Moody's Talks - Inside Economics - Running the Economic Gamut

Episode Date: July 25, 2025

The 2025 U.S. economy leaves no shortage of topics to explore. This week, the Inside Economics crew tries to touch them all. Mark and Cris, joined by Matt Colyar, discuss growing challenges to Fed independence, recent tariff agreements, financial market exuberance, and a U.S. housing market under significant stress. Finally, the team answers several listener questions and offers their latest recession probabilities and expectations for next week’s slew of important data. Read the full housing research paper here: https://www.economy.com/bringing-the-housing-shortage-into-sharper-focusHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @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 trusty co-host, Chris DeReedys. Hey, Chris. Hey, Mark. Marce is still on vacation? Different vacation, yep. That's a...

Different vacation. Yeah, she's visiting family. Ah, different kind of vacation. Different kind of vacation, that's right. When will she be back, you know? He'll be back for the next podcast. Okay, okay, very good. Jobs Friday.

She... Job, well, can't miss Jobs Friday. Can't miss Jobs Friday. Right. And this is a big jobs Friday. Huge. Like every other job's Friday. These days, yes. I'm sure we'll have Dante back on. But in the interim, we've got Matt, Matt Collier. Hey, Matt. Hey, Matt. Hey, Mark. Hey, Chris. Great to be here. Thanks for signing on with us. Absolutely. We appreciate that. All very good. And how are you doing? How's summertime for you? It's nice. Although growing a beard, which is, I think, a winter activity typically. Yeah. I'm going for it. I don't know what.

I guess you lose hair on the top of your head. I think there's a phase that men go through where they try to compensate growing it on their face. But yeah, other than that, good summer. Matt, I've never had that phase. No? No. I've tried to grow facial hair like once and itches.

I couldn't get that. It does itch. Yeah, but there's like a threshold, I think, then it becomes manageable, which is about where I'm at, I think. Does it always itch? It's much to go away. It takes a long time to dry after the shower. It's probably the biggest complaint I have.

But that's, we're getting personal. It's a lot of maintenance. A lot of maintenance. Yeah, a lot of maintenance. Yeah, for sure. Of course, if I grew a beard, I'd be like Santa Claus. It'd be like gray, pure gray. Christmas.

Yeah. Yeah, there you go. Well, I've been traveling an awful lot the last couple weeks. I was in Mexico for a week visiting. clients, banks, government officials, that kind of thing. Boy, that was interesting. You know, the most interesting thing about that to me was when I was there, the U.S. government, the Treasury Department, cut off three Mexican banks from the American banking system, and they failed. And so the Mexican authority, I think I had this roughly right,

Mexican authorities stepped in and took over the banks for money laundering, I should say, for money laundering with the drug cartels. And I found that fascinating. And there was a lot of support for it in Mexico, you know, at least the people I talked to in the banking community because, you know, they, they fear that they need help to address that particular problem.

So I thought that was of the, all the, of course, terrorists were top of mind. USMCA was top of mind. By the way, they're more confused than we are. So, you know, what the heck is going on? And now is this going to play out. But anyway, I found that, quite interesting. And then this past week, I was New York,

Chicago, back to New York, but fortunately, I'm back home now. So a lot of travel. Wow. Yeah. I was in Charlotte last week, but that was about it. I heard about it. I heard you had a great dinner with a great event. Yeah. Lots of bankers, CRE, investors, developers. Would you learn? Would you learn anything? Um, so I asked the recession odds. Ah. The group. And they were, A lot, I won't say they're optimistic. Some of them actually were.

One said only 5% chance of recession next year. Oh, geez. But in general, it was lower recession odds than I would have guessed. You would guess. For that crowd. So they're seeing some positive movements. Yeah. Yeah, that feels like the general sense of things.

People are feeling a little less nervous about what's going on. Well, I guess that's the topic of the podcast. asked, you know, how nervous should we be? And I thought, uh, the, there are a lot of things to discuss, but I thought top, top of mind, most important is Fed independence. Um, and, um, you know, of course, the president, President Trump has been, uh, pounding on Fed chair pal about cutting interest rates. Uh, do, do I have this right, um, that the president has asked, uh, or requested or demanded that Powell cut interest rates by three percentage points and to do that quickly. Do you know, is that, Matt, do I have that roughly right?

I've seen a reference to one point something is what has been suggested, suggested as the rate. So that would be about 3% percentage points. But I'm blurry on the details, but sounds right. So the current federal funds rate, the rate the Fed controls is some, just a tad north of 4%. And you're saying the president has talked about 1%. is where things should be in his estimation. Right, right.

So, Chris, how do you think about this? I mean, would it be a good idea to cut interest rate, short-term interest rates, the federal fund rate to 1%, you know, would that make, what do you think? First of all, about that proposal, that suggestion. And second of all, you know, the fact that the president's making that suggestion at all, you know, suggests that he's trying to influence the Fed's decisioning. And how do you think about that? Yeah, I don't know what the rationale is, right?

Obviously, the rationale is he likes low interest rates. He's made that very clear even before he became president, right? It was a real estate developer, so low rates, always favorable. But the rationale for cutting the Fed funds rate by that much, that quickly, I fail to see. Even folks who are economists who are asking for a rate cut or thinking about a rate cut are not. not thinking about that size of a rate cut given the current inflation and economic growth dynamics. So that would be a big shock to the system. And I think it actually could be quite counterproductive.

If all of a sudden, one day, we're out of the blue. Fed comes up with a huge rate cut. That's typically something we do when the economy is failing, right? When we need to intervene and provide a lot of more stimulus to the economy. Well, why would that be a problem? I mean, okay, you cut the federal funds rate from four to one. So why would that be a problem? So we're already dealing with, still dealing with an inflationary problem, right?

So it's not down to 2%. And in fact, we see some reacceloration of inflation. So cutting that down, making credit extremely cheap, suddenly would be a big boost to the economy, sure, but it would lead to some inflation and potentially inflationary expectations. So you're saying, okay, if you cut it, right now the economy is, growing, doing okay. Creating jobs, unemployment is low, 4.1%. That's consistent with full employment.

Inflation is kind of on the, it's above target, as you said, the Fed's 2% target. And it feels like the direction of travels to higher inflation. Right. So in that as backdrop, by cutting short-term interest rates to say 1%, you risk juicing up the economy. and igniting even higher rates of inflation and pushing unemployment even lower below full employment. That's what you're saying. That's the argument. On top of that, I would argue there's perhaps a psychological argument.

Investors are going to say, what's going on? What are they seeing that we aren't? And you could have, that's the counter effects that you could see. You could see more of a panic at that point, people scrambling to understand what exactly the Fed or in this case the presidency's that they don't. don't in terms of potential weakness. And how does that manifest? What does that mean?

Lower stock prices, higher bond yields? Yeah. I would think so. So that's the counterproductive part, right? You could see a bit of a panic there, a pullback in investment and consumption as a result of that. Right. So in a sense, it could be almost counterproductive.

