Moody's Talks - Inside Economics - Recession Lessons

Episode Date: May 20, 2022

Mark, Ryan, and Cris dive deep into the history, the causes, and the main indicators of recessions.Full transcript hereFollow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis 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 this is a special Evergreen podcast, sort of Evergreen. We're talking about recessions. And Evergreen in that, we're not going to actually talk at length about any of the statistics that have come out, economic statistics, but just about recessions, the history of recessions, causes, leading indicators, what goes to the severity of recessions, policy responses. And then, And ultimately we'll bring it all back to the current situation in the high probabilities of recession and talk a little bit about that. Joining me in this discussion is are my two co-hosts, Ryan Sweet.

Ryan is the Director of Real-Time Economics. And Chris, Chris, Chris DeReedy's Deputy Chief Economist. And we're all here in suburban Philly waiting for a storm. Ryan was telling me that your kids got out of school early because of the storm? Yeah, it was supposed to be a pretty bad storm, but I have empathy for weather forecasters. We all should, being an economist. So, you know, if we don't get a storm, I'm not going to blame them. Well, I mean, there is a front going through.

So there is thunderstorms. I guess the question is where are those going to actually hit, right? Right. I'm looking out the window and it looks pretty nice outside right now. Oh, is it your place? It looks like it's a little drizzling here, but certainly nothing to be all that worried about. But, well, I guess we'll see how it goes. I thought you were getting a metaphorical on us there.

We're waiting for a storm, right? Yeah, that would have definitely gone down that path, for sure. And I had all kinds of comparisons, economists, Weatherman, but I thought that's pretty hack neat, you know. Yeah. Yeah, yeah. Well, we exist to make them look good, right? Yeah, that's the standard, you know, joke. Classic.

Yeah, any other good jokes? Economist jokes? Actually, it's very funny. I was going to give, I can't remember for what. I had to give a speech, and, you know, they wanted me to talk a little bit about economics, and I said, okay, I'll tell a joke, an economist joke. They're not easy to find. I googled economist jokes.

There's, we're pretty boring bunch, I think. We are extremely boring. There's no such thing as a good economist joke. There was one. I can't, I can't remember what it was. So it couldn't have been that good because I can't even remember it. But I spent like an hour looking for an economist joke and I just gave up. I couldn't find one.

The only one I heard recently was what's the difference between an accountant and an economist. What? An economist is an accountant with a sense of humor. I was like, all right. That's about it. The well is dry now. Yeah, right. Very good.

And I should say in this discussion, we are going to play a game, although it's not going to be the statistics game. Oh, I guess it is a statistics game, but it's going to be around recession statistics, not a real-time economic statistic. Okay, recessions. Okay, how do we define recessions? You want to take a crack at that, Ryan? How do you define a recession? It'll give you the NBR's definition. Now I'm paraphrasing, but essentially, you know, for the folks out there, N-B-E-R.

Yeah, the National Bureau of Economic Research. So essentially a bunch of economists get in a room and they define where we are in the business cycle. And they define a recession as a significant decline in economic activity that is broad-based and last for more than a few months. I didn't, I never heard that last bit more than a few months. Yeah, I think you're tacking that on. I am not. Is that your own? You added them.

All right. Hold on. Well, hold it. Because the pandemic recession was two months. Is that not a recession? Scott, one of our colleagues, him and I had this debate. It was like, if it's just a few months, can it be really a recent? But it was so significant that they had a call to a recession.

Well, it was a recession. Well, I know. Yeah. All right. On the NBER's website. Okay. All right. All right.

What is a recession? The traditional definition of a recession is a significant significant decline in economic activity that is spread across the economy and that lasts for more than a few months. Oh, that is news to me. I did not know that. I think they must have added that since the last time I looked 25 years ago. So that definition is different than what we learned in principles of macroeconomics. That's actually, I don't, well, okay, well, they didn't actually, they violated that definition then, right?

I would assume so. All right. I mean, I would just say, paraphrasing that, this is how I describe it, a broad-based, persistent decline in economic activity. That's a recession, right? That's the NBR's definition without a few months. Yeah, that's right. No, but mine's much clearer. Yeah. He uses less words, you know, which is always a good thing. Very clear. Okay. I would say it's just a general decline in output. or activity. You wouldn't say broad-based? Yeah, general. That's broad-based. Yeah.

Keep it short and sweet. As opposed to broad-based, you'd use the word general, you're saying. Yeah, general. Okay. All right, general. I like broad-based, but okay, general. Okay, so, but that blows out of the water kind of the standard way people, like if you talk to most people to say,

a recession is two consecutive quarters of negative GDP, right? Correct. That's what we learned in principles of macroeconomics. You learned that, well, geez, where'd you go to school, buddy? Don't answer that question. I teach you, Westchester, in the textbook that we use. No, really? No. Yes.

I will bring the textbook in, let me show you. Oh, I don't even know. That's why when I teach you, I was like, I ignore that definition because that's, at least in the U.S. It's not what a recession is. And actually, we're going to have to write our own book. And we have, we like the, I think. the 2001 recession that came after the blowing up of the Y2K equity bubble, that wasn't two quarters of negative GDP, right?

GDP barely fell, right? They were like alternating. Yeah. Well, I don't even think that would have been labeled a recession if not for 9-11. Correct. Right? Because it declined one quarter, seemed to be coming, we seem to be coming back out of the doldrums. Then obviously 9-11 was devastating.

and took us right back in. Yeah. Yeah. Okay. Take right now, in current situation, we saw a negative GDP number for the, and GDP for everyone, it's gross domestic product, the value of all the things that we produce. That fell in the first quarter of this year. And it's actually, right now your GDP tracking, correct me if I'm wrong, Ryan, is pretty

soft for Q2, right? Yeah, given the decline that we got, it's only projecting 2.2% increase. in the second quarter. Okay, but it's conceivable that that actually goes negative two, right? Oh, yeah. Trade. So let me ask you this. Suppose we had two quarters of, we, Q1 decline, and let's just say, you know, for

whatever reason, trade or inventories or whatever, you know, say another wave of the virus comes back and so forth and so on. We have a negative quarter in Q2. Would you consider this a recession? No. And unemployment remains low. Well, everything, you know, everything else is fine. Yeah, everything else is fine.

Like it is now in the Q1. We saw negative GDP, but everything else was fine, jobs, unemployment. It doesn't fit the definition. It's not broad-based. Because the decline in GDP is inventories and trade. Right. Everything else is fine. That makes sense, right?

Okay. So I think I like broad-based to describe that, not general. Oh, I guess generals are okay. All right. The general theory of relatively, They don't call it the broad-based theory of the general theory of relatives. Yeah, that's a good point. That's a great point.

