Moody's Talks - Inside Economics - Inflation Head Fakes and Heartbreaks

Episode Date: February 17, 2023

Colleague, Bernard Yaros joins the podcast to help unpack the January CPI Report (which just happened to be released on Valentine's Day) and discuss their biggest inflation concerns, including Marisa's shockingly high gas bill. Bernard gives a rundown of the U.S. Treasury outlook with regards to the debt limit.Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a bevy of colleagues, my two co-hosts, Chris Doridis. Chris is the Deputy Chief of Commerce. Hi, Chris. Hey, Mark. How are things? A little bit gray here in Philadelphia. Well, I'm not going to brag about things down here in Florida. I mean, it's summertime, baby, down here, at least for today. And Marissa Dina Talley. Marissa. Hi, Mark.

Good to see you. It's nice to see you. I would say springtime in Southern California. Yeah, right. Yeah. You know, I, maybe this is too personal. My daughter's got engaged. Oh, congratulations.

Thank you. Yeah, I'm very happy. The fellow she's going to marry is a great guy. That's a whole other podcast in and of itself. But, you know, anyway, we went looking for venue for the wedding. and we were in St. Michael's, Maryland, you know, the eastern shore. I'd never been. Have you guys been here? Yeah, it's really cute little town. Yeah, I liked it. And the thing that struck me was there was a daffodil that had bloomed.

It was in all its glory out there. And this was February, what, 10th in a daffodil. That's how crazy warm it's been in the Northeast. much of the world, I think. I'm not sure. I'm not sure what to make of that. Certainly enjoyed it while I was there, but it makes me a little nervous about summer dead ahead. I'm not sure. Anyway, and we got Bernard.

Bernard, Yaros. Bernard, good to have you back. Yeah, happy to be here. It's been a while. Bernard is, I have to say, Moody's Analytics Renaissance man. You know, he's like, And I hope you don't take this the wrong way, Bernard.

You're almost like Forrest Gump. You know, you end up being everywhere all the time in the right place at the right time. I don't know how you do it, but you do it. And you make a valuable contribution. So we're really, I'm really thrilled to have you here. And you're going to do double duty because we're going to talk about the debt limit. You do all our estimates of the X date when the Treasury is going to run out of cash. and someone's not going to get paid,

and we're going to talk about that. And also you are covering the inflation statistics on economic view. Of course, we got a lot of economic statistics this week, and we'll come back to that. We'll play the game, the statistics game, and we have a couple of listener questions that we're, if we have time, we'll dive into that as well. So that sounds like a pretty action-packed podcast.

What do you guys think? Yeah. Sounds good to me. We'll keep it under two hours. Yeah. Right. Yeah. Have you noticed, though, the podcast end up being one hour and 10 minutes no matter

what we do somehow? You know, we say, oh, this is we're going to make this one short. It's an hour and 10 minutes. Oh, this one's going to be longer. It's an hour and 10 minutes. Have you noticed that? It's a regularity. It's like a law of physics or something.

I'm not sure why. Stamina. Is that what it is? That's exactly when I run out of juice, probably. We'll run out of juice. We all do. Yeah. Yeah. And, you know, we've had a lot of debate about how long these podcasts should be, right? A lot of people tell, you know, like my brother says, you know, it should be a lot shorter, like a half hour, 45 minutes. And then, but people's, a lot of people say, no, we want, we won't, give me, give me more, give me longer. So, I think an hour and 10's okay.

Yeah. Even our hour and a half webinar this week, we had people with seeing. Yeah, right. We had this short. Could have been longer. Yeah. Well, you know, I think, you know what? I think. You know what I think. it is, I think people like to work out to our podcast. And you need, you need an hour to work out and maybe five minutes to begin, five minutes to end, while you're stretching and trying to think about, well, do I really want to do this? Or I'm not sure I want to do it. Yeah, I'll do it. I'll do it. So it takes about a nine or ten minutes. Maybe that's what it is. That's a theory. The stats game is the cardio section of the more higher. Yeah, that's right. That's where the heart gets pumping in the stats game. That's right. Yeah. Got it. Anyway, okay, very good. Good. Okay, well, let's talk about the key statistic of the week. And that was the consumer price index, CPI, inflation measure.

Bernard, do you want to give us a rundown on that, your perspective on what the numbers are and what they know what they're saying about inflation? Of course. So there was a lot to unpack, not just the numbers themselves, but also a lot of methodological changes. So we also got seasonal adjustments to the consumer price index over the last year. And normally, again, normally in normal years, we don't care about these seasonal adjustment updates. But they did change the trajectory of inflation over the past year. So it turns out that inflation was just not quite as fast or strong as it was as we had thought during the summer, during last summer. But it did tell us that these new seasonal factors did show that inflation ended last year a bit firmer than we had. previously thought. So annualized over the prior three months in core CP, core CPI inflation. So

CPI excluding food and energy was running at a rate about 4%, whereas previously we had thought that it was closer to 3%. So, you know, I think a lot of people, there was a lot of hand-wringing about what this meant. I think this was just further news that inflation is proving stickier than maybe we at all hope for. Can I stop you right there just for a second? Because I had, I had, I had missed what you said earlier about it lowering the rate of inflation back in the summer. So in my mind's eye, the peak in inflation as measured by the consumer price index was in June of 2020. Exactly. We had 9% year over year.

Is that still the case? So annualized over three months. It was 8% in June of last year. It ended up being a lesser 7%, which is still high, but just not quite as high. So is year over your peak still 9%? Do you know in June? It's year-year-year, it's still nine. But when you look at the months-to-month and the annualized, you know, when you look over

shorter timeframes, it's changed. Yeah, and I want to come back to talk about seasonal adjustment broadly because it's effect, it feels like to me it's affecting everything. Everything, all the data. And I'm not so sure I believe the current data. Why do you think it's any better than the data we had before the revision? Because, well, we'll come back to that. That's, you know, something we need to discuss.

But anyway, go on, go on. And then the next major update was we're getting new weight. We had new weights for the January CPI, and there's even a new waiting methodology. So starting this year, the BLS is going to be updating the spending weights that it uses to calculate the CPI every year rather than every two years. So spending weights are essentially the share of total household consumption. It goes towards each good in service that makes up the CPI. So food, for example, counts for roughly 14% of the CPI, and that's meant to approximate the share of a household budget that goes towards food. So this new weighting methodology, it's a big improvement.

You know, we should care about it because it's going to improve the accuracy and the relevance of the CPI. So just to give, you know, the example of now, as of the January CPI, we're using weights that reflect 2021 spending patterns, whereas under the old methodology, we would have been using weights that reflected 2019. to 2020 consumer spending patterns, which would have been problematic given that, you know, how much we've been talking about how the pandemic has scrambled a consumer spending pattern. So this is definitely an improvement over, you know, over the prior methodology. It eases some of the concerns that I think we have with seasonality, but it's definitely an improvement, especially after the pandemic.

