Moody's Talks - Inside Economics - Rules of Thumb

Episode Date: May 30, 2025

The Inside Economics crew talks about the latest tariff news, as well as the reconciliation bill making its way through Congress and the long-term macroeconomic consequences of the bill. Mark gives some rules of thumb about the tariff impact on inflation, as well as the debt-to-GDP ratio and long-term bond yields. Finally, the team answers several listener questions and plays the stats game.Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn 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 my two trusty co-host, Marissa Diedentali and Chris Derees. Hi, guys. Hi, Mark. Hi, Mark. How are things? So it feels like we just talked.

We did. We just recorded on Tuesday, right? Just a couple days ago. Oh, that's right. We had a conversation with Cliff Rossi from the University of Maryland. That was a good conversation. I thought so, yeah. Talked about the housing finance system.

homeowners insurance, private credit, pretty wide-ranging conversation. He was good. He was really good. Lots of risks out there. Yeah, well, I'm sorry, Marissa, I'm in your neck of the woods, and I didn't knock on your door. I apologize. That's okay. California is a very large state, so you're still far enough away that I'm not offended. It's like if I'm in Philly, you'd be in Pittsburgh. That's how far it is. I'm worried for. That's right. Yeah. Oh, further. Further. Oh, is that right? Really. Yeah, it would be like if you were in Boston and I was in, I don't know, New York. Oh, okay. All right, because you're Orange County.

You're down in Orange County. Yeah, you're about four hours away from me. Okay. Yeah. Okay, I don't feel that bad then. No, you shouldn't. Okay. I'll let you know if you should.

Okay. And this is Thursday afternoon. So this is a little atypical. We try to record on Friday. And the reason I guess I'm going to be on a plane coming back from the West Coast. So we had to record. It's late in the afternoon, so a lot of news. I guess we should just dive right in.

We'll keep this podcast a little short because we did have that kind of bonus episode earlier in the week. Famous last words. I know. Every time I say that, it still ends up being an hour and 10 minutes. It's like a law of podcast physics or something. It's a gravitational pull. Yeah. Gravitational pull, right.

All right, we'll see how this goes. I do want to take some listener questions. We haven't done that in a while. We'll play the game. And then the one big topic so far this week has been what's going on with the tariffs and the trade war. Mercia, do you want to just kind of, where are, I've kind of lost track a little bit. I mean, what, because I guess I'm understandable. Yeah, right.

So what's going on now? Where are we? Well, so a court, a federal court that rules on trade matters declared the tariffs that President Trump had enacted under. the International Emergency Economic Powers Act as being illegal. So that isn't all the tariffs. That's a subset of the tariffs. It's mostly the tariffs that were announced on Liberation Day, many of which have been paused, right?

The retaliatory tariffs got a 90-day pause. It includes the 30% tariffs against China. It includes the tariffs put on Mexico and Canada. So it includes all these kind of broad-based country-level levies. The tariffs that are specific to products, like the tariffs on steel and aluminum and automobiles can stay in place. The court ruled. It's just the stuff that was ruled where he invoked this Emergency Economics Powers Act.

So a court ruled on that. I don't even, I'm losing track of time. Was that yesterday or today? But then the Trump administration appealed it immediately. And the appeals court just ruled, I think, a few hours ago, that they will stay that original decision. So we're back to where we are. We were two days ago, essentially. And I should say the court that struck it down initially yesterday had given the Trump administration 10 days to kind of stop the tariffs, right?

They gave them a 10-day window to make all the administrative changes they needed to put this into place. So they had some leeway anyway before the injunction would go into place. But now we're back to where we started with this stay by an appeals court. And this is ultimately, it feels like it's going to go through the court system up to the Supreme Court, I guess, right? It seems like that's the way a lot of these rulings are going. We're going to go. Yeah. This is unfair question, but do we have any sense of timing here? I mean, is this play out over days, weeks, months? Do we do you get any sense of that at all? Have you heard any reporting on that? I didn't read how long this stay is in place for. I don't know if it was reported. I'm not sure. I know the original injunction was they were giving the administration 10 days to kind of like get it together and obey the law. I don't know how long this stay is in place.

for. Yeah, I guess I'm trying to get a sense of how long this drama will continue. The whole thing. Oh. Well, on the IEPA, the I-E-E-E-P-A parts of the tariffs. Right. I mean, I don't know. I don't know. I don't know how long that takes. Of course, have you read anything about that? Do you know anything? The quote I saw was temporarily stayed until further notice while the court considers the motion's papers. So, right. That's it. Yeah. Well, originally before this state came through, the Trump administration had indicated that they were going to go directly to the Supreme Court to appeal it.

But now that they got the state, it seems like that's no longer. Now they go through the process. Yeah. Right. Okay. So this could be, I don't think it's as days, could be weeks, may even be months before the Supreme Court takes this up and rules and figures out. We figure this out. It seems like it's at least weeks, yeah.

These weeks. So, so I guess. Wasn't there another court case, though, that like toy manufacturers in, I want to say Illinois, there was another case that is making its way through. That had ruled that the tariffs also were. Oh, that wasn't, that's a separate from this. I thought that is not part of that. I don't believe so.

Oh, okay. Well, again, I'm not the legal scholar here. It just seems like there's a lot of cross currents here. Yeah, there are. I mean, I know that this case was brought by a bunch of state governments and individual manufacturers. So I don't know which manufacturers those were. Okay. All right.

