Moody's Talks - Inside Economics - Shaky Credit, Shifting Consumers

Episode Date: March 3, 2023

Colleagues Scott Hoyt and David Fieldhouse join the podcast to analyze the state of American consumers and household balance sheets. Then Mark, Cris and Marisa answer some listener questions.For the full transcript click hereTo learn more about Moody's Analytics Summit 2023 & register, click here.Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I am joined by my two co-hosts, Chris D. Reides and Marissa Dina Talley. Hi, guys. Hey, Mark. Hey, Mark. So we're all going to be getting on a plane shortly headed to Phoenix, right? You guys are there, right, in Phoenix at our MA summit, the Moody's Analytics Summit. I hope so we're doing the podcast there. I hope we're all going to be there. That's right. We are going to do in person.

I typically say live, but we're always live. It's like in person, we're going to be doing a podcast at the summit. This is a conference, a confab for our clients and I guess good friends. They're coming into Phoenix. And is it a couple days? I think it's for two days, maybe three days even. Three. Three days?

Okay. Yeah. And as part of that conference, we're going to put on the, the podcast, live with in person with the audience. In front of a live studio audience. Live studio audience. Yeah. That'll be interesting to see how that goes. What do you think? Yeah. Yeah, I'm excited about it. Yeah. Should be interesting. Next frontier in inside economics. Right. We need a laugh track and all that kind of stuff at some point. Although I do a fair amount of laughing anyway. I don't think we need any more laughter. We need to be a little more serious. But I was

going to say one other thing. What was it? Oh, because we're going to be doing the statistics game live and in person in Phoenix, we're not going to do that today in this podcast. We're going to skip that just because there's a limited number of statistics and we might use them, make it more difficult to do the statistics show at the summit. But we will do listener questions. We will do listener questions because, Mercy, you were saying we got a number of good questions that came in from listeners, and we'll go through that. And I'll let you moderate that. Okay. But do you guys look forward to a five-and-a-half-hour flight out to Phoenix? I mean, or not?

Do you look at that with dress? Oh, for you, Mercer, you just a hop, skipping a jump for you, isn't it? Yeah, it's a 45-minute flight for me. Yeah. What about you, Chris? Do you look at it with intrepidation or like, you know, like I can sit back and You know, it's a great time to focus. And I've written a lot of articles on these flights. Yeah. I have to say, because it's, you know, it's, there's no interruptions. There are no telephone calls or, you know, if you don't go on the Wi-Fi,

you don't have the emails bombarding you. And I can get a lot done during these flights. Yeah, I'm with you. I'm kind of, it's weird. I'm kind of looking for, I mean, I typically with dread because it's a Sunday night flight to, to or afternoon flight to Phoenix. But I'm kind of looking forward to this because I'm going to get five hours I can actually write. Assuming my computer works.

Assuming the Wi-Fi on the plane works. Oh, no, I don't need the Wi-Fi. You don't want the Wi-Fi. No, no. Yeah. Don't get the wackily. In fact, I hope now that I don't have Wi-Fi. Yeah, because I would pay a premium not to have the Wi-Fi.

I'd pay the airline. That's funny. Yeah, you're absolutely right. Okay, we got a couple guests, colleagues. We got Mr. Scott Hoyt. Scott, how are you? Good. How are you doing, Mark?

I'm okay. And you've been on the podcast at least a couple times. Yeah, twice before. Twice before. Okay. Memorable events or? Oh, yeah. Lots of fun.

Lots of fun. And of course, Scott, you're the, you're like everything, the consumer. And we're going to be talking about the American consumer again in this podcast, particularly with regard to their household. balance sheet and particularly on the liability side of the balance sheet on consumer debt and credit, because there's been a very dramatic increase in the growth in debt, growth in debt, household debt recently, at least for certain categories of debt and some significant increase in delinquency rates as well. So we're going to dive in here deeply to try to figure out what's going on.

So I'm glad to have you on board. And we also have David Fieldhouse. David, good to see you. Thanks for having me, Mark. And you're a first, this is a first time for you on Inside Economics. Welcome. Long time listener. First time caller.

Oh, really? You're a listener? Oh, yes. Yeah. Definitely, I get a lot of work done outside, listening to the podcast. If it's a really good one, lawn's in perfect shape. Yeah, this is what we were saying. It's an hour and 10 minutes, it seems like, every single time.

Because is that how long it takes you to cut your grass, about an hour and 10 minutes? I don't have a yard that day. but, you know, there's leaves and other things, right? Good, good. And you tell us about yourself. I mean, this is, your background is certainly apropos to the conversation we're going to be having here. But give us a sense of your background. Yeah, I've been at Moody's for 10 years.

I'm from Canada. I got a PhD at the University of Western Ontario. They have a great economics program up there. I was lucky to connect with some experts who wrote paper. about consumer credit and bankruptcy and business cycles. And Moody's was looking for people to do this kind of work right after the financial crisis. And so my dissertation matched up pretty much with the job description at Moody's. And I think Chris was on my hiring committee.

So I convinced him to bring me along. Yeah. Excellent. Yeah, I've been here for 10 years. It's been great experience so far, great colleagues. And amazing data. I remember we wished we had the data during when we were doing research that I have access to now. So we get all this wonderful data from Equifax.

Explain that for a second because that's really key. I mean, we have a lot of insight into what's going on in terms of household balance. She's because of this relationship we've had with Equifax for, I think, 20 years. It could be 20 years now, 25 years ago. We first started that relationship with the credit. Bureau, but maybe you want to describe that data because that's really key data. Yeah, we get two feeds from Equifax. I think the one that we look at the most is the aggregated feed of the consumer credit

file that Equifax has. So this is balances, delinquencies, all that type of information, originations by different product categories, origination cuts, term length, credit score, bans. And then we get some demographic information, age, income. that type of information. And then the really neat thing that we're exploring over the last year or two has been a loan level version of that. So we can really track bars and figure out exactly what they're doing and, you know, not individuals. I can't see your credit profile. But anonymized. We can look at that and figure out what somebody like you might be doing. And it's amazing. We're starting to do all kinds of

other things like migration analysis and other type of work with that data. Yeah, I mean, that's really good. I love that migrate. I mean, I love all that data, but the migration data is pretty cool because you can see addresses and therefore you can track address changes month to month. And we've, I think we've got data, we're probably getting the February data here pretty soon. So we can see, for example, the number of people that are moving from, you know, the urban core of Philadelphia to the, you know, to the, to the suburbs, exurbs and rural areas, you know, kind of the net outflows of people, gross inflows, outflows, and net outflows.

Really, really cool data. Yeah, and it's very timely. So that's a great thing about it. So, you know, we see these zip code movements or balances. So, yeah, it's awesome data to have. We definitely, the day it's printed, we, Tim and I, we race through it very quickly and we love looking at this data. Yeah, so we'll come back. We'll definitely come back to that because,

I think that'll provide real sense of, the data will provide a real sense of what's going on in terms of household balance sheets. But just to frame this a little bit. So up until recently, I'd say up until, I don't know, three, six, nine, 12 months ago, I was of the mind that household balance sheets were an excellent shape, both on the asset side. you know, we had high stock prices, high housing values. You know, people were enjoying some pretty substantive capital gains. And then also on the liability side, on the debt side, leverage seemed to be, well, was low. I mean, if you look at overall household debt compared to income or looked at debt service, which is the share of income that's going to servicing that, all that seemed relatively benign, you know, no real problem.