I mean, if you can push short-term rates down, the federal funds rate target to one, But if you spook bond investors who think, oh, this is going to lead to higher rates of inflation, and by the way, this means that the Fed is under the thumb of the executive branch of the president, and the motivations there are different than the current mandate of full employment and low and stable inflation, you could see interest rates jump, long-term interest rates jump. So you get short rates going down, long rates going up. And, of course, a lot of different interest rates are tied to long-term interest rates. The mortgage rate, 30-year fixed, which is a lot of – most Americans, that's what – when they say interest rate, that's what they think about, right?

Right. So that's what you're talking about. Yeah, that's right. Now, the president has alluded to the fact that we've got all this debt, government debt, treasury debt, you know, sitting out there, and we've got to pay interest on it. So by lowering the interest rate to 1%, you're going to make it less expensive for the U.S. Treasury to finance that debt. Does that resonate with you? Well, perhaps on the short-term debt for a while, but not all of our debt is locked into the very short-term securities or notes. So it's actually spread out along the maturity curve there.

And again, if this does cause bond investors to get spooked and higher interest rates for, say, five, or 10-year or even 30-year debt come into play, that's not good to help that argument, right? A lot of our debt is locked into some of those longer-term nodes. Hey, Matt, do you know what the maturity of the debt is? You know, if you look at all the debt that's outstanding short, long, do you know? I think it's like five or six years. Is that right? I was going to guess seven, but I'm not confident. Oh, maybe maybe it has extended out.

I don't know. Yeah. But that's what you're saying, Chris. You're saying, okay, you can bring down the cost of three-month treasury bills, but you're going to raise the cost of five, seven, ten-year treasury bonds. So exactly what is the net benefit of that? Right. Okay.

All right. Well, how about this? Have the Fed quantitative ease go in and buy treasury bonds and mortgage-backed securities. That's what QE is, right? They can go in. The Fed could go in and buy 10-year treasury bonds, seven-year treasury bonds, bring down the price, lower the yield. I mean, raise the price, bring down the yield. And they could bring down mortgage rates too, right?

I mean, because they could buy Fannie Mae, Freddie Mac, mortgage securities, Ginnie Mae securities. And that's three quarters of the mortgage market right now. So you could bring down the cost of borrowing. What's wrong with that? And I think that's called fiscal dominance, right? Yeah, you're monetizing the debt, right? Okay. Right?

So in the short term, you might get some favorable effects, but then, again, what does that mean for the long term? You're going to have investors going to be very worried that now you're going to be in this world where Congress can spend with abandon and we'll just monetize the debt and we're worried about the inflationary aspect of that as well. So that's unlikely to play out in a very positive way we've seen other countries, you know, fall into ruin when they've tried to monetize their debt. So it's a really dangerous game to play. Right, right.

Matt, any opinions on this particular talk? I mean, that's what Chris is articulating here is the consensus, right? I mean, is there any economists you know that out there that isn't saying the same thing? Is Erdogan considered an economist or just the president of Turkey? But that would be the only heterodox opinion I could think of. Yeah. Yeah. So you're in the same camp then.

Yeah. And I wonder how much this idea has legs because of the degree to which the public thinks that Jerome Powell and the Fed can change all interest rates at once, not just short-term rates. And now when the Treasury goes to auction, it's really investor appetite that determines where the 10-year yield and their mortgage and their car financing terms go. it's not a lever that the Federal Reserve actually has. It's really just a short-term mechanism there that bleeds through typically. But I think about that a lot.

And I think that's how these policies get oxygen. Right. Well, how worried should we be? I mean, because Chair Powell, his terms up is in May. You know, obviously he's under a lot of pressure. The president visited the Fed as of this podcast yesterday. That was Thursday. and obviously was putting a lot of, you know, kind of public pressure on the Fed chair.

So much that he had to wear a hard hat. Yeah, exactly. I think they both wore a hard hat. They both wear a hard hat. Because they were at the construction site. That's right. That's where the pressure is coming in, right? That's right.

You're spending way too much on this rehab of the Fed's buildings. Right. How worried should we be, do you think, Chris, about, you know, because President Trump is going to appoint a point, a new Fed chair that's going to take that seat in May, the process for picking that new Fed chair feels like it's already underway, and it will be in full swing here in the not too distant future. You know, is this a concern, should this be, let me ask it this way. Should that be something regarding this being our baseline forecast? Should we be influencing the kind of forecast we have for the federal funds rate or 10-year

treasury yield or anything else? I'm not quite there yet. There are a couple of safeguards, if you will, or constraints here. One is, I think there's a misnomer in terms of how much power Powell actually has. Yes, he is the chair of the Federal Open Markets Committee, so certainly has some power of persuasion, but they're 12 members, right? They all vote, right? So even if you replace him, you're not replacing everyone on the, on the FOMC.

So you could still have a lot of voting members there that suggest that don't go along with the plan to say cut rates by a significant amount. So that's one potential there. There is a process. There's a compromise. That can change. That can change. Well, it can. It will.

I mean, right? Because Fed members, members of the FOMC will are their terms are expiring. They're rolling over. He's going to appoint new people. Yeah. So, you know. It's not immediate. Not immediate, but over the next year or two, you can see some pretty big changes on the bet.

That's right. That's right. But I think there's an idea here that, oh, if Powell goes away, immediately you're going to see lower rates. It puts in his person and then that next day, 1% rates, right? That I don't think is the case. I think there is a confirmation process here as well. So, you know, there is some review. I'm hopeful getting at Congress that some vetting here.

Good luck with that, but okay. So, but then I think even the economists that are being proposed, I think they have some sense of the consequences here. So I don't know. I think there will be some pushback. I don't think they'll go along with a 3% cut immediately. Maybe they go along with a 50 basis point cutters. It's something that is enhanced. So there is some risk there.

But at least for the time being, I'm of the opinion that, you know, cooler minds prevail among the 12. and they're able to still make some more objective decision. I'm not going to change my baseline because I think ultimately the president is going to pick someone that still respects the independence of the Fed and will conduct policy consistent with their mandate of full employment and low and stable inflation. So someone like a Kevin Hassett who's head of the National Economic Council or Kevin who was formerly on the Fed, the Bernanke Fed during the financial crisis, someone like that. That's what you're saying.

That's what I'm thinking. But if we don't get someone like that, then there's a risk, right? There's a risk. Yeah. Okay. But Matt, anything to add on that? It could be Chris Waller, too, who's already on the Fed board, who seems to be on this short list. So he's already a voice that's listened to.

So kind of goes to the argument that it wouldn't be such a dramatic overnight shift, if that were the case. Yeah. Yeah. I mean, he's recently turned, quote-unquote, doveish, right? He's been saying, he's one of two. I believe FOMC members are out publicly saying they would favor a rate cut at the next meeting. Next week. Yeah.

Yeah. So you're saying he has, but he would be credible too, right? He comes from. He was director of research. Was he a can't? St. Louis? St. Louis prior. And his argument to cut is not irrational.