All right. Well, maybe I'll adopt that. In other countries in the rest of the world, oh, and that's the weird thing. One other weird thing about defining recessions, it's not the federal government or a government that says, hey, you're in recession, hey, you're out of recession. It's a group of academic economists that are at the National Bureau of Economic Research that form this business cycle dating committee. We know a lot of them, like Jim Stock and I think Christy Romer, I'm not sure, Bob Gordon, you know, these guys who follow the business cycle very carefully. All absolutely fabulous academic economists.

And I didn't mean it that way. They're absolutely fabulous economists. but they're, you know, I guess academic because unbiased. There's no bias. There's no political, you know, influence on these folks when they make a decision. That's, is that, how do they do it overseas? You guys know, I know, I'm sure it varies country to country, but like, like, what is the, what do the British do? Do you guys know, are the Canadians or Germans or Japanese?

Japanese use, they call it a technical recession, which is two consecutive quarters of declining GDP. I think many countries use that. I thought that was the same for the UK as well. Oh, that's an interesting distinction. So you could say if I have two quarters of negative GDP, it doesn't have to be a recession. You could label it a technical recession. Because everything else feels like it's okay. You're creating jobs, unemployment's low and falling, industrial production, incomes are all rising.

But you still got those two negative quarters of GDP, technical recession. Correct. Okay. And the NBR looks at more than just GDP. They look at employment, personal income, consumer spending, just a broad-based number of indicators. And that's why usually we're in recession before they actually date it as a recession. Yeah, that's an interesting thing.

It takes a long time for the committee to feel comfortable and confident enough to say, oh, the recession began March of 2020. it ended April of 2020. Actually, it was a little fat. It did actually pretty quickly in the pandemic because it was such a V-shaped kind of situation. The economy cratered and then came back when everything was reopened.

But in most recessions, it takes a while, a long time. Yeah. For this committee to say, it's not, they're not about being fast, they're about being right. That's right. Yeah, that's right. And that's why economists are,

constantly debating, bickering, are we in recession? Are we not in recession? The recession could be over, you know, at that point, you know, but we're still debating it. Yeah, they're the historians, right? That's the purpose of that dating committee. It's not for day-to-day business use, right? But overseas, do they, do governments define recessions? Do you know? Again, I'm sure it's country by country, I think in some countries they do. I thought in the UK was actually, well, if they're using a technical definition, right, it's, yeah, I guess it's the government who's producing the statistic and everyone knows that that's a technical recession. I know the IMF does some recession dating as well for globally, globally.

I think they use a few more measures, right? So it's also this general or broad-based decline in activity, but I think they consider a broader number of measures than what the NBER does. Generally the same concept. Okay, so I know the business cycle dating committee has identified recessions back to 1854. You want to guess how many recessions have occurred since 1854? In the U.S.? This is all U.S. now, the United States.

Yeah. Okay, this could be my statistic. I know it's not a really good statistic is it because there's a good that's a good that's a good statistic okay okay I'll ask you a follow up if you you know get close on this one I think there's been 14 since World War II no I don't think no no no no 12 recessions I'm pretty sure since 18 no no no no no no since World War II oh yeah yeah 12 since World War II and obviously there's been fewer recessions post World War II then pre-world World War I, you know, because the economy's gotten more stable.

Well, I bet there was a lot more recessions before World War I. Yeah, for sure. Yeah. 1800s were full of recessions. Before the Fed. The economy is much more volatile. Yeah. Yeah.

I mean, the Fed was put on the planet in 1913 and with the goal of providing some stability to the business cycle, and they've been quite successful. If you go pre-1913, there was all kinds of recessions all the time, you know, panics and financial. panics and all kinds of things. So you want to take a crack at it? Just, you know, how many recessions since 1854? 20.

That's good. But that can't possibly write if there was 12 since World War II. Right. I want to go. That's a bad, that's, that I would label that as a bad guess. I'm assuming that they were long recessions. Oh, okay. Okay.

I'm going to go 33. That is. Okay. Ryan, very good. 34. 34. If I counted right, I could have counted wrong. It could be 33. It could be 33, but I think it's 34. I actually think it's 34. Going through the pandemic recession, which is the shortest recession?

Pandemic. Yeah, right? Two months. Two months. Guess what was the, or just, what do you think the longest recession was? Is this group, big group in the depression into it? great depression oh that's another great question after you answer my question then i'm going to ask you the question what what's a depression versus a recession so i'm going to say i'm taking a you know some of my cherry drink here you guys trade cherry drink ever before highly recommend it but i do it for medicinal purposes but you know it's very good i haven't tried it with alcohol though is it from

i was going to ask is that a fermented cherry uh right i'm sure i've never heard of a cocktail with cherry drink, have you? Isn't it a Manhattan includes? Oh, that includes cherry drink? I don't know if it includes cherry drink. It includes a cherry. Okay. All right, fair enough.

I got it. I don't know. Okay. Yeah. All right. Now I forgot my question. Oh, what's, this should be a slam dunk, easy. A longest recession?

Yeah. It's the Great Depression. Great Depression. Right. Right. That was like 1929 to 1933. that was like, I don't know, three years or something, you know, something like four, three, four years, right?

Wasn't that basically two recessions just really close to one another? I think the NBR actually, I actually have it in front of me, look, I think the NBR actually labeled as one recession. So here, August of 1929, when was the stock market crash? That was, when was that in 1929? Was that, that was October? October, so it came a little after. Seems like really bad things happen to the stock market in October.

Oh, yeah, I think so. Through March of 1933. So that's a pretty long time, 43 months. So, you know, a fair amount of time. Okay, so what's the difference between a recession and a depression? What qualifies as a depression? I mean, I've got my own homemade definition. Well, everyone's got a homemade.

There's no technical. textbook definition of a depression. Oh, you're like the NBR doesn't say anywhere. This is what a depression is. I always think of depression that has to have the 3Ds. There's got to be deep. You have to have deflation and then it has to be duration. So it can be a long recession.

Or how about disinflation as opposed to deflation? Deflation, that's a high bar. Yeah, yeah. Actually, that's a great definition. I hadn't thought of that, the 3Ds. I mean, my sort of rule of thumb was if the unemployment rate goes above 10% into double digits in a consistent way, that would be a depression, particularly in the current context, you know, in modern context. Because in the typical garden variety of recession, unemployment goes to 6, 7% somewhere in there. So if you're above 10, that's, you know, that's depression.

If you stay there, not in the pandemic, we went to 15, I believe, right, for a month. Yeah. came right back in. So that doesn't qualify. But if you're, if you're double digits for six, nine, 12 months, that's a depression in my view. Yeah. But I don't think we, by that definition, in the modern era, I don't think we've, you know, even in the 80 recession, we got into double digits, but not long enough, I think, to qualify. Right. Okay. Okay. Anything else on how to define a recession or depression before we move on to the, to the causes? I will say something I said earlier just to reiterate and we'll come back to it. Big difference in the length

of business cycles, the duration of recessions, pre-fed, post-fed. If you go back and you take a look at that data from the NBER on recession dates, you know, back in late 1800s all the way up until, you know, the Great Depression, very clearly the economy was much more cyclical. Expansions were shorter, recessions, longer, business cycles were much quicker. Since we're World War II, and given what the Fed has done since World War II, much, much longer business cycles, longer expansions, very, very short, much shorter recessions. I think the recessions now typically last, you know, six, nine, maybe 12 months, somewhere in there, you know, no more than that.