And then I'd say in the last maybe beginning a year ago, but certainly in the last few months, you can really see a very substantive pickup in credit growth, borrowing by households. Not so much on the mortgage side, and we'll come back to that, but on the consumer lending side in terms of bank card and consumer finance and auto lending, that kind of thing's been very strong. And if you look at the kind of the overall credit growth, the debt growth that's been very robust, you know, much stronger than inflation, much stronger than income, you know, the debt to income is now rising. And even more significant, there's been a pretty significant increase in delinquency rate. It's still, you know, that's not out of bounds historically, but we're now for a lot of lending categories above pre-pendemic levels. So it feels like, stresses are starting to develop here and thus why I think it's important to kind of take another look at the balance sheet and ask the question, you know, whether it's an issue or not for the broader economy. So with that as a backdrop, and I said a lot, and there's a lot to unpack there. Let me turn to Chris, you first, because you've been looking at these things

for a long time. What do you think? What's your sense of things with regard to to hassle balance sheets and debt in general. Yeah, I think you characterized it appropriately. If you look at the aggregate statistics right now, actually things don't look so bad. 9.75% is the debt service ratio. So the amount of money that households have to dedicate to paying their monthly debt payments divided by their disposable income, 9.75%, I should say, that's as of the third quarter, of 2022, and that's exactly where it was the first quarter of 2020. So we're right back

where the pandemic was. At least we were a couple quarters ago, right? Probably it's, it has risen since then. So I would argue things are, you know, certainly deteriorating relative to we were, but still well below the whatever 13, 13.5% that we had during the Great Recession, something along those lines. So, but based on that measure, which is fairly core to understanding if consumers are able to make their debt payments right now, you know, no worries. But as you mentioned, if you dig below the surface a little bit, then you do see signs of stress forming here. So in particular, if you look at the delinquency rates, you see that auto delinquencies and consumer finance or personal loan delinquency rates are now above where they were prior to the pandemic. So

That's despite a very low unemployment rate. So that's a bit of the conundrum here, or a reason why a lot of analysts are particularly concerned that there may be underlying risks here, that the consumers may not actually be as strong as what those aggregate statistics suggest, or certainly parts of the consumer population may not be faring as well as what that aggregate number would say. outside of that, though, you're right. If you look at mortgage, mortgage is in its own different world. Mortgage delinquency rates are ticking up now, but they're still relatively low compared to history.

So they're off the bottom that we hit during the pandemic, but they're not back up to where they were prior. So things are, you know, I would consider that market to be more normalizing. They were, those delinquency rates were depressed, an awful lot by all the government stimulus. and the moratoriums that were put in place. Bars have a lot of equity in their homes, so the chances are that they won't default anytime soon. So something to keep an eye on, but definitely in a very different dynamic

than what we see in auto or personal loan. Credit card is somewhere in the middle. It's certainly been growing in terms of volume, and you do see those delinquency rates creeping up. So they're by my read. Maybe Dave or Scott can correct me. They're pretty close. to where they were prior to the pandemic, but the trajectory is upward. So I don't see that stopping

anytime soon. So it's very likely that credit card will be next in terms of surpassing its previous peak. So maybe I'll stop there. So the picture is that, you know, right now, things are still humming along. I don't see the consumer credit market as cracking or causing a recession in the immediate term. But certainly it's, you are seeing more and more signs of stress. And if there was uptick in unemployment or a worsening in the income growth that we see, you could definitely make the case for more defaults, more delinquencies. And ultimately, that would cut down on spending and the broader economy as well. I want to focus on one thing you said.

There's a lot to cover there and we'll do that. But the one thing you brought up at the beginning of your comments was the debt service burden. Yes. That's the share of aftertax income that households must devote to servicing their debt, interest in principal payments, to remain current on that debt. Correct. You're saying, okay, it's just under 10%. So 10% of aftertax income is going to debt service, which by the way, people hearing that may say, that sounds pretty low, but, you know, but you can talk about that for a second. But it's now back to its kind of, it fell sharply during the pandemic because of all the government support that was received. And on the income side support, but also debt moratoriums and, of course, student loan payments

and foreclosure, forbearance and all those kinds of things brought down those debt payments. You're saying that now we're back to where we were pre-pandemics. And in the grand scheme of things, historically, that's pretty low, right? It's still low. Yeah, because pre-pandemic it was low because of a low-rate environment. So that's still pretty low. So you're saying, okay, if I look at that, it's moving up. So that would be consistent with stress history and develop, but it's still pretty

low in the grand in the grand scheme of things. Is that fair? That's right. I guess I would just throw out the context of the labor market, though, right? Because we have this extraordinary good labor market still, very low unemployment rate, to see this, to see that debt service ratio rising. as quickly it is, given where we are in terms of the labor market, that should give us some pause, right? If that labor market were to get any worse, right, that service ratio is only going up, right?

It's not going to get better, right? So that's the cause for concern. Marissa, let me quickly turn to you because I think at the conference, the Phoenix conference that I mentioned, you're giving a session on this very issue. Is that right? I am. Okay. You are. Okay. So what do you think of how Chris laid things out there?

Yeah, I think you both hit the nail on the head. I mean, in the aggregate, things look good, still very, very healthy. It looks like we're just kind of getting back to where we were prior to the pandemic in terms of both debt service ratios and in terms of delinquency rates. I mean, for most product lines, they're either just below pre-pandemic rates or, you're. In a couple cases now, they're at or a little bit higher. And those, I think, are the interesting cases. And that's what I'm going to focus on in my session next week. What we're seeing is the usage of credit cards and personal loans by consumers. Delinquency rates for those two product lines are now a bit above where they were prior to the pandemic.

And that's where much of the growth was through the back half of 2021 and early 2020, too was this incredible growth. I mean, almost 25% growth in credit card balances outstanding and in consumer loans as well. Mortgages, yeah, like nothing really to worry about there, I don't think. I mean, the mortgage service debt service burden is actually below where it was prior to the pandemic, and that had been falling for some time. So it's really these lines of revolving credit that are kind of flashing some warning signs. And then we could talk about the auto market too. There looks to be some stress in the auto loan market, particularly among subprime borrowers. The other thing I'd point out, which is a little unusual, this is a very small

part of credit, but home equity has staged a comeback. So the usage of people tapping home equity lines of credit and one-time loans has risen again for the first time since the financial crisis, and that's just due to the fact that homeowners saw, you know, on average, 40% house price appreciation in a two-year period. And home equity lines of credit and home equity loans, the interest rates on them had been quite low. And so people were able to use those to, you know, pay off other higher debt payments that they may have had. So, that's sort of staged comeback in recent years. So while other things have sort of started to cool off a bit in the back half of 22 as rates have risen, home equity has kept rising,

which is a little bit interesting. Yeah, a lot going on there. Hey, Scott, I'm sorry, did you want to say something else, Marissa? No, no. Okay. So Scott, big picture, what do you think? You know, we seem to be all coalescing around this idea that, yeah, things are weakening. borrowing has been strong, but in general, at least so far, the balance sheet is still strong, generally. And we're going to come back and talk about under the hood. There's a lot going on there. But what do you think?

