Inflation, Tariffs, Spreads…Hike?
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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by one of my trusty co-hosts, Chris Drudy. Hey, Chris. Hey, Mark. How are you doing? Doing well. Saw you earlier this week. Oh, yeah. We had a party, a Christmas party. We did. We did. What'd you think? It was good to see everyone.

That's what you think? Yeah. Yeah. We don't see people in person anymore, right? That's true. That's true. Increasingly, it's going to be hard to get together, I think, because we're remote and people are now becoming increasingly dispersed, right? It's not like we're all centered. Still, there's a center of gravity here in suburban Philly, but increasingly, that's going to be less the case, I assume, going forward.

Yeah, I think that's the reality. The reality. Yeah, but it was good to see everybody. And we have Matt Collier here. Matt, thanks for joining. Absolutely. Mark, Chris, nice to see you. This is Inflation Week, and you're always with us on Inflation Week. And you were at the party as well. I was. I saw you with one of those cowboy hats and spurs. Yeah, I liked to lean into it. You were getting a little out of hand, I'm just saying, Matt. Is that typical for you, or is that you just- That's most Tuesday nights, yes. Most Tuesday nights.

No wonder your productivity is down on Wednesday. You have a pretty high level of productivity, so you're still okay. So what'd you think of that Christmas party? I'm telling you, I'm not, I wasn't a fan. I was not a fan.

Next year, I'm taking things under my own, I don't know what I'm going to do or how I'm going to do it. We're going someplace different than where we were. It was just too loud in my view. Maybe I'm getting old. No?

Do you have a venue in mind that you would like to go to? Your house? I have absolutely no idea where we would go. No, but I got a whole year to think about it. That's true. Yeah. A library of some sort. Okay. A library of some sort.

Anyway, it was good to see you. You're right. It was so good to see everybody. It's been a long time since we got together. Well, let's dive into the numbers. We got the Consumer Price Index, CPI. We got the Producer Price Index, PPI. I think we also got Import and Export Prices. We don't generally talk about that. I suspect with tariffs coming-

You know, we're going to be talking about those numbers a little bit more than we have historically. But, you know, for the time being, this is mostly about the CPI. So you want to give us a rundown on the if I'm wrong, unless I'm wrong, Matt, the most of the story is with the CPI, right?

Most of the story, yes. But I think the PPI has more interesting things to say than normal, but that doesn't mean it's supplanted the CPI. I think it's a good place to start. The headline consumer price index rose 0.3% in November. That's in line with expectations. That lifted the year ago rate from 2.6% to 2.7%.

Again, in line with expectations, not a surprise, even if that year over year change in the wrong direction can kind of scare some people. It was a little bit stronger than October's 0.24% increase and is consistent with what has been a little bit sturdier, stickier inflation in the closing months of this year than what we've seen through most of the year.

Core CPI rose by the same amount, 0.3%. We were expecting a little bit lower, but- Core being ex-food and energy. Excluding food and energy. So there, the year-over-year rate stuck at 3.3%. It's been there now for three months. Yeah.

You take a different view, three month moving average on an annualized basis, we're at 3.7%, a little bit higher than the month before. Six month moving average up from 2.6% to 2.9%. I guess the first increase in that measure that we've seen since April or March of this year. So more than a month or two of stronger inflation than we'd been used to. But maybe as I'll argue, I still, I don't think it's a,

Five-alarm fire? Just a point of interest. The Federal Reserve has a 2% inflation target, but that's based on the consumer growth and the consumer expenditure deflator, which is a different measure. Typically, the CPI, because of construction and other factors, runs a little bit higher than the consumer expenditure deflator, the so-called PCE deflator.

Probably at most about a half a point, right? So if the target on the PCE is two, the target on CPI would be,

say two and a half on the outside. And you're saying for the month of November, year over year, we're at two seven on the top line and three three on the course. It feels like we're on the high side of where the Fed would want us to be. And you're also making the point that it feels, you say, sticky. It's kind of been stuck there for the last few months. The progress and getting inflation back to target

which we were enjoying throughout much of 23 and much of this year seems to have stopped over the last, well, it sounds like last three, six months, something like that. Is that the way? Yeah. Okay. Yeah. Okay. Okay. So what's driving the kind of the stickiness? What's going on here? Why is it sticky? Why isn't it coming in more quickly? Yeah.