Okay. All right, let's talk about causes of recession. So what, you know, there's a whole range of kind of necessary, maybe necessary. and then maybe some necessary and sufficient conditions for recession. So let's go through each of those. So Chris, what would you put at the top of the list for causes of recession? Classically, it's kind of inventory boom bust cycle, right?

So you take imbalances. There's got to be any imbalance. Correct. Yeah. And you're saying inventories historically when we are manufacturing based economy, that was a major imbalance. Correct.

Correct. Less so now, though, right? Yes, less so. Yeah, certainly. Okay, what other imbalances generally, typically might be? When I say imbalance, what I mean is the, there's something kind of off the, in terms of the economy's balance sheet, in terms of the leverage, you know, at, you know, high leverage or on the asset side speculation bubbles, you know, something that's just

very atypical or in the financial system, banking systems undercapitalized or there's a lot of poor underwriting. Those are the kinds of things I think of as being imbalances. Is that how you think about it? Yeah, I do. I do. So asset bubbles certainly one cause of recession. That's more modern.

if we go back to the housing boom bus period yeah I would make a distinction between leverage and asset values it feels like to me leverage kills I mean if you've got a lot of debt that is a much bigger macro economic problem than you know high asset prices you know even a bubble that bursts because that's equity that's not debt doesn't you know drive companies out of business per se or cause households to default go into foreclosure like bankruptcy that kind of thing true although if we're talking about recessions that the two usually go hand in hand right you had a lot of house prices went up and you have a lot of mortgage debt well that's the worst so that that's the combo that brings you into recession or causes the a deep recession

right yeah well you i guess there's two case studies like with regard to asset bubbles i mean you go to the Y2K, that was the whopper of it felt like an equity market bubble. The internet was coming on, pets.com, you know, that kind of thing. There was, there was some leverage, but it was not a lot of leverage. There was some margin debt, you know, but that really wasn't the issue, right? It was, you know, people started behaving as, based on the fact that they thought they were a lot wealthier, given the run-up in stock prices. When stock prices went down, then they pulled back the negative wealth effects.

But that was a very, a very minor, modest kind of economic downturn. And as we said earlier, may not even have become a recession, if not for 9-11 hitting at that time. But if you go to the financial crisis, the recession hit in 08 or the first half of 2009, that was we had an asset bubble in the housing market, and that was leverage induced. I mean, a lot of mortgage borrowing, you know, egregious mortgage lending, weird mortgage products that juiced up demand and created, helped to create this bubble in the housing market. So it feels like a different kind of problem. Does that resonate? Yeah, yeah. Yeah,

I agree with that. Any other kinds of imbalances? So first condition for recession is these imbalances, kind of fault lines in the economy's balance sheet. What about overbuilt real estate markets? That's another, I would think, reasonable one, right? Yeah. It's another imbalance. Yeah. How about what I would call spent up demand? So, you know, during the boom times and the expansion, people spend a lot of money. They spend beyond what they would typically.

Their saving rate goes down. They buy, you know, a car a year before we would normally buy a car. They buy furniture before they would normally buy the furniture. And so you have this kind of situation where people have bought forward. what I call spent up demand as the opposite of pent-up demand that develops during the recession and helps power and expansion. I would consider that, would you consider that an imbalance as well? Yeah, certainly.

Yeah. It could come from a variety. It could be inflation driven, right, if inflation is going through the roof. I would characterize, I put that into a different. My behavior might front load some of the spending. Yeah, true, true. I would say, though, that the imbalances are kind of separate from the kind of the business cycle overheating dynamics, which is I consider to be a, I consider to be a second kind of condition for recession. But before we go there, think about the current environment and all the recession fears.

You said the most important precondition for recession is an imbalance in the economy, right? And we identified a few of them. You mentioned inventory, leverage, asset bubbles, spent up demand. So what exists in the current environment that is an imbalance that would result in recession? I'm going to Ryan because Ryan thinks there is going to be a recession. So what is it? What do you think that is? Well, I think there's asset markets.

I think the stock market was overvalued. Yeah, but it wasn't speculative, right? If you look at leverage, a lot of margin debt. How much is the margin debt? Three, four hundred billion, right? Yeah, I got to look at it as a share of it. Yeah, yeah, nothing. But you have a lot of spent up to mean on goods.

The only place that could save us is that there's pent up demand for services. Yeah. So a little bit of offset there. Chris, you can you're also thinking recession, not as high probability as Ryan. Sure. So where's the imbalance? What imbalance are you pointing to? Well, you don't, recession isn't just caused by imbalances, right? Okay. So you're saying it's a, it's a, it's not a necessary condition for recession. No. No. It's a, it's a potential condition for recession. Correct. I mean, look at the pandemic. You know, that was a shock. Oh, yeah. That's kind of a case on

of its own, though, right? I mean, right. Right. Yeah. That doesn't feel like it fits into It's not a case study for future recessions. What about the energy price shock? Supply shocks, certainly create recessions. Okay, but again, I say that's a separate category. That's a separate set of factors. When you say, hey, what are the causes of recession? Yeah.

First set of things, and you brought it up first, is the imbalances that exist in the economy. We can identify imbalances that exist in the economy prior to almost every recession. at least ex post, you know, ex ante before the fact, that's harder to do. And that may be the case today. There may be problems out there that we're not appreciating, or at least Mark Zandi's not appreciating to the degree that we should. But that's one set of factors that are, you know, that's behind recession. The second set of factors is you mentioned it.

But in that case, you're hard pressed to come up with a smoking gun kind of imbalance. Is that fair to say? Yeah. Yeah. Which doesn't mean there won't be recession. I'm just saying. Right. Yeah.

Okay. And that can go to the severity of the recession. You can say, okay, I'm going to have a recession, but it's going to be less severe because I don't have a problem. And there's not significant imbalances. But I'm just, I'm probing you because I want to know, is there something out there, some imbalance in the economy that you think is potentially a real problem that people have not been focused on or identified.

I would say potentially a problem, but not, probably not going to be the cause of recession would be some corporate lending, right? Some of the leverage lending, some of the zombie companies. companies that we were worried about before the pandemic. They kind of got a lifeline with low rates. As rates go up, I am worried that you're going to see a lot more defaults, but I don't see that as being the real trigger of a recession. It might make it harder to come out of recession, right?

Extend the recovery period, but. Yeah, I mean, I think in every case, these imbalances by themselves don't cause recessions generally. Right. You have some kind of shock, something goes off the rails, then the economy is stressed. Or it could be interest rates arising because of an overheating economy. Economy is stress, and you have these fault lines that exist in the balance sheet that get exposed by the stresses that are coming on the economy, through the shock or through the higher interest rate environment.

