Moody's Talks - Inside Economics - Mark’s References, Moderating Inflation, and the Midterms

Episode Date: November 11, 2022

Mark and Cris break down the October CPI Report and the latest on inflation. Colleagues, Dan White and Emily Mandel of Moody's Analytics, join the podcast to give a rundown of the midterm election results and the economic implications.Full episode transcriptFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues. Of course, we've got Chris, Chris, Chris Dewees, the Deputy Chief of Economist. Hey, Chris. Hey, Mark. How are you doing? I am doing well, and you?

Yeah, same here. Anything going on? And you're in the office in Westchester, PA? Anything going on in Westchester? I got a little bit of a cold November rain here. So that's about it. He didn't get it, Chris. He didn't get it.

You didn't get it? It's a Guns and Roses song. It's his favorite band. Oh, Guns and Roses? Yes. Yeah. Oh, I missed that. Oh, you have to go back.

Give it a listen. Okay. Okay, very good. Yeah, that was right over my head. Oh, sorry about that. Yeah, and of course, Dan White. Dan, that was Dan's voice. Hey, Dan.

Hey, Mark, you look warm. You look much warmer than here. I am, but I'm not going to tell you where. I am a little warmer than you are. but looking forward to being back in good old Pennsylvania relatively soon, making my way back. And Emily, Emily Mandel, Emily's good to have you. Yeah, good to be here. Yeah, and Emily, this is your second time.

Second one. The first one was the one where we introduced the world to your newfound love of guns and roses. So apparently that has not persisted since then. Now it's apropos. Okay. Actually, I'll have to tell you, the digger I. deep into Guns and Roses, the less I was impressed. I know that sounds bad and I'm sure I'm going to get male, but is, I didn't, you know,

the top three, four, five songs are fantastic. And then after that, I don't know. It didn't resonate with me. You don't need to go too much deeper than that. Okay, okay, fine. You can listen to the four or five songs forever. Yeah, but, yeah, very good. You know what I, you know what group I've run into recently that I really like?

And maybe this reveals too much about me, I'm not sure. 1975. Have you heard of 1975? No? I think it's a Generation Z thing. I think it is. You know, we're going to come back and talk about the election. But did you hear about this young fella, I believe, in the Orlando area, who was elected to Congress?

He's like 25. Yeah, the first Gen Z one, yeah. He's Gen Z, right, Gen Z? So I was listening to an NPR interview of him in, and he was saying, oh, I'm going to go to a 1975 concert. And I go, that's my band. That's my band. So believe it or not, I'm right in there with the Gen Z.

That's why you don't get guns at roses because you're just younger and hipper than all of us. Yeah, there you go. It's like, and now I'm definitely going to get male. It's like the Maroon 5 of the Gen Z generation. And they're going to say, Maroon 5, who the hell's Maroon 5? Do you guys know who Maroon 5? know Maroon 5. Everyone knows Maroon 5.

But it's good. I was like running on the treadmill the other day with 1975. They got really catchy, upbeat, you know, melodic. You know, it's really, really nice music. So anyway, I'm always looking for music for my treadmill. I need that music. Okay. And of course, Dan runs anything government-related for us.

And Emily is our maven on state and local government issues. They're here because we had the midterm elections this week, and clearly we want to talk about that and what it means for economic policy. But before we do that, go down that path. Of course, the other big news this week, economic news was the Consumer Price Index report, CPI report inflation. Inflation's top of mind. And a lot to talk about there. But let me turn this back to Chris. Well, I was going to say something else, but I won't say it. You can tell I'm in a good mood. I'm in a good mood. We'll keep it that way. Lots of different reasons. One of which is that CPI report. I really put me into a good frame of mind. We thank goodness for that report. But anyway, Chris, give us the rundown. Yeah, thank good. I think last week we were talking labor report and we had that little debate about bad news being good news, good news being bad news. I think this week we can

definitively say CPI inflation was good news being good news. Hey, Chris, can I say one thing on that? Yeah. And then I want to interrupt you. Okay. And I'm not notoriously bad at this, but we were nervous about whether people, what people would think of that someone called it bickering. And actually, that's the right word for it. We were bickering. And we were nervous, well, what will people think of that bickering? I think people like that bickering. You know, that seems, yeah. I was surprised. I didn't think they would at all. It was kind of like watch, to me it was like watching a five-year-olds play soccer, but, you know, that's entertaining as well. But I've got a lot of, I've got a lot of positive feedback that's, oh, you know, one thing that I think there's this myth that we are some monolith here

at Moody's Analytics, right? That there's only one opinion and that's it. Nobody else has any other difference. So I think they appreciated that, you know, we listen, we debate, we are in search of a truth here. And, you know, it gave them a little insight into some of that backstory, if you will. Yeah. So if you were listening to this podcast, you should go back and listen to that one. And by the way, that did generate some really interesting email conversation internally about forecasting. Yeah. From Camille Kovar, who's been on the podcast before in particular.

And I started writing a response. But the email he wrote to me was so full. of interesting things. It's going to take me while to respond to it all. I thought was really cool. Dan, I was just going to say, disagreeing with Mark is one of the funest parts about working here. Absolutely. You can disagree with your boss and not get fired because that's the whole point.

It's we're supposed to be debating and talking about this. Oh, I thought you were going to say because you can always win those debates. I thought that's what you're going to say. Well, it's the best part about economics. It depends, right? So I think I won the debate and you think you won the debate. We're all happy at the end of the day. Everyone's happy. Great profession. Great profession. Yeah, anyway.

Well, back to the CPI. Back to the CPI. Good news was good news. Headline CPI was 7.7% year for a year. That's down from 8.2% in September. And I believe the high was 9.1% in June. So we are moving in the right direction and actually moved a bit more swiftly than I think either we or consensus anticipated in terms of. of the decline. Even more encouraging was the core, right? So stripping out food and energy prices, that's down to 6.3% on a year-of-year-year-a-bases. 0.3% month over month, had grown 0.6% month

back in September. So that's a nice improvement, again, in the right direction. In terms of what are the factors that led to the improvement, we finally saw some significant improvement in use car prices, right down 2.4% on the month. We had been anticipating that for a while. Other data was indicating that, and now it's finally materialized to a larger degree in the CPI. Apparel prices are down. So I think we're also starting to see the supply chain effects and have worked themselves out. So we maybe even have too much inventory when it comes to apparel because of the overordering that went on during the pandemic. So prices are coming in there. And then medical care came in.

There's a little bit of a quirk there, though, related to health insurance. I'll briefly say, I don't know how much you want to get into this, Mark. I think you need to just a little bit because it was a health insurance premiums actually fell. Yeah. It contributed meaningfully to the weaker core CPI number. So maybe you can just dive into it. Maybe not go all the way to the bottom of the ocean here, but maybe halfway down. Yeah, and I think we talked about this maybe last time, actually, because in our discussion.