I mean, I think he has a sound argument. And it's not that he's looking to get the Fed run fund rate to 1.25. He's talking about quarter point cut. It's quarter point. Yeah, exactly. A meeting before we think so. So, yeah, it's not the end of the world. You could do that.

Maybe it's ill-advised, let's say, but then you'll get some data points and you can reverse course. Well, almost by definition, regardless of who is president or what the dynamics were, you'd have Chris Waller out there, right? Because the consensus view, our view, is the next rate cuts in September. So if that's the case, someone's going to be out there saying that it should be in July. I mean, you know, there's a distribution here. So he's not, he's not, he's not, what he's saying is not, you know, outside the bounds here.

I mean, it's well within side the bounds of what's reasonable. Okay. You know, I had this kind of daydream that Powell, I don't know where I conjured this up, but Powell actually has at his press conference in July says, okay, we're going to cut interest rate. I hear you, Mr. President. I'm going to cut interest rates. I'm not, I can't do it myself, by the way, but I will, as you point, out, I will favor a cut of the federal funds rate by three percentage points as soon as, you know,

when we meet, we'll be happy to do that. See what happens to markets. I'd be very curious to see what happens. Call the bluff is what you're saying. Call the bluff. Call the bluff. Let's just see exactly how that would play out. Yeah.

Be fascinating to see. But I can't see Chair Powell doing that. That's South Park. That South Park kind of stuff, I think. Yeah. Yeah. Are you nervous? You sound nervous.

Nervous about how this is all going to play out in terms of independent independence. I think independent independence is going to be affected for sure. Yeah. I think that, you know, whether. Intramently or? I think, I think there is a, well, I haven't, like you, I haven't changed my baseline. Okay. I have not done that.

But I can see a scenario where we get. more rate cuts and a lower federal funds right by mid next year than is in our baseline and that it's not consistent with the mandate. You know, again, going back to full employment and inflation, you know, a forecast where you have inflation going back to target. I mean, it's going to be, inflation is going to be elevated. The tariffs are going to result in higher inflation. There's no doubt about that, in my humble opinion. But what matters is the forecast. What's the trend line? What's direction of travel. And I don't think those things are going to be consistent with the idea that you should have a federal funds rate that's below neutral. I mean, in our estimate, neutral is

3%. So if we go from 4 and a quarter where we are today to 3% by mid next year, that's our baseline, but I can easily construct a scenario where we go from 4 and a quarter to 2 and a half percent, maybe even 2%. Because you do have an election coming up, right, in November, and there would be a great incentive, and this is the problem with when central banks lose independence, the executive branch has an incentive to juice things up in the advance of an election, particularly the midterm elections, because that's going to be important determining whether Congress remains under Republican control or not. So I can see that scenario. And in that scenario, I see higher long-term interest rates, unless you get, you know, full-on fiscal dominance in the Fed now QEs, you know,

And they may be forced into that position because if they cut rates too much too quickly and spook bond investors and long-term interest rates jump, then the Fed will have to come to the rescue and start queuing and buying those long-term bonds. And here we are, you know, full on fiscal dominance. I think that's a reasonable scenario. I mean, not one that I would discount. Would you agree? Yeah, I agree with that. It's not my baseline, certainly.

Now that I've just talked myself into, we probably should run that scenario, shouldn't we? should. Yeah, I think we should run that scenario. Because that, you know, the spike in long-term rates, there's other reasons to be nervous about that, even, you know, independent of the Fed independent, whether the Fed's independent or not, right? You know, foreign buyers. Yeah, all kinds of things going on. That, you know, hedge funds are now dominant players in the treasury market, you know, that kind of thing. Okay.

Well, one other thing that's come up in the context of, you know, we've got a lot of debt and we need to get an interest. interest payments are rising and we want to get that down is stable coin, you know, using in providing the legal and regulatory framework for more stable coin because stable coin, presumably, you know, those are, that's crypto and the crypto has to be in a stable coin backed by treasuries so that the stable coin fund would then be buying treasuries with the funds that it raises to backstop its, you know, it's crypto. And that would become a major source of demand for treasuries, which would keep interest rates down. I think that's something that Treasury Secretary Besson has talked about.

What do you think of that idea, Chris? Yeah, it's interesting. I still am trying to wrap my head around whether this is just a substitution, right? It seems like the money that is in money market accounts today, money market funds, which are backed by treasuries typically, the same type of assets. Isn't it this just shifting some of those assets from, say, a traditional money market fund to the stable coin. So that's how I'm thinking of it.

There could be other parts of this that, where money shifts around. But I'm not seeing how the stable coin itself is generating a whole new class of demand for for treasuries. It seems like it's just moving it from one pocket to another. One pocket to another pocket. Right. Am I wrong about that? Am I missing something?

I don't know. It feels right to me. I don't know. You're the young guy. You're the, yeah. And actually, this is a little weird coming from Chris because he's such a, you know, he's the Crypto Maven. I mean, you would think he'd be all over the stable coin thing.

But even he's skeptical. So anything, I don't know. That feels, what you just said feels right to me, Matt. I may be age appropriate, I guess, but I have very little to say on the matter. I'm glad you picked Chris first. I don't understand how that's anything other than extremely, not just monetizing the debt, but doing it in an extremely risky way that's, you know, uh, explain. kind of everybody to crypto volatility.

But outside of that, yeah, seems like a hell Mary. Although the stable coin, the idea there is to get rid of the volatility, right? Because you're backstop by Treasury. But to your point, the other wrap against this is I don't understand the logic behind stable coin in the first place. I mean, why exactly? Why would I hold stable coin? Maybe if I were sitting in Argentina and I'm worried about the pace,

or I'm in Turkey, as you point out. I'm worried about the lira. But why would I, you know, be going into stablecoin? You know, I just don't see it. There can be some transactional efficiency, perhaps, right? Is there, though? Is there? I mean, over a money market?

Well, let me think of like this money market, as example. If you wanted to shift from one account to another, you'd have to extinguish it or draw it down, go to cash, move the cash over, and then buy another fund. This could be, you could kind of move money market funds potentially around with a stable coin, right?

Some type of tokenization, right? Oh, I see. You're saying it facilitates the movement of that cash. Yeah, but I see that as on the margin, right? On the margin. It's got some downsets. There's some frictions in there that you could remove. Sure, let's do that if there's, you know,

make sense. But I don't see that again as really resolving that situation. And I don't see this really as adding a significant amount to our economic productivity. Well, you know what? We need to get a crypto guy on. We haven't talked about crypto in a while in the context of all the legal and regulatory changes that are occurring. And maybe we're missing something. We've got to get someone on to talk about that.

Take the other side of this. Sure. Yeah. Because, you know, I will say, I've been skeptical, but the price of Bitcoin is now $116,000, I think, per Bitcoin. So someone's buying Bitcoin. Now, of course, so who was telling me this? They call it digitized tulips. They called them digitized tulips.