So right now we're focused on the fault lines in the economy, and you're saying, okay, you know. Some corporate debt. Yeah, Ryan mentioned equity prices. is that feels like a stretch, but okay. You didn't mention house prices. Do you think that's a fault line? Because they're very high, as we've documented or overvalued. Do you view that as a fault line?

It's a risk, but as we've discussed, there's a lot of demographic other factors out there that seem to offset it. But, you know, things can happen. Yeah, you're going to the point that the fault line could be deeper than we know, particularly you could stress. But now you're saying, okay, also the other place I would, look is in the corporate leverage, corporate debt, corporate balance sheets, that there's this group of companies that are out there that if you look at the corporate balance sheet altogether,

it looks okay, right? Yeah, sure. But you're saying that the debt is kind of bar-billed. You got on one side of the distribution, a bunch of companies that are in fine financial shape, take Moody's or take, you know, Apple, got a lot of cash, right? Yeah. If they got any debt at all, it's because it's essentially up until now free money. Opportunistic, yeah.

Yeah, why won't you do it? And then on the other side of the distribution, you've got these companies that are all levered up that have, you know, kind of highly kind of PE firms have come in, levered them up, looking for higher equity returns. They've kind of levered up right up to certain rating thresholds, which might affect if they get lowered, if the ratings are lowered, they might lose access to markets and their cost of capital will go up. And that's where you're saying we should be looking. That might be a stress line. Okay. That's right. They're facing higher rates, so higher financing costs, on top of higher wages, on top of higher energy costs, right?

There's a lot of negatives that if the demand side should fall as well, right, that could certainly lead to more defaults. Okay. Okay. Yeah, I agree with you. I think that is a potential fault line that we need to focus on. Do you have any numbers on that or I'm pressing too hard? I mean. I don't. In the past, I've looked at it. It's certainly was small, much smaller than what we saw in the housing.

Yeah. A bust, right? So I don't think it's, even if there is a problem there, I don't think it's to the magnitude of a great recession, but certainly could create some issues. Some issues. Okay. All right. Okay. That's one set of causes that they're not imbalances in the economy that we're calling imbalances. And they don't necessarily, they're not, they're not a necessary condition. for a recession. You can have recession without imbalances. Yes. Okay. All right. Okay. Second set of causes or second bucket of causes, you alluded to it, was the potential of an economy that's overheating, right? Would you characterize it that way? Yes. You would. Okay. So do you want to describe that, you know, what that risk is or,

you know, why is that a cause of recession? I think you already did, right? In terms of the inventory site, you have an economy that is, firing at all cylinders, it's going too far. There's a euphoria out there. People are spending, pulling ahead some of the spending they might otherwise do. And at some point, it runs out of gas, right? You've gone too far, and therefore, there's nothing left to buy. Or I start to get, or I guess this will go to a bigger point, which I'll assert that all recessions at their part our sociological phenomena in terms of when they actually begin and end, but that there's this general thinking that or this belief that the economy is going down and that becomes a

self-reinforcing cycle. Right. Sort of sounds like today. Okay. Do you think so? Yeah. I mean, you've seen measures of consumer confidence dropping. We know it's gas prices, stock prices, stuff like that, but small business confidence

is they're pretty pessimistic. Yeah, it's not caving, though. But the spending isn't really... And the spending hasn't taken a hit, right? I mean, it's still strong. People are worried, right? They're saying they're worried, but their actions so far are not in panic.

You know, the way I would think about this cause of an overheating economy, and this is, you know, kind of typical in business cycles, right? The economy expands for an extended period of time. time, unemployment declines. At some point, unemployment gets low, that it's low enough that it's consistent with full employment. And at that point, the economy's growth rate has to slow so that you don't blow past full employment. That unemployment rates don't go so low that you don't get these broad-based wage and price pressures that, you know, ultimately illicit interest rate increases

and that tightening. And so almost by definition, you're going to get, every business cycle is going to get to that place. Sometimes it's, you know, in an, in a, expansion that's growing more slowly, that takes a while. That was the expansion that was after the financial crisis for various reasons. Or the economy grows so strongly, very quickly, you get right up to that full employment line very, very quickly. And the business cycle is a lot shorter. But the cause of the recession is that, you know, you're going past full employment,

inflation becomes wage and price pressures intensify, inflation becomes more of an issue, and interest rates rise. And as those interest rates rise, they put pressure on the economy. They bring down asset prices like housing values and stock prices. They raise the cost of capital for businesses. They raise debt service for anyone who's borrowed money up to that point. It puts pressure on the financial system and their ability of banks to extend credit. So it's the increase in interest rates.

And the faster that increase and the higher the interest rates go in a short period of time, the more damage that does, the more difficult is for the rest of the economy. me to adjust to that and the more likely you go into recession. After hearing that, I feel even more confident in my probability of recession. Yeah, I mean, in my view, it describes us today. Yeah, in my view, that is the, well, there's, that is a, let me say it this way. I think that is also not a necessary, it's almost a necessary condition for recession, Almost necessary. It doesn't absolutely have to be the case.

But an overheating economy is a feature of the end of most business cycles, if not all of them, except for the pandemic. Even then, to some degree. But, right? I mean, is there recessions you can remember where an overheating economy wasn't a feature of the end of the expansion going into recession? I think most of them ended in some way or another with an overheating economy. Maybe they don't need, they don't need to over. Oh, go ahead, go ahead. I was just going to say the double dip in the 1980s. The second recession wasn't an overheating economy.

Oh, you don't think so? I mean, that was on Volker was on the warpath to get inflation down. That was that, that's the prototypical kind of overheating. But was that, was the labor market overheating? Yeah. Yeah, yeah. Yeah, I mean, at that point, I mean, unemployment, the natural, kind of the full employment unemployment was a lot higher.

so it didn't get that low. But yeah, I think that was clearly an economy that was overheated. Maybe it wasn't overheating, but it was definitely overheated. Keep trying to get inflation down. Okay, so the economy can grow for a long time without overheating, right? Look at it in Australia or Japan, post-war. You can go for decades. Well, we never have.

Okay. Ten years is a long time. Yeah. Ten years is a long time. We didn't know. That ten years, the longest is a long time. expansion in history, I believe, was the one after financial crisis that ended with the pandemic, right? Right. So it would have, presumably, without the pandemic, could have gone. But we, that's because that

expansion was so slow, so painfully slow that unemployment didn't come in for a long time. We never really got to full employment. I mean, we were debating at the end, maybe we were at full employment, but we just got to 3.5% unemployment, right? Well, that's because of the catalyst of the recession. Yeah, absolutely. Yeah, I agree with you. So, yeah. But that, that, at the end of the day, that also we were at the end of that lengthy expansion. And I, you know, we were arguing, I, at least I was arguing, you know, the expansion was coming closer to, to its end than it's, much closer to its end than its beginning, right? Because, because of, you know, the fact that we've gotten very close to full employment.

