of 2021, and that follows a 3.8% rise in March. So we'll get into some of the components of what's going on there. Yeah. So, I mean, I think if you take a, do a chart of the consumer price inflation, CPI inflation, for the last, Well, since before the pandemic till now, you saw obviously the surge beginning in 2021 kind of peaking on a year-over-year basis in the middle of 2022. That's when Russia's invasion of Ukraine pushed oil and gas prices to, you know, gas prices to record highs.

It's been moderating, kind of moderate all the way back into a few months ago. And in the last, I don't know, three, six months is kind of the rate of inflation is kind of leveled off. It means coming in a little bit, but it's kind of leveled off. That's kind of the picture you get. It's not, at this point, on a year-over-your basis, it feels like it's not really, it's moving to any significant degree, basically. That's right. That's right. Yeah. Okay. Let me ask you a couple questions around the CPI report, just to provide context. Of all of the components of the CPI, which do you found most encouraging? in the report in terms of what it means for inflation or the outlook for inflation?

Well, I think we have to talk about shelter because it's- That's the thing that makes you that that's the one component that you find to be the most encouraging? Yeah, that it didn't accelerate again. Yeah. She's so weird, guys. Well, I have two answers, I guess. There's something else. There's something else.

Okay. But, I mean, I think we have to talk about shelters simply because. it's the biggest component driving inflation right now. Okay. So the fact that it didn't accelerate is good news. And in fact, you know, when you look year over year now and you look at primary rents and you look at OER, it's actually moderate. OER.

That's good. What's O'R? Yeah. Oh, we are some disease? What is that? OER. That is, in a way, it is a disease. It is owner's equivalent rent.

So the implied rent that homeowners would pay to themselves, it's imputed by the BLS. So they look at rental properties in an area and they look at people that own their home and basically assign them an equivalent rent for the home that they own. That's a big part of shelter inflation. And that has been increasing more than actual rents, right? like people that primarily rent their home. And we've talked about this a lot, about the problems of estimating it is completely estimated. Chris can probably go on about this.

He just wrote a paper about how problematic it's been, and this has been a big part of what's been driving inflation over the past. Okay, but why is that the most encouraging aspect of the report? I mean, it was 0.4 before. Point 4 is pretty high. It's a third of the end of total CPI. I look at that, and I get to, discouraged. I don't think of it as, this is good news. I guess, I guess I'm looking at it like

it's, it's not worse news. Oh, okay, that's the theme here. It's not, it could be worse. It could be worse. Actually, that may be the title of podcast. It could be worse. Yeah. Okay. Got it. Got it. Hey, while we're on that topic of CPI, Chris, do you want to describe the work that, unfortunately, Matt's not here, but Matt has been doing with the so-called harmonized consumer expenditure failure of CPI, because this gets to the point that Marissa is making around rent and particularly OER, owner's equivalent rent? Sure. So we've discussed a little bit in the past that there are several ways to measure inflation, right? There are lots of ways to select the weights or, you know, make different assumptions.

The harmonized index of consumer prices basically excludes the owner's equivalent rent. It does a few other things, but that's the big difference between that version of inflation and the CPI that Mercer mentioned. And the idea there is that, well, we can't really measure this OER. Owners equivalent rent concept very well. It has such a big weight in the index that if we get it wrong, it has a big influence. So maybe best just to exclude that, you know, we'll look at the rents that we can measure, right? The rental properties where we do see the price changes, but we're not going to use this imputation.

So this is the way that many other countries do their inflation analytics. Europe, for example, UK, they use this harmonized type of index. The BLS does produce a research version of this harmonized index. Typically along with the CPI, I noticed on their website, though, that this month there's a delay in reporting the harmonized CPI. So that, that are, yeah, the harmonized index. So that should be coming out soon, I suppose, but it didn't come out. Watch it come out with all these big revisions and the whole thing changed. The whole story changes.

Maybe, maybe, possible. Jeez, that would be awful. Yeah. But we had an idea that, well, if there's this harmonized CPI version, why not a harmonized PCE version, right? We've discussed in the past that it's the personal consumption expenditure index that the Fed actually focuses on primarily when they're making their monetary policy decisions. So we have the core, which excludes food and energy for both.

We have, of course, the headline. we searched around for the harmonized version of this. We couldn't find one. So Matt has been steadfastly working on a harmonized PCE for us to consider. I think he's either posted something or will be posting something. I tweeted. You tweeted it out? At Marks Andy.

Just saying. Okay. A nice tweet, actually. You should take, obviously you're not looking at my Twitter. Tweeter? Twitter? Twitter. I guess what do you say?

X. X. Xer? You're not looking at my Xer feed? I'm off the X. I'm off the X. Oh, you're off the X. Okay.

All right. Once you posted on LinkedIn, I'll take a look. Okay. Fair enough. Sorry. I interrupt. So there you go. I think that's the, yeah, that's what he's been working on.

He's published something there. It kind of, in terms of the trends, it's kind of showing a similar trend in terms of a much steeper drop in harmonized inflation versus what we see from either the headline or the core. Okay, okay. I'm really getting bugged by this whole thing now because this whole inflation thing. So. You go not too long. Yeah.

I mean, in the context of what it means for what the Fed's doing here, the Fed's like, I'm not cutting interest rates until I got clear evidence that inflation is back to my target. Well, if I look at harmonized CPI, core CPI, or harmonized core PCE, core X food and energy, which is, you know, what they do because they're trying to smooth out, they're trying to get to the underlying inflationary trend and food and energy prices go up and down and all around. And I would argue now in the current context, given that the housing market is a complete basket case, it's a complete, complete mess for lots of different reasons, that we use. should exclude owners equivalent rent when we're trying to understand what the underlying trend in inflation is. Because OER, as Mercer said, it's implicit, it's made up. Even in the best of times, I'm not sure we measure it well, but in this time, we definitely don't. It's not providing any information whatsoever in my mind with regard to, you know, the underlying

rate of inflation. So you buy into that, and I look at, and by the way, as you said, this is the way the rest, many, much of the rest of the developed world looks at inflation, harmonized, because they say, what, what is this OER? How do you, what is this? I can't measure this thing. I'm not going to, I'm not going to include it in my calculation. So we do that and you look at it, and on a percent change year ago basis, the harmonized core CPI has been below or equal to two percent for nine straight months. Now, you said, I haven't seen the April data yet. Well, BLS better not wrong foot me here. I would say or want to do, but assuming they don't, then, you know, nine straight months.