But health care, health insurance premiums are difficult to measure, right? And they were down a lot this month. So it's down 4% month or month, right? So a huge decline, relatively speaking. But health insurance is, well, it's notoriously difficult to actually measure properly, right? the premiums that employees are paying can change, but the plan can change as well. So quality adjustments become really complicated. We know that there are already issues when we think about how to quality adjust smartphones

or computers and health insurance, in some sense, I would argue, even more difficult. So there is this complex formula that certainly, if you're interested, go check out on the BLS's website. But essentially what they do is say, you know what, we're just going to look at the profits of health insurance. companies and those changes and profits on a year-over-year basis should be a good proxy for changes in prices, right? So if there are more profits that the health insurance companies are accumulating, then that implies that the prices of health insurance have gone up as well. What happened was with the pandemic, right? We had a lot of, we had insurance premiums being paid in, but not a lot of claims being paid out at the height of the pandemic. There was a lot of

elective surgery that was postponed. So health insurance companies actually on paper looked as though they actually did make large profits back in 2021. Now, a year later, we're starting to see that unwind. So now we are going back to the doctor. We are going back to the hospitals. Those profits are coming in. And again, based on this quirk and the timing, It looks as though the prices of health insurance premiums are coming down based on this methodology. In reality, we know that employees are kind of paying the same or perhaps more in terms of their actual premium. So this is, again, one of those quirks or anomalies in the CPI calculation. In this case, it's working in favor of putting downward pressure on inflation.

It's going to continue to do so probably for the better part of 2023 as well. Now, it's not a huge part of the consumer basket. It's less than a percent. So it's a big number in terms of the decline in the insurance premiums paid, but in terms of the overall impact on core inflation, it's relatively small. So taking a step back, it feels like today, the report for October suggests that inflation, it definitively rolled over. it's it's it's it's peak it's coming in oh i don't like to use definitively anymore with the inflation

but you know we burn but it's it appears that way certainly it's coming unless something else changes correct oil prices spike or yeah yeah covid lockdown in china or whatever assuming nothing goes off the rails it feels like it's peak yeah the trend seems to be downward the speed might be different, but, uh, right. And that, in that, uh, very small, small,ish, let's call it, decline in core CPI in the month, 0.3% because they had been coming in point five, point six. Six, yeah. Yeah, that that point three probably is overstated that the case here is overstated a bit because of this quirk with regard to health insurance, but it's still a case. There's still a case. Yeah. Yeah, let's say it's point four.

Right. Worst case. That's still improvement. Right. And of course, just for context, I mean, for inflation to be back to the Federal Reserve's target on CPI inflation, which is a little bit different than the consumer expenditure deflator measure of inflation, which is what the Fed typically is targeting, but looking at CPI inflation, it feels like we need to start getting 0.2s, point one, maybe thrown in there every once in a while to get it down to about somewhere in the market. mid-toes, you know, two and a half percentage, something like that. So we're, you know, the point three is, so it's good. Yeah.

We'll take it. Clearly the stock market took it. You know, they loved it. Bond market took it. Yeah. They loved it. But, you know, to actually get back to the Fed's target, we got a ways to still. Yeah.

I think they might have loved it a little too much. Might have extrapolated a little bit there. Yeah, yeah. Yeah. Yeah. Yeah. I mean, we jumped all over it, right? Yeah.

Yeah. Right. But before we go there, any other things in the report you want to call out, any other aspects of the report you want to call out? I noticed that food price inflation is still strong, but that moderated, which is we've been waiting for that as well, right? Because diesel prices have come in in a big part of the cost of food is transporting the food from the farm to the store shelf and lower diesel prices help. So I notice that. Anything else do you notice in the report? housing, so shelter is the other big one, right? We've been saying that that's going to continue to be a drag on inflation or keep to continue propping up inflation to be specific for a while. It actually did moderate a bit. Rents are growing 0.7% versus 0.8. So that's encouraging, but lots of script yet to be written there. So it's still too high. At least for another couple of quarters, I would think we're going to continue. Yeah, the other thing I notice is there are some, some things that made me feel better about the future, right?

So, for example, new vehicle prices, that continued to increase. Yeah. And that's, that's, that, there's gravity is going to set in there at some point once vehicle production, production around the world normalizes. It's that, I think vehicle production here in the U.S. is normalized, you know, back to pre-pandemic levels, but not in Germany, not Japan, where a lot of cars are produced. And we, you know, here in the U.S. consume a lot of those cars and vehicles. but as that production normalizes what you would expect with the easing of supply chain issues all

around the world, we're going to see more production, rebuilding of inventory, and we should start to see new vehicle prices at least level out, but I would even expect some declines, right? And that also sounds like a small component of the CPI, but these have been big, big changes. And if they go away or go down, that could have some meaningful impact on core as well. Yeah, the price is moderated. I mean, they're not growing as fast, as I recall new vehicles. I think they were 0.7 and now they're 0.4. Yeah.

I think our colleague, Mike Brisson, who was a great economist for the vehicle industry, points out that this is reflecting the 20-23 model year, these prices. And because pricing has been so strong, they've raised those 23 MSR, so-called MSRPs, those prices, the listed prices. And that's what's flowing through right now. but on the other side of this as you move, make your way into early next year, we should start to see some meaningful moderation, at least a flattening out of vehicle, new vehicle prices at some point I would expect to decline.

But that made me a little bit more, gave me some encouragement about, you know, inflation in the future. To back that up, Mark, we would just sit a conference, actually I'm in a conference the other day. And for the first time, I think in any conference I've ever been at with state officials, the people from Michigan were maybe the most optimistic in the room. They are never the most optimistic people in the room, but they were so excited that, you know, the microchips were finally showing up for some of those cars and some of those cars were starting to roll off the lots that I've never seen them excited as they were. Oh, is that right? Okay. That's interesting. So revenues are, they're competent in revenues because we're going to get more cars, more vehicle sales, more production.

Right. And they're ramping up production again for the first time because they didn't have any chips to put in the car so they ramped it down for the loan. Yeah, it makes a lot of sense. Hey, Chris, you mentioned the market reaction. What was the reaction with regard to what it means for monetary policy? If you look at the futures market for the federal funds rate, which is the key interest rate that Fed controls, do you have a sense of what they're saying now? Yeah, it came in. At least immediately. I didn't check it today.

I probably should. But, yeah, now the assumption is the Fed may not have to be. quite as aggressive in terms of hiking rates and the terminal rate may not have to go to whatever, 6% as some we're thinking. So a more modest reaction if, if in fact, inflation is coming in and can stay on this downward path. So I think it solidifies the idea that the Fed's going to raise the fund rate at the December FMC meeting. Yes. Just a point. Right. Right. There had been higher probability on a 75 going in, and now that reverse, at least last time I looked, 50 was the majority opinion.

And that's what we've been expecting, a 50-based point increase. And the terminal rate, the so-called terminal rate, the highest the rate's going to get in this cycle, I think was, I think he mentioned was well over 5%. Yeah. Is it still over 5? I believe it was it's like a quarter point higher than an hour's right there was one extra hike in three quarters so it's about like up as high range yeah yeah 475 to 5 right okay okay yeah and of course the stock market had a really a good day right the Dow is up 1,200 points I believe and I think

the market now stock market is not even down 20% from its all-time high at the beginning of the year. So I guess investors are trying to time the end of this rate hiking cycle because they know as soon as it's clear that the Fed is going to stop raising rates, then that's a signal to buy stocks and thus the reaction. But you feel like that's premature. I think so. And it's one report.

It's a good report, no doubt. You want to hear a negative. Well, gas prices, all right? Energy prices went back up. Not a lot, but, you know, they had been coming in and they could bounce back up again. So. Yeah, I think that's the key. I mean, if oil prices stay where they are, you know, I think West Texas intermediate is just south of $90 a barrel.