Food prices, that's only going to apply to headline CPI because core CPI, but food in the past, so you had a 0.5% rise in September, then relatively mild in October, then November, they come jumping back again. And

Eggs get a ton of attention, but they're kind of the perfect measure there. You have egg prices rose by 8% in September, then fell by 6-ish percent in October, then bounced back again in November. So it's following the same, if not more dramatic trajectory there. And that's a big part of people's budgets. That's how the consumer price index is calculated. So you're getting some upward pressure there. Food at home is the...

what we'll refer to as grocery prices. That's the DLS's measure of grocery prices. As I said, rose by 0.5% in November. That lifts the year ago rate to 1.6%. So it's getting a bit higher, but still not the kind of thing that's drawing meaningfully up the year ago rate in headline CPI. That feels like that's... I don't want to put words in your mouth, but I will. That sounds temporary, right? I mean, you're not expecting...

that to continue, are you? I don't think so. I think that's food prices are extremely mild for the over a year, most of the time, 23, 24. Year over year rate was 1%, a little below, a little bit above. That explains part of the increase, the 0.3% increase in CPI inflation in the month, but it doesn't explain why inflation feels like it's getting sticky, why it's kind of stuck here.

Well, that I think is a more nuanced discussion. I think the same concepts we've looked at, shelter, why is shelter taking so long to come down? Although it looked really good in November, it's still providing most of that year over year increase. It's keeping that elevated, even if it's on a month to month basis growing at a more slow rate. And then if we look to this other, I mean, look at goods prices, which had been falling pretty reliably since peaking in 2022, they're all used to vehicle market as an important factor.

you have a perfect measure. Think about goods prices, they spike in 2022, then they've come down very consistently. In the past few months, that

isn't the case anymore. So they're starting to tick up. Again, they're low on a year over year rate, but their monthly increases that were helping bring even the year over year rate down, those monthly declines that we were seeing in vehicle prices are no more. So all we're looking at is shelter prices and a little bit of inflationary pressure from things like core goods, vehicle prices, food prices. Preston Pysh: So the vehicle prices, because that had been declining, as you said, pretty steadily

for the last, I don't know, 12, 18 months. And it feels, what you're saying now is it feels like that decline is over. We actually saw some pretty sizable increases for both new and used in the month of November. What's going on there? Is there something fundamental going on there? I mean, this goes to the question of stickiness. I mean, if it's just temporary, then no big deal. If it's something more fundamental, then maybe the stickiness is more of an issue.

I don't think the stickiness is more of an issue. I think it's more of a measurement issue where there was help from these falling goods prices. Now that help is no more and we're focused on shelter inflation and we can bounce around. There's no real support to lower the year-over-year rate just yet. There's also some base effects going on. There was a big jump in January.

in the CPI. And as that's still in the year over year comparisons, I think that's going to make it hard to have any improvement. I think we can be pretty confident in the first quarter of 2025, we'll start to see some improvement there. So when I say sticky, when I say sturdy, it's we were used to seeing each month a lower and lower year over year rate. And that's stalled. But I don't think the forces underlying it are here to stay in any kind of meaningful way.

So we had been enjoying pretty steady moderation, and you're saying a lot of that was this fall in goods prices, vehicle prices would be the poster child for that. And we've seen some moderation on the service side of the economy, but here we are in the last few months-

the outright declines in goods prices has abated, and we are actually seeing some price increases, you mentioned vehicles. And even though the service inflation and housing inflation continues to moderate, the fact that we're not seeing these declines in goods prices is causing the overall CPI to kind of get stuck, seemingly stuck here. But the trend lines still feel

Good to you. Like we're moving in the right, we're going to start moving again in the right direction back to target. That's how I would, I expect things to unfold in 2025. Okay. Okay. Chris, what do you think? Yeah, I generally agree. I think the underlying trend is still there, but it certainly is, it is sticky, right? It's taking a long time to correct. On the vehicle prices, my theory, I'll throw this out there. I think hurricanes may have an effect here, right? You've

Flooded cars, right? That's going to put some upper pressure on used car prices, even new car prices. So that would be my case. And if you look, it looks like October, November were the months where you saw some of that increase. So that's my...