Is that a fair characterization? Yeah, I agree with that characterization. I mean, my biggest concern, as we talked about the last time I was on the podcast, is what this means for the spending outlook. six, 12 months from now, because I think, you know, consumers are starting to run out of either room to borrow or access to credit. I mean, the one thing that nobody's mentioned is the senior loan officer survey from the Federal Reserve, which shows a significant tightening in underwriting standards by a large segment of banks.

So, you know, consumers may, their ability to grow their credit to finance spending may shrink down the road. I don't think it is today, but I think it's a significant risk, you know, as we get late in the year. Yeah, so consumers' households are turning to debt to cards and consumer finance and home equity to help supplement their purchasing power. their income, their real income after inflation income because of the insurgent inflation has been under pressure. And so they're using the debt to kind of supplement to maintain their spending. And you're saying, hey, how long can that continue, particularly in the context of weakening delinquency rates and

tightening underwriting standards by lenders? That's what you're focused on. Correct. Yeah, got it. Okay, David, let me turn to you. And maybe we can get a little more granular because you go into bowels of this data, as you described, and get a sense of, you know, what's going on with regard to the trends when you look across income, when you look across age, when you look across other score bands, you know, can you give us any sense of, you know, where the credit growth has been strongest and where the stresses are starting to develop in a more significant way, looking around across those different demographic cuts of the data? Yeah, absolutely.

Absolutely. If we look at some of the growth, right, we had a lot of debt growth was powered by well-to-do borrowers, right? So these were people getting mortgages, expensive car loans, right? So even when you look at credit cards, you can see prime borrowers growing balances pretty quickly. So that's what's driving a pyramid of growth. But with it, you're still seeing the rest of the population trying to keep up. And I like to versus phrasing there, the flashing warning signs, because we are seeing quite a few warning signs. So when you look into the credit distribution, you can see that when you look at auto, credit cards, it's all the subprime bars that are really starting to show the higher delinquency rates, right? So the prime bars, they might be heavy delinquency rates below pre-pandemic levels. But when you get into the subprime, you know, they're getting really high delinquency rates. And really high? What do you mean really high?

I mean, well, I mean, well, we're seeing in some product categories, we're seeing 12, 12 year high delinquency rates. 12 year high back to financial crisis kind of high. Just just post, just post, just coming out of the financial crisis, right? So we're not, we're not, it's a different world than it was during the financial crisis, right? It would be hard to imagine we get to that level of delinquency default. But we're seeing some issues. And prior the pandemic, we've got to remember in some of those product categories, it wasn't particularly great. Credit cards were showing lots of stress.

So it had just pretty much from 2010, we just saw every year worse and worse delinquency rates for credit cards. Pandemic hit, delinquency rates drop. But now we're kind of back on trend. Because of the forbearers, they drop, right? forbearance, extra income stimulus, lots of reasons there. You weren't spending. You just couldn't figure out what you wanted to buy. Lots of reasons there.

But now we're definitely seeing some problems. And then when you try to tell the story and really understand what's causing that, it's really, you can think about it, people with less means overall are driving some of these higher delinquency rates. So we were circulating an email around. earlier this week about looking at the age distribution and delinquency rates, right? So if you look at that, it's the bars that are under 35 that are showing higher delinquency rates prior to the pandemic

when you look at credit cards. And then it's also some of the older individuals too. So it's not as much debt's concentrated out there, but the 75 plus category, some of those older individuals out there, they're showing some of the stress as well. So I think this is some of the inflation is really eating into people's, you know, pocketbooks, and they are showing signs that they can't really make those payments.

You know, if you have a nice home and a nice job, a nice income, you can weather inflation. But when you get around to the edges of the distribution, you're starting to definitely see stress there. And I am quite concerned about it. It's not a, maybe a macro issue yet. There's not enough debt sitting with those individuals. but it's a worrisome sign for the average person in the country, you know, when you're starting to see the tails really struggle. So when you look at the delinquency rates, because that's the window into whether folks can manage

their debt or not, you're saying, look, delinquency rates are up the most for subprime borrowers, so these are folks with low credit scores or lower credit scores. And just for a little bit of context there, David, in my mind's eye, I think the average score is like 720 maybe, 710. Subprime would, is that roughly right? Yeah, yeah. I think we're sitting around 700, 700, 705 in around that 8. Oh, is it still 700? Because I thought it'd been migrating up.

No, it depends on the score and the measures. Yeah. Which score you use. It's also come back down a bit since it kind of peaked and now it's coming back. down a bit. Coming back down. Yeah. But anyway, so when you say subprime, say let's just take 700, because that's easy. Say 700 is kind of the middle of distribution. What do you consider subprime? Below 660. There's some different definitions by a product category, but I would think 660 and below. And what do you call people like Chris when they have a credit score of like

858? What do you call that? Possible. Pondulent. I mean, there are lots of people out there like that. I mean, credit scores have migrated up recently over time. It's been interesting to sort of track who's going up the most. The people that went up the most, though, I mean, it might be, you know, Chris probably figured it away to get a couple extra points go from 840 to 845. But the people that really benefited were the subprime borrowers, right?

So you could see them, the typical subprime borrower, if you tracked what happened to them over, you know, a three-year period, they might have had the average score might have gone up, you know, 20 points or so. They were the ones that really saw a lot of the credit score inflation overall, but they're the ones that are coming back down. To Mercer's point, you know, we've peaked in terms of credit scores, at least right now, and it's going to be the subprime population that is really, it's another sign of stress that we're seeing that population, their credit scores are just going down. So it's subprime. You also mentioned it's, younger people.

I badgered you for that, as you mentioned, that data earlier this week, and we saw delinquency by age bucket. And it's really the folks in their 20s and maybe early 30s where they're always higher than older age groups, but they're, they're much higher and they've risen a lot more appears than it has been for the, for the other older age groups in this period. So it's younger people. You mentioned income, but you don't, we don't really. have a good window into income, right? I mean, income is correlated with score, correlated with age,

but we don't really have as good data on the income side. Is that fair to say? It's definitely improving what we have access to. So some of the loan level data, Equifax has a scoring model that they use for income. We're still, we'll still unpacking that a bit, but the income measures are improving over time. And so we're getting a better. view of that. But the message that we're generally seen is that the people with lower incomes, whether we've got the best score or some older methodologies that are being used, is that, you know, individuals, you know, with the incomes below, let's say, $50,000 per year, they are seeing signs of stress as well, right? So it's very consistent overall. It's just you can imagine that if you

don't have, if you're not in the prime or any years of your life and with your prime income, with a prime income and the distribution, the rest of the population is struggling. Yeah. I don't mean to, maybe I'm pressing you too far here, but I'm going to keep pressing until you tell me no moss. So if I look at age by income, so if I look at those young households, those borrowers, if I go look at the income of those young borrowers, is the problems most pronounced for the people at the low part of the income distribution by those ages? Have you looked at that?