Brent is just north of $90 a barrel. And that's kind of sort of where we've been now for the past at least a couple three months. Gasoline prices have settled in just south of $4 a gallon nationwide. They had peaked at $5 at all-time high back in June or down below four. If they stayed there, and that's our baseline forecast, obviously a lot of risk around that, given EU sanctions on oil, given potential OPEC production, more production cuts, given the brinkmanship with Russia over a cap on oil prices. But if that stays the case, then because we got,

the big increases in oil and gasoline prices, beginning very late last year going into early 2022, on a year-over-year basis, we're going to start to see some real moderation in energy gasoline prices, and that's going to take a big bite out of top-line inflation. In fact, if you do the arithmetic, as you said right now, we're 7-7, 7.7% on CPI inflation year over year. I think by, you know, by March, April, and that period, May, we should be down near 4% on top line inflation, I think, just on a year-over-year basis. So, but that does depend on oil prices remaining stable. Does that sound right to you? So that's taking out the energy food, right? So I guess you're translating it into energy food and the supply chain constrained, right? Those

either go flat or roll over. Yeah. As you put it in. Just simply go flat. Then on a year over year basis, because you had that big surge, you know, late last year, early this, then on a year over year basis, it really starts to come out. It's really going to be the hard part that, yeah. Yeah, the next two and a half or so that.

And that goes back to the labor market, wage growth. And of course, that drives the health care inflation and other services. price inflation. We need to get that. That's going to be a little bit more. Well, it's going to be a lot more difficult to get back. And the shelter, right? That's going to continue.

But there too. I'm feeling really pretty good about that as well because market rents, you know, the current lease up rents, there's a lot of weakness in rents. And that will translate over by this time next year, starting getting into much more moderate housing cost inflation, right? Yeah, by this time next year. That's what that's still, you know, a ways away. It's not going to be immediate.

So don't expect. I think there's a misconception that, oh, because the asking rents are coming down pretty rapidly, then CPI is going to pick it up rapidly to or within a few months. But it does take some time for those asking rents to work themselves through the CPI calculations, at least on the year-over-year portion of it. But, you know, I articulate this a number of times now on the podcast, but just to restate it to make it make it clear. The key, and obviously we're spending a lot of time on inflation because that's key to interest rates and key to, you know, what it means for the economy in terms of recession risks and that kind of thing. But over the next three, six months, we're going to, I expect improvement in inflation, just the base effects, you know, meaning those year over year base effects we just talked about because of stable oil prices and easing of supply chain issues. We also get a bit of benefit from new vehicle prices if they start to come in as we get more vehicle production. Then by the second half of the next year, we get benefit from slower growth in the cost of housing because of what we're observing now with regard to market rents.

That takes six, 12 months to translate over into CPI housing cost inflation. And then it's the first half of 2024 when I would expect to see a moderation in service price inflation because at that point, the labor market should be weak enough, long enough, wage growth, slow enough. that that takes the pressure off the service side, and we start to see service inflation moderate, and that's when we come back into the Fed's target of about mid-2s. That's kind of the path, as I see forward. Mark, can I ask a question about that? We were just talking to some clients about this the other day,

and the question was that we agree that, you know, that last two, two and a half percentage points is going to be the toughest to kind of squeeze out. if we run into more trouble than we expected to at that time, squeezing that last two, two and a half percentage points out, is that higher rates or is that high rates for longer at the Fed? Or both? Yeah, and I think that's the crux of the matter. I mean, you know, there's two key risks to the outlook I gave.

There's many risks, but two key ones. The first is we talked about oil prices and how that goes. Second one is what you just mentioned, and that is maybe, you know, the wage growth remains more persistent and entrenched. And you get more of that kind of self-reinforcing wage price dynamic that is very difficult to ring out. You can't ring it out unless you have a recession to do so, how much higher unemployment. But, you know, I think that at this point, my sense is based on last week's FOMC meeting

that it may be the case that the Fed doesn't raise rates. It goes up to where we say it's going to go, four and three, three, quarters 5% by early next year and stays there for a while and maintains that higher that kind of that high terminal rate for an extended period well into 2024 so you know they by not raising rates more aggressively they reduce the risk of generating some kind of financial event and also causing recession but they keep pressure on the economy with that high rate that and that rate obviously is above the so-called equilibrium rate was consistent with, you know, the monetary policy that's not supportive or restrictive to economic growth. And it just keeps it there. The fact keeps it

there at that four and three-quarters percent, five percent, well into 2024 to make sure that the economy slows sufficiently that would get that wage growth down and inflation back into the box. I think that's kind of their thinking now, the strategy that they're going to pursue, my guess. And that's in our forecast. That's what we have in our forecast. It would be interesting to see how it plays out, especially because there's a day in November at the end of that that you're talking about that all this is going to play.

Yeah, great point. I mean, how this all plays out obviously will be critical to the presidential election in in 2024. Because if inflation doesn't go back into the box gracefully without a recession, then obviously that has all kinds of implications for, you know, how that election is going to play out. Okay. Chris, anything else on the inflation front? I mean, let me ask you this, based on our bickering from last week, does this change your view at all with regard to the risks?

I mean, you were at 70% probability recession starting between now and the end of 2023. Is that still the same? Any change there? I'm data dependent. So, of course. This plus the Phillies losing the World Series, you know, has brought my odds down to 67%. So, yeah, yeah, I know, big move, big move. Actually, that's a bigger move than people think it is, right?

It's borderline. Why? What to explain why? Well, that's our threshold for making a change of the forecast is two-thirds. It's two-thirds probability. So I would still make the change. I still think we need a little bit more slowing in our baseline, but getting closer to that knife's edge.

If we get a few more reports like this, that narrow path the Fed is on could be realized. Do you hear that, Dan? Emily, does you get that? I've said that from the beginning, 30% chance of that occurring, right? From the beginning. It's still pretty low. Hey, Emily, did you get Chris's reference to the Phillies? No, I didn't.

I mean, I know they lost. Are you a Philly fan? In her defense, she lives in Massachusetts. I mean, I did the aster's. I saw that happen, but I don't know the significance this regarding the recession probabilities and data. Oh, it's in Mark's Twitter feed, right? You missed that one? Are you a follower, Emily?

I am, but, you know, I'm going to just blame a Twitter meltdown for not seeing it. You're right. You're right. There's been a bit of a meltdown in Twitterland. Yeah. Yeah, a lot of Sturm and Drang. Dan, you know what he's talking about, right? Yeah.

Actually, one of my students at Villanova brought it up to me as a reason why they should get off class the day after game seven. I said, if they make it to game seven, I will give you Monday morning off class and they lost in game six. he was very upset. Yeah. Chris, do you want to explain to the listener?

I think you should. You're the, you're the progenitor of this, right? Okay, very simply, and I think we've talked about it before. So the Phillies won a World Series in 1929.

Or the precursor to the Phillies? 1929 and 1930. And 1930. And they were the athletics at the time, but, you know, the precursor to the Phillies. They won. in 2008.

Oh, no, they won in 1930. No, wait, 1929, 1930, 1980, 1980, sorry, and 2008, right? So, Emily, what happened in those years?

Well, recessions. Big time, right? Yeah. Big time recession. See, originally I was unhappy about the Phillies losing, but now I'm kind of re-escessing there. I can say that because I don't love in Philly, anymore. When you were going to get your morning coffees at Wawa, were you asking people about that?