You can't stop you there. So, you know, my intuition is that by adopting weights that are more timely, and especially if we're now using 2021 weights, we still had a lot of spending on goods. Exactly, yeah. Because during the teeth of the pandemic, we were stuck home, we bought stuff. We couldn't go travel. We couldn't go to restaurants.

We bought stuff. And of course, the prices and inflation for goods has been inflated, significantly juiced because of the pandemic, the supply chain issues. also the shift in demand, right? Because there's been a lot of demand for stuff and that cost prices ago. So my intuition is that this adjustment to have more timely spending weights in this particular time would serve to push up measured inflation, not down. Am I wrong there? Or did you have you looked into that? So some of the most notable changes in the weights was actually the used car CPI got, the used vehicle weight actually got cut almost in half pretty significantly. So that means that any swings in this pretty volatile component shouldn't, you know, won't cause as much, you know, variation in the head in the core CPI.

Then the shelter, shelter, the weight to shelter increased notably, at least by a percentage point in terms of its weight of the course, CPI. So as we'll talk about more, that's bad. And again, that would that would lift measured inflation, right? Because exactly, yeah. We saw, we've seen experience a surge in the cost of housing services going back to the very strong rent growth a year, year and a half ago. And so if you put a higher weight on housing services, that's going to push up measured inflation, right? At least compared to where we were. Exactly. Yeah. Do you think the adoption of these more timely weights had a material impact on, you know, kind of how we think about inflation now that it's higher or lower compared to what it was before? Has it juiced things up or weighed things down or had no meaningful

impact? As we'll talk about a bit more later, the shelter, when it comes down to the core CPI or CPI, it's really shelter that matters the most, given its, you know, preponderance. And given, and, you know, I saw something that I think the weight, CP, uh, shelters, weight and the core CPI is now the largest it's been over since at least the late 1990s. So that means that as we continue to get very high shelter price increases in these next months, that's, you know, I think that's going to create more upside risk for CPI inflation. Really? I thought just the opposite, because now we're going to get the cost of housing services

growing more slowly because rent growth has gone flat. translate into lower cost of, and if we put a higher weight on it, that's going to actually push measured inflation down lower compared to what otherwise would have been. Yeah. No? I would say that disinflation we're going to get from shelter, that's coming, but it's going to come mid-year. Okay, fine.

I'm saying like very near terms. Oh, very near term. Yeah, February, March, April, it's going to be. But you see where my line of questioning is going, right? It feels like to me the change, certainly in terms of the weighting, has pushed up inflation compared to where measured inflation compared to where we thought it was. But going forward later in the year, it's going to actually do the opposite. Exactly.

It feels like inflation is all really hyped up, more hyped up than we thought here, to your point, about 4%, three-month annualized CPI core inflation, but that in fact, not in the not too distant future is going to be starting to work in the other direction. Exactly. Exactly. Would you agree with that characterization? Yeah, 100%. You would.

Okay. Yeah, yeah. Okay. Sorry, I know I'm interrupting, but there's a lot to unpack it. Go ahead. So, um. Oh, well, Chris has something to ask. Go ahead, Chris.

Sure. I mean, BLS provides a comparison right before and after the weights on their site, right? My read is that the change is small. The overall impact is very small, right? talking with cases points, right? So there is, yeah, I think it's all consistent with what you're saying, Mark, but I don't think it's not, it doesn't have a lot. Yeah. Okay. Okay. Okay. All right, so I'll take a deeper dive now into the actual numbers of the CPI. So the C.C. He kind of paused because he's, he's now a little gun shy. He knows I'm going to start him. Sorry about that, Bernard. Fire away. I'll leave you

alone for three seconds, maybe. Go ahead. So as we expected, you know, the CPI rose 0.5% in January. So this comes after smaller gains of 0.1% in December and 0.2% in November. So the main takeaway I would say from this is that we are still getting disinflation on a year-over-year basis. So year-over-year, the headline CPI was up 6.3%, which is the slowest since October 2021. one. But what this is telling us is that, you know, this inflationary process is going to be a bumpy road. It's not to quote to Beatles, but it could be a bit of a long and winding road. It's not going to be a straight path as you've been, as you've said. And, you know, there's, there were a lot of one-time factors that pushed it up. There were a lot of one-time factors working in both ways in this particular report. So if we focus on, you know, these typical, the volatile components like energy, for example, energy prices went from a drag to a big driver

of the index. So we saw gasoline prices rising. Unfortunately, gasoline prices, if you look at current prices, they're a bit higher than their January average. So this is probably going to be sticky through February. But we did see a one-time jump in the CPI for energy services. And particularly, we saw a close to 7% rise in the CPI for utility gas. services, which refers to natural gas. And this is obviously something that's going to hit home with Marissa, because this was largely driven by California. The BLS does produce CPI estimates for the major census regions. And in the West, natural gas bills were up, according to the BLS, by about 37%. And this goes to Southern California Gas Company and San Diego Gas and Electric, which

implemented new natural gas and electric rates that were up, I think, more than a double, you know, more than double from where they were a year ago. This is a one-off because natural gas prices are falling in the early, you know, the early part of this year. And all forecasts really are for wholesale natural gas prices to come down over the rest of this year. So I wouldn't expect this to really be a contributor in February and going forward, even though, you know, motor fuel prices, I think will boost headline inflation in the next month. Then in food prices, we had a bit of an acceleration, and the CPI for food rose 0.5%, which was a bit faster than before.

But on a year-over-year basis, again, food price inflation has already peaked. It peaked in August, and it's been coming down. And the good news is that we're going to get more food price this inflation. We like to look at the price of processed consumer foods that domestic producers are charging because that typically leads the CPI for food by up to three months. And what we're seeing is that a lot of these wholesale prices for consumer foods have been coming down in recent months. And that's a good sign that there should be more grocery store relief for consumers going forward. So energy, I think it's a mixed bag.

I think we'll get gasoline. We might get a bit of a higher rate for. for energy next month, but for food, I would bet that we continue to see a bit more deceleration in the near term. Ultimately, we care a lot more about, or as economists, we like to look at the core CPI, so excluding food and energy, because this is a better gauge of underlying inflation, and the core CPI rose 0.4% for the second month in a row, and annualized over the prior three months, the core CPI was up 4.6% in January. So that's about three-tenths of a percentage

point higher than the December pace. And hence, you know, that's why everyone is really saying that this January CPI just shows that this is going to be a bumpy road in the path towards this inflation, in the path towards, you know, the Fed's 2% inflation target. You said everyone thinks that. Or most, yeah. Do you think that? Do you think that? I mean, I think it could be. Bumpy road, but I mean, how much weight in your thinking do you put on this data? I mean, did your view change, does your forecast for inflation change because of the January CPI and all the revisions to the historical data that occurred with that release? I think I would push out by a couple of months, you know, when we get to target inflation,

but I still think we're going to moderate. It's just maybe a bit longer than I'd expect it. Okay, I'll let you go. I just want to get that context because we're going down and deep into the bowels of this report. People might get a little loss. I mean, what's the larger picture? But the larger picture you're saying is, okay, maybe inflation's a bit on the margin more persistent than I thought, but not a lot more persistent than I thought.