Okay. But does an economy need to overheat is my. Oh, I see. Point, right? Yeah. I think, but maybe, again, maybe it's not a necessary. condition, but it's a feature of most. Of many.

Okay. Of most recessions, I would say. Okay. Here's the third set of reasons for recession. So the first is imbalances. Second is overheating. Third is, and you alluded to this as well, is a shock. Something, you know, that shock in the sense that, hard to predict.

You know, you can't predict a pandemic. I can't predict Russian invasion of Ukraine, right? Correct. And most other recessions, I think there's some event that is that catalyst that undermines sentiment and confidence. The sociological reasons for recession, as you called it, Chris, drives people into the bunker. Does that make sense? Yeah, that's right.

So supply shock, it could be a natural disaster, pandemic, as you mean. mentioned. So something like that could be a trade shock, right? Some partner it all of a sudden decides they don't want to trade with you anymore. Or a policy mistake, right? That's kind of a shock, right? You make them, like the Great Depression was in part, at least the kind of the thinking is debate about it was a error around trade policy, right? Protectionist trade policies. You know, the economy is obviously already struggling, but that, you know, pushed. it under. Right. I would also argue that like the financial crisis, the Great Recession, and this may be, you know, a policy error may be the difference between a kind of a typical

recession and a really bad one or a depression. If you go back to the financial crisis, I think I would argue that it went from being what would have been, you know, kind of a tough recession, not maybe worse than typical, but not catastrophic to something that was catastrophic because of a policy error. And the policy error is that the lawmakers at the time, at the Fed, at the Treasury, and the Bush administration, were dealing with financial institutions that were teetering, and they resolved each of those teetering financial institutions differently.

They treated the creditors in those institutions differently, the debtors and the equity holders. You know, first it was Bear Stearns, and then, you know, Fannie Mae and Freddie Mac, and then Lehman Brothers, and then, you know, there was a million other failures at the time, each treated differently. And as creditors in these institutions realized that there was no cookbook for actually how to resolve these institutions, and they didn't know who was going to suffer and in what order they were going to suffer, the debtors or the equity holders, they bailed.

they bailed and that's when the financial system cratered so it was a it was a mistake by policymakers and again I don't blame anybody because this was you know how can you how can you this is crisis mode right and you're trying to resolve a problem while you're in the middle of a crisis and very difficult to do but there was no cookbook for resolving it that was a policy error that led to the financial crisis the very severe downturn that we suffered yeah That brings up the whole question, the ongoing debate of what policymakers should do, if anything, during recess. Should we just allow the cycle to heal itself or should we intervene? How much should we intervene?

That's where the fund comes in, right? And what about the moral hazard? Is it turning into an Austrian economist on us? Not at all. I'm just bringing up the points of debate, right? I think they're fair points on both sides, right? Yeah, I remember during the Great Recession, there were a lot of concern about moral hazard

because of the way the Fed was treating each bank. And then AIG, I think that, remember when the news came out about AIG? That's the other one. That's when things really went south. But is it the inconsistency of the policy versus... Or maybe they just... If they had chosen not to bail them out at all, right? Send a clear signal, you guys are on your own.

If they did that with, you know, Bear Stearns right away or with, you know, Lehman right away. What do you have been better off than mixed, you know, who knows? It's a good question. You're right. I don't know. And, of course, if you're in that position, if you're Secretary Paulson or Fed Chair Ben Bernanke and you're left with that, what do I do, it's pretty hard to say, okay, see you later, guys. We'll catch you on the other side. that's pretty tough to do.

Of course, I then did that with Lehman and set off a cavalcade of selling. Okay, so let's bring this back to the current context. So we've identified, broadly speaking, three reasons for recession. One imbalance, two, overheating, three shocks, right? Yeah. So in the current context,

it feels like imbalance is not hard to maybe, but not really. Overheating, would you say? Being close. But not, you know, hard to argue that, right? Because 3.6% unemployment is not full employment. We've come to that conclusion. Obviously, inflation is high.

But I would argue the reason for the current recession threat is shocks. Yeah. Right? Supply side shocks. The pandemic and the Russian invasion of Ukraine in the higher oil prices. Right? Okay. So that's why I think we can navigate through without recession.

Assuming nothing else goes wrong, though. Well, yes, that's our assumption, though. That's our baseline assumption. The baseline assumption is that the pandemic continues to fade, meaning with new waves, each wave is less disruptive than the previous one, and that the worst of the economic fallout from the Russian invasion is behind us. If you believe that, and you just bought into the logic I articulated, around the causes of why recession risks show high, that would argue for, well, we should make our way through.

I mean, obviously, a lot of risk around that, but we should make our way through. So how do you respond to that? I think it's reasonable. I'm just, I think I'm really concerned about oil prices. Okay, so you're saying you think oil prices are going higher is what you're saying. Okay, so you're saying my underlying assumption around the Russian invasion, is not in your baseline. That is not your baseline assumption.

Nope. Your baseline assumption is what that, what, what, what's going to happen here? The oil price, I mean, they're not going to jump.

They're still going to steadily increase. Because I think the European Union, Europe's going to put more sanctions on Russia. So if they go full oil ban on Russia, then we're going to give another jump in oil prices. Okay, that's fair. I mean, reasonable. You just don't buy into the baseline assumption around oil.

Yeah, yeah. I mean, there's a lot of uncertainty. Forecasting oil is... That's fine. That's fine. I mean, I'm also more pessimistic about the Fed pulling this off. That the Fed misjudges here. Policy error. Correct. Back to forms of shock. Okay. Yeah, so I mean, it's just not one catalyst for recessions. It can be multiple catalysts. You can have a supply-side shock, a policy error. So it could be like a perfect storm. Here's a factoid for you. I think every recession since World War II has been preceded spike in oil prices. I'm very confident in that statement. Even the financial crisis. The

all time high in oil prices was July of 2008. Yep. Right? Every single one. Pandemic? Actually, I should put that on my list of leading indicators. Yeah, okay. Okay, very good. Chris, how do you respond to the way I articulated things and your view that we are likely going to experience a recession? Yeah, I think we're vulnerable to shock, right? So whether it's an oil shock, I'm still concerned about a supply chain shocks, right, especially with what's going on in China. So I don't think, I don't think we're out of the woods by any means. And we're in a position now where even if we have a relatively minor shock, we don't have a whole lot of ammunition to fight it, right? So whereas if we were in a normal

growing economy, you have a little supply shock, okay, you can you can, you can, you can brush it off at this point might not be so easy. The Fed has got bigger fish to fry when it comes to inflation. Okay. So you're arguing that the economy's obviously vulnerable. We're dealing with some pretty massive supply side shocks. Yeah. Flations and issue, interest rates are now on the rise. So here we are, you know, belly up and flailing. And if anything else comes along, I don't, you don't know exactly what that is. But odds are that something will come along and push us under the underwater that's kind of what yeah that that's what I'm arguing okay pandemic all right cases are back up right yeah interesting and you're saying the probability

of getting some something else hitting us that's a sufficient magnitude to push us under is better than even odds yes okay that policy error would be at the top of my list right yeah i think that's fairly likely given the task. And financial markets are becoming more vulnerable. So just look at the rise in interest rates in Europe. You know, if there's news of another sovereign debt issue, then that's, it's game over. For Europe. For us, because that will feed back through into U.S. financial market conditions.