Because when I asked people right here, I explained them that, you know, correlation does not mean causation. But every one of them said, totally worth it. Totally worth it. We'll take it. We'll take it. No problem. Massive recession, financial crisis, Phillies were in the World Series. We're going with the Phillies. They were okay with it. Very good. Got all priorities. Yeah. I think it's a lot of the Phillies.

a good segue into obviously the other massive event last week or this week, and that's the midterm elections. And, you know, I don't know how to begin the discussion, but maybe I'll just turn it to you, Dan. Do you want to give us a sense of, you know, the state of play and anything else you want to say about it before we turn to what it might mean for the economy? Sure. Yeah, I think the the big takeaway is that nobody got everything that they wanted and everybody got at least a little bit of what they wanted. So it just means that we're just about as divided as we were before the election, but there are some interesting trends that came through. So the Republicans, as of this recording, haven't officially won control of the House, but they're probably likely to win control

of the House. We probably won't know who has control of the Senate until Georgia has their runoff. But either way, it's going to be a very, very divided Congress with probably one party in charge of one house and one party in charge of the other. But neither of them having a really significant hold on power in either one of those. So it's going to be some very interesting nuances in some of those votes. If the Republicans really do win the House, there are some folks who maybe not as core to the Republican constituency who have some power, who may not have had power before. I was just reading an article about how interesting it'll be when they try and bring up a vote on the $10,000 cap for state and local government,

And a bunch of their new congressmen are from New York and New Jersey, right? Are they really going to vote against the $10,000 cap? And on the Democratic side, you've got some folks who are from maybe more working class backgrounds who maybe vote differently than the normal Democrats do. And so the normal consensus within each party is really not going to be as firm as maybe it has been in previous elections. And so what that means is, and you know, I've talked with this class, probably nothing gets done other than keeping the lights on for the next two years or so.

which has some upsides for the economic outlook, but certainly some downsides as well. Well, before we go there, Emily, let me turn to you. Anything you want to point out with regard to the election? And, again, the ballots are still being counted in some key states. And we're going to have a runoff election for Senate in Georgia, which is going to determine whether it feels like it was going to determine whether the Republicans or the Democrats control the Senate. Anything else you want to point out? I mean, there's a lot of stuff going on at the state level as well, correct? Yeah. And I mean, at the state level, I think it's in some ways, it's kind of

the reverse of what Dan is saying. Like, we came into this election with very few, you know, state governance having divided control by historical standards. And that actually intensified a little bit with this election. Like, we had two states. I think it was Michigan and Minnesota flip so that they're now the same party as the governor. And then Democrat. Yeah, of course. And then, you know, with the caveat that a couple races haven't yet been called for the governorship, it looks like there'll be maybe eight or nine houses that are, or eight

or nine governments that are divided, which is just really low if you think about it. So I think implications for that is these places will have quite a bit of, you know, ability to make changes, to make tax changes, to make different changes, to hold. So we could see some more, you know, less gridlock at the state level than we're potentially going to see at the federal level for the next couple of years. So but to try to synthesize what both of you just said, it feels like to me the bottom line is it just means we are very divided and very closely divided. You know, I mean, it looks like the Republicans are going to win the House, but they're going to win the House by what, Dan, five, five seats? or 16. We can't tell yet. They need 218 to have control and it's looking like their last account I saw was like 220, 22, 23 probably, but there are seven races that are totally toss-ups that no news

agency is coming out and calling either way. So it could be 230, it could be 222, so we don't know. But neither side can really call. They got a little bit of what they wanted, but neither side can say, you know, we definitively won this election. The Democrats, they lost the House probably, but they didn't lose it by nearly as much as they thought they would, so they're kind of energized. The Republicans didn't win, probably didn't win control the senator. We don't know yet, but they certainly didn't win the House by as much as they thought they did. But you probably have a Republican speaker at the end of all of this. So it's really kind of nobody got everything that they wanted.

And so both sides are going to probably steer that towards energizing their base as opposed to working towards the middle, unfortunately. And of course, just to make sure everyone understands, you need 218, correct? 218 to control the House of Representatives. And if the Republicans sweeped all of the outstanding elections, what would they have? Do you know? How many houses? It would be almost 240. 240?

Yeah, but there are probably, and I'm probably but there's at least 10 of those that probably have no way of going Republican that are very lean, dem, they're just waiting for the count. So my best case for the Republicans is probably somewhere around 230. the probable case is somewhere 223, 2.30, 225 somewhere around there. Oh, my good. So the most likely scenario is the Republicans win the House, but they win the House with about a five, six-seat majority, which is kind of sort of what the, I think that's exactly what the Democrats just had in the last Congress. Yeah, they probably win maybe a one or two, a one or two seat larger majority than the Democrats have now.

Yeah. One thing, and this goes now we're kind of more kind of moving into what it means for policy, but one other political question is, okay, say the Republicans win the House, McCarthy becomes the Speaker of the House, Kevin McCarthy becomes Speaker of the House. Because it's such a slim, and he has five-seat, six-seat majority, which is very thin. What does that mean, you know, in terms of his ability to manage kind of any kind of consensus in the Republican caucus? caucus. It's going to be really hard. I mean, it's going to be really hard. I mean, it's going to be hard. I would imagine when we have the election of the speaker next spring, it's probably, sorry, the wintertime, it's probably going to be way messier than usual. Usually all that stuff

is figured out in the back room somewhere, and we all come out and we vote, and that's the way it is. But with some of the more diverse caucuses within the Republican Party, it might be more difficult to pull everybody together. And if it's that hard to pull, together on the speaker vote, I can't imagine how easy it's going to be to pull them together on things like the debt ceiling or some of the fiscal policy decisions that are going to have to be made. Okay. So, Emily, you said something that, and I don't think I got it until just now. What you were saying is at the federal level, because it's so close and because of what Jan was speaking about,

it's going to be very difficult to get anything through into law. But at the state level, because it's become so polarized, you're either a democratic state or a Republican state, you're either red or you're blue all in. It's much more likely you're going to get stuff done because it's one party. That's what you were saying. Yeah, exactly. And I mean, there's some. So you're going to see all the laboratories of democracy.

Yeah, exactly. Exactly. Yeah, I'm going to get a lot of interesting policies out there. Yeah, because the, you know, federal government's now going to be divided. And I mean, it was really close before. even, and we could see how much that, you know, impeded the democracy's ability to get some things they wanted passed. But I think the real thing is that a lot of places you've got the same control in the legislature as you have in the government. And so that's, you know, with variations across

how big those margins might be across states, it's going to mean that they're going to have a lot of ability to pass the law, pass laws and, you know, try out that new laboratory of democracy to Dan mentioned. You know, it's so funny for most of my life, I've always wanted to be a lot of I wonder, you know, why do we need to have states with such autonomy? I mean, you know, this seemed to be kind of a mess. Didn't make a lot of sense to me. You know, I could never understand the Tom Jefferson view of the world where, you know, give states, you know, real power. I was kind of like always an Alexander Hamilton kind of guy, you know, centralized power.

And now I go, oh, now I understand. Now I get it. It's not a bad thing, actually, really. So there's definitely disadvantages to it, but there are advantages. And that, to your point, Dan, it's a way to see what works, what doesn't work. You know, you've got 50 different data points out there to use. Yeah, we were very blessed to have both Alexander Hamilton and Thomas Jefferson because just one or the other would have made a really poor system of government, but having them both is what I think makes us great. Yeah, and I think, you know, the American political experience since its founding has been, Tom Jefferson versus Alexander Hamilton.

I mean, the whole way along, that battle continues to rage. Right, with both parties kind of switching sides over the course of history, which is kind of interesting, too. Oh, that's a great point. That's a great point. Yeah. Hey, Chris, before we move on to the economic implications in more depth, anything, you know, from your vantage point on the election, anything you want to call out?

I'm just happy that the Republic held, right? there was a lot of these. And I actually had... That's a really low bar. I know. I know. I actually had clients, you know, really concerned about civil war, you know, what, what are the implications?