Yeah, yeah. Okay, okay, fair enough. Okay, fire away. So we're going to. And basically, yeah, and basically the most important, you know, if we shift to shelter, which is the most important component of the core CPI. It's 43% of the core CPI. Those actually decelerated slightly in January.

So the most important ones, which are the CPI for tenant rent, and then the CPI for homeowners of equivalent rent, which is the hypothetical rent that a homeowner would have to pay themselves to live in their own homes. Those both rose 0.7%, which was a bit less than the 0.8%. gain that they had in the last month. On a euro your basis, these have really have yet to top out and they're at record levels.

But as we've been talking about, shelter and disinflation is coming down. So there's been some criticism or some, you know, people have pointed out that these rent measures and the CPR are lagging indicators. And that's because they're measuring the change in rent for all tenants.

But because most renters are locked into long-term leases for up to 12 months. Changes in market rents aren't going to affect every single renter. It's only going to affect those who are moving into new rental units. So it's this broader scope of the CPI for rents, along with just delays between when rent changes occur and when the BLS is surveying these units. You get quite a bit of a lag between changes that we're seeing in market rents and changes in the CPI for rent.

And one interesting thing is that the BLS has come out, you know, they created their own repeat rent index based on their rent micro data. And this one is just, it's not looking at all tenants. It's only looking at new tenants who are moving in recently. And year over year growth in this new tenant repeat rent index peaked in the second quarter of 2022 at about 12%. But in the following quarter, it really decelerated to half that pace. And the takeaway from the BLS analysis was that this new tenant repeat rent index typically leads the CPI for rent by about four quarters. So if this relationship continues to hold, that means that we should see the CPI for rent to really turn a corner in mid-20203. And once that happens, that's really going to be a big deal in terms of getting less,

and really getting disinflation, getting less lower monthly. as well as year-very-year CPI prints. So that's a big deal. It will happen. It's just we have to be a bit patient in the next couple of months. Great. I'm sure when we go around the horn here and hear from Chris and Marissa, we'll talk a little bit more about that. But the one thing I wanted to ask you about, because we were going back and forth on this over the past week, is the so-called super core inflation, which is the inflation inflation in social.

inflation in services that exclude energy services and housing services. And this is come to the fore because Jay Powell, the chair of the Fed, has shown a light on this saying, hey, look, this inflation is tied back into the cost of labor. And the cost of labor is something we, the Fed, can influence through monetary policy by slowing the economy, slowing job growth, slowing wage growth. and what did you learn there based on the work that you did there? Because actually, you know, it surprised me, actually measuring super core inflation from the CPI is a bit of a project.

It's not like the, yeah, yeah. And I will be working with the, yeah, yeah, we're going to be working with the data to think to really construct. Yeah, and you went back and forth with the business to make sure that you constructed it the appropriate way. So what did that say? Because that's also really critical to getting inflation back down to the Fed's target. Unless service price super core service price inflation gets back in the box and in the bottle, we're never going to get back to target. So this is really also important. So what it is?

Yeah. Yeah. So on a year-over-year basis, the CPI for core services excluding shelter. That has been decelerating over the past couple months. It's running at about a rate of six, right now at about. 6.1 percent. And other estimates that I've seen of the CPI for core services suggest that it rose 0.3 percent in January after rising 0.4 percent. So that actually moved in the right direction. And as you know as J. Powell has rightfully said, this is important because

wage growth really matters a lot for these services which are very labor and labor intensive. And one thing we've done at Moody's has been we created a like an aggregate, measure of wage growth for industries that are really relevant to the CPI for core services. So this is, you know, we're looking at education, health services, public transportation, you know, car repair services, you know, so on and so forth. And that wage growth in these industries that are relevant to the core, to core services excluding shelter, that peaked in, you know, earlier last year at about close to 9%, but it's come back down to 5%. So that's Again, still high, but when you look at wage growth, it's still, it's moving in the right direction,

maybe a bit slower than we had hoped. But that should put down, you know, put some downward pressure on inflation in core services excluding housing. One thing I do want to mention is that in the CPI, core services excluding shelter, it only accounts for about 30% of the core CPI. And the reason that Jay Powell is putting a lot of emphasis on this is because it accounts for an even larger, more than 50% of the core personal consumption expenditure deflator, which is the Fed's preferred measure of inflation. And when we look at the PCE index for core services other than housing, that's still, that's up about 4% annualized over the prior three months. So it's, again, it's high. It should be obviously much lower. But it's not, it was previously rising, but it's sort of stalled out at about 4%.

So one quick point. When you calculate this measure in the CPI, super core inflation in CPI, the BLS told us not to use seasonally adjusted data. Yeah. But to use seasonally unadjusted data. So when you talk about three-month annualized change, don't we have to take that with a bit of salt? That's just that annualized change was for the PC. Oh, that was for the PC. Yeah, that's sorry.

Yeah, yeah, yeah, for the per. Okay, fine. All right. Yeah, yeah, which is much, it's much easier. The PC deflator is a much easier index to work around. Well, here broadly is my takeaway from the work that you did here in looking at the data, was that super core inflation is still hot, but it's moderating. very quickly. It's cooling off. And right now it feels like it's, you know, kind of sort of four to five percent-ish, you know, on a, not year-over-year, year-over-year, year-over-year, still six.

But you saw the strongest growth back almost a year ago in this matter. And now it's come in, maybe four-ish percent, something where around there. Is that about right? Yeah. Yeah. I'd say we're range-bound between, you know, four to five percent, but closer to five percent. Yeah. Okay. Okay. Okay. Fine. Okay. Okay, that's anything else in the bowels of that report you want to call out? I would say the biggest surprise was really used car prices. So they fell 1.9 percent. And this is, there's been a string of declines of about 2 percent or, you know, 1.5 percent or more. And this was surprising because I, you know, this was a big concern of mine that if you look at wholesale used car prices as measured by the man high, as measured by Mannheim Consulting, you actually saw the largest

seasonally adjusted increase in wholesale use car prices in January just because of unseasonably strong demand. And typically these wholesale prices lead the CPI for use car vehicles by a few months. So I wouldn't count going forward, I just wouldn't count on such large declines in the CPI for used car vehicles,

at least for the next couple of months. What about new? New vehicle. New decelerated. It's still going up. Yeah. It's still going up, but it rose only 0.2%. Whereas it rose 0.6% in the prior month.

Presumably at some point that it's got to come back to Earth, right? Because that's been straight up. Yeah, yeah. Supply change, E, yeah, improve. And we get Japan and Germany get their production back up. Exactly. Okay. Okay.

Okay. Okay. Okay. So, all right, well, I was going to do my sylliloquy, but I'm not going to. I'm going to stop and turn to you, Marissa. That was a lot. There's a lot there. Yeah, yeah.

Is there any piece of that or that you want to chew on or broadly say something about what that Bernard put forth here? Well, I can personally attest to the natural gas increase here. I have SoCal gas. and just to give you some perspective of how shocking the increase was in December my gas, and I have a little house like 1,200 square feet barely. My gas bill was around 75 dollars. I was worth a lot of money.