I don't want to confuse the issue. But it seems like there are other cases pending here that could also have an impact. Well, I think the effective tariff rate, which is just take all the tariff revenue that would be generated, divide by the value of the imports that are being tariffed. If all these things remain in place and are actually implemented, because President Trump has also put an effective stay on the tariffs, right, until early July, the surreciprocal tariffs. Right. The ones that are affected by this IEPA ruling. But if they actually go into effect, I think the effective tariff rate is still 14, 15%.

And for context, at the start of the year, it was 2.5%. Something like that. So these are, you know, if they actually go through with all this, it will be a lot higher. The so-called sectoral tariffs, those are the tariffs on steel, aluminum, auto. That's included in that 14 to 15%. But it does not include potential sectoral tariffs on pharmaceutical and semiconductor, which it feels like that's coming. Those sectoral tariffs are done under different trade law, and there's a process that the administration has to go through to establish the legal foundation for those tariffs. And, you know, that's coming probably, you know, later this year. So feel, you know, in our baseline assumptions about the economy, we're kind of sort of assuming the 14, 15% is what prevails here through much of the situation. year into next and ultimately starts to come down mid-next year with the USMCA deal. That's the free trade deal with Canada and Mexico. So given all the things that have happened here and going on, does that forecast, does that assumption change?

I mean, do our baseline assumptions change, Chris? What's your instinct? My instinct is no. There's so much uncertainty and volatility here around the announcements. I also read a very interesting article about just the, you know, the complexities of actually assessing the tariffs. And the example given the article was about importing, you know, men's shirts. And if it's a polyester shirt, it has one tariff. It has a cotton, if it's a cotton shirt, it has a different, a much lower tariff.

And it's very difficult to, you know, catch all that and ensure that, you know, the proper tariffs are being assessed. So there could certainly be some of the steering that goes on as well. So, you know, when all of a sudden done, the tariff rate might be a bit lower because of that type of behavior and all this other noise. But I don't think we're at a point here where we can definitively, you know, change that tariff rate assessment with a lot of confidence. All right. Risa, you agree with that? Yeah. I think there's still a ton of uncertainty around just given our conversation right now.

We don't know how long this is going to take, you know, when is the next court going to rule. So I don't think that this gives us much solace. Of course, it creates more uncertainty, doesn't it? I mean, what are the other country going to do that are in negotiation over these reciprocal tariffs? You know, everyone's trying to figure out what the arrangement should be. So if I'm another, if I'm the European Union or I'm Japan or Korea, what do I do with this? I mean, do I just wait it out? I mean, I, or what?

I mean, right. Why would you now be incented to negotiate something that has just been declared illegal by a court, right? Right. But then immediately paused or potentially overreled. So why would you negotiate anything? I mean, unless you're, you know, it seems like the leverage here to force negotiation has just been impaired to a significant degree with, I think, right? right if I'm you would agree with that yeah I mean and that's actually the argument that the justice department used in appealing this decision that it just undercuts the administration's

attempts at extracting whatever concessions whatever from other countries that it's a it's not just an international trade issue it's a diplomacy and international relations issue yeah although at this point that's it's done I just don't see put that genie back in the bottle, right? I mean, other countries are, I know this, the injection has been stayed and the terrorists are still, you know, in train, but if I were another country, who knows? I mean, why would I, why would I come to any arrangement whatsoever? I'm not unless, unless there's more threats, you know, I don't know, but. Yeah, unless you want to negotiate on a specific product, right? If you, if you're Germany and you want to negotiate on car imports or something like that, I could see

that. But beyond that, I don't, I don't see why you would. You know, it does feel like we're getting pretty close to the day when these tariffs are going to start showing up in terms of prices for things. I mean, I think things got delayed by the fact that there was so much forward front loading of the imports. I mean, importers brought in so much product under the previous tariffs, low tariffs, or no tariffs. And that is going to start, Those products are going to start running out and they're going to be replaced by products who now have to pay the tariff. And it feels like that we're now going to start to see some price increases. Does that sound right, Chris?

Yeah. I don't see another. I mean, there's still a question of how long businesses may choose to eat the tariff. Right? They may extend it. Right. But there's only, it really depends on the industry, the product, right? Some margins are razor thin.

There's just no room. to eat the tariff if you're an import. Other industries may have a little bit more leverage, but yeah, I think we'll see price increases, a question of degree in which products, perhaps. Right. I mean, I've got a personal story, so I'm doing some work on that home

and got a quote from this salesperson for this company doing the work, and they were saying, you know, here's the price. On Saturday, on June the 1st, I don't know what day that is. Maybe it's Sunday. We are raising our prices 25% because we are paying tariffs of 25%. Now, I don't know if that's a sales tactic. You know, I didn't get that impression. I think, I think he was being honest. But that's pretty interesting, isn't it? You know, 25% increase? I mean, that's a pretty big deal. Because a lot of stuff that goes into

homes is tariffed, you know, from different parts of the world. So it just feels like we're right on that cusp of seeing some pretty significant increases in prices. And not to be cynical, but I'm sure a lot of companies will use this as an excuse to raise prices, whether or not they're actually being impacted by tariffs, right? Look around and say, everybody else is doing this. Everyone else is talking about tariffs. So I might as well try to get a price increase in here if I can. Right. Well, there's some public misperception around that, too, right?

