Moody's Talks - Inside Economics - What is Bugging Us?

Episode Date: March 1, 2024

Amid all the optimism regarding a soft landing for the economy, the Inside Economics team considers what bothers them most about the economy’s near-term prospects. Cris focuses on GDP vs GDI, Marisa on the soft global economy, and Mark on the internals of the labor market. They remain upbeat about the economy, but…. 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'm joined by my two trusty co-host, Merceda Dina Talley and Chris Duretis. Hi, everyone. Hey, Mark. Well, I've had a stressful morning. Yeah, let's hear about it. I lost power. Lost power. Apparently, I wasn't paying my bill. You know, down here in Florida, and I mail being diverted from my home in Pennsylvania down here to. Philly, but it's been a real nightmare. The post office has been doing a miserable job.

I haven't gotten the Florida Empower and Light electric bills for now three months. And they turned out no emails, no phone calls, no nothing. They turned off the power. They turned off the power. And, you know, I went into panic mode. I googled, of course I lost Internet in the house, but I had my phone. I googled Florida Power and Light.

I get this email site. I call it. And I think it's legit, but they got a lot of information from me. And now I'm here worried that, oh, no, you know, maybe I got scammed. I probably shouldn't worry about that, right? How did you know that they shut off your power

as opposed to just there being a power outage? Did you think the power just went out? Yeah, at first I thought the power just went out. So then I talked to my neighbor. I called my neighbors. And I go, and I'm thinking, what's going on? And I wasn't quite sure. And then I called this number and gave them some, you know, they asked for my account number.

Of course, I don't have my account number. Who would have their account number? Somebody against their bill. Exactly. Exactly. Exactly. Exactly. So that's where they collected the information, a lot of information for me.

And I'm thinking, man, do I really want to give them that information? Should I give them that information? but then, you know, they were able to, I'm sure it's legit. I'm sure it's legit because they, you know, they, it dispelled. Then your power came on. So that, that's not, that's not proof positive because then I had my wife call through the other, another line, you know, if you go down to Google searches, the first one is the one I called, go down a couple more.

There's another Florida power. And she called that. And that, you know, you went through the phone buttons and pushing the thing. And I think that might have put the, the light back. on, the lights back on. So I, yeah, I'm, I'm all stressed out. Let's just put it that way. I am stressed out. I got my power back. We can do the podcast, but oh my gosh. So anyway, you Mark, I got a word for you. Yeah. Auto pay. I know. I thought I, I thought I auto paid. I thought I really, Chris, I did. I thought I was auto paying. Um, but, you know. Or it's,

it really is this elaborate scam. Someone cut off your power. It had to be really elaborate though, right? I don't know though. Now with the infrastructure, AI, you know. It could be a cyber attack. Thank you, Chris. Cyber attack, you know. I'm really worried. Any advice? Any advice? You're younger than me. You know, you're more adept at this kind of stuff. Any advice? No? Auto pay everything. Okay. But I'm saying about, you know, this potential hack, you know, this potential cyber crime. I would call back Florida Power and Light and verify. that the person you spoke to this morning is an employee of Florida Power and Light. Yeah, okay.

All right. I kind of sort of did that, but it's hard to do, you know, try getting someone on the phone. Right. Power and Light. And I had to cut it short because I had this podcast I had to do. So, you got your priorities straight. I got my podcast first, Bill second. Okay, okay.

Willing to risk identity theft for. Oh, geez. I'm risking identity theft. for you guys. Yeah. No one's more dedicated than I am. Anyway, okay, so we don't have a guest this week, and I thought the way we had this conversation is let's talk about the data that came out this past week, and it was

data filled, and we'll do that. I think we'll just have a little bit of fun up front. I need a little bit of relief. We'll play the statistics game just up front, and then we'll turn to, I thought we play kind of a game, what's bugging you. There's a lot of things bugging me in the data. I mean, I look at lots of pieces of information and data. And kind of the way I think about it is I look at data and if it doesn't exactly fit

into my thinking, then my thinking starts to evolve and change. And I'm getting lots of things out there that are making me a little nervous. And I want to talk about that and see what's bugging you guys. And then we'll end with, we've got a number of questions from the listeners. I understand around the deficits in debt in particular and that's a good topic to end on and we'll call it a podcast.

Sound like a good game plan? Perfect. Okay, good. All right, so let's start with the game. I think it's rare we ever start with the statistics. Have we ever started a podcast with the stats game? I don't think so. I don't think so.

I don't think so. Yeah, I don't think we ever have. Okay, this is our first. Okay, let's play the stats game. The game is we each come up with a stat. And the best stat, oh, and the rest of, the group tries to figure that out through questions and clues, deductory reasoning. The best stat is one that's not so easy.

We get it immediately, although that's getting hard to do, but not so hard we'll never get it. And in this case, let's try to keep the stat to something that came out this week. So we can talk about the weekly data. And with that as a preface, Marissa, you're up. Okay. The stat is minus 1.03 percentage points. minus 1.03 percentage points. So it's a, it's a calculation.

Right. Does it have anything? I'm just going to. Oh. Oh, you know. Oh, boy. Oh, boy. The spread, the difference between CPI and PCE?

Wow. It's the difference, yeah, it's the difference between the core PCE and core CPI. Oh, my. My gosh, that was definitive. Wow. I thought that was going to be hard for you to get. For me, I don't know what you've gotten it. Good one.

Yeah. That's damn good. Thank you. Yeah. And what, what, give me a little bit of your thought process. How did you get there so fast? It was, it's, well, I don't want to see. It's on your mind.

It's, I'm, I'm, it's large. Yeah. It's large. It's a very large difference. Is that one of those things that's bugging you? that large difference? Not necessarily. Well, yeah, it is.

It's a discrepancy. It's one of the many discrepancies in the data at the moment, right? That makes you think about what's the truth, what's the underlying direction of inflation here. But I don't want to steal Mercer's thunder. Yeah, yeah, yeah. Oh, I think you already did, Chris. Yeah, it is a large difference. So the core PCE is over a percentage point less on a year-over-year basis now than the core CPI.