Bitcoin did. It kind of resonates with me. Who told me that? Oh, the Constant Hunter. She's the chief economist of the EIU. I was at a function with her. And she brought that up. By the way, we got to get her on too.

I got to invite her to come on. It should be good to get on. Your foreign argument makes sense. I can see that, right? Yeah, that I can see. That I can see. That I can see. You mean the peso or the lira up?

I don't trust the fiat currency. I don't trust the fiat. Or China, Russia, right? Yeah, right. About the expropriation of the dollars, right? Right. Right. Yeah.

Yeah, for sure. But other sources of demands, I can see. Okay. Well, let's turn to the other kind of ongoing big topic of the economic topic of the week. And that's tariffs. And we've got some recent trade deals. Hey, Matt, do you want to? to just give us a sense of things? What's happened in the last few days, last week on the trade front?

The biggest, certainly the biggest is the agreement reached with Japan, which is a major U.S. trade partner, a country that U.S. has a trade deficit with, very close geopolitical ally, and were on the cusp, Japan was, of being charged a 25% tariff as of August 1st, which is the Trump administration's deadline imposed a few weeks ago, if there was no agreement reached in the intermediate time, intervening time, they've been getting charged 10% for all the goods leaving Japan to the U.S., just after reciprocal rates were paused.

So the agreement reached, and cars are kind of separate, just given the magnitude of the automotive industry in Japan. They were all the cars in Japan were subject to a 25% tariff that every foreign car coming to the U.S. is being charged. So this is a big, big hang up, 25% rate being charged there. That was apparently a big sticking point negotiations, but this agreement gets reached this week selling everything at 15%, which I think markets initially cheered or not in reverse course either,

but that was accepted as good news. I would, you know, my first thought was to immediately go to all, our January forecast for Japan and look at what we thought was going to happen. We were, I think, relatively orthodox and thinking that tariffs against U.S. tariffs on Japan would be about 3 or 4% in 2025. Did we really? Yeah, do any, or this substitutes for the numbers game. But what do you think we had for S4, the Japanese S4?

So our worst case scenario, downside scenario for the Japanese economy. 10%. Yeah. So we thought 10%. And now we're at 15% and that's, uh, that looks rock solid. That's where it's going to land. That's where it's likely going to land. And I, and I think the UK agreement a few months back, uh, was a good guidepost for,

for where, you know, where agreements were likely to be reached in the UK, we have a trade surplus with very close to geopolitical ally and they still got 10%. So it was hard for me to imagine any country doing better than that. 15% for Japan feels consistent there. And I think that's a pretty good floor for, for other countries. moving forward. We've heard some other agreements with a little bit less detail. But yeah, that's the general contour of what happened. Yeah. And I guess it could be a little lower than 15, right? The actual effective tariff rate

because there's all kinds of exceptions and carve-outs and exemptions and everything else. So maybe it doesn't end up being 15, but it's going to be higher than 10, it feels like. Yeah. And the bigger sticking point, the bigger detail is that the cars, Japanese cars coming in trucks coming to the U.S. will be 15%, which makes. them, as far as I can tell, besides Mexican and Canadian carveouts with USMCA, the cheapest foreign cars coming into the United States because everyone else is subject to the Section 232, 25% tariff. And it feels like you're, I think he said it right.

The UK was kind of a prototype for what is coming and Japan was next. And that feels like that that's going to influence where the European Union, the negotiation of the European Union land. So it feels like they're going to be somewhere about the same. 10 to 15% which gets to the overall effective tariff rate bottom line I mean this

the stated tariff rate what the president is saying what the administration is saying that goes up that goes down that goes all around that's changing but if you actually look at the data if you look at the amount of tariff revenue that's coming into the United States you know paid by American businesses and consumers

and you divide by the value of the imports that are subject to tariff that's the effective tariff rate. That now feels like it's at least 10% north of 10%. So we started the year at 2ish, maybe a little over 2. We're now at 10, and it feels like it's going to continue to push higher here and settle in somewhere between 15 and 20%

because you've got much higher tariffs on other countries coming. And, of course, China is sitting at what, 40? 40%, I believe? Yeah. Because they went from 10. They started at 10 at the start of the year. they went up 30 and now we're at 40% on Chinese tariffs. So that's a big deal. That has that that that's not small.

That's like a huge, those are huge numbers. No? Yeah, absolutely. And I think there's a lot of countries like South Korea that are at the 10% 90 day pause, 90 plus day pause. They're at 10% but no expectation that they're going to be lower than 15%. So things are all pointing in the direction of higher. than where we're currently at.

Right. So I keep going back to this rule of thumb. Every percentage point increase in the effective tariff rate raises U.S. inflation prices by 10 basis points. So if I, let's say I go from, let's just make the arithmetic easy. Let's say at the beginning of the year, we're at two and a half.

Let's say we end at 17.5. Because that feels like where we're headed. That's a, what is that? That's a 15 percentage point difference. I multiply by 10 basis points. That's 1.5%. So inflation is measured by the consumer expenditure deflator. That's the measure inflation the Fed uses to set the 2% target.

The core CPA, a core PCE of deflator is now sitting at 2.5%. If that arithmetic held exactly true, that would put the inflation rate, let's say, a year from now or so 9, 12 months from now, at 4%. Right? Is that what I'm right? Yeah. Yeah. If we stick at that tariff level. Yeah.

If that. Well, it feels like that's where we're going and we're going to stay there. I mean, I don't know what brings that down, you know, unless you get a legal action at this point, right? At least in the near terms. Oh, you got some TA will be very negotiated, right? Well, that's coming too, and that feels like it's going to be hired. I was, as I said, I was in Mexico, so it's paying very close attention to the numbers. And the effect of, if the 30%, as you may know, the other announcement, I don't know if it was this past week or

maybe it was the week before, it was the week before, that Mexico was going to face 30% tariffs, you know, as of October 1. So if they go into effect, you know, and are implemented, that would put the effective tariff rate around in Mexico, even with the USMCA exclusion, you know, right now there's an exclusion, no tariffs on USMCA compliant product. But even with that, and assuming that compliance rate goes up, which it would, you're still going to be sitting at maybe close to 15% on Mexican goods, right? So, you know, it feels like we're going to somewhere between 15 and 20.

That feels like where we're going. And it almost feels like the president is going to continue to push on this. You know, I don't know that this is the end of it, right? Why would it be the end of it? I mean, it feels like he's going to continue to push until something actually breaks, right? Until the stock market breaks, until the bond yields rise, until the economy really actually falters. So this is real. This is, you know, and, you know, we'll talk about the stock market. I want to talk about the stock market because it's hitting record heist, you know, in the last few days,

you know, what's going on there. But it just feels like the stock market doesn't, hasn't got, has, doesn't look at this arithmetic yet. Here's the other aspect of the arithmetic, back to the rule of thumb. Every percentage point increasing the effective tariff rate reduces GDP, real GDP, by seven, eight basis points. So again, you do the arithmetic. tick, you know, go from two and a half to 17 and a half, that's a 15% increase, percentage point increase, you know, times seven, eight basis points. That's at least a percentage point off growth, right? So if the economy is going to grow 2%, that's just a real potential, real GDP potential,

now it's going to grow 1%. That's consequential. That's consequential, right? Am I missing something, Chris? Am I, what am I missing? No, no, I'm asking the same question. What is the stock market on fire? Well, what's going on?