That people believe, oh, well, the U.S. steel manufacturers, well, they're not subject to the tariff, so, you know, they won't raise prices, but that's not how it works, right? You compete and everybody raises prices, right? That's the whole point. So, yeah, they just raise a one percentage point below the competitor who's paying the tariff, yeah. Yeah, yeah. They capture that benefit in the form of a higher price.

Yeah. It's a better question of who's capturing the benefit on a product by product basis. Right. Well, our rule of thumb is that for every percentage point increase in the effective tariff rate, so if we go from, say, two and a quarter to 14, 15, that's an increase of, what, 12, 13 percentage points. where every percentage point increase, that raises inflation or prices by 10 basis points. And that's on the consumer expenditure deflator. That's the inflation measure the Fed uses for its target, the 2% target. And so if you do the arithmetic in the rule of thumb holds, then the inflation rate, which is now 2.5%, roughly speaking, so it's above the Fed's target, a bit above the Fed's

target, but two and a half percent, we'll now go to somewhere between three and a half and four percent by this time next year. That feels consequential to me. That feels consequent. If that holds. Right. Yeah. Absolutely. Yeah. Okay. Okay. So I guess buckle up. I guess those are the words. Buckle up. Buckle in? Buckle in? Buckle up. Yep. That's what's coming. Drop in. I don't know. Yeah. Right. Right. Right. Oh, The one other question before we move on, I'm so perplexed by the stock market. You know, the stock market, you know, obviously has been going up and down and all around. And it really hasn't gone anywhere now for, I don't know, six months or so since this all began,

this drama around the trade and tariffs began. But it's not, you know, it's kind of just below. It's high. It's all-time high. What do you make of that? What do you think about that? Marissa, what do you think? It drives me nuts.

I mean, it just is so reactive to whatever the headline is, it seems, right? It's up one day on good news. It buys it all back the next day on bad news. It just, yeah, I don't know that there's anything. I don't know how much of it is actually fundamental. It just seems like it's so much of these gyrations are driven by headlines. not that anything is necessarily fundamentally changing, right? And all of this is mostly expectation, as we've seen,

which is what a stock price is. It's expected earnings of a company. But, yeah, it kind of drives me crazy. I'm looking at it all the time, which is also why I'm being driven crazy because I'm doing it to myself. But, yeah, I don't... You look at the stock market all the time?

Yes. I didn't use to do that, but I do it now. Like what does that mean all the time? Like multiple times a day? Yes, multiple times a day. Yeah. Oh, interesting.

Yeah. You got a lot of your wealth tied up in the stock market there, Marissa? Is it personal? Yeah. That makes sense. That makes sense. What do you think? What do you make of the stock market, Chris?

It is. It seems like it's totally discounting any changes. Like, tariffs don't matter at all, right? So, yeah, we're not going to get the 145%, but still 30% tariff on China is still a really big deal. And to say there's no effect on corporate earnings, I don't know. It just, it seems to my take to rationalize it is it's kind of a Tina trade. There is no alternative trade that people have this idea that, oh, I don't want to hold bonds, treasury bonds, because, you know, there's risk there.

here or I'm worried about, you know, potential issues in that market. I'm worried about crypto. I don't want to go into that. Gold seems overpriced. Oh, yeah, I'll just stick with stocks. Yeah, what would I do with my cash? What would I do with my money? Yeah.

Right. So it seems to work out to buy on the dips, right? I mean, the tariff. It looks like it's going off the rails. Stock prices decline. Then there's a pullback on the tariff, tariffs, and the stock market goes back up. So if you've watched that a couple times and you begin to think, okay, that's what's going to happen here.

That's what's going to happen, right? And the AI trade seems to still be playing out. Yeah, pretty robust. So I saw Nvidia's stock earnings were good. Yeah, so. Yeah. So maybe it's long-term investors who are looking through all this and saying. Or, you know, when things perplex me like this,

they tend to kind of write themselves. Right. Right. You know, so I keep thinking this isn't over. It feels like the stock market, and I'm not providing investment advice to anybody. Don't get me wrong, but just feels like the market is highly vulnerable here. So anyway. Okay, well, I guess the other thing that really is playing out here that's really important to the economy is the so-called, I guess it's not so-called, I guess we'd just call it the reconciliation.

legislation in Congress. That's the big beautiful bill, as President Trump would call it. And that it's big. You know, there's a lot of moving parts there and on taxes on spending. And, you know, how are you thinking about that, Chris? What do you think of what kind of impact that's going to have on the economy? Well, first I'm trying to game out what the final bill will look like, how the Senate's going to modify it and what the ultimate bill will look like. My guess it's going to be pretty close to what it is, right? There might be some changes around the edges, but still, large deficits, large deficits, you know, significant increase in debt.

I guess the good short-term news is debt ceiling issue is taken off the table, so that's a positive. But, yeah, I think there's long-term... Because the debt ceiling is going to be, the increase in the treasury debt limit is going to be part of the reconciliation package. Yes. Therefore, if the package passes through, then the debt limit will be increased and that's a problem down the road somewhere. That's right. So at least for today, for next few years, I guess. We'd avoid that particular issue, which certainly has caused a lot of angst every few months, it seems like.