What I mean for now is that it might be a one-off effect and we'll start to see more moderation going forward. You mean these storms destroyed a lot of vehicles? That's right. So the supply, and then people needed to replace the vehicles, and thus this combination of supply and demand caused prices to pick up. That's right. That's my theory. Oh, interesting. Do you agree with that? Do you think that's-

Reasonable explanation, Matt? I look at wholesale auction prices, and they flattened out in summer and then started to rise. But are they rising because there's fewer cars because they were destroyed by storms? That's, I think, certainly possible. But in general, it's a trend that

I think the automotive market has just come into better balance. And now after supply and production being constrained for so long and having a hard time coming into line with actual demand for cars, I think we're at a better spot now. And I think we'll see more of a normalization in price increases. That's how I see it. But that's certainly a sound argument. Now, we have been getting some really large increases in motor vehicle insurance and repair. And that was a function of the surge in actual vehicle prices previously.

back a couple, three years ago, those increases have seemingly moderated, right? There's still positive increases, but not anywhere to the degree that we were getting just a few months ago.

Did I get that right? Yeah, you did. You did. Auto insurance fell slightly in October and then ticked up. So we're talking 0.1% decline in October, 0.1% in November. But after a stretch of 1% and more monthly increases, that's a change. That's an inflection point. It feels in recent months still 12.7% higher than a year ago. But again, much slower monthly growth right now. Okay. And I guess the other...

a component of inflation that may be contributing to the stickiness is medical care inflation medical services yeah so the medical care services rose 0.4 percent and is now up 3.7 percent year over year um that's accelerating that's as we've discussed it takes a longer time for

healthcare to digest and pass through cost increases to consumer prices. And that's happening now, and it's not a small component in the consumer price index. It's an even bigger component in the PCE, but measured a little bit differently. So within the

And that 0.4% growth matches what happened in October. So we have physician services, it's a big one, 0.3% growth. Hospital related services, 0.1. Health insurance is up 0.2. So kind of across the board, moderate increases in prices. And we largely expected that again,

given the nature of healthcare, but kind of the one component moving in the opposite direction than a lot of the other major components in terms of still seeing slower and slower price increases. Maybe the way to think about the stickiness issue is that, just to reiterate in another way,

is that if you add up the cost of housing, rent for shelter, owner's equivalent rent, the cost of home ownership with medical care services, in my mind's eye, that probably comes to not quite half the overall CPI. It's a big chunk of the CPI. And those two, the prices for those two things, housing and medical care services,

They are – they don't move in a big – they're very inertial, right? They don't move down in a big way or up in a big way. They move very slowly. And because all the other stuff, the goods price and everything else are kind of washing themselves out, they're no longer –

pushing price inflation down, you're left with these two things that are very inertial. And that's why I feel it is sticky. The reality is sticky, but it's not overly concerning because it continues to move in the right direction just very slowly. Is that fair? I think that's exactly right. We never expected goods prices to fall forever. We just expected shelter to disinflate. And if that was the case, we'll get there. And I think

I think November is a good data point. Shelter prices were mild. So, yeah.

Yeah, a little bit of volatility. It's not a straight line, but the larger story of shelter disinflation carrying the day remains. Right. Okay. You were mentioning, you teased us a little bit on the PPI. You're saying there's some interesting information in the producer price index. CPI being the prices we pay as consumers, PPI the prices that are called wholesale prices, intermediate prices.

Exactly. And it's the same framework as you have this relatively strong month over month change. So the PPI rose 0.4%. And that was a little stronger than consensus. It was stronger than we expected. And there's different components we can discuss within the CPI or within the PPI all along as we were looking at shelter in the CPI. I think the most important component within the PPI is the services PPI. That's service prices that, you know,

Our proxies for wages are a lot stickier. They move more slowly, but they're extremely important. And that keeps lowering. So the service, PPI for services rose by 0.2% in November. That's slower than October. It's slower than September. And it's moving in the right direction. So there's noise as well, mostly from food, like we saw on the CPI. But within, you know,

under the hood of that stronger month over month increase in the PPI is good news in the most important component, which is service services. Okay, good. One last thing on the data before we move to what this all means for monetary policy is

We got the CPI, we got the PPI. Both those data sets are used to construct the consumer expenditure deflator, the PCE, what the Fed is targeting. Do you have a sense of what that's going to be? I guess that gets released, is it next week that data is released or the weekend? It'll be sooner than normal because of the holiday. We'll get it Thursday or Friday. Thursday, okay. And there you have this interesting wedge opening up. So the PCE and core PCE are expected to rise by 0.1%.