This is the largest difference. There were a couple months back in 2002 during like the summer of O2, right, when inflation really started to take off where the difference was similar to this. It was about a percentage point. But you have to go back to the financial crisis to get this big of a difference on a consistent basis between the two measures of a. inflation. I think what this reflects is the much larger weight that the CPI puts on housing in the CPI basket than PCE. So in the CPI, consumer price index, housing makes up about a third of the basket of goods that they're measuring. In the PCE, it's only about 16%. So we're talking about, you know, double the concentration of housing in the CPI versus the PCE. So as we know, the cost of

housing is high. It is rising. It's been rising quickly, more quickly than we would like. And so that likely is skewing the CPI higher in terms of measured inflation than the PCE. Yeah, I think, I think, and this is from memory, but the year over year growth, and you're talking about is a percentage point in terms of year or year growth, core PCE? Yes, in January. over-year growth in January. That's right. Core PCE was 2.8 and I guess core CPI is this 3.8. Yeah, they're both like 2.9, 3.9 basically. Oh, is that what it is? Okay. Yeah. Yeah. And I think if, again, from memory, but I think the year-over-year growth and the cost, and the growth in the cost of housing services is about 6%. Yes. So it takes 6% multiply by 0.15. That's the difference

between the 0.3 share and the CPI and the 0.15 share and the core PCE, I think that comes to 0.9, right? Something like that. 0.9. Right? That would be 6 times 0.15 is 0.9, I think. So there you go. That's the difference, I think, the bulk of the difference. Does that sound right? You look perplexed, Marissa. Yeah, no, that sounds right. Yeah, that sounds right. Okay. That wasn't your perplexed look. No, it was my, I'm just.

Who that? I'm concerned. Everyone knows that, Mark. Yeah, look. I thought I was providing some insight. Yeah. Well, give us a little bit more on the core PCE. Give us more context there.

I'm curious in your view on what that means in terms of our, of the quest to get back to the Federal Reserve's 2% inflation target, which is on the core PCE. Yeah. I mean, as I said, the core PCE is rising 2.8%. year over year that has been pretty steadily coming in since early 2023. The change over the month in the core PCE was 0.4% in January, which was large, but we were expecting that, right? We saw a big increase in the CPI over the month as well. So it's consistent with that.

A lot of the inputs into the way that the BEA measures the PCE is the CPI. So they shouldn't, in theory, they shouldn't be telling. wildly different stories, but the mix of things in each basket is a bit different in terms of how they weight the different components of inflation. So on, you know, Core PCE 2.8, we're certainly, as you would say, Mark, in spitting distance, right, of the fed's target here, where we're firmly under 3% and heading lower, it seems. I mean, January, I think, is, was, will prove to be an outlier in terms of the uptick and inflation over the month. So we should see things move lower here. Part of the uptick over the month in the PCE was services inflation.

Housing did have a larger uptick. So measured housing and utilities costs rose 0.6%. That was up from 0.4% in December. So we do see housing price growth strong, the PCE as well. Again, it's just how much the VEA waits housing versus how much the BLS weights housing in the CPI. So, you know, I don't think it changes. This doesn't, for me, at least change the inflation outlook picture at all. It's consistent with what we saw in the CPI. It's not going to be linear. We've been saying that for a long time. You're going to have months where this accelerates, decelerates back and forth. But we're clearly on a downward trajectory here in terms of inflation.

I got a bit distracted. Oh, sorry, go ahead, Chris. I was going to say downward trajectory, but do you think it's more stubborn now than what you were thinking a month or two ago? Well, I mean, I think last podcast, right, we spent a lot of time talking about housing inflation because we had gotten the CPI report, and that certainly has been more stubborn than I think any of us thought.

And a lot of that is the way that the government imputes owner's equivalent rent using market rents to impute that. So yeah, I mean, it's not coming in as quickly as I would have thought or would have liked, but it does seem like it will happen. It's just not happening as quickly as we thought. And I think the Fed knows this, right? So the Fed knows the ins and outs of the data just like probably, hopefully better than we do, right? They're making monetary policy decisions based on this data. So they're aware of the lags in the way some of the, these components are measured and are hopefully taking that into account when they're thinking about the trajectory of monetary policy.

I got a bit distracted, and you may have said this, but just in case you didn't. So the year-over-year core consumer expenditure inflator is 2.9. Okay. Yeah, it's like 285 or something. Yeah, there's 28-8. 28-5? Yeah. Okay, go ahead and round it up to 29.

Yeah. Okay. I think on a three-month annualized basis, it's like two six or something, two-seven. And then on a six-month annualized basis, it's even lower than that. I think it's like two-five if I got the way. Yeah, that sounds right. I didn't know. But that sounds not right.

So the way I characterize it is that underlying inflation, abstracting from the baguaries of the data, including the problematic seasonals in January. And they're definitely there. You can see it last January, we had the same kind of bump up, one month bump up in inflation. So it feels like January is just a difficult month to seasonally adjust. Underlying inflation is about 2.5%. And the target is 2. It just feels like we're at 2.5%.

Pretty solidly. And on top of that, to your point, with growth and the cost of housing services feels like, almost by construction, that that's going to continue to moderate here going forward. Is that fair? Yes. Chris, seem fair to you? Fair. I guess any concern about other components?

So the PC, I think, puts more weight on the healthcare expenditure than the CPI, because it's, CPI's out of pocket versus overall. I didn't take a close look at healthcare. It did accelerate over the month slightly, so it went from 0.2% in December to 0.3% in January. I mean, it's been higher back in the fall. It was growing at half a percentage point. But yeah, I mean, that is obviously a large component of services spending, getting larger just demographically, right, for much of the country, becoming a larger outlay for many households. So, yeah, that is something that is a difference between the CPI and the PC, too, as well.

we are just like in the in the CPI we're seeing goods prices fall in the PCE right so that's across durables and non-durables so there's still deflation in goods so this really is coming from the service sector in in both measures of inflation great good that was a great statistic that was really uh and Chris boy that was I can't stump you guys anymore I would never have gotten that I would have been here all day Chris, you're up. What's your stat? All right.

Minus 0.3%. Minus 0.3%. Government stat? Yep. Came out this week. Yes. Construction spending. Neither.

Neither. Neither. Neither. Neither. Neither. Neither. Is it in GDP? Nope.

Oh, spending, income. No. There's probably a 0.3% somewhere in there. Somewhere in there. Yeah. It's not in that report on income, spending inflation. It's not in that report from the Bureau of Economic Analysis. No.

It's a government stat, though, that came out this week. Put up by the census, if you'd like a clue. Oh, the census. Ooh. Is it, did we didn't get anything around housing, vacant? survey, did we this week? Was that this week or was that last week? That's not it. Okay. No, I think that was. Yeah. That was last week, yeah. Is it an esoteric series that comes out every month or is it come out irregularly or

monthly? It comes out every month, but it's more esoteric. We covered it. We do cover it on economic. Is it construction spending? No. Durable goods? Yes. Oh. Okay. Was it top line durable goods or down minus point They were down a lot more than that. They were down like 6.1%. 6.1%. Core capital goods. It's probably X something.

Is it core capital goods? X transportation. X transportation. Got it. Okay. You got it. Okay. Very good.