So it doesn't have to be like something that shocks us. It could be, you know, a shock somewhere else that feeds back into our financial market. Okay, I want to, there's a lot to unpack here, but I want to keep moving forward and talk about the leading indicators of recession. But before I go there, I just want to stop, turn it back to you and say, I kind of led the discussion around the frame, framing, right? Here are the causes of recession, broadly imbalances, overheating, and shocks. and I kind of push things into those buckets. Are you okay with that? Did I miss another bucket of things that you think are important

in terms of causing economic recessions that I missed that we should include? I can't think of it. I'm just asking. Am I missing something? Should we have a bucket for just policy? Because there's fiscal policy as well. I put that into the shock category,

but okay, that's fair. You could do that. Chris, I think those are the right broad categories of the underlying fundamentals, but I would stress the sociological or psychological, right? The specific timing, why we go into recession in this month versus the month before, the month after. Yeah. That's a psychological phenomenon, right? So people lose confidence collectively, and that tips us over. I agree with that.

I mean, I think the way I say it, a recession is a loss of faith. Faith by consumers that they're going to hold on to their job. Faith by employers that they're going to have someone that's going to buy what it is that they produce. If we collectively lose our faith and we run for that proverbial bunker, consumer stop spending, businesses stop hiring and start lying off, you get into that self-reinforcing negative cycle. That's a recession. It's ultimately a loss of faith. That's right.

And so conversely, you can have some of these shocks without recession. Right? If people don't lose faith, we can actually work through them without actually going. That's what makes the whole practice of forecasting difficult, right? You have different responses depending on how people are feeling to a large degree. Yeah. Okay. Let's move on to the leading indicators of recession.

What should people be looking out for to gauge whether we're going to go into a recession or not? So there's a long potential list. So, Chris, I'll turn to you first. What is your most favorite leading recession indicator? Oh, it's obvious, right? It's everyone's favorite. It's the yield curve. You have to watch the-

I hate that thing. See, I told you. Okay, so let's explain it. So what is the yield curve? How do you measure it? Why is it a good leading indicator? What is it saying now? So it's the difference between long, the interest rates on long dated treasury securities and short dated treasury securities.

Typically, it's upward sloping, right? Typically, if you're going to loan the government's money for a longer period of time, you're going to demand a higher interest rate. So that's a well-functioning economy. But in a time of stress or concerns about recession, right, that relationship can invert, right? I'm willing to lend the money to the government for a longer period of time at a lower rate just to preserve my capital because I'm concerned that the economy is going to go down and other assets classes are going to be impacted. So what I like about the yield curve is that it is an investor-driven, market-driven measure

of the implied probability of recession. Right. And what's what I mean now? Right now it's a, I don't know what I haven't seen recently. It's positive sloping. Are you, and I missed it. Did you say, what's your measure of the yield curve you like most?

Is it the 10 years? 10 year versus the two year. Two year. Okay. And then why 10 versus 2? Just historically, empirically. It's been a very prescient predictor of recessions in the past. And the two years a very good reflection of what investors think the Fed's going to be doing.

Correct. That's right. So if they're going to be stepping on the brakes really hard, that pushes up the two years. year yield and a 10-year yield is what investors reflect what investors think is going to happen in the long run. So if they think the Fed's going to be successful in slowing growth, then the 10-year yield is going to be lower. And if you get an inversion two-year above 10-year, historically, that's led to recession. That's right. Led to implies causality. You know what suggesting that,

you're saying it's been correlated with. Correlated too. Because investors are forward-looking, and the 10-2-year represents their collective wisdom around what's going to have. happen. Correct. Yeah. Okay. So, Ryan, why that seems so compelling to me, seems so compelling to me. And theoretically and empirically, it's worked. Why don't you like it? I'm not saying it historically, it's been bad. I'm saying the last two cycles, or the last cycle, since the great recession. I think the yield curve is misleading because the 10-year treasure yield is no longer a true risk-free rate because the Federal Reserve is, you know, it can control. both ends of the yield curve. Short-term interest rates through the Fed funds rate and long-term

interest rates through quantitative easing or quantitative tightening. So it's just not the same yield curve as it was pre-financial crisis. Okay, I have two questions for you. One, I thought the Fed was buying securities all along the curve. So they weren't just going out at the end. So if there's, you know, they've lowered the rate, the term structure of interest rates, but it seems like it's lowered it across the yield curve. So therefore, it should not be affecting the difference between the tenure and the two-year. It's not just a shift. Is it a shift or a pivot, I guess?

Well, it's a shift down. That's what I thought. Yeah, it's not affecting the difference between the two. The composition, though, I think they were heavier or long-term. I think they bought more long-term securities than they did short-term. Okay. I'll have to double-check. Yeah. Well, here's the other thing. If you buy into that argument and there had been no, and let's just say you're right that they were buying more on the tent on the long end than on the short end. So you're saying that right now the curves looks more flat or inverted. But isn't that counter to what you're saying? You believe in recession. So you know, you're saying it's not even, if there was not that bias because of the,

of the Fed's actions on QE, the curve would be even more positively sloped, right? I mean, signaling less likelihood of a recession. No, I don't think you need the yield curve to invert to have a recession. Okay. But that's never happened, right? Except for the pandemic. There's false signals from the yield curve, particularly the 10-2. Not since, not for 50 years, not on a monthly basis.

This I know, because over the weekend, I spent a fair amount of time. time on this question. Now, on a monthly basis, now, it curve a convert for, you know, a couple, three days. I don't think that's a strong enough signal. In fact, it did that earlier this, I think in April, it did that early April. I don't mean, I don't think that means much, but if it's monthly, I think that that's consistent, you know, investors are saying something consistently. And, prior to the pandemic, the 10, two year got very close to inverting on a monthly basis, but never did. but we did experience a recession, right? But that was the pandemic recession, which is inherently unpredictable.

So I don't view that as a blemish on the forecast accuracy. But every other recession, since World War, excuse me, since in the last 50 years, admittedly there's not a lot of them, but, you know, I think there's six. You know, each one of them we've seen an inversion. Still, I haven't convinced you. I haven't convinced you. All right, okay, fair enough. Okay.

All right, what's your favorite recession indicator, leading indicator? I like lending standards on C&I loans. Because that's an indication that when banks start to tighten the screws on lending, that the availability of credit is going to start to slow down. I think that feeds that lending standards feeds into our probability of recession models. It does a pretty good job of explaining foreshadowing recessions. Does that lead recessions? Oh, I should take a look.