How do I calculate my losses if there's, you know, this type of disruption in the, in the, in the country once again. So I think it is a testament to some of the self-correcting power within our system. that we can have an election that seems like everyone is going to accept the results to a large degree. And I also think it was a vote for the middle way. I think, you know, Republicans, Democrats that were like to tend to be more centrist. I don't think there's going to be, although there will be gridlock, I don't think there's going to be a lot of tolerance for, you know, policies or discussions, debates that are not central to the problems.

that are really facing us, right? So I think we'll have good debate. We might not get a whole lot done, but I don't think we're going to be going off in a lot of direction. I hope we won't be going off a lot of directions or paths that don't lead anywhere. Yeah, I hope this isn't come across as being too political a statement, but does feel like the election deniers, the candidates that were denying the 2020 election election that President Biden won election as president. Those folks, there's still elections to be

decided here, but generally they seem to lose out in this election. They didn't do well. Like here in the state, in our home state of Pennsylvania, we had this fellow running for governor who was a very strong election denier. He got creamed, you know, by the Democrat. It's very, very unusual in a state like Pennsylvania, which is very definitively a swing state. There's red, there's blue, there's purple there's everything. So I think that was pretty definitive. Dan, would you agree with that statement? Was that, is that a fair statement? Yeah, I think some, I can't remember who did it. Somebody did the math and the, the, the candidates who, you know, across the House and Senate races, who generally were more in the January 6th camp seemed to lose more often than they won. I think

there's only a very few of them that won. But I think your point about Pennsylvania is a great point because, you know, Dr. Oz and John Fetterman were razor thin and the governor obviously was a much wider margin. I can't remember, I'd have to go back a look, but I can't remember a wider margin in the governor's race for Pennsylvania for a very long time. You know, I joke, my wife determines presidential elections because we live in Chester County, Pennsylvania. Chester County is a really purple county, populous county, just west of the city of Philadelphia, which is obviously bright blue, but it's very purple. And my street is half Republican, half Democrat, and I know it because I can see it on this with the signs.

And it's all about turnout on that street in Pennsylvania. Because Pennsylvania, in Chester County, determines Pennsylvania, and Pennsylvania determines. So I often joke, all these candidates should just be, you know, talking to my wife, you know, convincing her one way or the other about the election. But anyway, so, okay, so the most likely scenario is divide government. It's divided government. Yep. The Senate is, we don't know, that's a toss-up.

But what really matters here is the House flipping to Republicans, and that feels highly likely at this point. So let's use that as our basis for discussion. And Dan, if that's the scenario, what does it mean for policy? You know, what does it mean for what gets done over the next couple of years, particularly economic policy, obviously? It means not a lot gets done, which may be. more of a feature than a flaw. I mean, especially with inflation as high as it is right now,

we've been talking a lot about, I mean, there's a lot of people coming out and saying, you know, fiscal policy should be helping the Fed, helping to make the Fed's job easier. Fiscal policy hasn't helped the Fed at all. We mean, we had the student loan stuff. We had a couple of other things that is kind of piling on and not making things easier. For better or worse, not being able to do anything other than keep the lights on is, you know, probably a blessing over the next year, year to two years as we go under the 2024 election. That said, there's still a lot of risk out there that we can't physically do anything, which is too bad because there's some things we need to do to keep the lights on. We can't just send everybody home for two years. We've got to have the debt

ceiling. It's got to be increased, which is going to be hairy, especially in the house. We've got the continuing resolution, which has to be extended. Hopefully it'll be extended during the lame duck, but we'll see. There are some things that just have to get done. And God forbid, we're talking about the odds of a real recession as opposed to kind of the slowdown or growth recession that we've got in the baseline. If things get really off the rails, you're going to have to really convince a lot of very reticent folks to authorize additional funding if we go into a deeper business cycle and we're expecting. Okay, so the last, the Congress that's just ending the first two years of the Biden administration,

that was action-packed, a lot of drama, but a lot of stuff got done. You know, you got the American Rescue Plan, you got the infrastructure bill, you got the Chips Act, which, you know, provides support to the semiconductor industry to come here and produce here at home. And, of course, the Inflation Reduction Act around climate risk and prescription drugs, that kind of thing. So lots of things actually at the end of the day got through the legislative process because that was a unified government. That was Democratic control. And even though the Democrats only had a five-seat majority in the House, they were able to pull it together and get that through. I mean, again, a lot of drama, reconciliation, so forth and so on, but they got it done. And what you're saying is now with a divided government, even if the Senate remains Democratic,

because the House is Republican, we can't, it's hard to see anything getting done, you know, at all. It's hard to see anything getting done unless it really has to get done. And again, I think that's a good thing because, you know, you said that it's been action fact, there's been a lot of drama, but it's probably too much has gotten done in the last two years. And I think, I know not everybody would agree with that, but some of us would have said, There's too much. That definitely depends on, that's a political statement. Yeah, I think too much has been done in some cases.

And especially with this fight against inflation, that may not be a bad thing to have our hands tied a little bit in terms of going into 2024. Now, here's, though, the thing that worries me a little bit, and this goes back to the last time we had divided government under President Obama. And, you know, we got into a real brinkmanship over two things. one is the funding the government. So the government has to pass these funding bills to keep the lights on, to pay workers and payout program, do the things that the government does. And that legislation isn't passed and there's no funding. The government shuts down. And I think we've had, I think we had one big one under Obama. And we had two under Trump, actually, a small one and a big one. I can't even remember why. I think it was over immigration policy and the building the wall, that kind of

And then the other thing to worry about here is probably even much more important is the debt limit, you know, that an acornistic law. So maybe I'll stop there, turn it back to you, and maybe you can explain those things and handicap them. Should we be worried about that in the context of history that, you know, last time we were looking at this kind of government, we had these kinds of problems? Sure. Yeah, I think what it means is we have to go back to our slide decks from 2018 and 2013 and dust off our shutdown. charts again. But the first one, if you mentioned, you know, if you can kind of use our, we have our, I don't even know what it's called, our risk matrix, or what could possibly the wrong matrix. We've got the y-axis, which is the likelihood of something happening in the

x-axis, which is the severity. If I was to put the government shutdown, it'd probably be middle of the y-axis in terms of likelihood, and it would be very low in terms of severity. Very different than, you know, I think 2013 was the last, the first time we really had that government shutdown since Gingrich did it and then at the mid-90s. We found ways around making it as harmful as it was. There's some really bad regional economic things. We, you know, work very closely with the states of Maryland and Virginia, and they're always very concerned about that because it has a big impact on their regional economy. But if the government shutdown doesn't last more than, you know, a couple weeks, it's not a huge macroeconomic event anymore. Unfortunately, we become kind of

immune to that kind of government. I think just to put a finer point on that, I think based on those previous shutdowns, we estimate that if the shutdown is less than a couple weeks, it doesn't register. But if it goes into week three and four, each additional week shaves about a tenth of a percent off of GDP in that quarter. So that's small, but yeah, but you can measure it. Yeah, the third week is really key because that's when people start to miss paychecks, right? And have you missed one or two paychecks, even if you're getting your back pay, it's going to really create some issues. And if we're in a weak economy already or a weakening economy already, then that's something that could really kind of make the difference. Right. Okay. But you're

saying, okay, the shutdown, that's possible. And you're saying kind of a reasonable probability, kind of halfway up that risk. So like a, you know, 50, 50% probability, something like that. Yeah, it would happen. Yeah. It might not be that big a deal. If it's short, if it's long, The longer it goes, obviously, the bigger the deal. And the bigger the deal, the weaker the economy is. It depends on the state of the economy at the time. Exactly. Yeah.