You want to explain? Yeah, I was going to choose the 6.1%. Because it's a big number. Big number, big miss. But we can explain most of that by the Boeing. aircraft orders, right? So those are volatile the very month to month. So looking at excluding transportation is a bit more stable. And they may be down more, right, because of Boeing's max problem. I wonder that might be. Yeah, that's why. Is that why? Okay. I want to exclude

transportation. Okay, 6.1%. That's a big number, but, you know, it might just be some short-term noise. Yeah. But the excluding transportation, that's a bit more meaningful in terms of manufacturing and that's down consistent perhaps with some some weakness right some some of the concerns that you mentioned earlier that we'll get into so that's why I want to highlight this one it does show that manufacturers you know on edge here right some weakness overall yeah okay no go ahead go ahead sorry I think we're seeing some weakness particularly in the um kind of the initial stages, it was a primary metal fabrication, these types of manufacturers that could lead to, you know, more weakness down the line in coming months. So definitely something to watch.

Yeah. Is that, I tend to look at the non-defense. The core. The core. What was that? That was up 0.1 percent. So non-defense capital goods, excluding the aircraft. Yeah. 0.1, which, okay, that's positive, but still it's flat, kind of weak. And that's on a nominal basis. Presumably, I bet there's some inflation there, too. So on a real basis. Yeah, it's even worse. Right.

Right. Well, in terms of how that translates into GDP, which is investment spending, this is a key window into investment spending, I think the key is shipments, isn't it? I believe it's shipments. Do you know what they did during the month? So shipments of non-defense, capital goods, X transportation is kind of the best measure for investment spending that goes into GDP. Yeah, so that was up 0.8%. 0.8%.

Okay. So that might indicate now. Yeah. Right. Orders lead shipments. And so you're saying the orders are soft. Shipments may be good. Okay.

Okay now. Exactly. But we've got this weakness that's dead ahead. Yeah, if we're looking ahead, skating to where the puck will be. Yeah, right. Got to look at the orders. Right. And actually manufacturing in general just feels still flattish.

I mean, we got the purchasing manager survey this morning. This is a Friday, March 1. And I think it's below 50, isn't it? Yeah. Yeah, I think. Which is a threshold. 16th consecutive month, I believe. Right.

So manufacturing struggling. I guess that's one of those glasses. half full glass empty kind of things though, right? It's glass half empty because manufacturing is weak, but it's glass half full that it isn't weaker, right? Because historically when you have a high rate environment, when the fed's on the war path, it undermines first the housing market and then the manufacturing sector. So manufacturing is actually held up pretty well in the context of those higher rates, I guess. And then to use the other Zandiism, it's kind of according to script, right? We're trying to get that inflation. We need to see the softening. I think I should

have like a zandy vocabulary, you know. We could have like a zandy book of quotes. Zandi book of quotes. Yeah. I've got a bunch of them, right? Zandiisms. Yeah. Boatload. Yeah. So forth and so on. Okay. That was a good one. Okay. I've got one. Yeah. 3.8 excuse me 3. Well, I'm going to give you two numbers.

3.8% and then I'm going to give you the second number, which is related. It's 3.3%. GDP report. No. Well, it wasn't a GDP, it could have,

it wasn't a GDP report, but, you know, that's not, that's not the, focus of the GDP. Yeah, it's kind of buried in the GDP report, I think, somewhere. Okay. Actually, let me say take out back.

It's not in the GDP report. Okay. Defendant. That helps. I mean, I'm not totally confusing you now. I'll give you a hint. It came out in the rafted data the day after when we got, you know, income and spending and the PCE deflator, all that data, the data that we get from BEA.

Was that the dividend income? No, but you're, you're, you're, barking up the right tree. It's the government transfers right. Oh, the social security. Yeah. Is it the cost of living adjustment on social security? No, but you're in the vicinity. That was three five, I think, right? Yeah, that was three five. You're in the vicinity. Yeah. Those things that you just mentioned affect this number. It's a key number. Very important. Got to keep your eye on it every month. We definitely covered on

on economic view. It's not the current quarter. No, this is for January. That's why I say it wasn't in GDP. It's the January value. But this number is also in the GDP number on a quarterly basis. It's in,

it's on the income side of the accounts. Oh, boy. What else can I? Is it wages? No. 3.8%. you got to tell me when you give or you want another it's a component of income it's not a component

of income okay oh okay it's not a component of income but it's it's based on income income is a a saving rate the saving rate yes the saving rate the personal saving rate 3.8 that's the top line and then here's the interesting thing if you exclude the dividend that Costco paid Costco paid Costco paid this enormous dividend in the quarter. And if you annulize it, it's even bigger. I think Scott Hoyt, or analyst here, calculated $80 billion annualized or something like that. Wow. If you exclude that, which I think is reasonable to do, it's 3.3, 3.3. 3.3. And, of course, then we had a big Social Security bump up in January. That's when the cost of living adjustment occurs.

And so if you take that out, then I think I didn't do the calculation. I think you're in the twos. That's a pretty low saving rate. Now, it was lower briefly back when inflation was raging. When inflation hit the peak and gas prices were at their all-time high in the summer of 2022, saving rates got down into the mid-2s, you know, briefly. But, you know, here we are back again. So, you know, consumers have some excess saving in the high-income households, high-net worth households, and they're drawing that down,

and that's causing the saving rate to come in. The other factor is the so-called wealth effect, right? Stock prices are taking off. Housing values are rising. So people are a lot, lot wealthier than they were four years ago when the pandemic hit. And so, you know, you feel wealthier. You tend to save less. You spend more out of current income, especially if you're a high income household with

those assets. And that appears to be what's happening. And interestingly enough, what's happened? This decline in the saving rate and drawdown of excess saving here in the United States. Again, the excess saving is the extra saving we did during the pandemic, particularly about high income, high middle income households because they couldn't spend the money. They were sheltering in place. And there's still a lot of cash in people's deposit. A lot of debate around this, but by our calculation, there's still, you know, plenty of

excess saving out there. And they're drawing that down. And the reason, very different behavior here in the United States than overseas. And other parts of the world, if you go, you know, Europe, Canada, Australia, China, wherever you go, consumers did build up excess saving because they couldn't spend, but they're not spending that excess saving down now. The American consumer is very different in their behavior. They're willing to draw down those excess saving to supplement their income. And I think the reason is the wealth effect. You know, share ownership is equity holdings are much broader based here. Housing wealth is deeper here. And people are, And also, I guess the other factors, American consumers just feel, I think, less nervous, worried, cautious.

I mean, you go to China, they got, because of the very vexed way they handled COVID and kept it locked down for so long, people are really nervous about something happening. And so they're very cautious. Precautionary saving is a lot higher, but not so here in the United States. And that's allowed the American consumer to kind of power forward. But having said all of that, that's one of those niggly things that makes me a little bit nervous, right? I mean, you know, saving rates are pretty low. Consumers going to continue to do their thing.

I think so, but a bit of nervousness there. So what do you think? That was a pretty good statistic, right? Yeah, that was good. I can't believe it took us that long. Very good. Okay. So let's, before we move on, any other statistic you want to call out during the week?

What were you initial claims for unemployment insurance? We always look at that as a brown. They were up a little bit, but they're still really low. Still very low. Yeah. Just north of 200,000? Yeah, there. Okay.