I have not looked at it, but I would almost be certain that is correct. Almost certain. So it feels like it's partly aged, partly scored, but it's really about income. If I'm kind of lower income, I'm going to be under more pressure given the high inflation. I just don't have the financial cushion. And therefore I'm turning to debt and I'm starting to run into trouble paying back on that debt. Is that fair? That is a perfect description of what's happening in credit markets now.

See how I do that? I get those perfect descriptions. You know, everyone's well. So it's more income and experience, really, than age. Experience? Yeah, I would say the eight, what you're picking up with age is lower income and also someone who has not used credit

for a long time, right? If you're, if you know how the system works, how to use credit effectively, right, you're not new to it, right? You're going to have a better shot at being able to manage your finances.

Got it. I want to go on to, you know, why we're seeing this in a second. But the other thing I want to just ask about is that makes me a little nervous is the measured delinquency rate. All you do is you simply take the number or the dollar amount outstanding that's delinquent and divide by the total number or dollar amount that's out there. Right. And right now, so you got the enumerator delinquent, the bucket is delinquency and the denominator. You got outstandings or number of loans. And right now we're seeing a very rapid growth in the denominator, right, in the number of loans and in the debt outstanding.

But despite that, the measured delinquency rate is rising, which doesn't, that gives me a pretty queasy feeling, right? Is that right? Fair to say? Chris? Absolutely. Good reason to up your recession odds. Yeah. We're going to come back to the macro consequences because that's really important.

And here's the other thing. I know you, David, look at the data based on vintage. So you can say, okay, let's go look at all the, say, bank card loans or auto loans that were originated in 2021 first quarter. How are they doing relative to? other vintages at the same point in their so-called life cycles, so many months or quarters or years into the since origination. And that gets around this, or at least helps to address this issue that I just described with the measured delinquency, right? What are you observing,

and again, I'm pressing you until you tell me, no loss, but what's going on there? It's a great question. Yeah. I mean, the answer is terrible. Those vintages, the 20-21 One, vintages are some of the worst in recent years. So when we compare them to, you know, 2017, 2018, 2019, you know, obviously we've got to think about the pandemic coming in there. But when we look at the early performance, the first year and a half of that performance for 2021, it's been terrible. It's definitely the worst crop. And I think there were a lot of lenders out there who, you know, their job is to extend credit. But you got to find and make loans to certain people.

And, you know, everybody looked great at the time, but maybe they weren't as diligent overall about thinking about the prospects to paying those loans back. So when we look at auto loans, credit cards, consumer finance loans, 2021 has turned out to be kind of a crummy year for that crop of loans. That's interesting. Chris, any insight there? Why? What's going to 2021? I mean, we're just coming out of the pandemic. I mean, the lockdowns and people were just coming out about, why would that be such a bad vintage? Yeah, it's absolutely counter to previous experience, right?

2009 was one of the best vintages ever, right? Yeah. You typically go through the recession, you clean out all the, a lot of the bad debt, people are in better shape, and then the lending standards are tight, and you're making very high quality vintages. I think what happened this time around is the score and, the score. that that David referred to, right? The average went up overall. And yeah, the super prime borrowers had proofs their scores a bit, but it was really those big jumps at the subprime level. So someone who had a 600, 620 credit score suddenly looked like a 680 or a 690, right? They made huge jumps because their delinquency rates went way down. They didn't, they weren't spending. So their

utilization rates went way down. And their scores looked great. They improved to a large degree. I think there was competition in the lending industry that David referred to. And I think there were also a lot of models that just relied on scores themselves and didn't really adjust for the dynamics of the economy. So these lenders saw a borrower at the $690 and, you know, oh, let's send them an offer. And you're sending offers to folks who maybe aren't used to getting offers in the past, right, when they had their lower scores.

And so there was a lot of uptake, uptake in the credit. And now as things are normalizing, right, they're realizing the underlying credit isn't as strong as what the score was representing. That's fascinating. So in the pandemic, because of all the extraordinary support and the fact that people weren't out buying stuff and were saving cash, scores started to rise.

and the person that would have been a 660 back in December of 2019 is now all of a sudden a 690 and can qualify to get a loan or a card, auto loan, whatever it is. And they got extended the credit. They took it. And here we are in early 23. And that's when the credit problems are starting to show up. And it's not only that the score inflation, it's the, financial pressure that these same households are under, given the high inflation,

presumably. Yep. Okay. That's, yeah, that's my take. And then on the supply side, on the lender side, right? We were in that low interest rate environment, remember? Everyone was looking for yield anywhere. So they were, they saw consumer credit.

The performance was great back in 2020, 2021. And I think that's what led to a lot of origination. Yeah, I wanted to add to that because, yeah, that that is what we were seeing. I mean, if you think about the second half of 2020, the first half of 2021, delinquency rates were extraordinarily low. The senior loan officer survey said that lenders were easing standards. And so, you know, they were looking for consumers to borrow, especially because their balances were down. And so they were trying to build back up their portfolios, particularly in the consumer space. So I think they were lending relatively freely

and potentially too freely to borrowers who, as Chris said, were marginal borrowers who only looked good because they had all the excess cash that they'd received during the pandemic. Makes sense. Hey, Mercer, so anything else to add in terms of what could be behind this erosion and delinquency that we're observing now, the score inflation, the high inflation, you know, the the easing of underwriting by banks and during that period. Anything else that comes to mind? Yeah, I would just add the pool of borrowers during this time period was more likely to be

skewed toward less credit worthy people because we had all of this excess saving and most of that excess saving was concentrated at the high income. and middle high income levels, those people who may ordinarily have been in there seeking credit didn't have to do that. So the pool of potential borrowers, not only was their score inflated, making them look better than they actually were, but the pool that these lenders were fishing from was made up more of people at the less credit worthy end of the credit spectrum, because the people that were higher, more credit worthy weren't even in that pool seeking credit because they didn't need it.

Yeah. And I guess the other point to make on the score inflation is that was in part by government fiat, right? I mean, I believe, correct me if I'm wrong, but as part of the forbearance in terms of mortgage, say on mortgages, foreclosure moratorium and forbearance. And that's also on student loans, the moratorium on payments. the in the laws that were passed during the pandemic to allow for this, the law stipulated that the lender should not report to the Credit Bureau a credit problem, that it shouldn't affect

the score. And so that really helped to cause the scores to rise, right? Because anyone, the intent was you didn't want to ding somebody because they were going through this very difficult time and it was no fault of their own. But on the other hand, you also brought in people, you gave a break in terms of the scores to people who weren't going to be able to manage even in a normal time. And so their scores were inflated. Yeah, that's an important point. Okay. And I guess the thing that makes you really queasy is all of this is happening with a 3.4% unemployment rate, as low as has been since 1969. And what happens? No. layoffs. I mean, we saw that again this week, 190,000 unemployment insurance claims,

which is about as low as it ever gets. There's just no layoffs. What happens when layoffs to simply normalize, you know, go back to something more typical. I mean, it sounds like we've got delinquency rates are going to rise here meaningfully over the next 12, 18, 24 months. Under almost any, under any reasonable scenario, even no recession, it feels like they're going to start, they're going to keep rising. And adding into that all of the loans that were originated over the last year or so that we know are poor quality, you know, it's not the first 12 months when they're more likely to go delinquent. It's the second 12 months. And Davidkin probably knows those statistics better than I do. But yeah, you're saying the life cycle. You're saying like, you know, if you look through all of the life cycle of all the loans that got originated over the last year says that things are going to get worse. David, say take a typical bank card. You know, when does the delinquency rate on that bank card peak?