- Why? - Which is interesting. Because the most important components, I mean, shelter being low and it's like, well, on the PCE deflator, shelter's not as important, so why would that not be kind of moving the opposite direction?

But things like airfare, physician services, the way that that's measured, the components that don't come from the CPI, they come from the PPI. Those were weak and they've weighed heavily on estimates of the PC. Total sanity check were right in median and consensus is. So like at first I was like, without running our model, I would have guessed we were in that point.

too high, 2.3. That was my intuition. Yeah. But we're at 0.1, you say? 0.11. What would be year over year? That would lift the PCE deflator from 2.3 to 2.4%. Others are a little bit stronger, 2.3 to 2.5, because they rounded down a little bit higher, but from a little bit higher. And then core PC, our forecast of 0.13% would keep the year over year rate at 2.8%.

Where it's been, yeah. Okay. So still on the high side of the Fed's target, but within spitting distance and it feels like it's moving in the right direction. Yes. And something I still think we can be confident starts to come down. Right, right. Any other commentary there, color commentary, Chris, on that one before we move on?

No, I'm curious. I'm assuming the Fed obviously is paying attention here and is using that in their, will be using that in their deliberations, right? Right, when the Fed meets next week. Right. Right. So if the, you said the PCE deflator, the consumer expenditure deflator year over year, I thought it was a 2% in November year over year. It's not? It was higher than that? It was 2.2, you said? It was 2.3 in- November? Yeah.

And then it was 2.1 the month before that. So it's risen. Oh, it did rise? Yeah, it never actually hit 2%. Never did? Okay. Maybe it's my wishful thinking. Yeah, they were there. It's funny. I did travel a lot this week. I was in Washington, New York, I mentioned. People love the... We're getting a lot of good comments on the podcast. And one interesting comment was that we say interesting and fascinating a lot. Oh, wow.

I thought this was a kind of mild form of criticism because when someone says to me, "That's interesting," that means they don't really think it's very good. Oh, that's interesting. But no, he meant it in a very positive way that everything we talk about, it's interesting, it's fascinating.

So I thought that was pretty cool. That was pretty cool. So that was interesting, Matt, that rundown. Fascinating. Fascinating. Very well done. Very well done. All right, let's talk about this in the context of the Fed and Fed policy. And Chris, maybe I'll turn to you because I know you look at market expectations around the Fed. What are investors thinking about next week? And perhaps give us a sense of what they're thinking about next year in terms of interest rate policy. Yeah.

Yeah. So 97% confidence that that is going to cut next week. Really? Right? So investors are all in. I'm not even that confident I'll brush my teeth tonight. Jeez. Okay. Oh, gee. 95%. 95%. That's not interesting. That's not interesting. That's, what is it? TMI? No, too much information. TMI. TMI. TMI.

I probably should have said, I'll definitely brush my teeth. No, I take that back. 100%, I'll brush my teeth. 95%, I'll use floss. Although I'll have to tell you, I don't know. I highly recommend this. I got a water pick. Is it called a water pick? Yeah. A water pick. Yeah. It's great. It's so much better than... Oh, here's a personal hygiene question. It sounds like you use a water pick, Chris. Do you?

I don't. I floss. Oh, Matt, do you use a water pick? No, I floss as well. Then forget it. I can't ask you my personal hygiene question. I was wondering if you need to do both. Do you think you need to do both? Yes. I was going to ask my dentist. I think your dentist will say yes. Oh, yes. The dentist will say yes. Uh, uh,

Or maybe not. Maybe they like the work. Maybe they'll want to send me... Probably say you should use two water picks, one and then the other. So here, I'll sell you another water pick. Let's see another water pick. Well, there's the age old question. Do you floss or do you brush first? Wait. That's controversial. I never heard that question before. What the hell are you talking about? How is that controversial? Why would you floss before you brush your teeth? Exactly. That's my perspective.