215. 215. Okay. Anything else out there in the past week? You want to call out? No? Okay. The revision to fourth quarter GDP was negligible.

Yeah. Right. Okay. University of Michigan was up. Although was it, I think, I think it was in February. It was, I mean, wasn't it revoked as long? No, I'm sorry. It was down.

Down, right. No, it was down. Right. You have this problem with pluses and minuses. Have you noticed? Okay. I just, I just. We all have our problems.

Like, I don't pay my bills on time, you know? Right, right. That's a big problem. At least I have power. Yeah. At least you have power. Okay. Let's turn to part two of the conversation, and that is,

what's bugging you? You know, the kind of the catalyst for this is everyone out there, you know, the kind of the general consensus view now is, okay, no recession, everything is fine. It just feels like most everyone is bought into this kind of the soft landing scenario for the economy. And, you know, once that happens, I started to get very nervous. I don't know if I said this last week on the podcast, but in my speaking engagements, I often ask the audience what's bothering them because I want to kind of collect things that they're worried about and I should focus on in my talk.

And I'm finding that people are invariably coming up with geopolitical risk at the top of the list of concerns. You often say that, Marissa, if I asked you that geopolitical concern. And I actually, when I hear that, I go, oh, they can't think of anything else. Generally, you only say geopolitical because you can't think of something else that's more present. So that may be even, you know, another reason for some optimism. But nonetheless, there's just general angst out there that, you know, the people are expressing. But I'm getting a little nervous because of the general optimism. But so why don't we go around the group and let me, and we'll do this maybe one or two times depending on it's time this takes.

Let me ask you, what is, what's bugging you? And you can't say geopolitical risk. You can't say that. It's got to be specific, you know, something very specific, some data you're watching, something that you're observing, something out there that, you know, is just doesn't quite fit into your worldview, into the worldview we have of an economy that's going to continue to perform well. Does that sound reasonable?

Does that make sense? Yeah. Okay. All right. So this time, let's begin to me, Chris. What's kind of the thing at the top of your list of concerns? What's bugging you? I guess in general what's bugging me are some of the.

these mixed signals in the data overall. If I have to identify one, it's the difference between economic growth as measured by gross domestic prod GDP and gross domestic income. Right. So in theory, these are two measures that should tell the same story in terms of economic output. At the moment, GDP remains quite strong. We've been talking about that. It's kind of cause or at the, at the root of some of the optimism here is that we still have this very robust resilient economy. But if you look at the other way to calculate things, the GDI, that's showing certainly a much weaker growth. Still positive growth, but certainly not at the not at the same level as what we see with GDP.

So my fear is that, well, maybe we're not getting the complete picture. Maybe the GDP is overstated. There, you know, there are estimates going into that measure. And perhaps the underlying economy is, while still growing, may not be quite as robust as what we're thinking and therefore more susceptible to some type of shock. Yeah. What do you think? It might be helpful to explain the difference between GDP and GDI.

What could explain those differences? Yeah. So just at a simple level, the GDP is more of it. So both concepts are trying to measure the output of the economy. The GDP is going about this task by looking at expenditures, right? So we look at consumption and what's been spent in consumption investment, government services, net exports, sum that altogether. Obviously, we have this large, complex economy, so there are some estimates that go on

in those calculations. But that's the process. The idea is to just sum up all these expenditures, collect data, and sum them up. The other way to approach this problem is to look at the income side of the economy, right? Someone's expenditure or someone else's income. And so we can try to measure economic output by tallying up all these sources of income that we see throughout the economy.

Again, in theory and over the long term, these two measures should be equivalent, but certainly in the short term, when we're dealing with some estimates, some data that might be lagged or subject to revision, there can be discrepancies, and that's what we're seeing right now. Right now, I think it's a particularly large discrepancy between the two. I think that it's as wise it's ever been or close to. They call it the statistical BEA, Bureau of Economic Analysis, calls it statistical discrepancy.

And I think it's, if it's not the largest has ever been, it's about, it's pretty damn close. It's close, yeah. It's very close. And we got Q4 GDP. We haven't gotten Q4 GDI yet. That's right. And we get that next month because it's lagged one month.

So that'd be very interesting. So GDP in the fourth quarter was 3.2%. I think that's what it was revised to. And we'll wait and see what GDI is. And what you're saying is that in the last year or so, maybe even longer, GDI has been growing much more weakly, much weaker than GDP growth. That's right. We even had some negative pre-scarf.

significant negative prints. Yeah. And there is some research came out of the Council of Economic Advisers on Obama that said the best measure of how the economy is doing is not GDP by itself or GDI by itself, but the weighted average, the equally weighted average of the two, you know, looking at them both. And that would suggest an economy that's not growing three, probably not growing one, but probably growing closer to two. Yeah.

And that would be consistent with, you know, estimates of potential, the economy's potential growth, which we've long said has been 2%. And that all kind of works because the unemployment rate has been stable, right, just below 4%. And that's consistent with an economy that's growing close to its potential, which feels like it's closer to the two than closer to the three. Right. That tends to make sense. It's interesting. We, you know, we, as you know, and the listeners know, we have this tracking estimate for, for GDP for the current quarter that we put together based on all the incoming monthly data

that's coming in. And right now that's tracking in the twos. We'll see if that holds up given today's data. I suspect it's going to be revised a little bit lower, but we'll watch that. But we get, we collect, we do a survey of other economists that do tracking estimates. And there's one of the survey respondents is this fellow, people won't know him, but he's a great economist, Yuzo Kumusaka. He was one of my first clients.

And he was educated at Penn University of Pennsylvania, my alma mater. Larry Klein was his Ph.D thesis advisor. And his client was mine advisor. So I got to know him pretty well. And he puts out this, you know, what he does for a living. He's probably in the 70s now, but he really is into the data. And he puts these tracking estimates together. And unlike what we do and others do, he does the tracking.

the tracking estimate for GDP and GDI. So he's tracking GDI. He has an estimate for GDI and GDP. His tracking estimate for Q1, 2020-24 GDP is kind of sort of like ours, you know, around 2%, maybe a little higher. But GDI, and this was before yesterday's numbers, negative, another negative quarter. And if you take the average of the two, it's closer to zero, closer to zero in the first quarter of this year.

So I don't know. I agree with you. I think that's a really good one. That's a really good one to watch. I think that's a matter of some concern. Now, the one thing I will say is all this data gets revised, right? Often these discrepancies in the data are just measurement issues. And I know that there are some measurement issues here that probably explain some of the discrepancy.

And there will be some revisions to the underlying income data. And that generally income gets revised up, not always, but generally. So I think, you know, we'll see some resolution to this. But I think there is, there's, there's noise here, but I think there's some real signal here, too. And good reason for some nervousness. That's a really good one. Mercia, what's bugging you? It's hard to pick one thing, isn't it?

It's bleak out there. Oh, geez. Wow. Yeah, wow. Right down the hole. No, no, it's not bleak. It's not bleak. Everyone's happy.