How long after origination does it typically peak? Is it a year? Is it 18, 24 months? Yeah, you'd want to look around 12 to 18 months. That's usually where it peaks. You know, usually you can pay it back when you get the card, right? It takes a little bit of time for things to go off the rails a bit. Or you've realized that there's been some mistakes that have been made.

Yeah, after a year or so, you usually get a sense for what the peak's going to be. So those loans that were originated in 2021, those are now kind of experiencing their peak delinquency based on their, where they are in the life cycle. Yeah, yeah, and a little, yeah, maybe the next six months or so. But definitely the 2021, that the end of 2021 is bad, beginning of 2022 is bad. I want to make sure that's clear as well. And we're going to start to see where those peaks hit. That's for sure. I'll just say I'm looking at these

credit card delinquency rates by vintage. It the the, these early, excuse me, the later originated loans. So the ones originated in the beginning of 2022 and the ones originated in 2021. It's almost a vertical line in terms of their delinquencies. So they're actually going delinquent faster than you normally see. So yeah, like if you look at older loans, they go delinquent 18. 24 months is usually the peak.

These have gone delinquent like six, 12 months and have peaked. So they're really going sour like right away. What's the worst vintage, Marissa? Well, 2021, I'm looking at Q1s back to 2017. And so right now, 2021 Q1 looks the worst. But 2020, Q1, Q1 looks the worst. But 2022 Q1 is almost matching it within six months of that origination. So it's really the past, everything originated in the last couple of years looks very bad, very quickly.

Okay. Okay. So we've been talking about debt and kind of aggregate. There's a lot of nuance and granularity and stories when you look at the different lending categories. We kind of alluded to the bank card, consumer finance, kind of what the fintechs are doing, you know, buy now, pay later, auto loans, student loans, and residential mortgages. Chris, let me turn to you. Of all of those different lending categories, which one makes you most nervous in terms of what it means for the underlying stress the households are facing and what it might

mean for the broader economy? in terms of their current performance i probably would focus on the auto because that's a large fairly large portfolio and those there's been the quality of those underwriting there has actually been quite poor as well so there too maybe not quite as we're not seeing quite the vertical increase in delinquencies that mercer is indicating but that those portfolios are deterring really fast. The asset values are also projected to come down. So, you know, people are going to be upside down pretty, if they're not already,

they're going to be upside down pretty quickly. So the auto is driving the increase in auto delinquency is the score inflation. The actual inflation and the cutting into purchasing power, you know, people have to make a choice. Do I buy the groceries, pay the rent, fill my gas. tank or do I pay the credit card bill on time, or not the auto loan bill on time. And you're saying on top of that is also now we're seeing or have seen vehicle prices, which had gone skyward early on in the pandemic, used vehicle prices where a lot of these loans are going to buy a use vehicle. Those vehicle prices are now starting to fall. So if you bought your used vehicle six months ago, it's now worth a lot less. Therefore, you have little equity, probably no equity in that auto right now. And so that

gives you less incentive to continue to pay in a timely way. That's what you're saying. Exactly. And those are substantial payments as well would be the other thing, right? Compared to a credit card bill, which might be, well, it obviously depends on the balance, but that monthly payment may be a couple hundred dollars. The the auto payment can be very significant because of the prices that we saw over the last couple of years. So people had to finance because they didn't have any option. And those payments don't change. They're fixed and they're substantial. Yeah.

And I guess we know vehicle, it feels like vehicle prices are going to, you know, they've stabilized a little bit recently, but I think that's temporary. And we're going to start saying continue to decline. So that's another reason to be able to be nervous. about what all that means for credit conditions going forward in the auto market. Scott, let me turn to you. Of all those lending categories, any one of them kind of stand out in terms of your level of concern? I guess I lean in two different directions, obviously besides auto because I agree with

everything Chris said. But one is credit card just in the sense that if delinquency rates get too, high and lenders potentially under pressure from regulators, tighten standards too much, then it could be a real problem for consumed, particularly for the marginal borrower's ability to borrow to get a loan and to then keep up their spending. So I worry about that.

And then the other question I have, and this sort of maybe goes to Chris, is the story that you told for autos, how much does that apply as well to people who bought homes in the last year or two when prices were inflated and now are potentially going to be going down and eating substantially into their equity, especially if they were marginal borrowers to begin with. The issue there, of course, is that those are huge dollar sums.

No, you're right. There's certainly room to be concerned there. I take some solace in the fact that mortgage lending states. Although they may have loosened a bit, didn't loosen all that much during this period. It was still fairly rigorous in terms of the credit score and the income you had to prove to qualify for a mortgage loan versus auto where I saw, I also saw a lot of industry, new lenders coming into that industry, again, attracted by the yield. So I worry that there was a significant underpricing of risk in auto.

It's possible that occurs in mortgage as well, but I just see that as a stronger category of borrower in terms of their credit scores, their incomes. We're not doing all the crazy type of lending we did in the past. Right. Although you do have to discount credit score somewhat, particularly for the marginal borrower for all the reasons we've been talking about. So I guess that's the piece that makes me wonder if we need to worry a little bit there as well. Yeah, I would say you want to look at different portfolios. So FHA, for example, which does cater more to the lower income segment, and folks typically do have lower scores there.

That certainly is an area you'd want to watch out for. And you do see that delinquency rates and foreclosures are rising in that part of the mortgage market versus the total. So there's definitely a risk there. I'm not disputing me there. I'm just thinking the auto might be more vulnerable. You's going up, right? I think you might have mentioned that, but they're off bottom.

They're rising again. Oh, yeah. FHA, yeah, which is about a fifth of the mortgage market, debt outstanding. So not inconsequential. Hey, David, I'm a little surprised. No one said consumer finance, you know, the kind of where the fintechs reside and, you know, where you see a lot of those buy now, pay later. Any concern there or not really? I think there have been concerns.