And then I go look at the core consumer expenditure expenditure deflator, the PCE deflator, harmonized core PCE, best measure underlying inflation. It's been below 2% for five months in a row. And by the way, if you take the CPI and the PPI numbers that came out for the month of April, and you use that to forecast what the PCE. is going to be when it's released for the month of April at the end of the month, it's going to be a 0.2% month to month increase. And year over year, the harmonized core PC is going to be below 2% for six straight months.

This is year over year. It's not three-month annualized. It's not six-month annualized. This is a year over year. Okay. You're with me so far? So here's the concluding statement. Aren't we at Target?

Aren't we, haven't we accomplished what we need to accomplish? Aren't we back to underlying rates of inflation? Why do we need to wait around to cut interest rates? For what reason exactly? Okay, I'm going to stop. Chris, do you want to answer those questions, please? Credibility. Right? Okay. Is that it? That's your best answer? That's all you got, Warmy? That's the answer I would get. I'm with you. I've been an advocate of this for a long time, of moving to a harmonized index.

Mark, I'll add to it. Okay, Jonathan, you weigh in. I'm definitely on your side on this because I believe it also really obscures what individual consumers are experiencing in the economy. Great point. And we do a little exercise where we take the CPI numbers and we apply it to the basket of goods in the consumer expenditure survey for. the income quintiles to estimate what the CPI is per income quintile. And I believe we're vastly

overstating the level of inflation for homeowners, which is 66% of the population of the population who in fact are enjoying much lower inflation because they are not paying themselves on an equivalent rent. And by the way, they happen to be the house. that are invested in the stock market, enjoying strong dividends and interest, and are driving the vast majority of consumer spending. Yet, what does the elevated level of interest rates not coming down prevent us from moving forward on is very expensive real estate investments like multifamily construction that we are in such a need of in the country? So I would argue that leaving rates higher for longer is actually flirting with making the situation far worse.

Okay, you make – excellent. You make two really fascinating points. One is that homeowners aren't actually seeing their housing costs rise, right? They almost all – every American with a home with a mortgage has a 30-year fixed-rate mortgage, maybe 15, and their monthly payment hasn't moved one I-O. I know we discussed Iota. That's a word, right? Yes. Iota has not moved on. Only insurance and property taxes maybe are. Yeah, okay.

Yeah, exactly. But the actual mortgage payments are the same as they were. So, you know, we're saying with the implicit rent that the cost of living in the house is rising actually five, six percent on a year-over-year basis. And the reality is from a cash perspective, it's not rising at all for many homeowners, you know, in terms of their mortgage payment. That's a very, and that's, that's kind of weird compared to other goods and services in the CPI, right?

I don't, is there any other service, I guess like financial services? There are some implicit costs in the CPI that, you know, we don't, there's not cash outlays, but this is the biggest one by far. And the other point you're making, a really interesting point, you're saying, look, if we want to get the cost, the growth in the cost of housing down, we need more supply. We need more homes. And if you keep interest rates high, you make that more difficult for multifamily developers to get the capital they need to go out and build more rental units.

Also, it contributes to the so-called lock-in effect, right, that homeowners with mortgages at a mortgage rate at three or three and a half or four percent, they're not going to sell and go buy another home, getting a mortgage at a 7 percent where the current mortgage rate is. So it's affecting the supply in the existing market, too, both in the new market, you know, for rental and homeownership and in the existing market. And all the Fed's doing by keeping rates up is exacerbating the very problem they're trying to solve. That's what you're saying.

Yes. Yeah. Absolutely. Marissa, do you want to, I'm going to, now I'm doing a poll. I'm going to try to identify a person who disagrees with now, me, Dr. DeReedies and, I don't, unfortunately. You agree. You agree.

No, yeah, I agree with you. Okay. Okay. Okay, Mike, before Mike answers the question, if Mike disagrees with me or us, he's probably right. We're going to have to rethink. Generally, when he disagreed with me, he's right. He's right. But go ahead, Mike.

Go ahead. I fall on the side of the credibility issue. Okay. I won't come back to that. This is just changing the goalposts. If everyone is looking at the CPI and you say, oh, the CPA is not right now. We wanted lower rates. We're not looking at the CPI anymore.

Everyone published these CPI reports. I know the Fed always says they're looking at the PCE, but everyone else looks at the CPI, and if you're saying, oh, CPA is not right when we don't want it to be right. So now we can lower rates. It's a PCE. They say PCE. They say PCE.

The public looks at the CPI. But they're not changing the goal post. If they step to the core PCE, that's their goal. That's their goal post, core PCE. Right. Okay. Right. On the credibility issue, I don't think that they can, if we're still at three and a half percent year over year, it's really hard to say, oh, let's lower rates. And maybe it's a change in the R-Star. What's to say that it's really hurting the labor market right now? Labor market still seems hot. It's low unemployment. There's reasons to think we don't want to go into that stagflation type of scenario and keeping it here rather than pulling. back on interest rates too soon, I think might not be the wrong play at this point.

Okay. So we're basically saying it's better to be credibly wrong. Well said. Well said. I hadn't thought. I wouldn't have thought of saying it that way, but that's well said. But if it's 50, 50, credible, wrong, credible right. I'll rather be credible and be a 50% chance.

And, Mike, I sympathize with this argument. I do. I do. I mean, I do think credibility is critical because that goes to, inflation expectations and we need to make sure that inflation expectations remain anchored because that's key to everything. If they don't, then we got a problem. So I totally get you on that. I'm on board with that. But I would say this, you know, why couldn't Powell, Chair Powell, instead of calling out super core service inflation, oh, I'm looking at super core service inflation,

which by the way is completely bogus in my view as a measure of inflation and say, hey guys, there's this thing called the harmonized CPI, the harmonized core PC. I think we should be looking at that because that's a better measure of underlying inflation. And by so doing, he takes our eyes off of this bright, shiny thing over here that means nothing to a credible thing over here that means something and get people thinking in the right direction as opposed to not thinking in the right direction. And therefore, it makes it a lot easier for him to maintain credibility. He can actually ease more quickly than he otherwise would have if he sticks with this.

this super core thing over here. And super core is totally bogus because it's a narrow piece of the pie and it's got all kinds of imputed stuff in there that are just very difficult to measure. So what do you think of that argument? I agree with changing the lip service. Okay. But changing policy, I wouldn't say now is the time. Yeah, and I wouldn't change the policy either at this point.