The kind of is doing well. No? Even you are optimistic, right? I am. Yeah. I am. Okay. All right.

Yeah, I am. So we're saying we're generally optimistic. The economy's doing okay, performing well. We avoided recession. We're growing. Everything seems to be okay. But there are things that are bugging us. And I, so let me ask you again, what's bugging you?

What's not? What's not? Okay. So I can't say geopolitical risk. So I'm going to make it a little more. I don't say that. Okay. The amorphous thing, I don't know what that means.

Yeah. All right. So I would say that there are several large economies around the globe that are not doing very well. And some of these economies are our largest trading partners. We've talked before about China, right? Growth has been slow by Chinese standards. It is now in deflation. Chinese consumers aren't spending.

the real estate market's in turmoil. They're not traveling. They're not coming abroad to go to school. The Japanese economy is very close to recession. I mean, it's, you know, technically in recession. It's had two quarters of negative growth. We got data on Canada this week. Canadian economy is barely staying out of recession.

Bank of Canada hasn't started cutting rates yet, which is a little concerning, right? We can talk about the, I'm sure we will talk about the Fed here waiting to cut rates and whether that's wise, but same could be said there as well because the economy looks weak, investment is weak, job market isn't kind of teetering.

So I look around the world and I see parts of Europe too. I mean, Germany's economy has been sort of iffy as well. So when I look around the world, I see a lot of weakness in very, very large economies that could and will eventually have implications for the U.S. economy, right? These are some of our biggest trading partners. So if they're not going to buy our goods, this could end up affecting our rate of growth as well. That's a great point. That is a great point. Okay. So in my mind's eye, the U.S. is the largest

economy on the planet and 20 percent, 25 percent of global GDP. We're doing okay. The next largest is China. They're not in recession, I don't think, but they're struggling to maintain their growth rates. And then you go down the next is, is it Japan? I'm speaking for memory, but I think it's Japan. I think it is. Yeah, I think it's. Japan is kind of struggling too.

It's not, there's a bit, you know, Japan's always hovering around zero, growth around zero. So a negative number doesn't necessarily mean so-called recession because there's, The underlying potential growth is near zero. And then Germany, they're second wind, right? I think they're the next largest economy, if I'm not mistaken. Or maybe it's India. I guess India is the one large.

You mentioned Canada, the UK. They're all weak. I guess India, Australia, New Zealand are doing okay. But those are much smaller economies. That's a really wonderful point. Really good point. You know, we put together this business cycle status map every month, right? where we have all of our economists that cover a country,

look at their country and say, where are they in the business cycle? Are they in expansion, recession, at risk of recession? Are they in a recovery? And when you look at this map globally, it's at risk, like almost everywhere, right? North America, almost all of Europe, much of Asia is in this at risk of recession category.

Now, some of that is just sort of having come out of the pandemic, some economies have not fully recovered from this yet. They're still fragile, but nevertheless, when you look across the globe at the data, it's kind of teetering in many of these places. And so that makes me nervous. Yeah, I mean, I guess if these economies are flattish and not actually contracting, you might make the case that, that that is a feature, not a bug, in the sense that that's one reason why inflation has come in. You mentioned goods prices are declining. And one reason why goods prices are declining is the dollar is strong. And we're seeing in China in particular outright deflation, I think, in total.

And because the rest of the global economy is kind of on the flatish, softest side that's taking a little bit of steam out of goods prices and inflation more broadly. So that's a plus, right? Yeah, that is a silver lining of this, is that it's helping the inflation picture here. Right. And the other link back to us would be through things like oil and commodity prices. They're kind of, it oils up a little bit. I think it's around $8 a barrel, but still low enough to digest. And on trade, the other way it could affect us is through the trade balance.

if that were to continue to erode. But that doesn't seem like that's happening. It feels like the trade balance is kind of as stabilized. So maybe, maybe this sounds weird, but as long, maybe the concern is can global economy is can't be the status quo, right? You know, either these economies improve or they're going to go down. Right. Down with the, down the, into a black hole.

And that's the concern. But if it's like in the current context with inflation as a concern, if it's just kind of flatish, that may not be too bad. Yeah, I think I'm more worried about this in the sort of medium term, right? The next few years, once we're beyond, once we've gotten inflation to where we want it and we're sort of beyond the cycle and we can firmly say, okay, the economy did the soft landing or however we want to talk about it, then we want to look forward to where's the growth going to come from. We expect domestic consumer growth to slow, right?

We're expecting a slowdown in the job market and wage growth. We've seen the usage of credit come down a bit from its peak. So if U.S. consumers aren't going to be buying things at the pace they are now, presumably we want some of that growth to come from abroad. And if that's not going to happen, then we could start to worry about where that growth is going to come from. Right. Okay, that's a good one. That's a good one.

Okay, let me give you mine. the labor market, the job market. I know that sounds weird, right? You're saying job market, what's he talking about? The economy's creating, on average, 250,000 jobs per month. I think that's the three-month average monthly job gain. Roughly that for all of 2023, that's, you know, by itself, that feels pretty good. That's a lot of jobs.

I mean, I think our estimate for underlying job growth when we're not getting labor, force juiced up by immigration on other things is probably closer to 100k at most. So that's that feels pretty good. But what worries me is the internals of the labor market, how you get those 250,000 jobs because hiring is way off. If you look at hiring rates, they're now I think down to even below what they were pre-pandemic. And I was looking quickly and saw that hiring rates are off. It's not only in tech and financial services, which are sectors that we know are soft, but pretty much across the board, hiring has come way in.

Hours worked have been cut way back, and typically businesses cut hours before they cut people. And I think in the last jobs report, I'm curious to see what happens next week when we get the numbers for the month of February, I think they were consistent with like recessionary territory, you know, where hours get cut to during, yeah, right? temp jobs are falling and they've been following now for 12, 18 months. Now, that can be lots of different things going on there, but typically businesses cut their temp help before they cut their own employees, and that would be an indication of some softness.