I've never looked at that. The senior loan officer survey has the net percent of banks that are tightening on C&I loans. And that shows a significant tightening and underwriting on commercial industrial loans prior to recessions beginning. Correct. Oh, I didn't know that. And then you can also look at the weekly H8 data, I believe. C&I loans? Yeah, the C&I lending.

Yeah, but that, you know, the interesting thing about that is, when you're coming into recession, it surges, right? Yes. It surges because businesses have lines of credit that they draw down when recessions are hitting because they want the liquidity or fearful of not having enough liquidity. Right. So you initially see this pop in C&I loans outstanding that ultimately comes back in. Right.

So you're saying that the indicator is a pop in C&I loans outstanding. Yeah. That doesn't lead, though. I think that kind of laugh. I don't think, yeah, I don't think it'll lead. It's kind of like a contemporaneous or a bit of a lack. I think it's one of those things that it's good to know because, you know, once that happens, you know for sure you're in recession. Okay, I got mine.

You ready? And this goes to Chris's sociological reasons for recession. A more than 20-point decline in the conference boards survey of consumer confidence over a three-month. period. So it's not the level of sentiment that matters. And by the way, the conference board survey, which is more based on labor market conditions, that's pretty high. It's higher than its average over history. It's on the kind of the high side. But it's down from where it was, but it's on the high side. But anyway, it's about to change in. And when you see these big, consistent move downs and sentiment consumer confidence as measured with the conference board survey

over a three-month period, that's the loss of faith. That's people running for the bunker. And in ending their spending. And that happens two, three, four months before recession. Doesn't give me a long lead. Did you compare a conference board to University of Michigan? I did. Yeah. Conference conference board does better. Much better. You know, much better than the University of Michigan. And right now the University of Michigan is very weak, right? So it's down 40 points from its recent peak. Yeah. And we were discussed and by the way, it's in a three month period, right? Because it's got to be a sharp quick decline. That means they're panic mode and they're stopping their spending.

Okay. All right, very good. Speaking of the conference board, what do you think of the leading economic indicators? That has a pretty good track record as well, doesn't it? It's, I don't know. Has it really been helpful in pegging recessions? I don't think so, has it? I haven't done a deep dive, but it's always been my-

I think I tried it. in our probability recession models, but it didn't add it much. Although, having said that, I haven't looked at it recently because I kind of gave up on it as a good, I mean, it's a good leading indicator of future growth, but not of recessions, not of turning points in the economy. As I recall, but we should take a look at that. Because it includes some pretty lagging indicators. I think it includes housing permits and things like that. Yeah. Well, of course, the other really good indicator, which is not much of a leading indicator, is a very good, coincident indicator, which is still pretty valid.

because you're, you know, when you're in recession, you're still, you're more often still debating it, is the change in the unemployment rate. So if the unemployment rate increases by more than four-tenths of a percentage point in a three-month period, you are already in recession. And I think the, I think the kind of the chronology is consumers pack it in, you know, two, three, four months before the recession. It takes a few months before businesses say, oh, my gosh, I can't sell, you know, I'm not sell. You know, I'm not selling what I thought I was going to sell and pivot from, you know, hiring people to actually laying off people.

And once they start laying off, then we're in recession, then we're done. Because that layoffs means higher unemployment. And once unemployment starts to move higher, that's when you get into that kind of self-reinforcing negative cycle because unemployment starts to rise and then consumers say, oh my gosh, you know, now I'm losing my job. My wages are getting cut. I'm getting no bonus. They pull back further.

Businesses see that. They fire more people. you're off, you know, into the abyss and that's a recession. Yeah. Okay. What could be interesting in this cycle is that unemployment rate could be rising before the right reason that more people are pulling, being pulled into the labor force. That's a good point.

So, but I mean, I still think there's that psychological because people, you know, are going to watch the news and see the unemployment rate go up and start panicking, but it could be rising for a good reason. Yeah. Right. So it may not be the same, may not be as useful as go around is what you're saying. It's still, it would be useful because I still think the average person will panic when they see, you know, the news, CNBC, Bloomberg talking about higher unemployment rate. You guys think that, I mean, if jobs are still plentiful, you don't think.

Oh, sorry, Chris. Go ahead. If jobs are still plentiful, you don't think that that's the stronger factor here. Yeah, unemployment rates going up, but I still see plenty of opportunity. You don't. That could be. I mean, we have 11 million open jobs. solution. Yeah. And by the way, that's another reason why I'm more sanguine about making it through without recession. It just feels like, you know, the job market is so ripped more and so many open, unfilled positions, quit rates are so high. It can be pretty hard to kind of have that thing kind of come to a standstill and go in reverse, it feels like to me. But anyway, you guys didn't mention the stock market. You don't think that's a good leading indicator? Half the time. It is.

probably better than the yoke her yeah that's all the old sam paul samuelson quip you know the no goal laureate who said the stock market is predicted nine of the last five recessions so i can definitely go down no recession but although i think every recession has featured a big decline in stock prices i'm not sure if it's a much of a lead but you know we've seen big declines and stock prices okay okay on that note what about uh credit spreads Yeah, I was going to ask Ryan. I haven't looked at credit spreads being the difference between rates on corporate bonds and treasury yields, risk-free rate. That spread would reflect the concern investors have over the potential that those companies are going to default on their debt. So it should be a good indicator. Ryan, is that a reasonably good leading indicator or not? It's okay. I mean, I think you have to include all these things together. You can't just, you know, hang your hat on one of them. I mean, I did. Try using corporate credit spreads in our probability recession model.

And the yield curve was more, it pains me to say, but the yelker worked better than corporate bond spreads. Oh, really? In predicting recessions, yep. Say that again? In predicting recessions. No. I know.

I know you're trying to beat me at me. The connection's breaking up. Yeah, no. Oh, where's the storm? Oh, by the way, I'm looking outside, and it's like perfect sunshine out there. I know. Yeah. They send the kids home from school.

Geez, Louise. You know, we never got to the game. Let's do the game real fast and then talk about recession probabilities in the current context and then we'll call it a podcast. I've kind of given you my statistics. I can give you another one. But Ryan, what's your statistic? All right.

I got two of them. They're related. All right. So it's minus 3.7 percent and minus 2.1%. Is that the average decline in? GDP in jobs peak to trough in recessions since World War II? No, you're going. You got it.

It's the average decline peaked atroft in GDP for the last five recessions. That's minus 3.7%. But if you take the pandemic out, the average declines 2.1%. Okay. But you've got to be impressed with- I'm really impressed. Laser-like response. Yeah. All right.

Yeah, that was impressive. And I bet you if you go look at the decline in jobs? Oh, yeah, it's probably right. Just say it, just say it. All right. And you'd probably pick five recessions because you didn't have enough time to do all, I didn't have done it at all. Very good.