So that's the short-term positive, but the longer-term, next. negative, of course, is the very large size of the deficit, right? And that's certainly going to have impacts on interest rates, and that's going to have a negative impact on the economy overall. Right, right. Any perspective on this, Marissa, on the reconciliation package? What's your perspective? I, too, am not sure what the final outcome of this will be, but whatever it is, I'm sure we'll have an expanded deficit and a higher debt to GDP ratio when we look out five, 10 years from now. So it's not, it's not helping, right? It's not helping this long-term problem that we have. And I think eventually there's going to have to be some kind of reckoning

here. Can't go on further. You know, much of the package is simply extending the tax cuts for individuals that was set to expire at the end of this year. They were lowered with the TCGA, the Tax Cut Jobs Act back in 2017, and they expire at the end of, was it 2017? Yeah, I think it's 2017. Yeah, that expire at the end of the year. And so if you just simply extend them, that really has no macroeconomic consequence, right, because everyone's tax rates just remain the same. And then there's a bunch of other tax cuts and some for businesses, some more individual tax cuts.

There's a tax cut for tips and overtime. I believe there's an increase in the standard deduction for people over the age of 65 to because the president had promised reduction in social security taxes. And this is kind of a way of helping that group. So there's – Pardon me? Salt. Yeah, right, the salt cap, the state and local tax deduction cap being increased. I saw that as those sums go up.

Just kidding. It's a homeowner in California. Yeah, absolutely. There's some spending increases on defense and homeland security, but there's a lot of other spending cuts that, you know, it cuts to Medicaid, non-defense discretionary. the bill also gets rid of the tax credits for clean energy that were part of Biden's Inflation Reduction Act to address climate risk.

And so if you net all that out, it basically washes all out. It's zero. So in terms of the near-term macroeconomic consequence of the legislation, I think it's neither here nor there. It doesn't really add to growth. It doesn't detract from growth. It's not that meaningful. But what it does do is it leaves us with an outlook that includes very large budget deficits

in debt, increases in debt. So based on our work, if you do the calculation, and this assumes interest rates remain relatively low and the economy remains recession-free, continues to grow around 2, 2.5%, you know, per animal and GDP, real GDP, that. that the deficits are 6 to 7% of GDP deficits. And the primary deficit, that excludes interest payments, is about 3, a little over 3%, which is just really disconcerting

because in a full employment economy, you should be at zero or even positive, but here we are at minus three. And this does nothing to address that. Therefore, the nation's debt to GDP ratio goes from just under 100%, I think it's 97 or 98, something. like that, to 130 percent 10 years from now. Just soak that in for a second. We go, and by the way,

as a point of historical context, if you go back before the financial crisis, I think the debt GP ratio was 35, 40 percent. So because of the financial crisis, because of the pandemic, because of tax cuts and everything else, we've gone from 35, 40 to 100, and we're going to 130. That, to me, has macroeconomic consequence, right? And that comes in the form of interest rates. And here's another good rule of thumb. Maybe that's the name of the podcast, Rules of Thumb. I don't think we've used that before. But every percentage point increase in debt to GDP, I can see Chris's face.

He doesn't like that title. He's not on board with that title. That's good. It matches with Merce's thumb. Oh, yeah, right. Yeah. Rules of thumb. Yeah. Can you do that some more?

Some rules of thumb? Yeah, there you go. Well, done around the debt to GDP, I think. Yeah. Well, this is from CBO, and it's very consistent with our own. modeling, you know, every percentage point increase in debt to GDP raises 10-year treasury yields by two basis points. So if we go do the arithmetic, we go from 100 to 130, that's 30 percentage point increase, multiply by 2. That's 60 basis point increase. That's a 0.6 percentage point increase.

So let's say the 10-year treasury yield is 4.5% all else equal. We're going to 5.1% over the course of the 10 years. Of course, the world doesn't work in a smooth, non-linear way. It's not going to be a little bit of an increase every year. At some point, we could see interest rates move up. And that is, I think, I view that as a very, at least a corrosive on the economy and, you know, potentially if the bond market were to react violently, which at some point it could, given all the other things that are weighing on the bond market, you know, we could see, you know, interest rate spike. And that view that as a very significant risk to the economic outlook. Not our baseline, but very significant risk.

Anything that is that all makes sense? Did that add up? At least we're not Japan? Yeah, I guess, yeah, yeah. We're heading in that direction, perhaps. That's one way of looking at it. But obviously it leaves us in a pretty vulnerable spot. Okay.

Anything else to add on that, Chris, Marissa, on the fiscal situation? No? Okay. Everyone wants to be Italian. That's all I'll say. I know. Oh, no birth rates, high debt to GDP ratios. Yeah.

Going down the same path. Yeah. Just look at it and that's what you can see. Yeah. No growth. Okay. All right. From tariffs and trade order requisition.

That was quite a sigh. That was quite a sigh. Yeah, a lot to be nervous about. Well, I think this might be a good point to take some questions from the listeners. There's a, Marissa, do you have any good ones you want to throw our way? Yeah, let's see. Here's one. It's kind of a random question, but, and I don't know why the person is asking this.

I don't know what the context is. I know what you're going to say, too. In hindsight, in 2008, should Congress have not have passed TARP? Should we have let the banks fail? You know why they're asking that? Aaron Klein from Brookings was on and he was talking about TARP. Don't you think that was? No, this came in before he was on.