And what really kind of matters is, and this is probably what's going to happen, it's probably going to end up with some type of continuing resolution. And that's just the way that we budget nowadays, which is terrible. But what that does is it doesn't give the folks in the agencies a lot, a whole lot of certainty going through the next couple of years. And it really can decrease productivity, can decrease high. hiring in some of those government agencies, which doesn't give us a whole lot of juice from an economic standpoint. So it's not ideal, but it's probably what's going to happen. And it's not going

to cause a recession or be a huge macroeconomic effect. The second one that you talked about, though, that's the one that is hopefully very low in terms of the likelihood. I'd put it at maybe a third on the y-axis. A third. That's too high for me. A third for me. One third. Yeah. A third probability or a third of the way up that axis? A third of the way up that axis. I don't know what the scale. Right? There's no objectivity in this at all.

But you put the, you know, the impact on the extreme, right? On the X axis, it's all the way to 100, right? What's your probability straight up? Straight up. What's your probability? If I was to put a probability straight up, I'd say 10%. Okay. Okay.

That's still too high. That's still high. That's way higher. 0.01 is too high. It's the dumbest thing that we have in all of government is that debt ceiling. Okay, explain what the debt ceiling is. So the debt ceiling, the U.S. government works differently than all of the states work and that most other governments work around the world, which is where we basically have to have a vote of Congress every time we want to increase our credit card limit. So if you had a credit card at home, imagine that on all the money you've already spent, right, you eventually get to say, you know what, I'm not going to pay back my credit card. I'm not going to pay back my debt.

So they have to increase the credit limit. Otherwise, the Treasury can't borrow any more money in order to pay off the debt that we already have. And basically what you have under the worst case scenario, though, is you have a sovereign default by the United States, which creates unspeakable amount of bad things in the financial markets. Financial markets would melt down. I mean, there's no discussing it. It would be just about the worst thing that the federal government could do. Hopefully, that never happens. And I think most people in government would say that hopefully that never happens.

But with such a razor-thin majority in the house and some people in the house who I think would genuinely want to take us over that waterfall, I think it's higher than it's been for quite some time. Do you see that? I'm sorry. If I can, a quick question related to that. Is anything preventing the Dems from passing it now in the lame doc section? why wait so in the Senate they would need Republican help in the Senate

to do it why reconciliation they could do reconciliation they could do it under reconciliation but I don't think they would for a couple of reasons one because that means that the Republicans can use that tool in the future and Dems wouldn't be able to use

the debt ceiling as a lever the same way the Republicans would but too so far as I understand it there is some dubiousness about whether or not it is possible to do in reconciliation Oh, you mean the rules under reconciliation may preclude a piece of legislation that would obviate the debt limit? Yes. And again, I'm not a constitutional scholar or a parliamentarian, but I don't know that I can definitively comment on that. But I've heard people make very strong arguments both ways.

So I don't know that the Democrats are all that confident that they can do it under reconciliation. Yeah, just to make this clear to the listener. So under reconciliation, this is this an arcane, another arcane budget rule that allows the party to pass a piece of, this is being lame duck when the House is still Democratic. Get it through the Senate under 50 votes because the vice president would vote in favor. Right. And you could, Pat, you don't need, you don't have to worry about the filibuster. And you can do one reconciliation bill. each fiscal year. And of course, this fiscal year just started in October 1. So you can argue,

okay, we could use a reconciliation bill. But there are some rules around what you can use reconciliation for. And so that's what you're saying. They might not be able to do it, even if they wanted to do it. And they may not be able to do it because all you need is one Democratic senator saying, I don't want to do that for whatever the reason is. Like Joe Manchin, Senator from West Virginia, did that for a long time with regard to the two reconciliation bills that got through, or at least the second one. The first one, the American Rescue Plan, that got through under reconciliation pretty easily. I think it was the second one, which ultimately became the Inflation Reduction Act that

took two years to get done, basically, because of one senator, right? Yeah, the margin is right now where one senator can hold the whole bill up and hold the whole thing hostage. Yeah, okay. I do worry, here's the thing that worries me, and I think I do worry about the probabilities as well. I'm not sure I put it 10%, but maybe, is I do remember testifying in the Senate and Rand Paul, the Republican Senator from Kentucky, was openly contemplating a debt limit breach. And his thinking was, oh, you know,

we can decide who we want it. We can prioritize who gets paid and when they get paid. And we don't necessarily have to pay Chinese debt. He didn't say Chinese debt holders. I'm extrapolating. He was just saying, we can navigate around the debt limit, no big deal. And I found that terrifying because let me look, let me just think about it for a second. You're a Japanese bondholder in the Japanese on $1.2 trillion of treasury debt.

I don't know how many Chinese is probably close to a trillion. I'm not sure I haven't looked recently. They've been spending theirs down. There are a much smaller share of overall treasury debt. Okay, so it's $800 billion. I don't know. Still. I think they're less than Japan now. Oh, yeah.

I think Japan's the largest holder. Yeah. And even the Japanese are kind of getting a little wary of treasury bonds in the context of a $1.45 yen to the dollar. But anyway, put yourself in the shoes of a bond holder from China, Japan, Middle East, wherever. and the congressman says to you oh don't worry you're going to get your payment we're not going to pay the grandma her full social security repayment on time it's not going to happen so the bondholder's

going to run immediately interest rates are going to jump and we're going to be in a mess even if bondholders get paid if somebody doesn't get paid along that waterfall it's a default and if you if you made a promise and you didn't pay on it from a government that's a default And so the fact that you did that at any level of that waterfall, whether it's bondholders, whether it's people on Medicaid, people on Medicare, you only have to do that one time and you're done. The rest of the people in that waterfall are not going to trust you again. And that's the real cost of this because so much of the global financial system is based on that U.S. Treasury rate being the risk-free rate, that as soon as that goes out the window,

all hell's going to break loose in the financial life. And by the way, this is why I love Alexander Hamilton, one of the reasons, right? because he understood this principle. And he, back in the revolution, all the states issued debt to finance the Revolution. At the end of the war, investors in those debt, they thought it was basically a gift. I don't think many thought they'd ever get their money back. And that debt was trading that pennies on the dollar.

And hedge funds at the time, the analog to hedge funds today, you know, they weren't hedge funds then, but they were the analogs, the hedge funds, were going in and buying these, these, these notes, you know, for treasury debt. And Hamilton said, okay, I'm going to buy all those notes back, 100 cents on the dollar, you know, the hedge funds. And by so doing, establish the credit of the United States of America, you know, we're the the lannisters of the world. We pay our debts.

Emily, you understand that reference? I got that one, yeah. Okay, you got that one. It's above Chris's head. Yeah. You didn't get that. Everyone else did, but Chris. That's okay.

That's okay, Chris. Once in a while, yeah. Once in a while, that's true. I'm usually one where it goes over my head like this. But anyway, we pay our debts on time. We pay our debts and we pay our debts on time. And by so doing, we paid the lowest interest rates in the world. We're the reserve currency on the planet with enormous benefit because we pay our debts.

And as soon as you have any shred of doubt that you're not going to get paid your money on time, you know, to the second that it'd do, you've got a problem. Problems. But anyway, I worry, I agree, I worry about that. I think that's something to, you know, that, you know, come to the floor here at some point in the next year. So I'm not so sure, Dan, I'd be as saying when is you as saying, it's okay, we don't do anything.