That's very rough. So you're saying the peak, average, typical peak to trough decline in the past five recessions and GDP is 3.7% including the pandemic. In the great recession, yes. In the great recession. So if you take out the pandemic, it's 2.1%. Because in the pandemic, it was down like 10. 10.

Yeah. 10 on the next. It's massive. And I think the great recession was four peak to trauma. It was. It was. Yeah. All right.

Very good. Chris, what's your statistic? I can give you a fun one or a mind-blowing one. Let's do both. Fun one first. The fun one. How many recessions have, how many global recessions? Oh.

Has Ryan experienced in his lifetime? Oh, I love this. Oh, this is a good one. Yeah, so Ryan is about 18. Yeah. No. Ryan, you must be 40. Are you 40 years old?

Yeah, 40. 42. 42. 40. And you look like you're 32, by the way. I appreciate it. You could say that. Yeah, for sure.

So 42 would put us back to what, 1980, right? 1980, right? Yeah. And the U.S. has experienced, I think we've experienced five recessions since then. Something like that. You're saying global, global. Is this every country on the planet, developed, undeveloped?

Global recession, right? So IMF goes through and says, oh, oh, not how many. Oh, you see what I was doing. I was going to tell you. Yeah, yeah. Yeah, no, okay. So how many times has the global economy gone into recession? I'd say five times.

Five times? No. That's actually how many times, well, I don't know. That's how many times the U.S. is going in? Three? I think that's how many times you've experienced a global recession in your lifetime. Well, no. 1980, 1982, 1982, 2001, 2000.

1980, global recession. Yeah, global. That wasn't global. 1980 was not a global recession? No, no. 80, you want that? There was four. 82, 91, 2001, 2009, 2020.

Well, hold it. Didn't I say five? Yeah, you're all. Yeah. Oh, I'm off by. I'm off by. Oh, gosh. How many are there?

Okay. All right. Okay. Oh, you know, I'm new, you and I experienced 75, too. That's true. Did, is there, was there a global recession in 82? Yes.

Okay. Okay. They're, they're, the U.S. That was really one recession. It wasn't two. U.S. did two. The rest of the world said, no, we're not following your lead. We're going to call this one.

All right. You're going to have to go back to the committee. I'm just saying. Make a file and appeal. Okay. All right. We've had a long conversation here. And, you know, I should have had you us articulate what we think the probability of recession were before we even had the conversation.

But we run a survey off of Twitter and at Mark Zandi, by the way. is. What's yours, Ryan? At Real Time underscore Econ. Yeah, there you go. Off Twitter and LinkedIn. And I think we've got, I'm looking right now, we had 155 responses. And the question was, who do you think is closer?

Mark, Ryan, or Chris to the probability of recession between now and the end of 2023, let's say 18 months from now. So over the next 18 months. I said 40% probability. Chris said 55. 55, yeah. And Ryan, you said 75. Correct.

Okay, so the survey responses are mark me, 45% of folks buy into what I'm saying. You know, it's a 40% probability of recession through the end of 2023. 38% buying to Ryan's dark pessimism, 75% probability. through the inter-223 and 17% buy into Chris's down the middle of the road. So it's a very, it's kind of a barbell distribution. You know, either you're really pessimistic or you're reasonably saying when you're not in the middle. You're not in the middle.

It's interesting. Okay. Let's end it this way. I'm at 40% probability before all we had this conversation. Chris, you were at 55. Ryan, you were at 75. What is your probability of recession now after this? conversation.

Chris. No, Chris goes first. He's going to go to the middle. I haven't changed. Maybe I've bumped it up, actually, a little closer to 60. Really? Coming to the dark side. That's still pretty good odds.

But that's not enough to change the baseline forecast. That's correct. Oh, that's so smart. For folks listening, we have this rule that if you want to make a big change in the forecast or underlying assumptions, you have to be very confident, meaning subjectively there has to be a probability, two-thirds probability that that's going to happen before you make the change. And you're not quite there yet.

But you're getting close. You're getting close. Okay, Ryan, you're at 75. He's stubborn, Chris. He's not going to change. No, I was going to bump it down to this. Oh. Probably 65 now.

Oh, really? Oh, that's a big convince me. That is huge. That's a huge. Okay, so what changed your mind? Going back to like the imbalances and everything. Yeah. I think the economy can with him.

It's got to be a pretty big shock, I think. Yeah. Which I'm not confident the Fed's going to do it, pull it off, but we'll see. Yeah. Okay. Well, I'm still at 40, but I'll have to tell you, I sat down this weekend and wrote a piece and, you know, it's up on EV on recession indicators and, you know, really kind of went through things. I actually felt better after doing that about the economy's prospects.

So I'm not going to, I still think it's, you know, uncomfortably high at 40. But I, you know, I'd say the risks to that are to look to a lower probability. How many cherry sodas did you drink when you're writing that piece? Well, again, you know, no alcohol. Okay, just checking. No alcohol. No alcohol. Anyway, okay, that was a great conversation.

I know there was so much more we could have talked about policy and, you know, monitoring fiscal policy and, you know, severity of recessions. But maybe we'll come back to that at a future podcast. But I think we should call this one a podcast. What do you guys think? Anything else you want to say or cover at this point? What was your mind-blowing number? Oh, he didn't tell us his mind-blowing number.

You want the mind-loying numbers. Very quickly. Here's the question to you. What fraction of the time was the U.S. economy in recession from 1857 to 1900? Oh, my. Wait a second. Wait a second. This is, you can see I'm looking out here, so I'm not looking at anything.

The typical recession on average was 17 months. The average length of the business cycle was about 60 months. So what is 17 divided by 60? That's the number. Is that right? No. What? Hold on wait.

As it's 1857 to 1900. Oh, 1900. 100. I was thinking, oh, I said 1854 to 20. Let me give it some context. Okay, no, it's okay. Oh, wait, wait, wait. 40% of the time we were in recession before 1900. And since World War II, it's down to 15%. Oh, so close. 50%. 50% before 1900?

1857 and 1900. And then 14% from 1950. Yeah. Yeah, 1950. You know, this is, you know, you got to, this is, people listening to this, now understand why I'm chief economist. Right? That's pretty impressive. What about since 2000? Since 2000?

Yeah. How long have we done? I could probably do that. I mean, I can actually calculate that. So in 2000, that recession was probably, I don't know, maybe no more than nine months. The 2008, that was 18 months. The pandemic was two months. So 2, 11, 18, 29.

I'd say kind of 29 months out of 100. So it's three decades, 2000, 2010. the 2000 to be 22 years 240 10% of the time oh 11 very good there you go see how I did that

all right baby yeah it's so fun to be an economist I don't understand these jokes accountants economists weatherman economists I love my job

you guys love your job absolutely unbelievable what a job all right okay we're going to call this a podcast because I think we have another one after this. So we should go, I'm going to get more cherry drink and we'll reconvene. All right, you guys. Thank you. Thanks. Take care.