Oh, really? Yeah, yeah. This one's been sitting in the hopper for a little bit. Maybe Aaron sent that in in anticipation. It could. He could be using a nom de plume here. Yeah. All right.

Yeah. So the question is, should they have done TARP, the bailout? Yeah. Yeah. Chris, what do you think? she knows what I'm going to say but of course they shouldn't have

they should have gone big the first time as well shouldn't you know the two rounds in order to get it across the finish line were problematic but yeah it's easy to look back and with the benefit of hindsight but we were staring into the abyss there

yeah I mean I think that was a slam dunk success I mean obviously getting it passed was not graceful. To Chris's point, Congress voted it down initially and that created complete chaos. Stock prices were cratering.

The economy was evaporating and that forced Congress to pass it, I think one week later, the $700 billion bill. And, you know, I'm not even sure when you're in that kind of a situation, when things are falling apart like that,

it's not even a, there's no, you can't, there's a, nothing theoretical about it. You can't just say, oh, I don't think we should do that moral hazard, you know, blah, blah, blah. That's just not happening. So we're going to go down that path. But should we go down that path? We don't know what the counterfactual, you know, would have been. But I feel pretty confident it would have been pretty ugly. And it would have cost us a lot more than $700 billion. You know, that's for sure. You know, and lost economic activity and all the hit to the fiscal situation that would have happened because of the deeper recession that we suffered.

So, you know, from a cost-benefit of analysis, I mean, pretty clearly, I think, you know, it was, we needed to do that. And as Aaron pointed out, that money was paid back, right? That was going to say, yeah, it was, certainly there was three parts of that bailout, that tart money went first to the banking system, and they fully paid that back, right? and then some. There was interest on that. The other was the auto industry. I don't know if we lost money on the auto industry bailout. I'm not sure.

Maybe a little bit because that was dealerships and everything else. And then the other was homeowners. That was at the end of the day pretty small, though. And I think ultimately the government did just fine. So if you add it all up, I think taxpayers got paid back with interest. I don't think they lost any money. So now you could add, you could say the downside. was moral hazard, you know, that if you get bailed out, it makes it more likely people

are going to do dumb stuff in the future and need another bailout. But that doesn't resonate with me either. I think there was a fair amount of pain, financial pain that people felt. And a lot of regulation that came about in the wake of that, that forced banks to go through painful exercises and hold more cash on their balance sheets, right? Yeah. I don't think there was any moral hazard that came out of that experience. So, yeah, that was a slam-dunk success and critical to, you know, helping us navigate through. It wasn't graceful, you know, recovery, but it would have been really much worse, if not for that. So we're in agreement.

I don't know. Has anyone, have you read anyone taking the other side of that? I guess you'll find somebody, but, you know, kind of, I'm not. really heard anyone say that that was a bad idea. Yeah. Okay. Probably somebody. You know, there's probably somebody.

Their folks are against deposit insurance. Right. It's the same as a argument. Okay. That was a good one. Any another question? Yeah. Here's one that dovetails on this.

Chris's very esoteric stat from a couple podcasts ago where it was like 25% of 75-year-old don't have money to afford daily home health care. Remember that statistic? Right, I do remember that. It stuck. I like it. And it stuck with Kyle, our listener here. So he wants to know, let's see, if you looked at that statistic in relation to homeowners

by age group by metro area or cities around the country, you know, would you see differences, regional differences for where you might have an overabundance of housing because, you know, aging boomers have to leave their house. And maybe it goes to the kids and the kids sell it or probably sell it, right? Probably not move into it, but sell it. And then are there places in the country where it's a younger age profile and you're not going to have as much of this phenomenon happening? Yeah. So that's the statistic. this came from a paper from the it was publicized on the JCHS, the Joint Center for Housing

Studies out of Harvard. So first I direct folks to that. I don't remember the author's name, unfortunately, but you can Google it, you'll find it. That study really considered more the income demographic, so it did a nice breakout showing what the, what that percentage would look like for folks in different buckets of the area median income, right? And clearly you see the progression that you might expect. Folks with wealthier, right, they can afford that type of daily health care. Folks at the bottom, right, on their own certainly cannot. Renters disproportionately impacted versus homeowners, right?

So there were a number of demographic cuts. I don't recall a regional cut there, but it certainly makes sense. We have cost of living differences across the country. So, yes, I think it'd be pretty clear that you would see some of those differences. And that might drive some future migration patterns. Yeah, and actually, I think this person's asking about how that might drive home building in different places across the country where you might have more of a scarcity of homes on the market and in other markets. You might have an abundance of old homes on the market. Yeah, I think in the case of Florida, just one example, I think you are seeing at least anecdotes.

I don't know that it's enough to really substantiate a broader trend, but there are certainly plenty of reports of folks who have been living in Florida, retirees, living in Florida for a very long time. period of time. And now because of higher insurance and property tax, right, they are cashing out. They're moving to cheaper locations because of the cost of living. Right. So I clearly think that that's going to continue to be a trend. And you'll see that in certainly some of these states with the higher costs of housing. Well, I'm glad listeners are listening. That's a good one. Yeah. That's a important trend. Watch. important trend, yeah. Yeah, there's actually another, there's another related question on that goes to this

passing, boomers passing on their homes to their children. And are we going to have this huge wave of that happen that's going to significantly add to our undersupplied housing stock? I mean, how is that factored into your forecasts of the housing stock? home building and all of that, say, 10, 20 years from now. Does that affect? Do we factor that in? I don't think that affects the supply, does it, Chris?