Yeah. Well, I know you're fully invested in crypto, so you don't really follow it. Of course, of course. But maybe Matt does. I know Matt, Matt, Matt's watching the stock prices. Yeah, I need to. So why? I think that there's, there's a general sense, I think, that this is now starting to be not

that big of a deal. And investors are looking and they're seeing people aren't getting fired. consumers are, I think consumer spending is weak, but it's not falling off a cliff. Inflation hasn't come roaring back. And I think there's this general sense and maybe it's residual from, you know, big, spectacular implosions that we're used to kicking off for sessions, whether it's, you know, Lehman Brothers or COVID-19 cases exponentially rising. There's nothing to point to quick and tangibly that says the economy is in a tailspin.

the big silly tariff announcements are the stock market supposed to be forecasting i mean it's not like what's happening today it's what's happening over the next six 12 months wait they're they don't believe the economists is that what i mean we've had two three years of people saying that we should feel really bad that inflation is really bad but people continue to spend businesses continue to hire and i think there's maybe an invincibility sense oh so it's all those bad bum forecast not our bum forecasts but the others yeah the others back a couple three years ago saying it's a chicken little syndrome kicking in i see yeah yeah Is that what you think it is, a chicken little kind of thing?

I think it's a sense. And when tariffs are slower growth, tariffs are investments that don't happen and industries that never get off the ground. I mean, there's this slower burning weaker instead of 2% you get 1% type of effects that are injurious, but not, not February 2020 or March 2020. So I think people are willing to continue to look through that and keep plowing money into, you know, AI companies and everything else. That's interesting.

But eventually, eventually earnings will look, you'll see the bad earnings calls. There has to be some type of correctance. Valuations become so detached from reality is my expectation. But until that becomes undeniable, I think we're going to keep walking forward. Right. I guess the tax cuts also maybe are rolling, you know, giving a little more support in the short term here that makes things look better than. No more than five percentage points, right, on the SMP 500.

I mean, the tax cuts, you know, because what you're saying is, look, if you assume the same price earnings multitudes, and after tax earnings are now higher because of the tax cuts, therefore you should have higher prices. That might be worth, you know, three, four, five percent percentage points on that most. Yeah. Which I guess that's a point because if you look at the S&P 500, even though it's hitting a record high, you know, compared to where it was at the end of last year, it's only up three, four, five percentage points, I think, you know, something

like that. And that would be consistent with just simply discounting. the tax cuts into the earnings. It's also highly concentrated, right? Yeah. The gains, right? So it's really just a few firms,

relatively few firms. Driving the train. Driving the growth. So that's also, it seems like more speculation. Yeah, what you're saying, well, what you're saying there is if I take the tech stocks,

the big AI companies, the top 10 stocks, they account for 50, 60, percent of the gains that we've experienced, you know, over the, I guess, the course of the year, and everything else is flat to down. So the rest of the market is kind of more consistent, performing more consistently with how we're speaking about the economy. And it's, you just don't see it because, you know, the invidias of the world and now, you know, Google just had a great earnings release and stock prices. You're saying that's what's masking kind of the, the message

that, you know, was coming from the equity market about the economy. Yeah, it's the AI and crypto enthusiasm. Crypto enthusiasm taking off here. Yeah. Now, forecasting too. It's also the expectation, this is dwindling, but the tariffs are not going to be here. If we're talking about forecasting, I think there's some increasingly unlikely expectation that this was a, kind of a cooler heads will prevail. I think that's harder and harder to hold on too, but I think some of that's in the in the market as well.

Yeah. I keep thinking that that that's that I keep thinking that that's got to get wrung out here because that's not reality right we're actually seeing it and so once that gets that view gets wrong out then that's where you see at least some correction in prices yeah although I guess you know one interpretation of what I what you said Matt was even if the scenario is that the economy's growth rate slows that may not be a reason to sell stock, right? You can kind of just look through it because your investment horizon is going to be longer than the next 6, 12, 18 months. So, okay, the economy slows, but no big deal. I mean, earnings are going to be under some pressure, but I'm going to look through that. I still think AI is going to enhance productivity for the next 15 years or 20 years. That's your strategy. Then you don't pull out, I would think. Right. Okay. All right. Anything else on the equity market, the stock market, the tariffs, the trade

war, any of that kind of stuff? Anything else before we want to move on? Chris, anything? Anything more that we didn't mention? We could go on, but I think we're long in the tooth here, right? Are we already long in the tooth? Oh, yeah, man. The conversation has been engaging. Yeah. That's what happens when we get mad on, you know? Yeah. Okay, let's let's, let's, I know we have, what, what's your pleasure? Should we play the game? Should we take listener questions? Should we do both? Matt, do you have a preference? I burned my number with the Jeff. Japanese S4 tariff rate. So questions.

You go for the listener, listener questions. Okay, let's do a few listener questions. And I want to turn back to the economy because there are a lot of data came out this past week on housing. I know we got durable goods. And we got GDP next week for the second quarter. So that's a big number.

And PCE, that's coming out, the consumer expenditure player. So we'll come back to the data and one end there. But before we do that, let's take a few listener questions. So fire away. So adjacent to what we were just talking about, relatively capital markets, financial markets, the dollar is weakening. There's a lot of talk about it. It's a big deal.

Okay, equity prices go up, but a lot of people will point to, okay, there's bad news. If the dollar is getting weaker compared to other currencies, how will that actually start? And what's the clearest way that that starts to manifest as an economic pain point for everyday people? Oh, that's a good question. Chris, you want to take that? Well, the most direct ways that imports get more expensive, right? It just becomes more dollars to buy the same amount of imports. And that's even independent on top of the tariffs, right?