Really? Because you want to get all the gunk out. You're kind of, you know, you sweep it away. Now that's way too much information. That's WTMI. Way too much information. It reminds me of that. Do you ever watch Archie Bunker, All in the Family? Did you ever see that show?

No, you're too young. Oh yeah. Oh, you see, you saw Chris, right? I saw the reruns. Oh, the reruns. Yeah. Well, there's this one episode where Archie and his son Meathead are debating, do you put on both socks and then put on your shoes or do you put it on one sock and one shoe at a time? What's your view on that? Do you have a view?

Socks, then shoes. I agree with that. That's my view. Yeah, that was Archie's view too. Meathead was definitely the one sock, one shoe, one sock, one shoe. What do you think, Matt? I can't imagine there's people that would have a bare foot next to a shooed foot. Okay, all right. Well, if you knew Meathead, you know. Oh, yeah, yeah. Yeah.

Where were we? Oh, investor expectations. Yeah. Yeah. So very confident for a 25 basis point cut next week.

low confidence in terms of what's going to happen after that. So you look out at the futures by March, there's like a 60% chance of another cut. By March. By March. Sorry, by March. There's a meeting in January and then a meeting in March. By March. Right. January, very low expectations of any movement, pretty much a pause. And then even by March,

at this point, only 60% chance. And if you look out throughout the end of the year to December, it's pretty dispersed in terms of the...

the possibilities for rates. You do have some kind of at the very low end, which I guess would imply some type of recession or slow growth environment. So you have that kind of factor in there. And then you do have some folks who actually are calling for- No cuts? Increases. Oh, increases. There's actually- Maybe a 25 basis point increase if inflation takes off again or something. Really? So if you look at the median, it's maybe two to three cuts next year at the most.

but like i said it's a pretty wide uh dispersion right well uh our forecast has changed if you go back prior to the election uh we had we had a cut in december and then we had four cuts in 2025 one each quarter and then a couple more cuts in early 2026 to get back to the so-called equilibrium rate which we put at in the long run you know abstracting from the business cycle at about three percent

Post-election, we took out two, we still had the December rate cut, so we're on board with the consensus for December. And then we only have two rate cuts in 2025, one in March and then one in September. And then a resumption of cuts as we move into 2026. And by the end of 26, going into 27, we're back to equilibrium. And a lot of that goes to the Federal Reserve trying to digest the

the economic policies that are going to come out of the new trump administration and we'll come back to that in a minute i'm i'm beginning to wonder uh whether there are going to be any rate cuts next year and that's not our forecast i'm just beginning to wonder that and i thought it would be instructive because we've not done this but maybe we can do this on the podcast

go through all the different things that the Federal Reserve would consider, does consider when setting interest rates and assess what that implies for rate cutting next year. So we began with inflation. That's kind of at the top of the list of things the Fed looks at. And it feels like we came down as a group on that would be consistent. Our forecast for inflation would be consistent with more rate cuts next year, right? Right.

Something consistent with at least two rate cuts in 2025. Would you agree with that, Chris? I would. Yeah. You would. Okay. Inflation's coming in. Yeah. Modestly. All else being equal. All else being equal. Okay. What about you, Matt? Do you think the inflation forecast is consistent with rate cuts next year? Yeah. If there were to be a change, I would say yes.

three rate cuts, but that's just because we feel pretty good about inflation. I think two is the right spot. And that's in the context of all else equal. Just looking at the inflation, you're saying at least two, maybe three quarter point rate cuts next year. Yeah. Policy is still restrictive and we have a little bit of ways to go and all else equal. I think that would make sense. Okay. So make a mental note of this. Based on inflation,

It would say two to three, our forecast of inflation all else equal two to three rate cuts next year at quarter point each time. Inflation expectations. That's the other thing the Fed looks at, right? I mean, this is in their so-called reaction function. This is what they talk about when they release their statement with each interest rate decision, each policy meeting. They begin with inflation, then inflation expectations.