If it's, well, I think that one's going to get done. So we can argue about where it is on the y-axis. We all agree that it's like a thousand on the x-axis, right? It's infinity in terms of severity. But in terms of the fact that it's even a little bit up at all, regardless of where you would have it, is going to make some people nervous. It's going to make financial markets nervous. Because what will happen is in March or whenever we get around to the next debt ceiling is there's going to be brinkmanship and everybody's going to hand ring and you're going to be on CNBC talking all this stuff you just said, right, about how bad it's going to be if this actually happens. And then at the last minute, they'll make a deal, right?

That's what has happened traditionally over the last 10, 15 years. here's the thing though here's the thing that even worries me about that scenario because you just articulated that everyone's thinking like you are so markets aren't going to react at all they're not going to react at all oh no worries no problem it's a bluff right down to the you know the midnight hour and we'll pass a piece of legislation so there will be no signal from financial markets that anyone's at all concerned and then the ramp pauls of the world are going to say i'm sorry to pick on ramp paul he's just you know because of what he said Oh, look, the hedge markets aren't worried at all, and we go over the waterfall.

By the way, I wouldn't use waterfall as a metaphor. I'd use, you know, cliff. You know, waterfall has this kind of nice, fuzzy connotation. It's cliff. It's cliff. We're going down. You know, it's like, coyote, what, Wioly, Wiley, Wiley Coyote. Emily, do you understand that reference?

Wiley Coyote. Yeah, more vaguely, but yeah. I thought I'm old enough to understand because I watch those. That's what I watched when I was a kid. Wiley Coyote. I don't know. They still work. I still show them to my kids.

Okay, very good. All right. Anyway. Okay. So, Emily, I got a question for you with regard to state, state and local governments. But before I ask my question, is there, you know, what kinds of, as you said, we've got these, these now states. that are dominated by one or the other party,

and we could get to see a lot of things happening here. So what's at the top of the list of things that could happen from an economic perspective? I mean, the potential good part would be, you know, states have money still set to allocate from some of that federal spending. They maybe could get their act together well to like make sure that they allocate that.

They get projects moving. They got infrastructure projects on the ground. That could be, you know, effective. state government moving along. What kind of is more concerning for me is that states have been kind of enjoying these huge windfalls of just having a ton of revenue come in lately. And I worry that, you know, having, you know, this consolidated government could maybe lead them to over, over-allocate, over-spend, over-rely on that money kind of continuing into the future, whether that's new programs that they're funding or whether it's tax cuts. We've already seen

a lot of states passing tax cuts. So I think continuation of that, amplification of that could be potentially concerning as we go into the next couple of years where they're not going to see that massive growth and tax revenue they've been kind of starting to rely on. Great, good, good. But there's no kind of one burning economic policy issue out there that...

That's the beauty of state government is there's a huge amount of variation there. Yeah, okay. Dan, anything there you would add that you might we might see at the state and local level? I think a lot of the things that you'll see that both parties are advocating for at the state, at the federal level and national level are going to play out at the local level. They're going to try it there first. And that's where you'll see, one, who's got the political, is that really winning in the political arena when they do that?

And two, is it working economically? So, you know, the Republicans are going to try and have more tax cuts. The Democrats are going to increase a lot of these spending programs. especially on social services and things, and how that gains momentum up to the federal level is kind of usually how we get these federal programs eventually through one way or the other. So it'll be interesting to see who gains the momentum

by doing that at the state level. Here's my question, and I'm not sure I'm going to articulate this well, but hopefully I get the gist of it across. Do you think we could see kind of self-selection going on across states where, you know, Republicans tend to go to start living in some red states and Democrats start living in blue states and we actually fracture. You know, one of the beauties of the American experience is that we're kind of a hodgepodge. You know, we all melt it together. We got Republicans and Democrats, got all kinds of ethnic groups,

minorities, kind of all. You know, we've got communities. and there is some segregation going on across all these different groups. But generally, you know, we've had a mixing, right? And actually much more so in recent decades, because we've seen this massive flow of people from the northeast and Midwest into the south and the west. And the country looks a lot more similar today, demographically and industrially than it has ever been.

But now it feels like it might be moving in the other direction. that, you know, if you go take a look at the state of Florida, for example, it's turning increasingly red because you've got a lot more, it feels like Republicans moving into, this is just my sense of things. And I know the question is, is that happening? And is that something we should be worried about? And also in the context of the abortion laws, right? Because the biggest, now, distinction between states, you know, might be with regard to abortion laws

and rights. And that could have very significant effects on, you know, who wants to live where. Is that something you're observing? Is that something we should be worried about? What do you think, Emily? Yeah, I mean, I don't, I want to go to, like, look to the data on this,

and I don't know that we have a clear-cut idea of that at this point. I think, you know, this polarization, you know, obviously is concerning. Obviously, abortion rights are on a lot of people's minds right now as far as choosing, you know. I think where they want to live, for I think Adam Kamens, who does our regional work, has done some good work on whether that would impact where people want to go to college, which maybe could impact things on a longer term basis about where people settle. So I don't know that we're seeing it yet.

And in the reverse, we've also seen some of these like rapidly growing cities, thinking like Boise, Idaho, for example, where people are still moving to despite maybe not always aligning with the politics of the area. but so I think I don't have a good answer for this. It's something I definitely want to watch. But I don't know. It kind of depends also. I feel like in a bit this past election was a little bit of a repudiation of some of that extreme, more extreme views. So maybe there's some natural like checks there where if states don't get especially extreme,

maybe we won't see it manifest. But I think it's going to depend how that plays out. Yeah. What do you think, Dan? Am I parking up the wrong tree? No, I think you're on to something. I think it's interesting. I think the advent of remote work has just accelerated that a little bit, maybe,

because people don't need to be, they don't need to be by the industry, right? They can go work. A lot of folks, especially in the services industry, can go work wherever they want, right, in office using, you know, service industries. And I think we're seeing that. It's what's not just the retirees moving from the northeast of Florida or Texas. It's, you know, people with, you know, people in. their 30s and 40s with jobs and kids move into those places, which is interesting to see the

demographics and demographics is destiny, so it's going to play out. But I think near term, there's other things at work. Florida is a great example. So Marco Rubio absolutely annihilated his opponent in the race yet the other day. And so did DeSantis. DeSantis was his margin was enormous. But what shocked the heck out of me was when we're looking at the results, it was that Miami-Dade County, they did better than any Republicans done. And, I can't remember when. And it's not the demographics are there, right? It's a bunch of Hispanic voters who have started to vote red instead of blue,

which is more of a messaging thing around those platforms, I think, than it is a real demographic story. So there's cross-currents going both ways. I don't know that we can tell just by looking at the voting data that. But if we look at the demographic data and how it plays out of the next 10, 20 years, is going to be really, really interesting to see who the swing state is in, you know, five years. Yeah, I think it would be a good research topic. Let's see if we can't kind of, because there's a lot of moving parts here, so it's hard to disentangle things.

But, you know, maybe we can do a little work, try to identify that if there's kind of a, you know, if you look at net migration state to state and have a kind of a political variable is one of the explanations. one of the explanatory variables and see if it's significant or not in terms of actor controlling for everything else, you know, all the other things that affect migration flows. Well, you could do that. You could tie it into the, we have voter registration data by state that you could actually look at.

And you could take that down at the county level, actually. That would be really cool to do it. All right. Well, so the listener, this is how we decide what research we're going to do these kinds of topics is kind of how it happens. Chris, anything else you want to add here on these issues before we call it a podcast? Oh, we got the game. I forgot about the game.