Quits are way down. Now, admittedly, that's coming off a period of very high quits. A lot of people were quitting their jobs back two, three years ago. So, you know, maybe it's not surprising. We'd see kind of a lull in quitting as people settle into their new jobs and I think generally like them, but, you know, something to watch. The only thing that kind of is hanging in there, and we alluded to it earlier when we talked about initial claims for unemployment insurance is layoffs are low. They remain low by historical

standards. So that's the one thing that's kind of keeping the labor market together, allowing the net job growth to remain positive and frankly, I think, to avoid a recession. But when you go to layoffs and you ask, well, why are layoffs so low? Why aren't businesses responding to kind of their weak sales by cutting back on their payrolls? You know, the explanation that we have, and I think the one that I've heard others expound is kind of the labor hoarding argument that businesses have been through a long period even post-pre-pandemic where they're having a hard time finding workers and they're very fearful that if they start laying off workers, they'll get trapped and difficult to rehire and and to find people. They don't want to get in that

situation again. So they're just kind of hoarding labor and just not laying off, but very reluctant to lay off. And by the way, this is a phenomenon in many other parts of the world as well. But that feels like a very tenuous kind of reasoning for businesses, not to lay off. You know, and, you know, one thing that has, that has, that may be a catalyst for businesses starting to lay off is profit margins, which rose quite a bit during the pandemic, are now rolling over and starting to come in. And while margins are still very high by historical standards, and now I'm going to speak as a business person, you have to defend that margin, even if it's high, right? Because, you know, you're, you're, you're, you're,

target that's set by the shareholders of the company or the owners of the company, they're not saying, oh, it's okay if your margin comes in. They're saying, no, you've got to keep raising your margin. If your margin starts to fall, the response may be, oh, well, I've cut hours, I've cut hiring. What do I do next? I've got to start laying off workers. And the other thing I'd point out is it feels like there's a little bit of a herd mentality in the business community, like in everything else. I mean, right now, businesses don't want to lay off, and everyone's saying the same thing.

But once we start to see one business in an industry start laying off, others could quickly follow, and it's kind of a herd. And if we start seeing a layoffs and job grows slow, then, you know, game over. We're, you know, consumers are going to pack it in and we're going to go in recession.

So it just feels like the, you know, the metaphor is the labor market is the seat of a stool. and if you look at all the legs underpinning the stool and keeping it up, all of them feel pretty creaky except for one. And the question is why it's hard to explain. That makes me nervous. That makes me nervous. Am I being overly, like I'm really worried.

I gave away too much personal information earlier. Am I being irrational here, you know, or what do you think? Chris? No, I think that's a very rational. respond. I think we're at this point in the business cycle where, you know, we could be on that soft landing path and we're just slowly easing into it and it's natural that we have this type of pullback and you see some of that weakening. Or it could be the start of the down draft, right? That, you know, we don't stop. This is just the first leg of the stool to go. And maybe

there's another, you know, set of layoffs that are to come. And you're right. if you look at the historic layoff picture, it's never very, it's not gradual. It's very sharp. Either it's very low and then once it starts, boom, it goes up. And yeah, I don't think, I think companies don't want to be the outlier. They don't want it. It certainly looks bad if you are laying off and nobody else around you is. But once it starts, you know, some of those pent-up layoffs may be released in a short period.

of time and that could build on each other. So I think it's a very, right, you're not more like me. Yeah. Well, coming to the dark side. Well, as I said, I mean, now that everyone's on over on this side with us, I'm going, okay. And the Fed's, the Fed is not, is being very recalcitrant about that, I think I use that word properly, recalcitrant about lowering interest rates. And the longer they wait, the more nervous I get that, you know, they've kept their foot on the neck of the economy for too long.

And they've been manifest in the labor market with layoffs. They're a bit trapped. You want to add? Pardon me? I was going to say, I think the Fed is a bit trapped at this point. A bit trapped. Well, they think they're a bit trapped. Or the messaging would have to be very, very precise, right?

So. What do you mean by that? Well, just in terms of even if they read all the, if they read through the data, as we've been kind of alluding to that, you know, maybe now is the time that they should start to cut. Still, they have to deal with the fact that the official numbers, right, the core PCE that we talked about earlier is still well above 2%.

So how do they message that? Can they really use the transitory explanation once again? Just wait. Housing is coming in. It's easy. They just hire me to write the FOMC minutes or meeting. Well, that's their mistake, I guess. Yeah, come on.

You can just say, look, we're at 2 and a half percent, targets two, all the trend lines look good. We're looking at the puck down the road. We're not looking at the puck here. We're going to start lowering rates. By the way, we're not going to lower them fast. We're going to lower them slowly, but we're going to start lowering rates. I think that, I don't know. That's not that hard to do.

I don't. Okay. Mercer, I want to ask you, any other theories out there as to why businesses are still reluctant to lay off other than the labor hoarding argument? Well, maybe demand's okay is good enough and they don't really need to lay off. They haven't gotten to the point where they actually have to lay off. I mean, they cut hours and cut jobs. Yeah, there's your point about hours, right?

So I was looking at this with the jobs report last month. Hours are in recessionary territory. I mean, aside from April 2020, right, the month after the pandemic started, you have to go back to 09 to see hours, aggregate hours this low, average aggregate hours this low. It's really coming from two industries. It's manufacturing and its retail where hours have plummeted. Other industries are pretty good, historically speaking, either hours are rising or they're flat, essentially. So it's those two industries that have really, really cut hours. I worry about layoffs. I worry that we're going to miss it. Like Chris said,

When it starts, it's just like the floodgates open. So it's very hard to predict or forecast when that's going to happen. And the two measures of layoffs that we have are the Joltz, job opening and labor turnover survey that gives us layoffs data. We've talked about this. The survey response rate and jolts is abysmal now. I mean, it's in the 30s. So you have to take some of that data with a grain of salt.

The other is unemployment insurance benefits, which normally, I would say, that's what we should look at, right? But those are concurrent. They're not leading. So you see it, and one week it's fine, and then the next week it's not fine. I also think there's reasons why UI may not be as good of a measure of layoffs as it once was. Good point.

benefits have become less generous over time as measured against inflation. The replacement rate, you know, the share of someone's wages that get replaced by UI is low. I mean, it's in the 30s at 40%. So for many workers, especially if they think they could find a new job quickly or if they're getting some sort of separation benefits from their former employer, they may not even bother filing for unemployment insurance. It may just not be worth it. Also, states over, a lot of states over time have made eligibility for UI more tough. So it's harder to even apply and be eligible to get unemployment insurance benefits. Remember, these are state-run programs. The federal government

kicks some money into these funds, but ultimately it's a state-to-state decision on how these programs are run. So I think there's, I don't think it's as good. of a real-time indicator of layoffs. And we hear about a lot of layoffs in the news, right? But we don't really see it reflected. I mean, there's that Challenger, Gray and Christmas layoff report that comes out. We did see there was an enormous increase

in the last one in layoffs relative to the previous few months, but we didn't see it in UI claims and we didn't see it in the Joltz data. So I feel like this is, one of those things where I'm increasingly nervous that we're missing something with layoffs. Okay. Well, I, when we're preparing for the podcast last night, I was sending some emails around to just say, hey, this is what I think we should talk about. I was soliciting, you know, things that people are worried about. So I'm just going to read down

the list. I don't think we have time. We're going to go on to the questions, but just to, of course, you said GDP versus GDI. And then we talked about global economic conditions, you know, some of our major, major economies are struggling. I mentioned soft, like I said, soft market, soft labor market internals. And we just talked about that. Here's the rest of the list. Inverted yield curve. It's still inverted, by the way.