Here, I'm looking at five-year break-evens, and that's simply looking at treasury inflation protected securities, five-year tips, so-called tips. Compare that to five-year treasury yields, and the difference is kind of the break-even measures what investors think inflation will be over the next five years. That has moved up meaningfully since...

Really, over the past three months since investors began to discount President Trump winning the presidency and, of course, his policies coming into place. That's up, you know, I think 30, 40 basis points over that period, which is not inconsequential. Chris, am I characterizing the facts there right?

Yes, I think the latest rate is around 2.4%, right? Five-year break even. Five-year break even, 2.4%. Do you think that's on the high side then or not a matter of concern or all else equal? What would that imply for monetary policy going forward? It's certainly on the higher side, right? So I think it would argue for pause in that case, at least. I don't know that it's...

It's not so far out of the historical norm, but it's certainly higher than it would be. So I don't think it calls for raising the rate, but I don't think it supports a cut.

Okay, so kind of the status quo, just zero rate cuts in 2025, right? Yeah, based on that, again, we're looking at- Yeah, all else equal. ... alone and assuming it doesn't change or- Yeah, yeah, yeah, yeah. Sitting here today, we're doing a forecast. We're kind of thinking of what the forecast should look like based on the information we have in our underlying assumptions about these things going forward. What is our forecast for monetary policy, interest rates?

Matt, any pushback there or any thoughts on that, inflation expectations? No. No, and other measures seem to have been similar, consistent with what Chris is saying, which on the higher side, but not scary. Like what? University of Michigan comes to mind, but I want to say to the Philly Fed's professional forecasters, but I don't know exactly when the last quarterly forecast

figure came out. Well, I put zero weight on the U-MISH survey. Right. Are you listening to the podcast, Matt? You need to listen to the podcast. I listen to the podcast. Okay. All right. So, you know, I don't like the U-MISH survey, but I do like the survey professional forecasters. Right. You know why? Whole responder? I respond to it. Right. Yeah. Yeah.

What do you say? You know, they should, should like it then, right? Yeah. Are you able to exclude your own just to see what everybody else is saying from the aggregate? Probably not. I do. Yeah. Yeah. I down weight those other X, you know, forecasts, but no, no, only kidding, only kidding. So yeah. So you're in agreement that kind of on the high side here. So that would argue for no rate cuts next year.

Okay. All right. All right. Let's go to growth or to kind of the economy, growth and unemployment. Here, I want to call out something you put together, and that is the

estimate of GDP, current quarter GDP, or so-called tracking estimate. And I nearly fell off my chair yesterday when I looked at it. You want to describe what you're tracking here? Well, I'll start with it's 3.9% right now, but what does that mean? That means the model is built to be like, if the quarter ended today-

Your estimate, based on this model, and you're going to describe it in just a second, but what you're saying, this model that we use for estimating current quarter GDP growth, and that's the Q4, the fourth quarter of 2024, is coming in at 3.9% annualized, 3.9% annualized.

We're pretty far into the quarter. It's not like there's a lot more script to be written here and you're going to talk about that. And that's real. That's real GDP growth. Real GDP growth, yeah. Relation adjusted. Did you know that, Chris? Did I tell you something? I saw that. You saw that too, yeah. Pretty shocking. So that would be an acceleration from the third quarter and it would signal an economy that's heating up, accelerating. And I will say-

Most other metrics, mostly from Atlanta Fed, are within the same distance as we are. Oh, they are? What are they? Like 3.3, I think is the last they check. But a really important distinction to make is the model is built not to say, here's what we think is going to happen. If the quarter ended today, there was no more new data for this quarter. What is the existing data saying growth would look like if we...

interpolated that out for a quarter. And on that front, what we got was a really high increase in import volume in September, which is the last month of Q3, and then a sharp decline in October, more of a correction in import volume in October. So because that straddles a quarter, and we do have like a lagged effect. We project out growth based off of like a longer running period.

growth trend, but that trend is very, it's more volatility than normal and is pushed down our estimate of import volume in the fourth quarter. If you think about how GDP is calculated, it's a net of exports and imports. If you're importing a ton, that's bad for GDP growth as it's measured. And if you're exporting a lot more, that's better for GDP growth. So we had a big swing in net X because of the

drop in import volume in October. Now that's not an excuse. I think that's the model doing its job. That's saying what is being shown by incoming data. But of any situation, I think now is unusually so we can be confident that's going to be reversed. We think there's a lot of reasons to believe that imports pick up in the next couple of months as importers get ahead of tariffs, but kind of speaks to a volatility that may have started in September, likely jump in November after the election result.