I say let's get, but I would say two things. One, if we change what we're focused on, then it makes it easier to start easing sooner than otherwise would be the case. And the second thing I'd say is I would not sacrifice the economy to the altar of that 2% on core PCE if push comes to shove. If something's breaking somewhere, and by the way, if you listen to the last couple podcasts, we've been talking about things that could be breaking, you know, under the weight of too high for too long, then they should not sacrifice the economy to that.

Agreed? Disagree? Agree. we should not be sacrificing the economy, but I'm not on the couch. So I'm living in. Yeah, making reference to the previous podcast. Yeah, very good. Okay, I'm going to ask the question again to the group because Marissa did not give me a

satisfactory answer. It was what in the report makes you that made you feel better about inflation. Is there anything in that report? And you can't say vehicle prices because we're going to come back to vehicle prices in just a minute. But anything else? Food prices. Oh, that's the answer. That was the answer I was looking for.

Anyway, do you want to explain? Yeah, they were flat over the month. And if you break apart, right, there's basically two segments within food. There's grocery prices, food at home, they call it, and food away from home, everything you buy in a restaurant, a fast food, a vending machine, a college dorm cafeteria, right? So grocery prices, which have caused much angst over the past several years, fell over the month. And it's the third consecutive month with either negative or no price growth. Year over year, grocery prices are up just 1.1%, which is not much, right, in the grand scheme of

inflation that we see in other goods. And just for a little bit of context, the post-pandemic peak in grocery prices was 13.5% in August of 2022. Grocery prices were rising 13.5% just, you know, two years ago, right? So there's all different components that fell over the month. We always somehow, the discussion always turns to eggs for some reason. egg prices were down over 7% over the month. You know, there's been these outbreaks of avian flu, which have whipsod egg prices over the past several years.

Food away from home, so the stuff you buy outside of the house was that those prices rose 0.4% over the month. That was an acceleration over the prior two months. And over the year, they're up 4.2%. But they're also, which is high, but they're also. coming down. The peak there was 8.8% in March of last year. So food, at least grocery prices, look like they're actually deflating over the past several months, which is really good news for consumers, right? Your average consumer that's consuming food and gas and these kinds of things. So that

was going to be my second bright spot. Yeah, no, I think that that's the one I would have focused on. I mean, I think food at home groceries, year over year, they're basically flat. They're zero. I mean, food away from home, restaurants, that's up, as you said, 4%. Yeah, over 4%. Yeah. And that goes to mostly, I think, strong demand because people have been going to restaurants in the post-pandemic period and labor costs.

And wages. And minimum wage hikes. And, you know, you saw the ones in California for fast food restaurants. That's adding to it. Here, I have a question for you, though. So if you look at food at home, and I think this is the thing that really causes the disconnect between economists like me with all this happy talk and how Americans feel about the economy, because they're focused, many of them are focused on food, items that they buy on a regular

basis. And if you look at food at home, it's flat on a year-over-year basis, but it's up 25% from where it was, you know, three years ago. That's a big increase. So here's the question to you, and maybe to the group. Should we expect food prices in aggregate? I know there's different food items that go up and down and all around. But in aggregate, should we expect food prices to actually fall?

I think, well, I think a lot of this hinges on what energy prices do and what gas prices do, right? They're very correlated. And when we saw the peak in food prices, it was right after Russia's invasion of Ukraine. It was right when oil prices peaked. So it really, because this is how food is transported around the country, it's mostly by refrigerated truck. So it really depends on what diesel and gas prices do. And energy prices have been rising.

So I'm not quite sure that we should expect, you know, a spike or a reversal, a major reversal in the trend. This might be a bumpy road, I think, for the next month or two. It may not be a linear coming down like we see in some other components. Jonathan, do you have a view on that question? Should we expect food prices, at least in its totality, to come down? Or is it a case where food prices go sideways for a long time, let wages and incomes catch up? I suspect it's more that. Although I've heard some interesting talk about the – I'm trying to remember what the class of drugs

is related to OZMPIC, but there's actually a decline in demand for food. Oh, interesting. That's correlated with that. And that, too, could help keep food prices contained. Oh, that's an interesting point. Yeah. There was one other thing that I would point out as encouraging in the CPI data, and that was motor vehicle maintenance and repair was unchanged because we've been dealing

with that component really following the early surge in vehicle prices. And I would argue that is a huge part of the insurance, the motor vehicle insurance, which is the other kind of problem in the CPI data so far this year. So let's go to, before we go to vehicle prices, let me just turn to Chris quickly. Do you think we should expect food prices to come down, Chris, or is it more a question of They just kind of hopefully go sideways here. Yeah, I'd expect more flattening than actual. More flattening.

All right deflation. Yeah. Other than the OZempic argument, which I, that's a pretty interesting argument. The only other argument I've heard where you might see, I don't know if you see actual prices come in, but it keeps a lid on the inflation in the food in food is margins are now for grocery stores are actually pretty wide. But they, grocery stores have taken advantage of the run-up in-prud. price and now the kind of a more moderation in their cost structure so that they are their margins

are extraordinary and it could be over time as competitive pressures kind of kick in that that will put you know kind of downward pressure on price increases so a reason I don't know that even on competitive pressures I don't think businesses will cut price generally right but they they may not be able to raise price quite as much yeah okay yeah all right let's turn to vehicles uh and That's good news, right? Jonathan, what we got with regard to new and used vehicles. It seems like it's moving in the right, again, from the perspective of getting inflation back in the bottle. Yes, both vehicle price components of the CPI were negative in April.