I think they've materialized a bit earlier. That was the first category to show signs of stress. And when the cost of capital increased quite significantly for those firms, you really saw a bit more pullback and a little bit more prudence there. So I think they were very nervous. Their life cycle on these loans is much shorter. And I think you saw a lot of pullback. pretty quickly. So I don't have as many concerns. That market is starting to stabilize the in terms of like buy now pay later and some of those short term loans, that that's going to be

very interesting to see how that how that plays out. It's a bit of big growth category. Consumers are tacking on small amounts of additional debt, you know, purchase here, purchase there. And we don't know the whole lending industry doesn't have a great view into that. We're starting to get some reporting to the Bureau on Buy Now Pay Later, but for the most part, these loans are almost just an adjacent risk for the typical consumer. So we don't really have a great view into, you know, how much of those, how much extra debt, those, you know, I'm going to be, cast this with a broad brush, but like the millennials, right, the younger population who typically gravitates to Buy Now Pay Later, we don't really know how much debt they have outstanding there. So, you know,

even though credit card might have been low in 21, 22, maybe some of that was buy now, pay later. And now we're seeing really rapid credit card growth. And then you maybe add a buy now pay later and you put a personal loan here. That's, it's a, it's a, it's a, it, it can add up and be quite a concern. Here's the other thing, uh, student loans. I mean, that's not in, right now there's a moratorium on payments, right? I mean, which has been, uh, president Biden put in place when the COVID,

when the pandemic hit, has been extending the deadline for renewing those payments again and again. And, of course, is trying at this point to get through the Supreme Court his executive order to forgive a lot of student loan debt. You know, what happens if he loses that court case and there is no forgiveness and the moratorium on those debt payments end? That means a lot of the student loan borrowers who have not been paying on their debt now have to resume paying on the debt. at the same time that they're struggling with their credit card bills and consumer finance bills. Chris, that feels, have I got that right? That feels like that might be, you know, an issue here too in the not too distant future. Yeah, absolutely.

Absolutely. Okay. All right. Mercy, anything to add on that on the student loan side? No? No, other than it's not looking promising the forgiveness. Although I did see, did you see, and I didn't read the press report carefully, but I guess the solicitor general of the United States who speaks before the court on behalf of the government

apparently did a fabulous job presenting. And now it's not there's there's no longer a consensus as to how the court's going to roll. Did you guys hear that? I didn't know. The last thing I saw was that it wasn't looking good for the Biden administration. I think there's some question about that. Now she apparently did a fabulous job making a case. So anyway, we'll see how that plays out. Okay, but okay, obviously reasons to be nervous about the household credit environment. Mortgage is a little less so, but in the world of falling house prices, you can't be too complacent. Right. And 3.4% unemployment to Scott's point.

You know, we got a lot of issues with cars, consumer finance and auto, and so a lot of things would be worried about. But here's the, not taking it to the final step, what is it? mean for the for broadly consumer spending in the broader economy and one i'm going to make a case and then hear what folks have to say is that you know it's not a significant all these issues don't add up to a significant macro economic issue at least at this point in time because the numbers are too small so if i add up all the bank card debt outstanding i and add in all the retail card debt outstanding there isn't a whole lot of that but throw that in that's you know know, the retailers having their own credit cards on, and then you throw in all the consumer finance,

you know, you're talking maybe a trillion dollars outstanding. And if you kind of look back historically, take the trend lines and growth pre-pandemic, extend them out. The current level of debt is not much higher than you would have thought it would have been if there had been no pandemic. Because that debt fell sharply during the pandemic is coming back strongly, but still landing in a place that's very consistent with where you would expect it to be if there was no pandemic. Yeah, auto lending is up. But again, that's, you know, 1.5 trillion, you know, so maybe it's a little bit higher than you would have thought it would be. But it's not, we're not talking trillions of dollars.

We're talking, you know, maybe hundreds of billions, maybe tens of billions of dollars. Student loan debt has actually gone nowhere, you know, in recent years. It's kind of just kind of flat. So, you know, you add up the numbers, the dollar amounts that are at risk here. it doesn't feel like it's a macroeconomic threat. And then to, you know, corollary to that is the problems, the credit problems are really concentrated in low-income groups, younger people, not in folks, certainly not in the top high parts of the income distribution, or even in the middle parts of the distribution,

the low parts of the distribution. And I don't mean to, you know, belittle that, the concern that we should have for those folks that are under a lot of stress, but from a macroeconomic perspective, the consumer spending is done by folks in the top part of the distribution. So this rule of thumb I have that kind of strikes that point home is that folks in the top third of the distribution account for at least two-thirds of the spending, maybe probably closer to three-quarters of spending. So if they're, if they're doing okay, the economy, the consumer spending and economy are going to, you know, they'll navigate through without a pullback. Okay. That's a big statement. I mean,

I'm basically saying, yeah, I hear you on the credit qualities eroding. We've got some, you know, further erosion debt ahead, but it's not a macroeconomic threat. Scott, what do you think? Okay. I accept everything that you said, but I guess I want to take it a step further and look at the question. You notice that he's always taking it a step further. He's always taken it another six, 12 months down the road. Okay, fair.

Go ahead. Exactly. Exactly. As we get towards the end of this year, how are consumers going to finance their spending? If credit quality continues to deteriorate and lenders remembering the financial crisis and under pressure from regulators cut back, restrict lending standards significantly, which they've already started to do, borrowing gets very difficult for all but very credit worthy borrowers who may not need to. wealth is falling. The stock market's going nowhere. House prices are falling. That's going to undermine spending in the, particularly probably in the middle of the income distribution, potentially the high end too. You basically come back to the only source of funding for spending is growth in real incomes. Now, you're talking about folks in the bottom part of the distribution,

though, right? You're not talking about, because there's a lot of excess savings sitting in the rest of the economy, right? Okay. And- But I'm also assuming that that, that the amount of excess savings that consumers are wanting to spend is going to diminish significantly over the course of the year. So- But that hasn't been their behavior to date. Well, spending the money.

The saving rate's been rising for the last six months. Yeah, but it's still well below pre-pendemic, right? I mean, the amount of excess saving has been declining steadily for the last 18 months. Yes. But if you were to take a ruler to the saving rate over the last six months, by late this year, you'd be back near pre-pendemic levels. And you'd essentially be saying that there's no more drawdown of excess savings. Okay. Fair enough.

So I'm presuming that, again, by towards the end of the year, the excess saving, that is available in consumers' mind for spending is not large. What about this, though, Scott? If I look at real incomes, you know, after inflation incomes, they are now rising and they've been rising for, you know, since last summer. But that's, that is exactly my point is that consumer spending will be at that point entirely dependent on real incomes. Not, again, you're saying they're not going to draw any down any more of the savings?

I am. That's your, that's a working assumption. Working assumption or at least at least very, at least not enough to materially contribute to spending growth. Even if the saving rate levels off at five and a half or something like that and yeah, there's some draw. I think this is the Amish and Scott talking, you know, that's that's that it's not the rest of America. They are spending that S.A saving. Well, but look at the trend in savings. I mean, I, I, mean, I, don't know where that stops. And as you know, those saving rates are going to be revised again. Well, yeah. I know. It's. Yeah. But anyway, I hear you. I'm raising a concern anyway. Yeah, raising a concern. Yeah. And if the, if the Fed raises rates enough to slow the job market as much as we say they're going to, then even with lower inflation, real income growth is not going to be much. Yeah. And so my question is,

when we get to nine, 12 months from now, where is the funding to sustain spending growth coming from? And it wouldn't take much of a shock or a blow to the system. And, you know, what comes from, well, there's a little bit there to know there isn't anything there, you know, could happen. Yeah, and I guess if inflation doesn't come in, then. Yeah, inflation doesn't come in. You're getting higher rates. And of course, if the economy, you know, it keeps going back to that damn inflation. If inflation doesn't come in, the Fed steps on the brakes, harder interest rates go up.