Yeah. Oh, poor Marissa. No, Marissa is incredibly wealthy woman. Just so, just so you know. Hey, my house prices here are falling mark. Oh, yeah. Less wealthy than I was a year ago. percent you come back three you know okay sure enough anyway my gas bill went from 75

in December to three hundred and fifty dollars in January that again what was it from seventy five dollars in December to three hundred and fifty dollars in January wow and that's pretty typical you know my sister called me screaming when she saw her gas bill for her house that's that's much bigger. But and they warned customers that that was going to happen well in advance. But they've since sent out emails saying, well, now natural gas prices fell 70% in February. So your gas bill is going to be much lower next month. And we're going to give everybody a credit back.

Oh, cool. For kind of the end of the month when that started happening in January. So definitely I think underscores why when we look at inflation. To Bernard's point, we want to exclude generally energy and food because these prices are so incredibly volatile and the markets for them are influenced by stuff that's kind of beyond the control of policy makers for the most part, right? Well, you know, I just want to push back on that a little bit, maybe a lot, actually, in the current context, because I do think energy prices, particularly gasoline prices,

have a lot to say about inflation expectations, you know, how people perceive inflation is going to be in the future. And that, I think, had a big impact on wage demand. Wages. Yeah. Yeah. So I think generally, you're absolutely right, you know, totally agree. If you want to do a, if you want a good forecast of, of the, of inflation, you go to core, the recent core inflation, that'll give you a much better forecast than looking at actual overall inflation, because energy, as you, As you said, as you pointed out, energy and food go up and down all around. But in the current context, I think energy, particularly gasoline prices, are playing an incredibly important role in determining overall inflation because of its impact

of inflation expectations. So we can't discount the importance of that. Right. I guess my point was more that the FOMC can't do much about gas prices or energy prices, right? So just in terms of policymaking and why they're, they excluded is. because they're trying to look at what they believe is in their control when it comes to monetary policy. And I guess just the overall takeaway on the report, I mean, it reminds me of when we're talking about the jobs report and just this, you know, much stronger. Well, this was in line

with our forecast. But these blips in the data. And again, I think it just goes to, you can't look at one month of data and be whipsawed by one month of data to change your thinking. There's seasonality issues, I think, abound in all of the economic data that's been coming out, not only because of literally the seasonality in terms of the weather, but just also the seasonal factors that are in this data now based on the last few years that are all screwed up because of the pandemic. So it doesn't change my overall thinking about inflation. I agree.

It may not be down, down, down every single month in a straight line. But I don't think this means we need to be more worried than we were, you know, a couple months ago. A couple months ago, yeah. And you make a really good point about the seasonality. It's not only the weather. And the weather, obviously, January was an incredibly warm month and creating havoc in the seasonal adjustments. Particularly in the jobs data, we discussed that, you know, back a week or two ago. but the so-called residual seasonality, the seasonality introduced in the data because of the pandemic effects on the labor, on the labor market and economy, when it shut down and then reopened very quickly back in early 2020, that really messes with the statistical techniques that the government agencies like the Bureau of Labor Statistics used to tease out that seasonality in the data. So I totally agree. Chris, what do you think? What's your perspective on the report?

So I'm curious if Marissa's going to go electric now, if she's going to get the heat pump installed, take advantage of the IRA. No, I think I'll stick with gas for the timing. Because she just went through a massive renovation, right? It's still going on. Oh, is it still going on? Oh, still time to. Now's the time. Now's the time.

No, I should go solar. There you go. But in terms of the report, I didn't really change my perspective. I do think the data is never as smooth or as straight. line, as you might imagine. So there are going to be little bumps along the road, but I don't see this as taking us off course. And also, I think we alluded to a couple of these lags in the lag defects in the data, right? So the natural gas is one good example where gas prices are coming down. So that's going to get reflected in the next CPI or future CPIs. If you look at the wholesale

market for some of the food commodities like eggs, while they've plummeted, but they're not really reflected in the CPI just yet. So I think you don't want to read too much into a single month. And then the rents, of course, right? We already alluded to that as well. That's just going to take time for those rent declines to make their way through the reports, but still the downward trend seems intact. Yeah.

I think maybe the, because there was so much moving, so many moving parts here in this discussion. Maybe let me just give you my forecast for CPI inflation and explain it briefly and then get your reaction to it. And so, and it's consistent with our baseline forecast, the Moody's forecast. So, and I hope I had the data right, but, you know, the peak in CPI inflation was June of 2022. And I'm saying year over year was about 9%. I think it was 9% on the nose. As of January of 2020, we're down to 6.3% year over year. By December of 2023, I expected to be somewhere between 3 and 3.5% year over year. And by spring, summer of 2024, I expected to be within spitting distance of the Fed's inflation target, which for CPI inflation is probably somewhere around 2.5%.

Maybe 2 and a quarter or 2.5%. And I said there's a few reasons to be optimistic and I feel confidently optimistic about the inflation outlook. First, cost of housing services. I very confident that's happening because rents have gone flat and that will translate into lowered measure of cost of housing services. As you said, Bernard, it takes about a year for that to translate through. But the peak in market rent growth was back now just about a year ago.

So by the second half of this year, we're going to get some real nice moderation in the cost of housing services. Which were the CPI, as you pointed out, it's a big chunk of the index. The second reason you mentioned food prices. That's coming in. That's going to come in. The egg prices is just an example, but broadly speaking, as you pointed out, Bernard, if you look at the PPI's, they kind of lead the CPI. And we'll come back to the PPI in a minute because I want you to talk about that, Bernard. the producer price index, that feels like that's going to start coming in with regard to food.

New vehicle prices, they're going to fall. They're going to come, you know, we are going to see, and they have gone literally straight north here, you know, since the supply chain issues became a problem back in the delta wave of the virus, you know, in late 20, 21 when all the chip plants in Asia shut down and, you know, global vehicle producers couldn't produce. so we're going to get a lot of benefit there. And, you know, I do think labor costs are coming in. You look at wage growth, you know, of all the measures we look at,

they do indicate very strongly that wage growth has hit a peak and is now moderating, you know, pretty quickly. And that goes back to inflation expectations. Inflation expectations have come in because we have seen gasoline prices come down and people are feeling a little bit better about things. So I feel actually quite confident that inflation is going to come in in a reasonably graceful way. Bumps for sure, but mostly measurement issues, in my view, not reality. You know, it's just the vagaries of the data, timing issues around the survey, seasonal adjustment, you know, so forth, the weather effects, that kind of thing.

But broadly speaking, you know, we should see a reasonable graceful, graceful moderation and inflation. that did not change with that CPI number that came out on Tuesday this past Tuesday. Okay, I'll stop there. Bernard, what do you think? Take any umbrage with that? No, I agree. I agree. I think it's going to really come down to shelter, and that's, that for sure we know is going to happen.