So we've had several months of used vehicle prices being negative. And new vehicles largely have been negative over the last year. I don't recall what the CPI is year over year on new vehicle prices. I always have an issue of will the CPI make sense in the vehicle prices relative to what we see in the real world? And actually in April, we saw a slight uptick in average transaction prices, and that's a part of our vehicle affordability index. And I think it largely represents there's periodic pressures in vehicle sales. And associated with that, there is. strong trends and incentives and discounting. So April followed the end of a quarter in March,

which happens to be the fiscal year in for a large number of Japanese manufacturers. So we've had the highest in multiple years of discounting and incentives in the month of March. And they just kind of laid back a little bit in their aggressiveness in April that I think was behind our numbers. But when you add the quality adjustment and other things that the BLS does, you know, with the numbers, that's probably why we still had a down number in April. But broadly speaking, I mean, use vehicle prices, correct me if I'm wrong, Mike, have been falling for a better part of the past year, right? And new vehicles really in the last couple, three, four, five months where we've seen some, some weakness in new vehicle prices. Is that,

Is that factually correct, Mike? Yes. So the separating the CPI from the, which tracks retail prices versus our index and the Manhattan index, which tracks wholesale prices in the used side of the equation. The wholesale prices have been coming down for a couple of years now. And they peaked to early 2022. They've come down over the past couple of years. And this is just a continuation of that in the wholesale side.

On the retail side, it's lagged. But it's continued to track that wholesale side of the equation as the lower prices for dealerships at the wholesale market go into the consumer side of things on the retail side. So I think the CPI said it was down 7% on the year for used vehicles. And that's been going down. We saw a jump from the first quarter of 23, but it's since that point, which was lagged out until June of 23. So since June of 23 until current, we've seen continuous drops in used vehicle prices. New vehicle prices have been flat or so since that point. We saw, I think the largest monthly drop was this month that dropped 0.4% month over month.

And then so I think that's the yearly change too because it's been pretty flat over the past year. I would expect that CPI to continue to come down on retail too, despite what Jonathan said with the transaction price. but we still have pent up prices from the real side of the economy. So the numbers that Jonathan and I look at in transaction prices, we've seen four or five months of decreases in those transaction prices, which are starting to move into those CPI numbers. And so we should expect, not that jump that we saw in the one month that Jonathan talked about, but more of a consistent decline I would expect in those new vehicle CPI numbers over the next coming months.

So prices are declining. and how much longer do you think that will continue? Is that through the end of the year, or is that through this time next year? Jonathan, do you have a view on that? I think it will at least be through this year and most likely through next year as well because it's precisely what you were bringing up about grocery retailers.

Most of the declines that we're seeing are really a result of margins declining or put another way, discounting is returning to a market that actually was pricing above sticker back in the early parts of the pandemic through 2021. So as discounting returns, we're about halfway back to the level of discounting we had, which means we've got another 2 to 3 percent, and incentives also play a role of that. That's the amount of money manufacturers are putting in to make it more urgent for you and interesting for you to buy a vehicle.

And both of those things mean that average transaction prices are going down and should continue to go down until we're more in normal territory. But interestingly, the vehicle itself is not getting cheaper. The stickers are still seeing inflation. The invoices, what dealers pay, are seeing even greater inflation. And that's reflective of, well, guess what, guys, we're paying more in labor. we've got more expensive technology and regulations. We've got a general skew towards vehicles that are much more expensive

because you're catering to who's left and capable of buying new vehicles, which tends to be high income, high credit quality consumers, and it sort of reinforces that. And oh, by the way, we're preventing any inexpensive vehicles from entering the country with 100 plus percent tariffs. So we're ensuring that this regime of more. expensive, but maybe lower volume vehicles is really what's going to be the nature of the U.S. vehicle market for the foreseeable future.

Oh, interesting. So even with the pickup in global production, vehicle production, which was significantly impaired during the pandemic, and it, it took me if I'm wrong, but I think has largely normalized at this point around the world. Yes. Let me correct you one thing on that. The Japanese production was way down over this first quarter. big quality issue at a Toyota supplier.

So their production was down about 15% in this first quarter. So we saw Australian prices pop over the first quarter unexpectedly. So it's not all the way back. There's still some supply chain issues, but U.S. is back right where it was pre-pandemic. And inventories on dealer lots have this is a statement and is actually a question. They've normalized as well. They're rapidly growing and recovering. We're not back to 2019 levels, either in absolute inventory levels or day supply.

Our metrics of supply show we're approaching 3 million units on dealer lots, and we were around 3.5 million back in 2019. But on a day's supply, we're within 10 days of what the day's supply was in 2019, because the sales pace is lower, even though the inventory levels are lower. Okay, so not quite there. We're rapidly moving in that direction. If you look on the year-over-year change, we're increasing inventory levels by about a million units. So most of the recovery in production with a little kinks here and there, like Mike was mentioning, has really been in the last 12 months. Okay. So all the latency supply chain issues are mostly worked out, Jonathan?

Yes, knock on wood. Yeah. Okay. And despite that prices coming from the producers is still, they're still moving moving higher because the cost of production has moved up. But what's happening is that the retail price is coming in, in part because the margins that the dealers have are narrowing. And I guess also the quality, as you mentioned in passing, the so-called quality

adjustments in the consumer price measures. The CPI tries to account for the improvements in the quality of the car as well. Yes. And arguably, the quality is tremendously better. Tremendously. Chemicals are lasting much longer. Right. Clearly more fuel efficient, even if you ignore the EV component. So lots of improvements in that space. Okay. So it sounds like we should count on or we can count on continued actual price declines in the new and used vehicle market for the next six, 12, maybe 18 months, something like that, not to put words in your mouth, but yeah, okay. And that then leads to if that's happening, then we should start to see some with a lag,

relief with regard to the increase in the cost of maintenance and repair. and you mentioned in the this month's consumer price report, there was no increase in that's the CPI for maintenance and repair. And do you think that's the beginning of this of a trend here? I do. I mean, there's components of maintenance and repair, like on the service side that probably still has an inflationary bias towards it. But the parts shortage and the amount of inflation that's happened in parts, I think,

is reaching the end of its cycle. But, you know, even with April flat, it was still up 8% year over year. So it's clearly been driving a lot of the insurance uptick. And insurance, you know, it was still up. I think it was 1.7% month over month, which was a major deceleration from the two handle in March. But it's really been an area that's been hurting average. Americans, no question. And that's next then, because it's, first, it's the vehicle price, the direction that that's headed, then it's repair and maintenance. And then the next step on the process is insurance, because insurance is the last thing.