Statistics game. We'll do that right after you opine here. Anything else you want to say? No, I'm really interested in the last study topic you brought up because I do think there are a lot of other cross-current, like housing or being locked into your homes. Yeah. Can people even move to places that they might want to move to, given the housing situation? I think there are a lot of other considerations.

So there'd be an interesting regression. complex. And also there's confounding factors. Like, you know, you could say, I think, and I don't think I'm mischaracterizing, but older populations tend to be a little bit more Republican, younger population, a little more Democratic. And you've got a lot of retirees now moving to, you know, places like Florida. And maybe it's age and it's not.

But we have age. We have that net migration data by age. So we could actually look at that. I know. I know. But I'm just saying you got to control for that. Yeah, for sure. It gets difficult to disentangle. But anyway, okay, let's play the game. How can I forget that?

Man, who wants to go first? We've had listeners waiting for the last hour just to get to these games. I know we have a few good ones. Chris, you want to go first? Just show us how it's done? Sure, 39.1. 39.1. Is it related to the L.E?

elective? No, but it is 39. I'll give you units, 39.1 percent, just in all fairness. Is it a statistic that came out this week? Yes. That is one of our rules. It has to be this week, right? That would your rule? Well, sort of.

I can break the rule every once in a way. I'm allowed. Is it from a survey? Yes. Is it from the NFIB survey? No. Is it from the university? Michigan survey.

Nope. Oh, is it the loan officer survey? Yes. That's what it is. Senior loan officer opinion survey for, what was 39.1%? Commercial industrial loans. Highening standards. Lending standards for C&I loans.

For large and medium customers. Yeah, but you want to explain it? Sure. This is an indication that the lenders, the banks are getting much, are tightening up on our credit, presumably out of fear of profitability and the ability of these businesses to pay back. 39.1% is a high level of tightening and is one of our key recession indicators, right? So at this level, we've always had a recession.

The survey only goes back to 1990, I believe, so we don't have many recessions to compare against, but this level of tightening is consistent with recession within several months. And this doesn't tell you the intensity of the tightening down and underwriting. It's just directionally the underwriting is tightened. That's right. That's right. Yeah, that's a good one. That's a really good one.

Okay, Emily, you want to go next? Oh, by the way, that was an example of teamwork, I thought, in terms of getting that one, right? Teamwork makes a dream work. But no one wins a cowbell based on teamwork in this game. Very individualistic thing. But anyway, good one. That was a good one. Emily, you're up.

Okay, I think this should be an easier one because I didn't want to start this off. Oh, anytime you preface it with this should be an easy one. No, but like actually. You look that ridiculous. Okay, go ahead. 0.75. Is that from the CPI report? Is that a yes?

Yes. Oh, okay. You got to say yes. You got to say yes. Yeah, I forget that this is going to be audio for us people. And your nod was kind of a very, very... It is definitively, positively from the CPI report. Nice.

Okay. Is there a difference? Point four. Is it a month-to-month increase? Yes. Okay. Oh. Is it one of the components of the CPF?

Yes. Is it housing related? Yes. Rents. Oh, housing related. Okay, so was the cost of housing services? It's just the top line there. Top line.

Yeah. Oh, shelter. Shelter. Yeah. Okay. Okay. I think, what do you think, Chris? What do you think of that statistic?

How did you get the second ditch in? How did you get the first? I went into fame and I looked at the non-seasonally adjusted because I figured if I just gave the rounded one would be a little easier. That was a little tricky. Would it throw Chris off? Just add a decimal point. Yes. Well, I looked at the report.

It's extra precision. It's extra. I looked at the report. That's right. You don't remember that for next time. Hold on. I think they don't give you the second significant did you do that? But it's an index, right?

So like if you look at the percent change in the index, then that'll give you another digit. If you go in fame there, if you go into. and do the percent change. Yeah, Carlstein does it to more. We've got it banked, yeah. Okay. Okay, very good. Because I think in the CPI report itself, they round down to point seven, don't they?

Correct. I think, yeah. Yeah. Okay. Okay. All right, very good. Very good. Tricky.

Okay, Dan, you're up. You guys are rough. All right. My number is $43.4 billion with a B. what is it 44 43.4 billion is that how much 43.4 billion is it related to the election

no it is a release that we cover on dismal that came out this or on economic view that came out this week is it related to the treasury budget it is oh Bernard's not here so I

to something you guys that way. Yeah, yeah, yeah. Is it something about the space left under the debt limit? Don't even know what the magnitude would be on that. We got the October Treasury report this week, and it was the first month of the fiscal year. And 43.4, I don't, I think the deficit was, it was a positive 43.4 or negative? It was a positive 43.4. Is it how much we spent?

on interest in the month? It is. It's the net interest paid out by training. Oh, that's a good. Okay. That is a cowbell. That is a cowbell baby. Oh, that's impressive.

That was impressive. Who got that right? I'm just asking. Well, you didn't specify if it was gross or net. I said it. You'd connect you down by that. Not a trick question. That is one and a half times more than we spent last October.

Is that right? Wow. Yes. Can I ask, I mean, in my mind's eye, I have interest expense is, the federal government is 2% of GDP. And that's low. That's low by historical centers. I mean, when it gets above like four or five, that's when the alarm bells go off because that, then you can say we're spending more on interest than on defending our country, which doesn't make sense to anybody. and we do something on the deficit.

That 43.4, what that would be? So CBO and OMB over the summer both projected that it would be about just over 2% like 2.3% this year. But that's way stronger than CBO and OMB assumed when they did their interest rate forecast over the summer. So it's possible. So in context, in 2022, we ended up spending like $440, $450 billion on interest that year or the previous fiscal year.

if we keep going to that rate, we're going to be over $600 billion this year, which is the highest we've paid, I think, ever on the debt. Yeah, okay, okay. But as a share of GDP, it's closer to 3%, I think. Okay. But still, it means creeping up. Two is low. Five is a problem.

Three is okay, but moving in the wrong direction, obviously. Well, the reason people are freaking out about it is if you look at the total number of that $600 billion, which means by 2025, 2026, you'd be over. you could be over 700 billion, which is actually more than we spend on national defense, which is a nice kind of notable point that everybody's going, oh my gosh, we're spending as much on this as we are in defense. So people are paying attention. But it's one of the reasons why I think it would be very hard to convince some folks

to come along with anything that has to do with fiscal policy over the next two years other than keeping the lights on. Yeah. Yeah, no, I think on both sides of the eye, there's a lot of increasing angst about the deficit and debt. Yeah, for sure, in a high rate environment, for sure. I mean, historically, you didn't worry too much of interest rates, long-term rates were below nominal GDP growth because if you had that situation, then debt to GDP would

decline, but now nominal potential GDP growth, you know, interest rates are about equal to nominal potential GDP growth. And so you don't have that, Ben, you can't rely on that anymore. It's going to become much more difficult. I'm not going to get running out of time. I've got a hard stop. So you'll have to wait. next week to get my my my my my statistic but that was that was very good i really appreciate you can

tweet it out i'll tweet it out um that was a great conversation very informative and uh the other thing i didn't ask the biggest news of course was chris going from 70 to 67 percent i just a huge deal that was the biggest news of the week uh from my perspective so uh we'll we'll any any last words of wisdom before we call it a podcast. Hearing none. Thanks, Emily. Thanks, Dan. Thanks, Chris.

Thanks, guys. Thanks, everyone. Talk to you next week. Take care now.