And that's not a good thing. You know, that's a problem for the financial system. Hey, Fed, the curve is inverted. That's a problem. Global supply chains. And that Suez Canal, Panama Canal, Houthis, lots of things. to worry about there. You can see or are concerned about the Fed's reticence. Is recalcitrant? Is that the right word? Am I using that property? The recalcitrant? I think. Someone

can look at it up. And I have to Google it. Winding down, here's the other thing, winding down of quantitative tightening liquidity and money markets. I actually worry about that because, you know, they're going to have to end QT at just the right point. They want enough reserves in the system to make things function properly, but they don't want to take too much out. They don't want to let too much in. So getting that exactly right might be a kind of a flashpoint in the financial system. We mentioned China's deflation. Oh, here's the other thing. Oil prices, obviously, can U.S. frackers continue to increase production if global demand continues to improve and the Saudis and the Russians don't ramp up their

production and they won't, given sanctions and given the desire for higher prices? Last year we got bailed out because U.S. frackers could ramp it up, but the way they did that was not sustainable, certainly not allowing them to increase production going forward. I worry about the weak University of Michigan survey and consumer sentiment. You know, maybe it's something more there than I'm anticipating. And this is Chris's perennial bugaboo, consumer credit quality. Well, I'm less worried about that, but, you know, I hear you. the affordable housing crisis

and then just when we were starting to really depressa threw into the mix the obvious dysfunction in Washington although a little less dysfunctional right they just looks like they're going to avoid a government shutdown which is yeah for now for now yeah for now anyway

anything else you want to add to that list while we're at it now I think it's a pretty good list right pretty exhaustive pretty exhausted did you mention there's an election exactly Right. Yeah, we didn't mention that. Yeah.

Yeah. Not only here, but, you know. Everywhere. Everywhere. Yeah. And that economic weakness you mentioned, Marissa, globally. I worry about that having non-economic consequences, right? Political consequences, you mean?

Political conflicts, right? Yeah, very good point. Very good point. Okay, let's turn to a couple of listener questions and then we'll call it a podcast. So, Marissa, I know you've been collecting those questions. Anything look interesting to you? First, the definition of recalcitrant is having an obstinately uncooperative attitude toward authority or discipline.

Okay, there you go. That's a, isn't, I used it properly, I think, right? They're the authority, but they're, they ought to, they ought to, they ought to, they're very obstinate is the right word. Obstant. Okay. Anyway, what's the question? So there's a couple of questions along the lines of the deficit in the national

debt in the U.S. So I'm going to paraphrase. So I guess a broad question is how do we, we always hear about it from a political point of view when it's discussed. But how do economists think about the deficit, the debt? When do we get worried? What do we think should be done about it? When do, when we think it's reaching sort of a critical point,

how do we think about tax versus spend? It's a broad question, but I think it's a good one. And by the way, that sounds like a podcast to me. Yeah. We should get a guest, someone in, I think a few people right off the top that we can get here to talk about that. That's a really good one. I've got a view on that. Chris, do you want to expound a little bit?

And I'll fill in more gaps or do you want me to go first and you fill in the gaps? Go ahead. Go ahead. You want me to go? Yeah. All right. So just for context, the nation's publicly traded debt to GDP ratio is 100%, you know, give or take. that's more than double what it was if you go back before the financial crisis. So the financial

crisis was very costly. The pandemic was even more costly. And then we've done tax spending policies that have exacerbated our problems. So we've gone from making this up, but roughly speaking, 40% debt to GDP before the financial crisis to 100%. If you take the Congressional Budget Office forecast, CBO is the nonpartisan government agency that does the budgeting for the the government, federal government, if there's no change in policy, if we don't change fiscal policy, tax and spending policy, the debt to GDP ratio, and again, I'm making this up, but we'll give you a sense of the magnitude. We'll be at 115, 120% of GDP at 10 years from now, 180% of debt to GDP 30 years from now. And I think that's when they're forecast end,

but you can do your own forecast. You know, the thing continues to rise. The implication is, at least for a while. When I say a while, I don't know exactly how long, but not a year, probably five, 10, 15, 20 years. If we stick to that path and we make no changes, and by the way, nothing else happens. There's no other pandemic. There's no other war. There's no big climate event, whatever it is. It will be a corrosive on the economy. It means that every year underlying long-term interest rates are going to be a little bit higher than the year before. Right now, we think the 10-year treasury yield, roughly speaking, should be around 4%, 4, 4 and a quarter, roughly where it is. But for every percentage point increase in the

debt-to-GDP ratio, by our calculation, and I think it's consistent with CBO estimates, it adds one to two basis points to a long-term interest rate. So do the arithmetic. Say we're at 100% debt-to-GDP now, 30 years were at 180%. That's an 80 percentage point increase. And let's just say it's a point, basis point increase in the 10-year yield for every one percentage point increase in the debt to GDP ratio. That means a 10-year yield is going to go from four, around four to around five, around five, right? Now, here's the other thing. At some point, it goes from the deficit in debt go from being a corrosive on the economy to a clip event, meaning at some point investors going to say, hey, what's going on here?

The debt's continuing to rise. And by the way, it stands the reason if we don't have the political will to change that forecast, we're doing other stupid things. Like we're shutting the government down on a regular basis. We have all kinds of brinkmanship over the debt limit increase. We may even breach the debt limit, give that a shot at some point. And then investors are going to say, you know, I'm out of here. And adding to that scenario is we're not the only country on the planet has got this problem.

Almost every country in the world has a very high debt to GDP ratio that's rising. There's exceptions. Germany is an exception. China's federal government is an exception, although they got other leverage problems. But, you know, so you're going to have a very significant increase in sovereign debt around the world. And, you know, increasing demand, putting strains on. the ability of investors and savers to digest that debt without even higher interest rate. So at some point, we'll probably see some kind of crisis in event that will occur where

interest rates spike, the economy gets nailed and we go into recession. Here's the final thing I'll say. Or maybe I'll say two things. One, a little dark, one a little bit hopeful, and then I'll stop. On the dark side, it's almost like we need to have that crisis to generate the political will necessary to make the changes that are necessary. lawmakers are having a hard time connecting the dots in the mind of the electorate. Why do I need to do those cuts?

You know, why can't you give me a tax cut? You know, why can't you do those things? Everything seems fine to me. You know, what are you doing? And you need the crisis to say, hey, Mr. voter, Miss voter, this is why we have to do it. I'm hopeful we don't need to quite get there. Maybe, you know, in the past, one catalyst for change was when our interest payments on the debt increased to a level that was greater than the amount we were spending on defense.

I don't think that's ever happened, but we're getting pretty close to that now if we're not there. And then lawmakers can say, does this make sense to anybody? We're showing out more on interest payments to investors, half of whom are overseas. Some of them are Chinese, by the way, or Middle Eastern or whomever. And we're spending more on that than we on our own defense. Does that make any sense? Can we make some changes here, please?