Because the insurance rates go up because insurers have to shell out more cash to repair a car that's hitting a traffic accident because the vehicle price is so much higher. So you're saying we should expect to see over the next 6, 12, 18, and in the case of the case of vehicle insurance, maybe the next couple of the years, at some point, you know, some moderate, significant moderation, maybe even some declines. I wouldn't necessarily think we're going to see declines. Okay. That's some technical reasons that vehicles are more complex and battery electric vehicles are

more likely to be totaled. And there's a lot of variables there that suggests that insurance is never going to get cheaper. Yeah. But hopefully it won't go up as much as we've been experiencing. Well, I won't recount again my. my own personal vehicle insurance experience. But I just had that with my homeowner's insurance, too.

I got kind of bill the other day. And, you know, the interesting thing that's happening is I'm reducing my coverage, right? I go, because the sticker shock, the price on the insurance makes me call the broker and you say, hey, what's going on? Can we get a better price? And the broker says, no, that's the best price. but you could change your coverage. And then I really look at the coverage and I go, well, I don't need that.

So, you know, the price is up, but the actual amount I'm spending in the case of both the vehicle and the homeowners insurance is, I wouldn't say it's less, but it's certainly not more. It's certainly not more, which, you know, obviously I'm getting less for it, but nonetheless. Anyway, it's all about me, Jonathan. It's all about me. Okay, let's do, was there anything else that was going to go? Oh, just a factual question. If I towed up the share of the consumer price index that's in new and used vehicle purchases, maintenance and repair, and vehicle insurance, approximately what is that? Does anybody know offhand? Five to six percent? Five to six percent of the CPI index. Yeah. Overall CPI?

Yep. Yeah, okay. So that's not inconsequential. That's consequential. Yeah. Okay. Okay. There's so much to talk about. I do want to come back and talk about the, this is, I'm not sure this is the right nomenclature, the real vehicle industry, meaning what's going on with sales? Because I have, and, you know, EVs and that kind of thing. So let's come back. But before we do that, let's play the stats game, unless there's anything else on inflation that anybody wants to say. any other appurals of wisdom there? I mean, I think generally the bottom line is, you know, this conversation is making the case that inflation, if it's not already back to the Fed's target, it's pretty close. And all the trend lines here, or at least most of the trend lines look pretty good. Is that a reasonable summation of the conversation, you know, up to this point? Anyone disagree with that?

Okay, hearing none. Okay, let's play the game. The stats game, and Jonathan, you're going to play this game? Absolutely. Okay, yeah, good. We each put forward a statistic. The rest of the group tries to figure that out with clues, deductive reasoning, and questions. And the best stat is one that's not so easy.

We get it immediately, one that's not so hard. We never get it. And we always start with Marissa. Marissa, you're up. Okay. Very relevant to this conversation. I have two numbers. plus 20% and plus 46%.

Uh, measure, price increase? Yes. A certain product or products, services? Use vehicle prices? New and used, I'm wondering. One of them is... Plus, they're up 20%. One of them is new.

Compared to February 2020? Correct. Oh. So new vehicle prices are up 20% since February 2020. What's the 46%? Is that insurance? Yes. Okay.

Wow. That's perfect. Yeah, perfect. Yeah. So what you're saying is since, if I go back to February of 2020 right before the pandemic hit, and I look at the new vehicle price index from the CPI, it's up 20%. That's right. Even with the recent declines.

That's right. And vehicle insurance is up 40. 46% since February 2020. And half of that is in the last year. And the CPI index is up 21. So vehicles are less than inflation overall. Wow. Yeah.

Interesting. If you believe in the vehicle component being accurate, but that's another. Yeah. We've talked about in the past how wacko. The new one is actually done quite well now. Who's that right? transaction prices and it's it's more immediate the used one still takes a little bit of belief yeah beliefs yeah okay uh mike you want to go next sure uh 3.3 trillion it's not dollars

3.3 has something to the vehicle industry correct vehicle demand some of the uh nope 3.3 trillion is a lot of that's a lot of something that's a lot of something that's a lot of Is that it do with EVs? No. The total value of retail sales? Nope, not dollars. Not dollars. Not dollars.

$3.3 trillion. And it has to do as a vehicle industry. Yep. Is that how many people drive? No, I was going to say drive a car. But that's that. Myelage driven. There you go.

Oh, mileage driven. Total miles driven in the past. 12 months, the highest 12 months in the history of the United States, showing that this work from home isn't impacting significantly the amount of miles driven, the amount of miles driven, directly impacting the amount of vehicles demanded in the auto industry. Oh, so 3.3 trillion was 2023? That's March of 2024 over the last 12 months. It's been 3.3 trillion miles driven in the United States.

And you're saying that's a record high? Record high. Which is really surprising to me. How is it that our oil consumption, this is probably an unfair question, but oil consumption the U.S. is down about a million barrels a day. Fuel efficiency. Dramatic improvement. Fuel efficiency.

Right. Right. The EVs and the hybrids. Even before EVs. Even before that. The change for the decade leading up to the pandemic was enormous. Trucks getting 20 instead of 12 miles per gallon. Oh, okay. And what you're saying is at the end of the day, and this is a lesson I learned from you,

when we were debating vehicle sales back in the teeth of the pandemic, what really matters to demand for cars is the mount driven. And we're back to driving. And scrapage. And scrapage. Of course, scrapage, right. Right. Okay. Well, I want to come back to sales after this conversation, but that's a good segue into it. Okay.

3.3 trillion. And any granularity around that? I mean, in the sense that is it across the country? Is it – they do have it regionally. I don't have it broken up in my mind, but I could say it's southeast. They drive a lot more than the northeast. Right. And population centers.

Where's everybody going if not to work? There's studies out there that show that you drive just as much because you're not going to the city center. So if you see need to pick up flowers or you need to get a haircut, you still need to drive from your house to do those things. Whereas you're going into work, you just get the flowers on the way home from work. You just get your haircut while you're at your lunch break. You go to the gym. I know I see Chris at the gym every day at the Y across the street, but now you've got to drive to the gym. So it's, you're doing those.