I mean, we do factor it. I mean, it's part of the supply, right? In our moms, we don't really distinguish between, you know, how the house got there or who has it. Yeah. So, yeah, it's kind of factored in indirectly. I would say, so, yeah, there's been a lot of the, you know, the same household. It's just who's in the household.

is changing, right? Right, but I mean, I guess, but but then it becomes freed up for someone else. Do you know what I mean? Oh, I see. So the, the boomer gives it to the kid, doesn't put it on the market. Right. I don't think that affects the overall shortage, though. I mean, it affects who owns the home, right?

So it's just the home remains in the family as opposed to, you know, going to someone else. But in terms of what it means for the shortage of homes, I don't think it, I don't think it means anything. It might affect the mix of rental versus owner housing, right? If that could be a concern if you think that wealthier households with homes, right, just have built dynasties and they pass it on to their children and those homes only get rented out and you lock out potential people. I mean, I'm creating a pretty contrived story here, but, you know, you could think of something along those lines. But no, in terms of the overhaul housing style, a home is available. either to be lived in, rented, or it remains vacant, but why would that, why would that property

owner decide to just keep it vacant, right? That can lock out other folks for no reason. Right, right. A lot of credence. So that's, sure, it's just changing hands, you're saying. Just changing. I think what this other statistic is related to that, you know, lack of savings for health care, that could certainly have an impact though.

We've been talking about this great wealth transfer, right? If in fact you have older retirees who are house rich but cash poor and they start to borrow against their housing or, you know, downsize to a significant degree, that certainly could impact some of the dynamics out there. Maybe some potential errors won't actually receive as much as they thought they might be receiving, right? if indeed the person lives longer and they need to tap into that wealth and it doesn't get transferred to their errors directly. Right. Okay.

You want to do another? Sure. Do you think we'll ever see the Fed go to the zero lower bound again? Absolutely. Yeah. I mean, I think in the typical recession since I want to say World War II, but I don't think that's right. Say in the last, since 1960, the average decline in the federal funds rate target in a recession is 500 basis points, five percentage points.

So, you know, right now the funds rate target sitting, it's pretty high, higher than, you know, what most estimates of equilibrium are. It's certainly higher than ours. It's, you know, four and a quarter to four and a half. So if we got into a recession and it was typical, you know, on average, then they're going to hit the lower zero bound, you know, in the current cycle. I mean, our estimate of equilibrium and that, but when I say equilibrium, that rate at which monetary policies neither supporting or restraining economic growth is probably somewhere closer to 3%. That's kind of sort of where we have the funds rate going over the course the next couple of years. So if you're sitting at 3% and you get hit with the typical recession, yeah, we're at the zero lower bound. That's one argument for why you might want to set the inflation target higher, right?

You set the inflation target right now it's two. So if you set it at three, you know, maybe have more room to maneuver when you get into the recession. You don't hit the zero lower. Less likely you'll hit the zero lower balance. But, you know, with the 2% target and 2% real, 2% real growth, you're at 4% nominal growth, just feels like there's a, you know, in a lot of recessions, you're going to hit that zero lower bound, you know, going forward. So, yeah, I think that that's very likely.

And in particular, I left part of the question, part of the context for the question is, do you think the Fed is going to be reluctant to lower rates that low, now given what we've seen with the lock and effect on mortgages? What it did to the housing market? Oh. I think they'll be concerned about? I mean, again, it's kind of goes back to TARP.

When you're in the middle of something like that and things are going off the rails, you do what you need to do to get through that period. And you don't worry too much about what's on the other side and the adjustments that it creates. So maybe it would be in the Fed officials, the back of their minds when they think about that. But I think it push comes to shove. They're still focused on, you know, unemployment and, you know, inflation and, you know, those things would predominate and they would continue to push rates lower if they need to to support the economy. So, no, I don't think so. The one question I do have, and maybe I'll pose it to you guys that I wonder about, suppose the, you know, go, let's go back

to the bond market and let's, because of the large deficits in debt and all the other things that are going on that, you know, feel like they might push yields up. Suppose we see bond yields rise to a very significant degree, you know, we go from 4.5% 10-year yield to 5% to 5.5. It feels like we're getting into like what happened to the UK under Liz Trust. You remember that episode. The Bank of England stepped in and bought bonds, right? Would the Fed do the same thing here? They actually step in and, you know, buy long-term bonds to keep long-term interest rates from rising further?

Do you have a view? Chris, on that one? that's a tough one it's a tough one it also depends on who the next that is yeah that's a good point talked about that in the past as well um I think they might though I think it's a pretty good chance they would yeah I guess if you know it's an impeding kind of a well-functioning financial system You know, if you have funding issues, right? Liquidity issues. That's in their mandate.

That's kind of standard and fair. You would step in, right? Because they're the lender of last resort. Ultimately, they need to provide the liquidity that's necessary to keep things moving forward. But suppose that didn't happen. It's just rates are rising by 5.5% because people are nervous about the fiscal situation or Fed independence or the reserve currency status of the United States. then for them to step in, it feels like, you know, that's a, that's really debatable, you know,

should I step in to, to, to, I mean, I guess if it starts turning the economy, then that, you're back to that. I was going to say, well, yeah, what are the real economic, if it then, if those higher rates trigger recession, right? Right. Then they have cover, if you will, to intervene. Well, I think this is a real question. It's a real question, though.