But I suspect we may have to have something that a much deeper question. crisis for us to address these issues. But here's the hopeful thing. You know, if history is a guide, when push comes to shove, and we've been in periods when the deficits in debt were high and interest payments as a share of GDP and revenues were higher than they are today, you know, we did find the political will to make the changes necessary to ensure that, you know, the deficit in debt didn't become the kind of problem I just described. So we have shown an ability to do it when push comes to shove. Although, I guess I can't help myself to end on a dark note,

those previous times were in a period when our political system and sentiment was seemingly much less fracture than is today. So this is a big deal. This is a podcast, definitely a podcast. But Chris, anything out you want to add there? Or did any of you, I said you disagree with? Not fundamentally. Sounds like everybody wants to be.

Italian, right? That's the conclusion, right? We're kind of following that. They're 120% debt to GDP, I think, right? What's that? Are they 120? Their debt to GDP ratio? Oh, I think it's higher than that. Is it higher than that? And then of course, it depends what you, what you include. But, um, well, let me ask you, here's a question that I think is an interesting question related. If you go look at Japan. Yeah, that's where I was doing. Japanese debt to GDP is, what, 250%? Yeah. So, Why are they able to manage that?

And why should that be, therefore, why should this be a big deal for us? If we're at 100 going to 180? Well, that's always the question, right? You do see other examples where countries kind of limp along. I guess that's the cost is that the Japanese economy is just limping along. The central bank basically handles the financial plumbing to ensure that these large debts and deficits don't create a lot of economic harm. So I think that's a, and same can be said about Italy, right?

Other countries with large debt to GDP. It's just limiting in many ways. So I don't, there are some folks who have a very crisis-oriented view. Oh, if the U.S. debt to GDP ratio hits whatever, then everything falls apart. I don't know that that's necessary. I think we would just kind of move along, right? We would kind of put a patch here, patch there. You know, yeah, certainly 10-year treasury bills would experience a higher interest rate.

But I don't know that it's a total collapse, right? I don't know that I buy into that narrative at least quite yet, just given this other experience. I guess I'm also colored by my own history. When I was an undergraduate academic student in the 90s, I was assigned this book. called bankruptcy, 1999. I don't know if you remember this, but I had to write a report on it. And the whole, so this was in the early night, the idea was, oh, collapse, calamity coming because of, you know, high, high debt payments.

And then soon after, the budget was balanced. And, yeah, the debt ratio continued to climb for a while, but it's, you know, we passed 1999, no problem, right? Well, actually 2000 was the last year we had a surplus. us. Yeah, but in terms of the fiscal situation, you know, kind of moved on. But I use that as an example of when I said earlier when we've been pressed, we've figured it out. In the 1990s, that is a case in point, right? You go in the early 90s, bond market vigilantes, interest rates were rising, a lot of concern about deficits and debt. That was

Gingrich and Clinton and Rubin as Treasury Secretary. And they did come together and they did make changes. You know, reforms to the welfare system, so-called welfare system at the time. They made some other budgetary changes. And of course, we got fortunate with the tech boom and all the capital gains that generated a lot of revenue. That helped a lot, too. But I view that as a time when we actually came to get, you know, there was a lot of brinkmanship. There was a government shutdowns at that point in time and so forth and so on. And then we thought the political system was very fractured. Number

probably certainly not as much as it is today, but thinking then then was it was pretty fractured we came together

at that point. Yeah, but so I think that's the hopeful view. Hopeful view. Yeah. But I don't know

that. So you're saying you're saying Mark, okay, it's not great but relax. We can digest

you know, much higher debt loads or maybe we could. A variation on that theme is we can digest them. It's not good because it's going to be problematic in terms of underlying growth rates. We will have higher interest rates.

We're just not going to grow. We'll be Japanese like to some degree. That's right. I don't, perhaps I'm hopeful that we'll see some type of political solution come along, but I'm not very optimistic that that will be the case. More likely that we'll just, as we've kind of done over the last couple of years here, We go through these, you know, debt ceiling brinkmanship periods or, you know, getting another government shut down.

We just kind of patch it along, you know, keep going. But making those big decisions in terms of the true reforms that would be needed to actually turn the tide here, I just, I don't see that happening. Yeah. Yeah. Mercer, anything you want to add on? Yeah, I just, one of the other questions is, do you? you think that we could ever see a budget surplus again. It just seems, I mean, it could, right?

There could be some big, we talk about big productivity boosts or, you know, some major shift in the economy, some major innovation, just like the tech boom was in the late 90s, early 2000s. Well, I can. Well, I can't. Here's how you do it. You have to grow 3% per annum, not two. And the way you get three is you get more immigration reform and you get a lot more immigrants into the country. The immigrants with skills and talents and wealth and kind of Canadian-like immigration. So that's maybe half. And by the way, more immigrants means higher productivity growth because they start companies at a higher rate.

And then you get a little juice from AI, you know, another half point there. You get three. I bet we should do the calculation. But I would think if we go from 2% on our level. line growth to three, problem solved, be my guess, unless we create more problems by cutting taxes or increasing other spending or whatever it is. We're going to find a way to spend that surplus pretty quickly. Yeah, I just don't have much faith that that we'll do that. Legislators have the will to put that ahead of partisan politics. I mean, it just looks increasingly bleak on that

front. Yeah. I didn't really want to end on a down note. I kind of, you know, I gave us a way to end on a positive. You just wouldn't take it. What was the positivity again? You know, it's actually doable. It's doable. It's conceivable. It's conceivable. It's conceivable. Why, I mean, why do we think we need to be boxed in a 2% rate forever? I mean, that is our forecast, but that doesn't necessarily need to be the case. Doesn't necessarily be the case. Yeah, I think this goes to like talking about what are the upsides, right? We always talk about the downside risks, but there could be upside risks now.

We've hinted at them in the past, but you could construct rosier narratives around our baseline outlook. Well, let's get, let's just, pinky, what do we do? Agree. Swear? We don't, we're not going to, we're not going to,

we're going to have a podcast on this issue and we'll get, we'll think about, And if listeners got recommendations on who they think would be good to have on the podcast to discuss this issue on fiscal deficits in debt all ears, but there are some really good choices out there. So we'll try to do that in the future. Anything else, guys, before we call it a podcast? A listener suggested that we broadcast what our upcoming topics will be so that questions

could be submitted in advance. So next Friday is Jobs Friday. So that will be, we'll have Dante, I'm assuming, we'll be on. and we'll be talking about the jobs report for the month of February. Oh, good. Great. Anything, Chris, before we go? Just wondering, given your comments today, have your recession odds shifted it all here?

No. A little darker? No? No. These are just things that are bugging me. Yeah. Okay. 20% probability.

A little elevated. The unconditional probability is 15, but I say 20. What about you? Have they changed at all? sticking with 30. These geopolitical risks are really hot. Mercia, what's your probability? 2025, somewhere in there.

Yeah, okay. All right. Okay, very good. Well, thank you to your listener, and we will talk to you next week. Take care now.