That close my mind. Chris goes to the gym? I ride my bike now, by the way. I thought he was just a botsey ball player. What was his whole? Got to get shape for botchy ball season. You know, highly competitive. I think the overall data also reflects that the way that the miles are being delivered

may not be the historical way that we had an average of 12,000 miles per car. Because when we look at vehicles like at Mannheim that are coming through, you really have the average, what I would say, the average household vehicle is actually accruing slightly less mileage than it used to. And it's because we effectively are outsourcing some of our miles traveled to ride hailing services, goods delivery. So those miles actually also represent more vehicles coming to our homes and having to drive in two directions to the home and back where your prior prior trips may not have incorporated that. So we've got some changes going on in Miles.

Fascinating. Well, maybe since we're here, let's talk about it. The thing that confuses me a little bit, if I look at new vehicle sales in the U.S., I believe, and correct me if I'm wrong, in the month of April was 15.7 million units at an annualized rate, correct? Okay. And if I go back before the pandemic, it was a consistent 17 million. million per units per annum, give or take, but for at least a few years, it was like,

it was almost like the industry was targeting 17 million units. They wanted 17 million units and sales. How come we're still, given the increase in mileage, I guess maybe the answer is scrappage and the point Jonathan just made, but why is it that we're kind of stuck at 15, in affordability is a problem, but why are we at 15.7 million? Why not back to 17 million units? Jonathan, you want to take a crack at that? Sure.

I principally point to affordability. Affordability, okay. We've effectively, when you look at the credit tier and income distribution data of who buys new vehicles, we've skewed to even higher credit quality and higher income that, based on my math, has eliminated about 10% of what was the market in 2019. it's impossible for that 10% to buy today. So the market has shrunk. And I think we're struggling with the 16 million level

because clearly the industry is not able to deliver there. If you plot the long-term trend of light vehicle sales for the full history, this is the only period in time where we've not been above the long-term trend, simple linear trend without a recession. and I believe it's it's mainly affordability but to Mike's point Scrappage plays a role in that too vehicles are lasting longer so the good news is from an affordability standpoint vehicles last longer the use car market is bigger and and more important and increasingly more people are principally buying used when they

may have considered new you know just five years ago if you concur with that Mike that assessment I do and then that goes right into driving up a pair of maintenance. The older the car is the more expensive, the maintenance drives up prices per maintenance. So in the same kind of dynamic as playing out in the housing market. And we have this, Chris has come up with this concept of pent-up households. We, you know, we've got households that haven't formed because they can't afford to either rent or to purchase a home. So if you can't do that, you've got to stay with your parents or double up with your friends. In that field, we call that pent-up demand, meaning that's kind of latent demand.

People want to strike out on their own. They just can't afford to. And once affordability improves and it will eventually, I mean, interest rates will come down and incomes will continue to rise. And we are talking about falling prices. And so we're to build gasoline, assuming gasoline doesn't go higher. and we continue to move over to hybrids and EVs, and there's tax subsidies there. So we should see improved affordability.

Does that mean if that's the case, then we should see an improvement in sales. And there's so-called pent-up demand for vehicles, and that will ultimately, let's call it, say, unleashed, and that will lift the demand, and we'll get back to 17 million units, a couple, three, four years down the road when affordability is restored? So we definitely believe that there's long-term growth potential in the market,

and the principal thing holding back the market today went from being supplied to being affordability. So as prices and rates start to come down, you really start to improve that potential. But I am worried that the new vehicle market could be constrained by affordability for the foreseeable future because the technological change and the shift of the industry to principally selling much more expensive vehicles. It self-reinforces. And so, you know, it may be worth a pause for you to take a look at your medium-term forecast for light vehicle sales because you have a trajectory. Now you're talking to Mike because I learn my lesson. I don't agree with him. That's his forecast. I'm just saying. He tells me it's your forecast.

Oh, geez. Short term's definitely mine. I'm not questioning the short term. It's the 17-7 handle in five years that looks. It looks high. Without the Chinese actively delivering sub-20,000 units in this market looks really impossible. Yeah. Okay.

So to get to that that's the exact point I wanted to make. That's getting up higher than 16 isn't the question. It's, is there pent-up demand? Yeah. I don't think we need pent-up demand to get to. 17 million. But if you want to get above 17, 17, 17, 5, once you start getting that, you're going to need a pent-up demand. I don't believe that there is pent-up demand in the market. I think we drive through demand through increased repairs, aging of the vehicle stock. It's not like the housing market

where there's new families that need to be made. It means there's new vehicles that need to come on to the market. You can drive through that demand by having more miles on a single car. That being said, I don't think we're going to get above 17.5, 18 in the next three to five years, just because I don't think that we're going to have an explosion as prices come down. Oh, okay. So we need – because we're on the high side then, you're saying. In the medium term, yes. In our forecast, we're on the high side.

Okay, so we may want to reevaluate that. Okay. Okay. Very good. Jonathan, you want to go next? Yeah. So I like the style that Marissa had with two numbers. And I'm going to, so I'm giving you two.

They're two percentages, 6.58% and 23.25%. Is there any meaning to going to the second significant digit or is that you're just showing off? Is that what's, what's it? I think it's meaningful. This is a part. This is a number that's quoted that way. Oh, oh. Okay.

These are they? Oh, are they? Interest rates. Interest rates. They are interest rates, yes. Say them again? 6.58 and 23.25. Interest rates, 23.2.

Prime borrower. Oh, sorry. You're going in the right direction. They basically represent the best and the worst average auto loan rate in the month of April. Oh, cool. So the best one, 6.58, was for people who have superprime credit. So that's a credit score above 760 and buying a new vehicle. So those are the lowest credit risk.

Best possible rate today is 658 when the average is around 10. And then the worst rate, 23.25, is a used car buyer with deep subprime. So 590 or less credit score. So you can imagine how difficult it is to get an affordable payment with that kind of interest rate. I can't imagine anyone paying that. Geez. Wow. The average use rate today is around 14%.