So to the extent you're consuming imported goods, that's going to manifest itself. And then it's also indirectly, right? There are a lot of imported goods that end up in domestic production and things you might not think about. There are certain components or there's machines. that domestic businesses need to acquire from abroad and that becomes more expensive so that gets passed through. So yeah, I think the most direct channel is through the prices, right? Yeah, I guess it also makes it if you travel, it makes travel more difficult. I mean, particularly Europe. I mean, I haven't been to Europe in a few months, but I've heard this

summer it's packed everywhere by Americans because, you know, even with the same, sell off in the dollar and the appreciation of the euro, it's still pretty attractive. So you see a lot of visitors. I guess, though, the thing that makes me most nervous about the weakening dollar is what it says about global investors' faith in the U.S. economy and a place to put their money. I mean, typically when you're in a risk-off environment, like the one we have been since the beginning of the year because of the tariffs and trade war and everything else, money, a global capital comes flowing into the United States as a safe haven. And that causes, you know, interest rates,

the value of the dollar to rise in interest rates to decline. And we've seen just the opposite. We've seen, you know, in this risk-off environment, the value of the dollar decline. I guess on a trade weighted basis, it's down almost 10%, I think. Mostly a lot against the euro, but against all currency. Even the, of course, according to the Chinese currency. And interest rates, you know, they've pushed up, you know, the 10-year treasury yields hanging just south of four and a half percent. So that's, that, that, that, that, that, that, that, that, that, that mark, those market dynamics are consistent with global investors kind of questioning the safe haven status of the United States, which I think is a big, that could be a really big deal, you know, if that's in

fact the case and if it intensifies, because, you know, we've, the U.S. is over the decades and, really since, uh, over a century, it, you know, it's benefited enormously from that safe haven status. You know, we get, we get all this money flowing in when times are tough, and that makes it easier for us to navigate the tough times compared to the rest of the world. And this is going to become increasingly more important, given the large budget deficits in the high debt load. I mean, someone's got to buy that debt. And if foreign investors are more circumspect about the safe haven status of the U.S., and there's a risk premium that they build in, that means higher interest rates. And that, of course, higher interest rates are a corrosive on the economy,

He means higher mortgage rates, higher auto loan rates, higher credit card rates, higher for long-term growth, you know, hiring rates for corporate borrowing and investment, which goes to productivity gains. So for me, I think that's the most, you know, worrisome aspect of the, you know, weakening dollar in the context of what we're going through now. Does that make sense? Chris, does that make sense? Yeah, I guess the other aspect might be exporters, right? You might expect that they would actually benefit, but I'm not, at least what I've seen,

I'm not seeing a rush of foreign demand for U.S. products. So that's also concerning. Right, right. Matt, did we miss anything on that question? No, I think the downside, you know, whenever a recession hits, how clearly visible this kind of pain, I think that's the most important and certainly what I would have went with. Okay. You want to take another one?

Sure. The relatively familiar question, should we have tariffs? You have these announcements that, okay, Japan is going to invest $550 billion in the U.S. Allegedly at the discretion of the president, which I think is a little bit different than what we've seen with other agreements. But generally, they follow that thinking that we reached an agreement and what this agreement will allow is, A, access into foreign countries' markets, and B, in promises of investment in the United States. That latter, the investment in the United States, is there a real potential that supply chains, production does get diversified to the United States, not just job creation, but will these things come to fruition? I think I have a sense of how you're going to answer, but why isn't

that a compelling type of tradeoff? Yeah, I, it says you're calling out the part of the agreement with Japan, in addition to the tariffs, was around this idea that the Japanese I guess government would help fund investments in the United States to the tune of $550 billion. I don't know what that means. I don't know what that is. I don't understand it. I mean, there's no detail there. So I'm very suspicious and skeptical that that will ever happen.

I mean, think about the timelines that will be involved to execute on this. They go well beyond President Trump's term as president, right? I mean, to get these things off the ground, to get the, to think about what the investments are going to be, to actually start to execute. That would take years, I would think, you know, to do. And I just don't see it, you know, happening. So I don't know. I guess color me skeptical on this one.

I think it feels more performative at this point. You know, maybe my mind changes. Maybe I'm missing something. we start to hear more detail and we actually see some movement on this. But it's like a lot of other things that have been proposed, like a sovereign wealth fund, those kinds of things. I don't know. It just feels very difficult.

And then I'm not sure how I feel about it generally, right? I mean, particularly around governance of the fund. I mean, who controls the fund, right? I mean, is it at the discretion of the president without any oversight from Congress, or other agencies within the government, then what does that mean? Does that mean this fund money can be used to finance a, you know, I don't know, hotel somewhere?

I mean, I don't know. I just wonder about, you know, the governance issues that are involved. So, you know, maybe, but color me skeptical until we get some real information about what this all means and what it's actually saying. Chris, any Yeah, I'd agree with you in terms of the lack of detail.

I also wonder at, and we've seen this with some other announcements, how much of this may actually be already committed capital, right? Toyota, Honda, they were already planning to expand operations, and this is just reiterating that. So I don't know. It's curious. I also wonder, is this a blueprint for China? Could China say, oh, we're willing to invest in the,

in the U.S., open plants and for tariff relief. I think they would be more than happy to, but. It seems touchier. Yeah. It's an interesting proposition also, right, in terms of that global dynamic in terms of foreign capital. And to your point, what is going to be an acceptable investment, what's not, right? Well, you know, it's, it just feels so weird.

in the sense that here I'm said in the answer to the first question that investors don't want to invest here but now they're being forced to invest here I mean that just really I mean I guess that's the other question I haven't read anything I don't know is it is it even legal to do you know I guess everything is legal I guess in foreign affairs I don't know it just feels really odd It feels really odd. We're going to force investors to invest here. I don't know. When you use sticks like that, that tends, things tend to take a long time to come to fruition and never come to fruition.

Right. Again, this is going to play out well beyond President Trump's first term. But I don't know. Let's see how these other arrangements, you know, and let's see if we get any more detail on it. Yeah, we need details. More details, yeah. Okay. One more question, and then we'll move on.

Okay. This, I have not thought of. I thought it was interesting. Is it possible that people think in consumer sentiment, you go to an election, oh, people voted because they really hated inflation. Is it possible that people hate inflation more just because there's no safety net where there is with the unemployment rate? You can find, with joblessness, you lose your job. You can go collect VY claims.

It's not as, you're not as left out on your own as you are. if you can't afford certain things anymore. So given the Fed's dual mandate, the argument there would be that's why inflation matters that much more. There's no stabilizer for it. I thought it was an interesting way to look at a phrasing that we hear a lot, which is people really hate inflation. Maybe that's the underlying focus.

Yeah. Well, I think there's truth to that. I mean, we've talked about that Chris has made the point that maybe in the Fed's reaction function, the weights on the inflation mandate and the full employment. mandate should be different with, you know, a higher weight on if inflation is above target because people feel that, ostensibly people feel the pain there more than on unemployment, if unemployment's high. And that's, I guess the premise of the question is right, isn't it?

I mean, if you become unemployed, you do, you can file for unemployment insurance if you qualify, most people do, and you get some benefit, and particularly in, you. in recessions and during the pandemic, those benefits were extended. But there is no, right? There is no direct government's offset, government support to offset the effect of inflation, right? That's correct. Unsuccessful attempts at price controls, but also security checks. Sorry, and there are some indexing.