It's a real question. I think it's not our baseline, but I think there's a real possibility we get into that kind of situation. And the question is because in the fact that you're, at that point, you're actually monetizing the debt. Yes. And that's going to lead to other kinds of economic problems, right? Well, that in itself would then cause investors to get even more nervous, right? Yeah, right. Right.

So then get into that spiral, you see an emerging economy. Yeah. Yeah. So. I mean, it's kind of like what? the Bank of Japan has done. Yeah. They've essentially monetized the debt of that country.

Yeah, of course, they never had an inflation problem. That's right. The population is declining and, you know, depressing demand. But it's interesting because it kind of, it sort of somewhat straddles that line of fiscal policy and politics with the Fed, right? Yeah. Yeah. Okay.

Well, okay. Let's do one more question, then we'll move on to the game, and then we'll call it a podcast. Thumbs up, pop. They're the Rules of Thumb podcast. Here's one. Okay. And this is probably unfair, because you might want to think about this. It's a hypothetical.

What's one statistic that you wish BLS made that they don't already? Preferably something that could plausibly produce if they had the resources. but feel free to let your imagination run wild if you want. I think I've heard this one before, no? No. Did I ask it before? I don't know. It's like three years old, two years.

Oh, okay. I think I have actually heard this one before. I'm not sure what I said the last time you asked it. I think we've been asked in general. In general, not the BLS. Not the BLS. Which economic statistic would you like? So this is specific to the labor market.

What would we want to know? I'm Gellarrow, I guess it could be prices or anything to BLS. Right. Right. Mercy, well, you're a former BLS official. What do you say? What was on your wish list when you were at BLS that you wish you had, but, you know, you didn't have?

Anything? I mean, they produce so much that's wonderful. I guess my wish would be if you could get things at a higher frequency, right, without as much of a lag and at a higher frequency. frequency. Like, it would be really cool to see consumer spending patterns at a higher frequency. I'd like a lot more data on the income distribution, you know, cut the data across income or wealth, you know, get a better, because, you know, it's very, very difficult to know what's going on, you know, different parts of the distribution, high income, middle income,

low income. And I think that's so important understanding dynamics in the economy, but also politically because, you know, the folks that are under lower income under such financial stress, I think that goes into our kind of fractured, fractured politics. Really important to understand that a little bit better. I'd love to have that data. The other thing is the response rates are pretty low. To your earlier point, it might be let's spend the resources trying to get better quality data, right?

Because, I mean, there's got to be alarm bells going off about the decline in the response rate for a lot of these survey-based statistics. I think that would be important. Yeah, that was my answer. That was your answer? I'm sorry. Higher quality, right? I think they measure the right things.

You know, and there is a lot there, right? You know, even when we cover the employment report every month, we don't get to all the nitty-gritty detail that they have. So I think that, you know, they cover multiple job holders and self-employed. There's a lot of great data there. Just for some of those categories, right, things get pretty. then especially given the response rates. So anything we can do to improve the quality and the frequency.

I agree. I agree with the frequency. Yeah. I think that already would be a huge benefit. I go for weekly jobs numbers. That would be nice. Yeah. Yeah.

Yeah. Yeah. Yeah. Okay. All right. Well, that's good. Okay. The stack game, we each prefer to a stat.

The rest of the group tries to figure that out with clues and deductive reasoning and and what else, clues, deductive reasoning, and questions. And wild guesses. We learned the term wag in the last podcast. Right. Wild-ass guesses. Yeah, there you go. The best one is one that's not so easy.

We get it quickly, one that's not so hard we never get it. And if it's apropos to the topic at hand, and we're all over the map here. so I think everything's fair game. That would be the best statistic. Marissa, you want to go first? Yeah, I do. God, I have a few. Okay, I'm going to give you two numbers related.

So same category, just two different groups answering this question. Is this the University of Michigan survey? No. 26% and 13%. It's not the conference board survey. It is the conference board survey. Okay. And the two groups, 26 and 14?

13. 13. Is it across, it's not income? It's not income. It is across income. It is across income. Yeah.

Okay. So is it a change in the survey? No, it's the level. No. It's the share of income groups who are doing something or did something or say they did something or express an opinion about something. About inflation, not inflation. No. Major purchase?

No, but you're on the track there. Okay. homes, autos. Can you ask a vacation question? No? No. Shall I go ahead. Put you out of your misery?

Yeah. So 26% of households where household income is over $125,000, said that they made purchases in advance of the tariffs. and only 13% of households with income under 50,000 said they did the same thing in the past few weeks. Oh, that's a great statistic. Yeah. So, isn't that interesting? So double.

Double. Yeah. Double. Which I think goes to the ability to do that, right? And then maybe how informed you are about what's coming as well. But that's a pretty high share of people that are saying that they actually change their purchasing behavior because of the expectation of tariffs. Well, what does that auger for future spending? Because presumably you bought forward.

You were going to buy at some point. You just bought it sooner rather than later to get ahead of tariff increases, pricing increases. So that's got to have an impact you would think on future sales. That's a really good one. So that was a special question that the conference board asked. It was. It was a special question this past. By the way, because I'm traveling, I hadn't looked at that.