So deep subprime is a full 10 percentage points higher. While we're on the topic of lending, Mike, auto loan credit performance. I had thought, you know, we get the Sequefax-based data, credit file data, and we look at those delinquency rates, and it's a census of, you know, credit files. So it's good data. We got monthly data we seasonally adjust. And I had been looking at it, and I'm looking at the entire loan market, the super prime prime, subprime, everything. It looked like the delinquency rates had stabilized. Then in April, we saw a bit of a pop.

Do you think we, well, what do you think? Is credit quality still weakening or has quality stabilized? Quality has stabilized in general from where we were with that huge increase from 21 through 23, where we were having 25, 30 percent year-over-year change. The April pop, I think, is a little bit more noise and delinquencies. I'm more concerned with what's going on in charge-offs. Charge-offs and the auto-delinquency rate are up 12 percent over 2019 levels. and they were staying pretty low or stable up until the past few months.

So as you see these used vehicle prices come down, people have less equity in their vehicles, which means that this is going more towards charge off on your loan rather than selling it and paying off your delinquent loan. So this is a little bit more concerning for me on the auto credit side of things. Yeah, we look at the same data from Aquifax. But we narrowly look at 60 days. plus for delinquencies, and we had two months in a row, March and April, of 60 plus delinquencies falling. That's a usual seasonal tax refund season pattern. So we're thankful that that was the

case. But even so, the percentage of seriously delinquent loans was the highest in the month of March and the month of April in the history of the data series we have, which goes back to 2006. So it's actually, even though it's come down, it represents a level of stress in auto loans that is worse than in the Great Recession. The big change I've seen last year, the silver lining was delinquencies were very high, but defaults didn't correspondingly reach even average territory. But in the first quarter of this year, the default rate has more than normalized. It was at an equivalent, if you do an annualized pace of defaults, or,

or think of it as repossessions, you know, in the world of Mannheim. We were at the same level in March and April that we had in 2010, you know, in the, in the worst of the, almost the worst of the Great Recession. 2009 was a little worse. So there's a lot of stress on, on the loan side. And it's exactly why Mike explained. Mike, though, I came, I listened to everything he said and then I kind of went to the bottom line, but I think things have stabilized.

I'm a little worried about repossession charge off because the value of these vehicles are now falling. There's less or no equity in the car and therefore people are more likely to turn the keys back. Do you concur with that view, Jonathan?

Are you more pessimistic than that? No, I concur with the view. You do. Because the market is very constrained in supply and historically auto loans are written for this. What we're seeing is, yes, a slightly elevated relative to normal, but it's definitely within the bounds of what the lenders

are pricing for. And by the way, their yield spreads, even though the performance, their yield spreads are the widest, at least in the history of our data. So they are prepared for this. And by the way, it's why even if the Fed starts cutting, we may not see substantial improvement on consumer rates until the loan performance starts to get better. Okay. Okay. Let's do one more. Chris, you're up. What's your stat? Okay. Keeping with the theme, $50 billion. 50 billion. Billion. Auto industry profits. No, but your... Subsidies, the value of the tax subsidies?

No. Let me throw in a, I'll make it, I'll say negative, 50 billion just. Oh, well, okay. Oh, gee. I'll throw in. I mean, you're surprised that we're surprised? I see it on your face. Like, isn't that a big difference? 50 versus negative 50? No, it's just, it's kind of along lines of what Mike said, right? You could call something 50 billion a profit.

You could call it 50 billion loss, right? You wouldn't necessarily say. Guys, do you know what the hell he's talking about? I have no. A hundred billion dollar difference. That's what we're talking about. Can we now put to rest, you making fun of me with negative signs? I was bet say, Marissa, somebody needs to come to your defense.

Exactly. Thank you, Jonathan. What else you're talking about? Like, I'm totally confused now. Mike's on the right track. It's not the auto industry. It's some. Oh, the subset of the insurance industry.

Exactly. Okay. They lost 50 billion. The auto insurance industry lost $50 billion over the last two years. 2022 and 2023. So a reason why I don't expect to see that insurance premium fall anytime soon, because they're still making up for the losses that they've incurred. I'm not even sure that they're appropriately priced at this level.

They probably need additional premium hikes just to get back to any gluery. Oh, that's a good one, though. That's a lot of money. It is a lot of money. It is a lot. Yeah. I mean, basically an insurance company, they do their probability assessment. actuarial assessment, and then they say, okay, this is what I'm going to lose probabilistically,

and now I need X return on top of that, and that's my premium. It's pretty straightforward, actually. Yeah. Yeah. The probability in actual aerial results could be different than what you calculated, but, you know, on average, it's going to be right, generally. Oh, especially for driving more miles. That was an interesting piece, right?

So I thought we were actually driving less, which would lower premium, but if we're driving the same, that's just redistributed. Right. And we're driving hard. It works its way in here, too. Climate, it's climate works its way in here too. How many vehicles we lose from Hurricane E and two years ago, I think over 350,000. Hurricane Harvey, I think was tripled that.

Yes. So I can almost guarantee we have a weather event between August and November where we lose more than 50,000 vehicles. Also, hail, right? I mean, yeah. I mean, like these hail storms are pretty bad. here in suburban Philly, we're not going to lose it to a hurricane, but we could lose it to a health. The cars could get damaged by a hillstorms, no problem. Okay, very good. I want to,

we're kind of towards the end of the conversation. I want to end it this way. I want to give you kind of our forecast for inflation, and then I'll turn it to the group and see whether you think that's a reasonable forecast or you think we're being too optimistic or, uh, too pessimistic. So in terms of the core consumer expenditure deflure, so I've picking on that one, because again, that's what the Fed is focused on and setting its 2% inflation target. That's through the month of March growing year over year, 2.8%. And we have, in our forecast, that coming back down to the Fed's target by mid-20205. So a little over a year from now, we're back to within spitting distance, give or take,

you know, a tenth or two. And not that that means that's going to wait till then to cut rates because they just need enough evidence to know or feel confident that, you know, we're headed in that direction. So I would expect that to be the cuts rates well before that. But that's the kind of the trajectory for the forecast. Marissa, what do you think? Would you take the high, the low, or are you on board with that forecast? I'm on board with it.