And when it does, it's going to be a big deal. Yeah. Marissa, would you take exception to any of that? No, I agree. And now shelters more important in the measure of inflation. in the CPI, right? So just at least by the measured data, it could be even faster and larger. Yep.

Chris, seem reasonable to you? Yeah. A lot of uncertainty, obviously. Eyes open for the other risks, right? Yeah. Russia, Ukraine goes on. Could very well be some other shocks there, China reopening. But assuming that those are handled reasonably well, then the narrative makes sense.

Yep. Okay. We got two other inflation numbers. more tertiary, people don't pay as much. Although this week, it felt like the equity and bond market did pay attention to the PPI, the producer price index. And then we also got import export prices this morning. I don't know if you cover those, Bernard, but can you just explain to people what is the

PPI and how much weight should they put on it when thinking about inflation more broadly? And then we can talk about the import export prices briefly. Yeah, so the producer price index also, I think that was maybe a market mover because it increased more than expected. So it rose 0.7% in January. But again, this was largely driven by strong, by much higher energy prices, which again, as we're saying, it's likely a one-off. And then we saw food, you know, the producer price index for foods dropped 1%. So that's a pretty meaningful drop. And that's also something that augurs for lower consumer prices on the food side.

Maybe one concern that I had, and again, I think I should start with this, producer prices. This is essentially these are prices that suppliers will charge businesses and governments and other customers for goods and services. You know, one thing that I think was a big concerning when I looked was. Just to make it clear to the listener, I always thought of producer prices kind of like wholesale prices. It's not, you know, you and I pay at the store at the gas pump, but it's, you know, it's one step back. You know, it's what wholesalers are charging, you know, retailers and gasoline stations and so forth and so on.

Is that fair characterization? Yeah, that's a fair. Yeah. Okay, go ahead. So one thing that I think was a big concern was that if you look at the PPI for, you for goods excluding food and energy, that did accelerate to 0.6%. But again, I have a hard time seeing that really stick

just because we've updated recently our supply chain stress index and that continues global supply chains are continuing to heal. If our forecast for growth is right, I mean, we should see lower demand. So I don't see that acceleration in core goods really sticking for a while. So overall, I just felt that this, the PPI just, you know, hammered home the message that as the CPI that this is, you know, this is going to be a bumpy right, but I still think we're on the right path. The sharp increase in an energy that's not going to stick for longer and we're seeing good developments in food.

If you want to move to the import. Yeah. Yeah. So import prices, there we saw kind of a divergence. And so total import prices fell 0.2%. But this again was this was large. This was due to lower natural gas prices imported and lower imported petroleum prices. But the one concerning thing here was that non-fuel import prices rose 0.3%.

And this was the second monthly gain in non-fuel import prices after I think it was a streak of about seven monthly decline. clients for most of 2022. And this matters because non-fuel import prices, they matter the most for consumer prices here in the U.S. And I think this has a lot to do with the recent dollar depreciation that we've had in recent months. However, again, here, and the dollar will affect import prices with a lag by one to two months. So some of the strong depreciation that we got towards the end of the year, I think that's starting to have an effect really on these core input import prices. But that said, you've seen just this month, you've seen there's been a pop in the dollar. It hasn't fully reversed the depreciation that we've gone over the past couple of months.

But really after the jobs report, you saw higher the dollar date increase. I think month to date, it's about 1% depreciation or more. And I think that's just under the expectation of tighter monetization. policy than previously expected. So if we get a stabilization in the dollar, maybe a bit higher, I think that should ease some of the pressure on non-fuel import prices, which should also ease some of the pressures on consumer prices down the road. Just for a little bit of context, the import price, these are goods, right? Yeah, these are all goods, yeah. Yeah, and goods are a very small piece of the inflation puzzle, right? Impression puzzle, yeah. So import prices are important to watch, you know,

particularly if they're moving big time in one direction, non-fuel import prices in particular, if they're moving big time in one direction or another. But right now, you know, it's on the margin. It's really not going to be a big impact one way or the other. Is that fair to say? Yeah, that's fair. Yes.

Okay. Very good. It is interesting to watch market reaction to all the data. I think the stock market kind of hung in there reasonably okay, but gotten a little nervous towards the end of the week here about the inflation numbers. And I did see a couple of folks put in another hike in the federal funds rate target because of the numbers, you know, saying, oh, the Fed's going to have to be a bit more aggressive in raising interest rates here to get the economy where it needs to be

to get inflation back in. So I take a pretty sanguine view of all these numbers. And again, because as Mercer said, can't get swayed by any months worth of data, particularly in the month of January, but it did have some impact on kind of market sentiment on the margin, at least. Okay, let's play the game. Before we play the game, anything else anybody want to say about inflation at this point before we move on to the game? I know you're biting at the bit to play the game, but no, anything else? No, I don't see any takers.

Okay, very good. Let's play. The game, this game, we all come up with a statistic. The rest of the group tries to figure what that is through questions and clues, reasoning. the best question is one that's not so easy. We get it immediately not so hard. We never get it. And bonus, if it's apropos to the topic at hand, which so far has been mostly inflation,

but I don't think we should be limited to that. We thought we threw in a lot. Bernard probably took somebody's statistic already because he mentioned. I took my own statistic. Okay. And as it has become tradition, Marissa is up first. So Marissa, what's your statistic? It is 22% in January.

22%. Is it an inflation statistic? It is inflation-esque. Inflation-adjacent. Yeah. This feels like, and I'm just going to take a wild guess, just to show my prowess here, if I'm right. If you're right.

Lack of humility, if I'm wrong. That comes from the small business survey, and it's one of the questions around percent of respondents that are raising prices. You're really close. Oh, okay. Okay. Now everybody's got to bow down, bow down. But you're wrong.

I mean, you're right. Compensation, the percent raising compensation. It's the percent of small businesses who said they plan to raise compensation. Oh, yeah. Oh, come on. Come on. Where is the cowbell for that one? Well, your first guess was about raising prices. So it wasn't quite correct. You're right. You're right. You're right. It was the right survey, though. Yes, he got the right survey. Yeah. So it's the net. It's a net percentage of respondents in small businesses who say they're going to raise compensation. This is down from the previous month when it was 27% in December. And this has been coming down pretty steadily since last fall.

And now it's back to where it was in about May of 2021. And it's really close to where it was prior to the pandemic as well. So I think we forget the job market was also really strong prior to the pandemic and coming into the pandemic. Wage growth was not anywhere near where it was now, but the unemployment rate was quite low. And so it's just a little bit above where it kind of, it's average for 2018 and 2019. I think it's still, and the reason I picked this is kind of what I said before, right, that as Bernard explained, the super core inflation is watched very closely

because the major input to the price of these services is labor costs. So wages are really important for us to look at. This suggests wages are still going to be rising as they typically are, but at a slower pace, which would be good news on the inflation front, particularly core inflation front. Do you know, this may be on for a question, but do you know the average for that particular survey question over the history of the survey? It's a long survey, that small business survey goes back a long time. Do you know what it is? I think it goes back to the 80s. I can eyeball it for you.