That survey jumped, right? It did. It jumped back. It jumped back. It jumped back. It came back in May. Anything notable there in terms of the bounce back? Was it across?

I mean, it basically bounced back to where it was back in February. So like it undid. And this is mostly in the expectations index, right? not the present conditions. It basically erased the last couple months of that nosedive that it had taken because of the tariffs. Oh, interesting. Yeah, interesting. So it's still below where it was in February, but it went from 85.7 to 98 over the month.

And in February, it was right at 100. Right. Yeah, you know, that's my favorite leading indicator of recession. And I was looking, remember in April when it was down, was down 19.3 points. Every time it's fallen more than 20, we've gotten a recession six months later. So we kind of just got under the nose there. And now it's bounced right back up.

It would suggest that recession risks are receding, consistent with our own assessment of the recession risk. Oh, that's interesting. Okay. Chris, what's yours? 36.2. 36.2. Is it a percent?

No. It is a ratio. Oh, it's a ratio. Is it labor market related? Nope. Housing? Nope. Is it a trade?

Nope. Oh, it's not housing related. No. Not housing, it's a ratio. Point two. Oh, is it fiscal related? No. Oh.

goodness gracious it is financial market related oh is it a PE ratio price it is it is a price earning ratio yes it can't be S&P 500 right it is an SMP 500 price earning ratio but some group oh from oh I know for the for the tech guys no no for one company no it's the show no it's S&P 500 for For that technology, it's the Schiller price earnings ratio. Oh, oh, really? Is that that adjusted? Yeah, the long-term cyclically adjusted PE ratio.

That's right. Is that high, really? That high. Wow. You explain what that is. Yeah. Yeah. So I think most people know price earnings ratio in general for stocks or for the market as a whole.

What this sickly adjusted price earnings ratio does is look at the average earnings over, inflation-adjusted earnings over a 10-year period. So it's trying to smooth out some of that volatility and give us a sense of the truly underlying priced earnings ratio. And that 36.2 is high. What's notable is that it's kind of like your confidence and board number.

It's right back to where it was, right? The PE ratio went down, the CAPE ratio went down during the tariff situation and then it's right back up where it was previously, as though nothing ever happened. And that's elevated historically, right? Going back to, I don't know, 1800s median is around 16, right? So it's high from that standpoint. But even in recent history, 36 is high relative.

We were kind of trending around 30 for a number of years here. Right. So it speaks to kind of that valuation of the stock market. And like you, Mark, I'm very nervous that, you know, there's some complacency. going on here. We know terrorists are still around. They're just not as high as originally thought, but still they're going to have some impact. And that's bound to reduce earnings. Yeah, you know, the other thing is interest rates. I mean, it's one thing when rates are low, right, you have a high PE. Here you have a high PE with rates are high and threatening to go

higher. I mean, the 10-year yield is four and a half. I don't know what the corporate bond yield is, you know, seven percent. That's not like, that's not like stratospheric, but that's not low by historical standards. So, oh, no. Another reason to be just a bit nervous. Okay, I got one, 45 percent. Your odds of recession. That is my odds of recession, yeah. Ding, ding, ding, ding, ding. Yeah, yeah. That's not what you were thinking of, though. That's not the number. Well, you know, it's good. I think it's good enough. It's because it's also the probability of recession. implied by our new session indicator, our new recession indicator. Have I talked about this? I can't recall. We talked about it last time. On the podcast? Yeah, a random forest model. Oh, I did. I talked

about it. I'm so proud of it. Because it matches what you say the probability of recession is. Absolutely. Not only today, but historically going back. It got everything right by my, by Zandi's interpretation of history. It failed it. We're still doing a lot of experimentation with it, try to really understand what's going on and how it's working. But yeah, 45%. Have you guys, have any of your odds changed on recession? Merced have your, as your odds changed?

You're at 40, I believe, aren't you? No, I'm at 45. Okay. Chris, you're at 45. Let's say 45. That's what I said last time. All three of us are at 45? Yeah, which makes me nervous.

It's a really bad thing. Is your arrow pointing up or down? Oh, that's a good one. I'd say my arrow, I'd say my arrow is still pointing up, meaning higher probability. What are you, Marissa? I think mine's pointing down.

Pointing down? Yeah. All right. And Chris? Mine's pointing sideways. I knew you were going to say. I was going to say that, but I said, no, I'm not going to do that.

That's chickening out. That's chickening out. Sideways to slightly down, though. To slightly down. Lower probability. Lower. Lower probability. Okay.

Yeah. Well, all the recent events this week has your, I guess it adds up to nothing. You know, a lot of drama, storm and drang, up and down all around, but at the end of the day, doesn't change your odds of recession. Not materially. Not materially. Okay. Right. Okay.

I don't know. This was a little shorter, I think. It was not that much shorter. A little shorter than the typical podcast. We'll keep it that way. I'm traveling. I'm going to be on a plane tomorrow coming back home. I'm looking forward to that.

Any last words before we call it a podcast? Marissa, anything? No. No? Okay. Keep the questions coming. Keep the questions coming. We enjoy.

Because we're blowing through on. Yep. Okay. With that, dear listener, we're going to call this a podcast. Talk to you next week.