You are. I think if we're wrong, it's going to be later, right? It's not going to come down that quickly. But I think as the baseline forecast, I'm on board with it. As you mentioned, most things are on a downward trajectory here. So I'm with you. Okay. Okay. And do you think people's perceptions about the economy are going to thus steadily improve here

because inflation is coming in? People's perceptions of the economy are very out of whack with the economy, I think, right? I mean, if you look at these sentiment issues, if you look at these sentiment surveys and you look at inflation expectations, ask people what they're going to be a year ahead. We saw that last week with the University of Michigan, they don't think inflation is going to change at all over the next year. They think it's going to be right where it is. So I don't think that people are accurately gauging what's going on with inflation. That said, if you look at inflation expectations, look at what the Fed says and what markets think. They're on board with the Fed's projections, right? But I think your average consumer is not well tuned in to the overall

inflation picture. Okay. Jonathan, what do you think about that forecast? I'm on board and in fact using it for my forecasts. Oh, that's right. That's right. Put it where it means something. I believe it makes sense and I totally agree with Marissa that if anything, maybe there's some slight timing differences to it. But I will flag that the one thing that I'm becoming more worried about is we just, we do quarterly surveys of dealers and we did a corresponding survey of consumers this month that we're going to be releasing next month. And there is some irrational, crazy expectations of what's going to happen with rates and inflation based on what people are assuming will be the outcome of the election. How interesting. And if that's the case, even if it's irrational, those expectations

could drive some realities that we have to deal to deal with. Are you in Liberty explained that a little bit more? I mean, suppose. Basically, it depends on your political perspective. For those that are skewing towards saying that they support Trump and they believe Trump is going to win, they believe that interest rates and inflation are going to fall dramatically as soon as he's in the White House. And, you know, all of our forecasts for rates and inflation suggests a specific trajectory. But if you think about that in the vehicle market, it relates to my deflationary spiral concern, then if it comes to a vehicle purchase or a home purchase, and you believe that rates and inflation are going to be dramatically lower in six to 12 months,

months, then the rational course of action is to stop purchasing and delay purchasing until that works its way through. And even if you're talking about less than half the population, it's enough to move what's happening in the auto market and housing and consumer spending. That is fascinating. And I'm used to the, you know, been through a few of these cycles before presidential elections should mean nothing to the macro forecasts. So you're saying.

In the surveys, when people say, I support President Trump for re-election, they're also of the view that Matt, whatever the mechanism is when he's elected soon thereafter, inflation interest rates are coming down in a meaningful way. And therefore, you're concluding for that. If you ignore the political alignment, it basically says the majority of people think that the election outcome is going to have. have a significant impact on the economy. Yeah. So we in the profession don't believe that. So the flip to the other side of that, Jonathan.

So people do people believe that if Biden is reelected, what happens? Interest rates go higher or don't change? I think that they don't change. I think it's more the perspective that they don't change and we're still dealing with inflation at a higher level for a longer period. time. It's probably the net conclusion, but frankly, I just started reviewing the data yesterday and I've just been troubled by it ever since. I had to share. I had to get on my own couch. Yeah, that's pretty interesting. And this was a survey of dealers, you said? So we do a

quarterly survey of dealers that we use for what we call the dealer sentiment. But then our research team did a corresponding view of consumers of the same questions about interest rates, inflation. and the economy overall. Interesting. Okay. Yeah. That's a little, yeah. Okay.

Hey, Mike, what do you think about the inflation forecast? I think it works well with the employment forecast. Our outlook for employment's very strong going in the near future. So that's going to have the Fed be able to lower interest rates as CPA comes down. If anything, if it'd be higher for longer, in my view, under our current employment forecasts, but the risks are weighted because in the case that there is recession, we would be much lower, much faster. Yeah, you're right.

I mean, the forecast is based on the assumption the economy continues to do what it's been doing, meaning growing, low unemployment jobs, but in certainly no recession. Yeah, yeah, okay. Fair enough. think. Yeah, I think it's reasonable. And it's consistent with the rest of the forecast. So we're all going down then. That's what it means. We're all going to be wrong. No? Yeah, probably. But we'll be credibly wrong. We'll be credibly. Credibly wrong. Yes, which is according to Mike, the important thing that we're credible. That we're credible. All right. Well, that was a wonderful conversation. Jonathan, I want to thank you for coming on again. I always learn. so much and I really appreciate it. Mike as well, you know, I like teasing you, but, you know, I do it from a point of deep respect. And I'm not joking. I'm not joking. You should know,

Jonathan, early on when we were started working together, I would like override him. I would, you know, I would, he'd say this and I'd say that. And I'd learn quickly, everything he said was actually right. I'm going, I'm not arguing anymore. I'm not arguing. It's good to have people like that on the team. I know. I know. It's pretty pretty good. Okay. Anything else guys? Marissa, Chris, Mike, anything? No, we didn't get to Marissa's car next time. Oh, yeah. Let me just thank Mike. So I consulted. Oh, she had a new car, right. Yeah, yeah. And Mike, remember we were talking about it a month ago and I asked you what I should do and he said, lease an EV. And so I did. That's right. I'm thrilled. And by the way, to that question of waiting, you know,

You know, I get people asking me, is this a good time to buy? There's no question. It's a great time to lease an EV. The brands that are providing some very attractive lease offers. So if you're interested. Cheap prices and can't go wrong right now. Tax credits, yes. Can I ask it maybe this is unfair question?

Which EV would you know? Probably shouldn't ask you. No, no, no. But I'm not doing that. I'm known as a last mover. I moved last. I heard the podcast with your rental experience. Oh, yeah.

Plug in hybrid. Mark, plug in hybrid. I know. That opportunity is there. Baby steps. It seems like they're making less of them, though. It's a very small portion of the market, but they're actually growing. So more are coming online.

Okay. Because when I was looking for cars, one of the cars I test drove was an Audi Q5, which is the plug-in hybrid. And they told me they're discontinuing it. Oh, interesting. Huh. Really? Which I was surprised. Yeah.

Nice car, Audi. I like the audio. Yeah, very nice. Okay. I think we're going to call this a podcast. I want to thank the listener for tuning in and hopefully you enjoyed it and we'll talk to you next week. Take care now.