Yeah, just roughly because I went to 22. Is that high relative to long run historical norm? Or is that average? I guess it's on the high side. Well, 2020, oh, the value of 22. Yeah, the value 22. Let's look. Okay.

It's high. Yeah. It's still high. It's still high. It's still up there with the peaks that we've seen since the series began. So in the mid-80s, 2000, when the job market was very, very tight. And then prior to the pandemic, when the job market, it was really, really tight. So it's kind of up there in those peaks. The average looks to be about 15-ish, I'd say. Yeah. And what was the peak in, if you go back a few months? I'm sure the peak was about a year ago or not quite. What was the peak? Can you tell? Yeah, the peak was in, uh, March of 22 or April. It was, I'm going to say March. Just, just, just now I'm playing my own. Well, well, the peak. Yeah. To be, so it, it peaked in late 2021 and then it started coming down and then it, and then it kind of hit this peak in October of last year as well. What's the peak? And then came down again.

What is the peak? 32. 32. Okay, all right. Yeah. Very good. And I think that, you know, hitting the peak in October, right? I think that goes, again, to your point about this expectation of where inflation is going,

often being dictated by energy prices and people feeling the pain of gas prices or natural gas prices and, you know, going to employers and asking for more money. Yep, that was a good one. Very good. Bernard, should I go to you next or do you want to, you want, okay, you're up. Yeah, I can go. Yeah, all right. So it's 3% on the nose. Retail sales. What exactly? Well, that's, he's definitely right. He does.

Yeah, you're right. Yeah. Overall retail sales, right. Yeah, so it's retail, nominal retail sales annualized over the past three months. And over the month. And over the month, I think. I think the month over a month was 3% on the nose. Annula, yeah. Yeah.

Yeah, yeah, yeah. I was looking at it through over the, you know, over the past three months. I don't, it can't be three. No. You mean last month in the month of January, over December, it was up 3%. Yeah, yeah.

Okay, fine, right? Yeah, yeah. Because it fell in November, if I recall correctly, November and December, right? It fell. Or it certainly fell into, remember December was disappointing. Yeah, I think it fell in November and December. I think it did.

Yeah, yeah, yeah. So it's the month of January, retail sales rose 3% over the month of December, right? Okay. So why did you pick that statistic? Yeah, again, it's just, I think there's a lot of, so I think a lot of people saw that and were concerned that there's a real, like a real reacceleration and growth. You know, I think there's, you know, seasonality issues, a warm weather. but also we're looking ahead to next week.

I think the statistic I'm most excited for next week is personal income because that's probably going to be a blowout number. Can I just stop right there? Can I stop you right there? That is Bernard. He's excited. I am so excited about the personal income. And you see, he said it in a way that he actually meant it. He's genuinely excited.

He's genuinely excited about that number. You're so cool. You have a lot of, just a lot of factors occurred in January. It wasn't just the warm weather. You had the largest cost of living adjustment for 66 million Social Security beneficiaries. This was the largest since the early 1980s. And even last year, I mean, we at one point, we were estimating that, you know, at least 150 or so. Or social security benefits were falling short of inflation by, you know, by $150 per month.

or more. So with this very high COLA adjustment and inflation set to moderate, I think this large chunk of the population could start to see their purchasing power improve. And then also, if you believe the jobs report, I mean, it wasn't just that jobs were up, hours were up, and wages were also up. So if you look at the so-called labor income proxy, that suggests also a pretty strong increase in compensation. So all in all, it's just, it just seems like a lot of people, in January, people had a lot more money in their pockets. And even inflation, if I'm right and the income rose 1.2%, and we only have, you know, 5% inflation, that means that, you know, real incomes really went up. And that just gave a lot of purchasing power. And that shows up, I think, in the strong retail numbers.

And it's not just, you know, it's not just weather, but it's also just as a strong consumer that's holding steady. Yeah. I know you follow tax refunds carefully because, and I don't know if it's too early to see. It's too early, but I would, last year there was a lot of weird stuff going on because you had the advances on the child tax credit so that it'll ultimately, when you looked at aggregate tax refunds last year, they were, you know, they were a bit better. but what happened was that you just had fewer people receiving tax refunds. And for a variety of reasons, those that did receive tax refunds got larger than normal ones. But the tax refunds last year started a bit slower. But this year, I would assume it's going to be more typical of, you know, pre-pandemic.

So maybe that played a role. We don't know. That's really going to play a role in it because the tax season doesn't really start until end of January. So that was kind of too late. You really don't have, this is more a story for February. So February, I will be looking at this closely because that is an impact. February and March and to a lesser extent, April. Yeah.

Well, and that's a great statistic. And it just highlights everything felt juiced in January. Jobs, retail sales, vehicle sales were boom-like, which obviously feed into retail sales. But I think when I say boom-like, boom-like relative to what we've been experienced in the pandemic. I think it was, what, 15.4 million units annualized new vehicle sales. That's pretty strong compared to what we've been saying. The inflation, it just feels like everything got pumped up a bit, you know, by the, by the weather and the seasonables. So I can't read too much into it. Okay, that was a good one. All right, Chris, you're up. All right,

58,000. 58,000. Is it a statistic, inflation statistic? No, no. It's housing, right? It is housing. Yeah, single family units under construction or? No, no, no, no.

That's more like 750,000. Okay. Yeah, that's single family. 58,000. Is it, it has, in the Housing Starts report? It's in the report. Okay. Is it single family?

No. Multi-family. It will be single family under the mortgage definition, but it's not one unit. Condos. No, it's two to four? Two to four. You got it. Oh, my gosh.

So it starts of two to four. No, oh, then you didn't get it. Permits, permits, yes. Oh, I didn't get it. Oh, my gosh. Oh, interesting. That's an interesting. one that you picked. Why did you pick that?

I picked it. You thought you'd stump us is why you picked it. That's what you thought. No, no. If I threw out 1.3 million, you would have gotten it in a heartbeat. But no, it has another significance. Right. So the census reports one unit, two to four unit and multifamily, which is five plus units. The one unit and the five plus units are all down on a year or year basis. and the single family or one unit significantly, right, down about 40%. Permits are down for... Permits. That's right.

Yeah, permits, yeah. But for the two to four, they're actually up still, slightly about 2%. Interesting. So maybe, and the data is a bit volatile, you don't want to read too much in it, but maybe this suggests that there is building going on, or builders are planning to do more building, but they are focusing more on a slightly more affordable part of the market. Right? Maybe it's not so much the cutting back.

I'm going to be the traditional single family detached and looking more at the two to four. It's still a very small segment. Yeah, yeah. It's growing faster than the other two, right? Because $58,000 in the grand scheme of things is not much. I think we put up 100,000, we place 100,000 manufactured homes every year just for context. Yeah. Right.