Oh, there's some indexing, right? There's some indexing. That's true on Social Security. but not like on you know you just if you're working right no uh so yeah i guess intuitively that would say yeah i i i feel the pain more from inflation than i do from the thing about but i think that's more secondary maybe third order you know first order is not everyone suffers unemployment even if the unemployment rate's high you know it's 10% 90% of people are working

but with inflation everyone feels the inflation right everyone feels the inflation and the inflation we suffered in the last since the pandemic was you know things that people need you know food shelter you know energy you know that kind of thing so that those are first order reasons why people hate inflation but maybe a second or third order it's an interesting idea I don't know anything any thoughts on that Chris I think it's right. I think it's a lack of agency, right? At least people feel that inflation happens to them and there's not much they can do about it. They can rearrange their budget a bit, but to the extent that they have necessities, there's not much they can adjust there and they feel

like it's happening to that. It's not something they control, but with unemployment, right, it is a smaller share that actually get unemployed. I think most people believe that, oh, there are some things I could do to get new skills, look for a job, right? There's some, I have some agency in dealing with that situation versus the prices just kind of fall from the sky. Yeah. Matt, anything you want to add there? Yeah, you can't hide from inflation and 10%. Unemployment's terrible, but most people are just hearing about it as they go to work.

Right. Or maybe a relative or friend are being affected by it, but not you. Yeah, that's a great question, interesting question. Okay, well, let's send the conversation with the data. And I think there's a bunch of data that came out, a bunch of much more will come out next week. This week we got some housing data. And Chris, maybe I'll let you talk a little bit about that. And then we also got durable goods, which is a window for June, I believe, which is a window into business investment.

And maybe, man, I'll have you talk about that in the context of, you know, what it means for the economy. So, Chris, you want to talk about the housing data? Yeah, sure. So we got home sales data this week for. both existing and new homes. And both are still extremely weak, right? So existing home sales, 3.93 million. That's lower than last month, kind of flat on the year, but very low from historical

perspective. So it's just evidence still of the lock in, lockout effect, high mortgage rates, making it very difficult for people to transact to find homes if they're looking, to find an affordable home. And then if you're locked into your mortgage with a 3, 4% rate, you're not selling either. And certainly not in this environment. And then on the new home side also, we had 627,000 homes sold, which is kind of flat on the month, but still lower than last year. So again, here too, home builders are still very dower on the market.

We have large or high inventories of new homes for sale. So they're having to make concessions or certainly slow down construction going forward. So it's not a great market. Let's put it that way for housing. Certainly. And I'd even say it's a housing recession from this standpoint. Or depression. Depression.

The ones that kind of does stick out to me is the condo sales. I don't know if you saw this market. 360,000. That's as low as it gets. That's great recession level. Right. Really? Bottom of the Great Recession.

So it's really slow. We typically think of condos and co-ops maybe being a more affordable option. So if you see that part of the market really suffering, it's certainly an indication of some broader. I know the Florida condo market is a complete mess, right? I mean, given all the concerns about homeowners insurance and climate. That's right. You have an insurance issue there as well, property taxes. So it's not looking good.

going to take a while. Yeah, I mean, there's different ways of looking at the housing market, right? Sales, construction prices. In terms of sales, I say it's depression, right? Because if you take $3.9 million existing plus $600K new, that's $4.5 million, that's as bad as it got during the teas of the pandemic shutdowns or the high of the financial crisis, right? Right. That's right.

That's pretty bad. Yeah. Okay. And my sense is that we are going to start to see construction. Construction is held up better, you know, because builders have kind of used incentives, interest rate buy downs to kind of keep sales up. But even that's not been enough. As you pointed out, unsold inventories now about as high.

It's almost as high as it was during the lead up to the financial crisis, right? The overbuilding during that period. Yeah, it's 9.8 months of it? 9.8 months. Typical is what, 5, 6? Yeah, something like that. So that feels like we're going to see a real fall off in home building, you know, starts and completions here.

I mean, we've already seen that with multifamily because that got overbuilt on the high side of the market and that's already come in. But it feels like on the single family. And that's, isn't that the most important link back to the economy? That's where, you know, most of the hit to GDP actually occurs. That's right. It's in the construction. And then there's spillover effects as well.

I think we've discussed those as well. Yeah, the multipliers. Yeah. You buy a home and now you need furnishing, you need insurance, you need a bunch of other cars, vehicles. Yeah, it has a real direct impact on local economies. So, yeah, it's significant. Yeah.

In terms of prices, what do you think on that? I mean, price growth, prices continue to rise, you know, because we've had the lock and effect, no supply. There's been, you know, a shortage of homes. and even with the weak in demand, you know, prices have held in, you know, and they continue to push higher. They feel like they're starting to moderate here, though.

It feels like we're going flat on national house prices. That's right. Flat nationally, some markets that are down, they're down, double digits, right? So regionally, you do have some of that impact there. I think that, well, to really get the significant price declines, you need foreclosures to go up. And I don't see that trend happening.

just yet, right? At least certainly not under our baseline. Unemployment ticking up, but homeowners have a lot of equity still. So there's still quite a bit of a cushion there before they end up in foreclosure. So I think my forecast here is we do have prices going flat here for a while and then gradually things recover. But on a real or inflation adjusted basis, that means they're negative, right? So it's not a great market. So adding it up, home sales, very depressed, hard to see it getting more depressed.

So maybe that improves a little bit, you know, given demographic push to move. We are seeing more listings and more markets. Yes. People need to move for demographic reasons or job reasons. On the construction side, it feels like we're going to get weakness here. It's going to decline and actually be a drag on broader economic growth, GDP. And on prices, you're basically saying flat. You know, we're going to be flat here for a while.

Go sideways and let things try to catch up. And I guess the two underlying assumptions are one, no recession, a weak economy, no recession, because that could change that house price forecast pretty fast back to four. Absolutely. Yeah. Right. And the others mortgage rates kind of hang where they are, you know, six and a half to seven percent somewhere in there. The lock-in effects don't, we're not going to get any relief from the demand side from the lower rates.

Right. that's right okay all right you do have underlying demand though fundamental demand so that's a reason to believe that you know even if prices start to fall you might have some buyers stepping in we recently released a paper on the housing way to go I was waiting for that okay yeah I was like it was like teasing you teasing you waiting how zero was like come on Chris yeah so by our calculations there's still quite a you know well we got a paper you didn't finish your thought Yeah, we have a paper. We had a podcast and a webinar and scheduled.

We'll put a link to the paper in the notes to this podcast. So people should take a look. So the underlying, we still believe that there is quite a bit of pent-up demand, if you will, for housing. But without some relief on interest rates and prices kind of easing up here, it's going to be a while before that pent-up demand gets released. Yeah. Okay. All right. Durable goods, Matt. Most people don't really look at that, but I find that to be pretty important kind of real window into business investment. And I haven't had a chance to look at it. It came out this morning. What did it say? So big number. The top line reading was down negative or 9.3 percent. As you're likely aware, that's very volatile. It's a Boeing places, gets a bunch of orders in one month. Then doesn't the next, you're going to see some big swings in that top line number. It's why it's important to look at kind of more narrow, aggregation. What we look at and what we put into our high frequency GDP model is we strip away defense spending and aircraft spending and call that core goods, core capital goods. Their spending fell 0.7%.