It's going to hit the job. If we go in and then we've got some real. The point is, if we don't get a significant slowing in job growth, then we're, you know, either the Fed's going to be raising rates more or there's, something going on. But if we get a significant slowing in job growth, if we're down to, let's say, 50K a month on jobs, you know, and inflation is down to,

what, 3%, do you really have much real income growth? Right, right. Okay. That's a good counter. Marissa, what do you think? I kind of agree with Scott and also that we know interest rates are going higher. I mean, we know the Fed's going to do at least one more

rate hike, maybe up to three more. So all of this in the context of a higher rate environment, which makes all of this revolving credit even more expensive for people that have high balances, low income, and are more vulnerable to a slowing in the economy to begin with. So how do people that are now paying, I mean, I don't even know what it is, 25% on a, a credit card, you know, flash forward nine months, what are, what are the rates going to look like on this revolving credit? And they, they, I assume, will have drawn down any excess saving they have at that point. And credit will be not only tighter, but a lot more expensive. So I have a lot of the same concern that Scott has. Now, just because I'm an economist, to buy a little bit of that back.

But can I just again, going back to my earlier point, it's not a lot of dollars, right? I mean, well, that is what I was going to say next. Okay, fine. Okay, fair enough. So why is it different from like the financial crisis? You should let me play the other side. There was mortgages, right? And that is 75% of all of the debt outstanding or something, something huge like that. I might be off, but it's something like that, right? So there, when you have things going belly up, that was catastrophic to the entire economy just because of the sheer size of it. Now, now what we're looking at is something that's a much smaller percentage. And if we think the vast majority of mortgages are okay, really, it's really only the people that bought houses in the last

couple of years that have real risk, you know, to delinquencies or foreclosure. And that's very, very small compared to what we saw in 08, 0708. So yes, I agree. I think there's a lot of risk out there that I'm worried about, but I think it's a smaller proportion of the total economy than it was if we go back to the 08 recession. So I don't think we're looking at anything like that in terms of the economic impact, but I wouldn't discount what may happen over the next 24 months. Yeah, I mean, because on the mortgage side, I mean, people have locked in those low rates. That's right. And they're not going up. There's the average coupon and outstanding mortgage is 3.5% and that's not changing. And just to give context, and I'm just, tell me if

I'm wrong, but I'm going to fire it off. $800 billion in credit card debt, maybe 200 billion in consumer finance, $1.5 trillion in auto, $1.5 trillion in student loan debt, and probably $12 trillion in mortgage debt, first mortgage and home equity, just to give you context. That's kind of the balance sheet, I think, roughly speaking. Chris, and then I'll come to you, David, on the macro. Anything I want to add there? You know, where do you, are you lending more on the pessimistic side or the pessimistic is led by Mr. Hoyt, the optimist is led by Mr. Zandi. What do you think? Are you leaning more pessimistic, in regard to this particular issue? I know I'm not asking about your general state of thinking, but, you know, or your, or your mood, but on this issue,

where are you landing? As usual, a little bit of both, right? On the, optimistic in the sense that I don't see this as a financial crisis, right? So to Mercer's point, right, the issues are not, are certainly not apparent in the mortgage market. So the issues that we're talking about, they're really in these smaller markets. So unlikely that banks would have to take a lot of losses and certainly they won't have to take losses given their capitalization rates that would push them over the edge. So I don't see that as an imminent threat. Obviously, anything could happen, but I don't see that playing out as a repeat of the great financial crisis. But in terms of the spending outlook and what we see, I am sympathetic

to Scott's view in terms of what the future holds here. And I might add, the one thing, thing I might add to Scott's argument is just some of the demand that we've already pulled forward, right? So some of that durable good spending or other spending we did to the pandemic that's not going to be repeated anytime soon. So that also would call for some weakening in spending growth going forward. And with higher financing costs, right, it's going to be difficult to see that consumer really revving up their spending and producing a lot of additional hour or contributing a lot to output going forward. So I'm going to turn to you, David,

but I'm going to guess you're on the lugubrious side. I mean, anyone who has like a Moreau painting behind them, is that Moreau, by the way? Yes. Yes, it is, yes. I love Moreau, but I always get very, very morose when I look at Moreau. I'm not sure why.

So I'm guessing you're going to come down on the, on the Mr. Hoyt side. Yeah, I will. I might be a bit biased because I work with risk models, yeah. But yeah, no, I think this will be a drag. You know, we looked at the data that we got from McAfax today. Bank card balances have grown year over year. They're at 21%.

It has not rolled over yet. We thought it was about to roll over. And then to Marissa's point about all the high, It's really expensive. That debt is expensive. Now we're dealing with the average interest rate, a balanced weighted calculation for credit cards is over 20%. You can't have 20% financing cost and grow 20% year over year.

Something has to give. There's the additional spending that additional dollar just is getting more and more costly. So I think it's going to be a drag for the next year. And borrowers are going to run up against credit lines. and it's going to be a problem. And then this will spill over not just to, you know, the spending channels. Some of these credit cards are used to support small businesses and other channels as well. So I think it's just going to be sort of a drag overall.

And just financing credit availability is just going to be a problem throughout the whole year. And there's just a lot of uncertainty out there. So I'm a bit pessimistic. And I actually talked to one of my clients. They grew in the auto space year after year after year, very aggressive, growth. They're just exiting auto finance altogether. They said it's too uncertain. That's what their investors are saying. It's too uncertain. So they're just going to park their assets somewhere else. And we're just going to see sort of tight lending standards. And it's going to be a costly debt going

forward in 2023 and just a lot of uncertainty out there. And until that uncertainty resolves itself, I think it's going to, you know, household finances are going to be a drag on the economy. Yeah. Well, yeah. Have a great weekend, everyone. Yeah, I mean, no argument. It's going to be a drag. It's just a question of how big a drag, you know, is it going to take us down, you know, kind of drag? But, but yeah, good points. We, I thought this was going to be shorter.

Never is. It's always the same. You say that every time. Yeah, you know. Let's take one question. I think anything else on the, on that. That was a wonderful discussion. We covered a lot of ground.

anything else anybody wants to add before? Because I think we want to take one listener question before we call it quits. Anything? No, it's hearing none. Marissa, you want to give us one of the, because you said we got a number of good questions this week. We did. And actually, one of the ones I was going to read, which was tweeted to you, we just answered, which was the impact on the economy and the consumer because of these variable rate products, right?

They tweeted that to me? Yep. How come you know it and I don't know that? Should I know that? Because Sarah sent it to me. Oh, Sarah, okay. Okay. Sarah's my assistant or more than my assistant. She kind of does everything. She keeps you in line. She keeps everyone in line. Okay. So this is, this is, that was sort of the one topical, topically relevant question we had. So this is a switch gears. Oh, we're switching gears. Okay. Question, okay. Because we don't have another question about this. topic. So this is about inflation. Actually, there's two really good ones. Do you want one on monetary policy or shelter inflation? Okay, we're going to do both quickly. Do we can't do both quickly? Okay. Chris, what do you want to do? David, what's your preference? Shelter is very interesting

right now. Let's do shelter. There we go. David one's shelter. Fire away. Okay. So this listener wanted to ask a question regarding how rent feeds into the CPI calculation. Okay. So he says, and now I didn't verify this so hopefully somebody else can, the way the BLS calculates

shelter, rent as a primary residence contributes only about 7.5% of the total shelter weight of the CPI. And we know that total shelter in the CPI is about a third, a little higher than a third, right? 34%. Yeah. So he said, listening to your podcast, I had a feeling that you're putting much more weight on the fact that, you know, the lease signings, right, are a lagging indicator in the CPI. so it could take 12 months for any changes in the price of new leases to show up in shelter. So he said, am I right to assume that only that 7.5% of rent is the lagging indicator and that the rest is coincident or leading? Do you understand?