And I think overall housing starts annualized was $1.3 million to what you were saying, which is actually, let me ask you that. I'm curious what you think. Are we at the bottom in terms of starts? I mean, we were before, if you go back a year ago, before rates really started to take off, builders had been ramping up production of homes. And we were at 1.75, maybe even 1.8 million looked like it was headed north because of the housing, affordable housing shortage. And now we're down to 1.3. Do you think we're pretty close to the bottom in terms of starts or there's more to go there? Well, that's what we've built into the baseline forecast. Right. But we don't, it's not V-shaped, right? So we might hang out here for a while. But given the rest of the forecast, if everything else holds, there is still a lot of underlying demand out there. So I would expect that, you know, it is it.

And make no mistake, 1.3 million is a very depressed level. Very, very depressed, right? History. So, you know, even if we don't go lower, it's still not great. But because that's really important in terms of economic growth, right? Because that's right. What that would say, if we're at the bottom, that would say we're pretty close to the end of the major drag on economic growth from housing construction. There's still more drag to come because of lower house prices.

But that plays out over a long period of time. But the real drag, the real hit from housing was in the same. second half of 2022, we'll still get a bit of a dragon 23 because it's about completions. You know, that's what really matters. But it feels like the worst of the of the headwind created by the housing recession may actually, in terms of what it means for GDP and maybe even jobs, that might be the, we might be pretty close to the end of the, you know, end of the worst of it. Does that make sense to you? It does. I think so. Barring, again, some other shock. But, but yeah, yeah, yeah, we're not going to get.

Don't expect a boost from housing anytime soon either, though, right? It's going to probably maybe at the end of the year, things start to really start to pick up again. Right, right. But the drag should be over. Yeah. Coming to an end. Okay. I've got a statistic and I always say I think this is a hard one.

And I'd say it again, this I think is a hard one, but really important in my view, 417 million. $417 million. What do you think? Any questions? Dollars. What is that? Those dollars? Not dollars.

And I can't give you the units because that would give it away. Unless you want me to put you out of your misery. Wait, wait, wait. Yeah, quickly. No, no, no. I'm not going to do it. Yeah. It is, as I think Marissa put it,

did you say tangentially related to inflation? Yeah, tangentially related to inflation. adjacent to or something. Yeah, the next way I was saying it. You're on mute, Marissa. But yeah, it's related to inflation. Is it like natural gas storage or oil inventories or something like that? Oh, baby.

Yeah? Way to go. Oh, I thought that was going to be so. You did a great. That's fantastic. Yeah. It is inventories of oil, 417 million barrels of oil. 417 million barrels of oil in inventory.

And the inventory is rising. And it's, you know, if you look at the broad historical series, you know, going back into the 80s, we've got data back into the 80s, it's pretty high by historical standards, which, you know, as encouraging, you know, we've got these stocks. So if there's any, you know, if demand from China picks up for oil or, you know, there's the Russian production gets more shut in because of the sanctions and we need more oil. We can draw down those stocks. And that, you know, is very encouraging.

And I think it's one reason why, I don't know if you've looked, but gas oil prices are really very tame. You know, they come back down. Today, we're back down to $75 a barrel on WTI, a little over $80 a barrel on Brent. And that's pretty low. That would be consistent with, you know, $3.50 for a gallon of regular. I know not in California, but in, you know, most of the rest of the country. And again, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I'm

a, uh, uh, uh, uh, the cost of getting food from the farm to the store shelf. But on, uh, what it all means for inflation expectations, wage growth and ultimately monetary policy. So, So we got to keep, you know, oil prices have to stay down. And I take a great deal of solar solar. And then if you go look at natural gas storage, it's up 15, 20 percent above where it was a year ago. And that goes to the warm weather. That goes to the just incredibly warm weather. Here and in Europe.

Europe didn't need as much natural gas as they thought they did because the weather there's been very warm. And so natural gas prices are down. So that, to me, that's really important and very, very encouraging about the inflation outlook going forward. But very good. That was great. I thought that would, that was going to be, I could have to put you out of your misery, but you got that one. That was great. Okay.

Let's double back. I don't want to spend too much time on this, but the debt limit because Bernard, and we are just point of interest, we are going to run a bunch of scenarios, running through our models and produce. scenarios for clients, and we're going to be doing that over the next few weeks. And Bernard does yeoman work here trying to figure out, you know, the timing of when the Treasury is going to run out of cash. As everyone knows, the Treasury, we have hit the debt limit. The Treasury can't issue any more debt, can't issue any more bonds, net to increase the amount of debt outstanding.

To pay all the bills, it's using so-called extraordinary measures, basically rating government pension plans and looking for, you know, cash under the proverbial mattress. And the question is, when do they run out of that cash to pay bills on time? And I know, Bernard, do you have an update in terms of your thinking on this? Yeah. So we're still point, we're still looking at about a mid-August, X state, or, you know, mid-August, if lawmakers do absolutely nothing, it should be around mid-August or sometime in August that the Treasury would run out of these extraordinary measures. They would run out of cash on hand. But it's going to be, you know, it's going to be a roller coaster ride from now till then. So over the next couple of

months or through early April, the Treasury is really going to run down its cash on hand to dangerously low levels, probably less than $100 billion. But fortunately, there's going to, you have the timing of tax day on April 18th, if I'm not, if I'm correct. And you're going to see a surge in tax payments around them. And that's going to give some life back to the Treasury. It's going to allow it, give it some breathing room. You've got some further tax payments that come to. So people who don't normally withhold their taxes or corporations, in mid-June,

you typically have another, you know, a brief surge in tax payments. You have some other one-time, one extraordinary measures that come into place. So over the summer, the Treasury's headroom under that limit is more. more or less stable. But after, you know, come July, you know, it's, it's typically, the, the, the, the, the, the, the, the, the, the, the treasury typically runs a, a meaningful deficit in that month. And then in early August, as well. And, you know, it's, by early August, I would say no later than early September, it's, it's very hard to see the Treasury lasting much longer beyond them. And incidentally, you know, I think one of the the coup de grace right before the treasury loses, or exhausts all extraordinary measures and cash is just a large interest payment that's due in the middle of August.

And as we know, you know, interest payments have risen due to higher interest rates and just a larger stock of debt. So that's, so there's a lot of, there's a lot of, you know, scenarios. We were updating this based on the Congressional Budget Office, which just published as 10-year projections. But even the CBO, which has hundreds of economists really looking at this closely, they still don't get their forecasts right. You know, on average, their forecasts of revenue and outlays are, you know, incorrect by 2 to 5 percent, respectively. And their forecast errors have even risen in this post-pandemic period. So there's a lot of uncertainty, and it really all comes down. to tax season, which, you know, I don't think it's going to be as good as it was last year

because of last year the Treasury really benefited from strong capital gains in 2021. This time around, stock prices, as we know, really fell. So you're going to have, instead of capital gains, you're going to have capital losses. So I don't see that really being, you know, and we're incorporating that, you know, that expected decline relative to last year. So if it was, if it was anywhere as good as last year, then maybe I would say September, late, early October. But it really seems like August is, will be the moment of truth for. So you think mid August, right around. Yeah. Yeah. And that's pretty consistent with, if you look at T bill, the T bills, yeah, T bill yields. From what I've seen is, it seems like there's some, there's a kink right around mid. mid-August. So those that are maturing afterwards, you know, are commanding a higher yield than those right before. So they seem to be in agreement. Those investors are thinking that they