So not as bad as that really bad top line number, but not good. And June's data, which we just got, is the last for Q2. And for the quarter, after you had a run up in orders in the first quarter of the year in the end of 2024, we see a 0.1% reduction in. in durable goods orders. So these big, big manufactured goods being ordered in the United States fell in the second quarter after, right after the election,

you get over 1% growth again in January, kind of a rush to get ahead of tariffs and get these orders in payback in Q2 and much weaker. So not a terrible story. It's not, it's not the bottom falling out, but certainly trending in the wrong direction. So the key in that report for me is non-defense capital goods,

aircraft. Aircraft, right? Yeah. And what was the orders, the orders were down? Yeah, they fell there. 0.7%. And you're saying they've been soft. And, you know, if you, abstraction from the monthly ups and downs have been soft

in recent months. Yeah, second quarter down slightly. Down slightly. Yeah. And I guess the thing that matters for GDP is shipments. So the orders lead the shipment. So that's why that's so important is a leading indicator. The shipments are like a coincident indicator. And what do they look like?

Shipments rose in June. 0.5%. You stripped away aircraft, 0.4%. So, it's okay. Yeah, modest growth and slightly positive before the quarter. Okay. So do you think investment in second quarter for GDP, which we get next week? You think that's going to be an ad or a... We have a small ad. Yeah. So not bad. I still think there's some residual effect from, you know, this first full quarter of chaotic tariff policy and then a lot of uncertainty. Stoney started to be a weight, but not so much that firms altered all of their plans entirely. Okay. Let's use all this to forecast GDP next for the second quarter, which we get the first read on next, I guess, Wednesday, isn't it? next Wednesday or Thursday.

Yeah. And, you know, our tracking, I think our tracking estimate is now like two and a half to three or something like that. 2.8% annualized, yeah. 0.8% analyzed. So if I take 2.8%, that's a bounce back from Q1 because of the swing in imports and inventory. That was down minus 0.5.

So like I'll take an average of those two as I think a good economist would. That would, and it would suggest that in the first half, of the year, what, that the economy grew one to one and a half percent? Something like that, real GDP, one to one and a half percent. So, and last year we grew almost three, right? So growth has been cut in half in the first half of this year compared to last year. Yeah. That arithmetic correct?

I agree, yeah. Yeah. Well, okay, that feels like a soft economy to me, doesn't it? It's below potential. Below potential is probably closer to two. That feels, I mean, as you said, it's not falling off a cliff, but it's definitely struggling here, no? Yeah, that's a real deceleration.

And I think the most comes out next week, too, not to get out ahead of ourselves, but how much of that is a softening in a consumer. I think the second quarter was that was the story. I think the imports oscillating back and forth are meaningful, but the U.S. consumer pulling back and not being as much, not delivering as much support to growth, I think is the most important story there. Well, almost no growth. I mean, if I look at real consumer spending all in, and we're going to, as you said,

we're going to get another data point next week. But that's basically zero in the first half of the year, right? There's no growth in the first half of the year, right? Yeah. And we're closer to about a percentage point add in real consumer spending in the second quarter, which is not what anybody would call extremely healthy. A lot of the increase from there is net X. So some of the import paybacks.

But yeah, that's weaker consumer growth. Yeah, and so I don't why anyone's optimistic. I mean, the first half of the year was no growth in consumer spending, one percent-ish, maybe a little bit above an overall GDP. And this included a period of front-loading and forward buying that has a backside to it in the second half of the year. And it's before the tariff increases actually got into prices and inflation and undermine real consumers, real incomes, you know, real purchasing power.

So why in the world would you think second half is? going to be any better than the first half. And presumably it could be even worse, right? Am I thinking about this wrong? I mean, no? Chris? Yeah, it's baffling. Okay.

Baffling. Okay. All right. Okay. All right. Even if you get a bunch of tariff deals, right? That's, well, a lot of this is done. It's baked.

It's baked. It's baked. It's just a matter of time. Okay. And let's, okay, let's end with, I was going to say, let's end with some good news, but we're not. We're going to end with some bad news. The PCE deflator.

I know you do a lot of work on this because this is the primary measure of inflation the Fed uses, and it's really very closely tied to what the CPI Consumer Price Index and the PPI producer price index is due because the PCE is dependent on those inputs. So what do we expect for inflation for the month of June? So we have a 0.3% rise from May to June in both headline and core PC inflation. That's right about where consensus is, a little bit some higher, some lower. It's a pretty small margin of error with PC given the input data. What that does to the year ago rate, so headline PCE, the year ago rate rises from 2.3% to 2.5% and core PCE rises from 2.7 to 2.8%.

So both on a year ago basis tick up, both on a month-to-month basis, moving in what we would call accelerating stronger pace. And Fed's target is two. So we're above target, meaningfully above target and moving in the wrong direction. That's right. To the extent, I mean, I think that year-over-year rate increase is a little bit overstated, just based off of base effects from last year. we had some really soft growth in like Q2 last year that makes 12-month comparisons now look

a little bit worse than they are. But the underlying components of, frankly, there's very little that's pointing the other way that's decelerating at a really healthy, encouraging way outside of shelter, which is this reversal in story over the past few years. But yet, rising good prices, food prices have accelerated a little bit, energy prices up and down. We look through that mostly. But we're starting to see increasing evidence of tariff past. through. And yeah, that's generally the force behind the acceleration in June.

Well, I haven't had you on in a while and asked you this question, Matt, but what do you think the probability of recession is starting in the next 12 months? I'm high. I think last time I was here, I said two-thirds and then you guys were blown away. So I'm there. I mean, I think the consumer spending story is kind of drives the train for me. Yeah, you wouldn't work in Charlotte's High Society. they'd kick you out, apparently. I don't get the reference. Should I be embarrassed?

No, no, Chris was in Charlotte in their... Oh, so it's high society. Okay. I can see that. Yeah, Chris, what's your probability of recession? I think it was at 40. I'm going to stay there. 40?

And I'm about the same 40, 45. What do you think Charlotte was, the folks in Charlotte? Probably on average was maybe 30. Really? Okay. 30, 35 or something. Okay. So we got a nice competition here set up

between Matt and the folks in Charlotte. There you go. Okay. All right, good. Well, we covered a boatload of ground. Anything else you want to say before we call it a podcast? I'm pretty tired after all that travel. I need a weekend.

Yeah, stats game next week with Marissa. Stat games, it was not the same without her. It really isn't. Someone told me I should go first. They think it's not fair that I make Chris Marissa go first. I thought I was being, I think it was tradition. I mean, I don't know. It's tradition.

It's tradition. Okay. All right. Yeah. Matt, do you think I was on play unfair by making mercy go first? No, I can't see clearly, but if switch it up, sure. Why not? Oh.

That's his. Oh. Wow. Yeah. You're out of bounds on everything. No respect for tradition. Nope. I am iconoclast.

It's. Yeah. Mix it up, baby. All right. Well, very good. good well thank you so much listener dear listener for listening in and we're going to call this a podcast talk to you next week take care now