So basically saying, we're using market rents, they've gone flat in saying that that is going to translate into. slower cost of housing services, but for rent of shelter, what about the homeowner's equivalent rent, the other component, which is much larger, which is, I think, 25.5% of the index. So how does that relate back to rents? Right, because presumably the OER is not lagging in the same way rents is. Owners equivalent rent. Yeah, yeah, right. Chris, do you want to take a crack at that?

Sure. Sure. So I would say it is in a, the approach is similar for the owner's equivalent rent as well. It's also survey. It is survey based in terms of the expenditures and I'm really going off of memory here. But the actual rent that is used is from the same rental survey. So that goes into the primary, the rent of primary residences in the CPI. So both measures, you'll actually see that the two measures are quite highly correlated. right? So the weight, you know, splits it splits it out, but the effect is the same. The other thing is that, yeah, the answer is that the rents are affecting both the rents of shelter and the homeowners equivalent rent. Interestingly, in the last month when the BLS, the Bureau of Labor Statistics updated its methodology for the CPI, they do this once a year, they did do two things that are relevant here. One, they increased the weight on housing. It's actually higher now by about a point, percentage point than it was previously. And secondly, I think they added more survey-based information on single-family rental.

So, you know, renting a single-family home because that gives you a better sense of, you know, rent for homeowners' equivalent rent. So they are, they've improved the kind of the information they're using to construct that measure. But as Chris points out, they're highly, highly correlated, very closely correlated. And so the fact that market rents have gone flat to down here in recent months will translate through into the lower cost of housing services, both for rent of shelter and homeowners of equivalent rent, which add up to 34, now 34%, I think, maybe it's a little even over, over 34% of the CPI index. By the way, it's meaningfully less for the consumer expenditure deflator.

I don't know that, I think it's closer to 20% of that index. I don't, I'm sure I don't have that exactly right, but that kind of gives you order of magnitude. So hopefully that, does that answer the, do you think that answers the question? Yeah, yeah, I think yes. Okay. Do you want to take one? On the BLS website.

Oh, is there? Oh, okay. Do we get it right, Chris? Yeah, well, that's my memory. Okay. Yeah, I remember going to that site and they explain very clearly what, how they're calculating the owner's equivalent rent versus the primary rent, the different series, the surveys they use. So if you want more info, it's there.

All right. Real quick. Well, we'll try to do a quick. The monetary policy question. Okay, this is a good one. So St. Louis Fed President Jim Bullard was quoted as saying, quote, this is the age of forward guidance. And so the long and variable lags argument doesn't make as much sense as it made decades ago. The listener wants to know, what is your opinion on that. So this is referring to the time it takes from when the Fed, you know, changes monetary policy makes a move in the Fed funds rate and when that actually feeds into economic activity. Do you want me to take that one, guys? Yeah. I agree. You know, with the forward guidance, that is the Fed officials are through speeches, through minutes, through

statements, FMFOMC statements, making it clearer to everyone what they're going to do with monetary policy, both in terms of rates and in terms of their balance sheet. That means that what they're doing gets embedded in so-called financial conditions like immediately.

You know, you watch, you know, when they give a speech, when Powell gives a speech or is testifying in Congress, you can see the bond market, the stock market going up and down based on what he's saying because they're listening to the guidance he's giving with regard to future monetary policy. So stock prices, bond yields, foreign exchange, the value of the dollar, underwriting standards,

everything is getting affected much more quickly, almost immediately. And that's the financial conditions, which are the link between what the Fed's doing with monetary policy and what it means for the economy, the real economy. And so that transmission of that of that information to the marketplace and to financial conditions is much faster. Therefore, the lag between shifts in monetary policy and its impact on the real economy probably aren't as long as and aren't as variable as they have been historically. So in fact, I would so far as to say that the maximal impact of the. rate increases the Fed has put in place so far are probably behind us. You know, they probably occurred in the fourth quarter of last year. And unless monetary policy deviates from the forward

guidance that the Fed has articulated to us, the impact of monetary policy on the economy is going to fade here pretty considerably as we move through the year. And is one reason to think that the economy won't go into, if the economy isn't going into recession now, and it's not. I mean, you can see that and the job market data, less likely it goes, it's going to go in the future unless this isn't the end of the rate hikes, unless inflation isn't coming in and they have to double down again and start giving guidance that they're going to raise rates to 6%. Right now, they're closer to 5. We're going to 6 or 6 and a half. Financial conditions will tighten again. Stock prices will go down. Bad news will rise and then we'll go into recession. So in my mind, the most likely scenario is

no recession, but, you know, I'm not going to argue with anyone who says recession. year. I will argue strongly when anyone says recession this year, or certainly any time in the early parts of this year, first half, middle parts of the year, that's just not happening. But, you know, maybe I would concur that there are, you know, increasing risks for next year. But that would require the Fed to change forward guidance again. But bottom line, I agree with this, with what he said. Anybody want to add to that or take umbrage with that? I agree with you fundamentally. I guess the one question I have is for both consumers. and businesses, they have debt outstanding that's fixed rate, but it rolls over. And so that,

as it rolls over, the rate, the past rate increases suddenly impact their budgets. So I think, while I agree with you that the largest impact is immediate, it's not drawn out, I think there still is a tail to that that you may, I wonder if you may have understated a bit. Yeah, no, no, I agree. I'm not saying that there's still a drag, no doubt about it. It's just the drag is quickly becoming less powerful. The other thing I'd say, though, idiosyncratic to your point, is the actual amount of debt that's going to roll over is actually quite modest in the grand historical scheme of things, at least in 2023. So if rates do start to come down in 24, that roll over, so-called rollover risk becomes less of an issue. I mean, it's not that big an issue this year compared to, you know, other recessions when, you know, you.

You had a lot more debt rolling over than you do in 2023. But great question. Those are great questions. And thank you listeners for those questions. And we clearly would like you to continue to pass those along. They're really important and insightful and love addressing them. So thank you for that. And okay, guys, like it always is the case.

This is longer than I expected. But only because it was a wonderful conversation. It was great to have David, first time on the podcast. podcast and Scott three times and a bit of a gadfly, I'd have to say. So we're going to have you back, buddy. So, uh, any other comments before we part ways here and, uh, get on a plane to Phoenix? If you want more, you know, you got to catch Marissa session on a Monday on Monday. Is it going to be taped? No, I think it's just live. You have to be there. Be there. Got to be there. Got to be there. Got to be there, Arizona. Already. Take every.

care everyone have a good good week and we'll call it a podcast bye bye