might not get paid on an timely way. Therefore, the demand for those bills is lower, therefore pushing up the yield relative to where it would be otherwise. Okay. One thing, as you pointed out, there's a lot of scenarios. One scenario is that lawmakers, Congress, administration agreed to a short-term suspension of the limit, you know, maybe for six weeks to kind of line it up with the budget process because the other thing that has to happen by the end of September is there needs to be a piece of legislation funding the government in the next fiscal year, fiscal year 2024. And it likely lawmakers will want to line those two things up so that they can come to some kind of agreement, maybe some kind of spending restraint, you know,

for the Republican House to get them to get enough votes to increase or suspend the limit. Does that sound like a reasonable scenario to you? Yeah, it seems like that that's a possible. That's going to happen. That could happen. Yeah, yeah. And if they suspended it, I guess, to October, again, I'd have to look at this, but I would assume because it's October 1st is when they would need to pass the next fiscal year budget.

So that's the other must, you know, that's. That's another key deadline. You know, I think then we would be looking at another X date closer to, you know, November, December, and, you know, at latest January, but it would still be an issue later this year. Oh, because in the interim between mid-August and say- I would just, unless they really came up with some restrictions that the Treasury couldn't, you know, boost its cash balance to an excessive degree. They might be able to raise more cash in that interim and that buys a little more time. Yeah, exactly. Yeah.

Yeah. Okay, very interesting. But, you know, in our baseline, we're assuming in no recession, we're assuming that lawmakers come to terms on this in the nick of time. And it feels like the most logical scenario to get there is this, where they have to come up with a budget and they could impose some kind of restraint on spending relative to what's already in the budget. And that would get enough votes from the House. Republicans to actually suspend or increase the limit. Exactly. Yeah. Okay. Yeah. And I would assume that we probably have this, you know, these budget, these debt limit, you know, this, this debt limit issue could be, I think might extend through the rest of this year.

But, I mean, come next year, I mean, it's a presidential year. So I don't think either party wants to, you know, play politics with this, with such a, you know, a scary economic issue like this. So I would assume that. Yeah. Yeah, so I would assume that at some point by the time we get to early next year, there's going to be some resolution to just push this pass to 2002, 2005 after the elections is done. Right. Okay. But.

Okay, fair enough. That was a good. Thank you for that. And, you know, obviously we'll be spending a lot of energy on this going forward. There's a lot of interest in, you know, alternative scenarios. Suppose these guys don't sign on the dotted line, you know, in the nick of time, you know, what then? And again, there's a gazillion scenarios that can unfold here and we'll consider some of those going forward. Okay.

Why don't we do this? You know, we're already, you know, I told you the hour in 10 minutes. I think it's longer. I think it's pretty close. So I don't think we have time for listeners' questions. We'll come back. But I do want to, because we haven't done this in a few weeks, talk about recession odds again and, you know, get people's collective thinking around what is the probability of recession? over the next, Chris, should we just say the next 12 months?

You know, so that would put us to early 2024, or would that be just kind of push forward this, this window that we're considering for recession? Or do you want to do something else? Do you want to- Why don't we say through the first quarter of 24? Yeah. Okay, fair enough. Yeah.

Okay, fair enough. Why don't we say March 30th, 2024? Yes. Okay. Why not? Why not? Okay. Very good. Okay. So with that, let me, let me turn to our guest, Bernard. Bernard, and I don't think I've ever asked you this question, but do you have a sense of, or do you have a view on the, you know, what the likelihood of a recession is starting between now and the end of the first quarter of 2024, a little over year? I'm, I'd say I'm basically in line, I think, with the, when we surveyed everyone in the company, I'm more like 40 to 50 percent. 40 to 50 percent. Yeah, somewhere. 40 to 50 percent.

Yeah, somewhere. 40. 40. 40 to, yeah, 50 percent. Yeah. Okay. Because I'm still of the view. I think maybe I was 40 percent before this week, maybe up to 45 this week, just because, you know, inflation may not be as simple of a problem to resolve.

But I still feel that the downward trend is. is there, you know, I think we're going to, especially with CPI, we're going to get less shelter contribution. Wage growth seems to be coming down. And if we do get, you know, if I cannot, I think the labor market, I don't think it can be that strong for too long. And, and, you know, I think the Fed may, maybe they raise another 25 basis points more than we expect in, I think we're expecting through March, maybe there's another one in another meeting, but I still don't see them going too high up because they know that a lot of these disinflationary forces I think should gather steam later in the year. Yeah, very good. Okay. Mercer? I'm still at 50. Still at 50. Yeah. Okay.

And that's where you were a couple, three weeks ago, the last time we did this exercise. Yeah, I've been there for a bit now. Yeah. And there's nothing that has happened. happened. That has really changed my mind. Yeah. Okay. Chris, what do you think? I think you were 60% weren't you? Yeah, I'll stick with 60. 60? Okay. 60 and coming down though, right? Well, my arrow's up now. Oh. Because of the inflation numbers? Oh, and the growth numbers. Just January in general. The January data in general puts the arrow up going up. That's right. Even with the revisions, it's still pretty strong. I fear that I will.

I'm lower in mind, 45. Of course, of course. Yeah. Well, I've been at 50 for a long time. Yeah. Yeah, but I'm lower in mind to 45%. I'm feeling more confident about navigating through. And, you know, I kind of gave you my sense of inflation.

I feel more confident in the inflation outlook than I have for a long time. So I feel pretty good about that. But to Chris's point, there's no room for error here. There's no give if something else goes wrong. And goodness knows, you know, things happen. So we're still very vulnerable. And the Fed, hard to gauge. I agree with you.

Bernard, I think they raise rates a couple more times, March, May, quarter point, put the funds rate just north of five. You know, I wouldn't argue with anyone who said maybe they go three times, you know, quarter point each time. I don't think I'd argue too hard. But no more 50 basis points I wouldn't see. No, I think that's over. But I do, you know, here's the thing I do worry about.

And this goes to the way we framed the period of which we are considering the probability recession. I think there is a reasonable scenario where, you know, they raise a couple, three more times, stop. And then they figure out, well, inflation isn't coming, you know, back into the bottle completely. And we're going to have to raise rates some more. And they go to six on the funds rate or six in a quarter or six. and a half. And then I think, you know, probability of recession will be over 50%. So if we extended the horizon, you know, not through the end of the first quarter of 2024, but through the end of 2024, I might say 55%, you know, something like that. So we need to start thinking about that,

you know, as a possibility as well. Okay, very good. We covered a lot of ground. It was an hour and 15 minutes. That's a good workout. You know, again, everyone needs to work another five minutes longer, you know, just, you know, suck it up, you know, work out a little longer. Anything else anybody wants to add at this point? We're going to call it a podcast. Okay. Okay, very good. Well, thank you, dear listener for listening in and we're going to call it a podcast and we'll talk to you next week. Take care now.