We don't have that data yet. So I think- - So you're saying, particularly the trade data, that's really lagged. You're saying the last data point's in October. So we gotta wait for November and December.

And you're saying October import volumes were very low. That's not intuitive. But, you know, that was before the election. Now, post-election, we're getting tariffs. The thinking is that importers are going to bring in product quickly in November and December to avoid the tariffs. And so we're going to get some bigger numbers here. And that will push down. Your thinking is, well, wait and see. But what you're thinking is that that will push down the current quarter estimates as we get that additional data.

That's right. And as unintuitive as October's decline was, it really did come after a big jump in September. So you solved the trade deficit wide and then it narrowed. We're overstating it in our model. I don't think that warrants any kind of adjustment or change right now. I just think it's a matter of...

even for midway through December, still too narrow of a view of the quarter. I think we get more incoming data that changes. I don't think growth is, I think growth is probably closer to two and a half, which is still strong. It's about the economy's potential. So we'll see what happens when we get more trade data, but consumption spending doing okay.

Other components, inventories, I think you might get some of the same strength of people hoarding inventories ahead of tariffs and starting to build up their warehouses. And I think that can be reflected in GDP data as well. So I don't think we're going to be seeing a reduction dramatically, but I don't think 3.9 is realistic.

Yeah, but still, it feels like the economy's really got some oomph here, right? Because the other, we got on the jobs front, we got, again, you know, we got abstract from the monthly vagaries of the data, hurricane effects and strikes and everything else.

But it feels like underlying job growth, now I'm going back to last week's data in the employment report that we got last week, feels like that's somewhere around 150K-ish, maybe even a little higher than that on a monthly basis. That's meaningful as well. That's pretty consequential. So the economy feels like it's growing strongly at this point. And-

maybe even beyond the economy's potential as the potential growth rate is starting to slow as immigration flows start to moderate. What do you think, Chris? How do you view the data on growth? Yeah, I'd agree with that. I agree with both of you. It's strong and not as strong as what the current model suggests, but

Still, underlying growth remains robust. Okay. So all else being equal, what does this mean for monetary policy? Higher rates, no change in rates, or lower rates? Certainly not lower rates. Certainly not lower rates. I think it's pause again. I don't know that it's rip roaring growth either at this point that you need to really worry about wage inflation taking off. But again, I would say-

It's bordering though on a rate increase. It is bordering on a rate increase. It's bordering on a rate increase. I don't know. One more report out there. Yeah. One more report. Right. Right. Matt, what do you think? I would be more firmly as a pause than as a potential rate increase. Yeah.

I think the Fed needs to make policy less restrictive, business debt coming due. It's going to be refinanced, higher rate. It's not so much stimulative as it is normalizing. So I would make that argument over a rate hike, but not a rate cut. Okay. So inflation, that would argue for cuts, a couple of cuts, you say two, three rate cuts. Inflation expectations, no change, pause. Growth, the economy, jobs and unemployment,

a pause in here i would i would side with chris and say it feels a little to this to the all else equal raising rates but i think pause more likely okay so here's the final set of criteria that the fed looks at this again in their so-called reaction function so inflation inflation expectations the economy jobs unemployment that kind of thing how close are we to full employment

is financial conditions, financial conditions. Because at the end of the day, the rate increases, interest rate changes affect the economy through its impact on so-called financial conditions, stock prices, corporate credit spreads, what's going on with commodity prices, housing, the value of the dollar, all those kinds of things. So

This, I don't know, how would you characterize financial conditions, Chris? It seemed pretty frothy to me. Right. Crypto at $101,000, just as one example, but then stock market valuations, that spreads, you mentioned, very tight. It seems like a pretty risky behavior. Yeah. Yeah. Yeah. So you got stock prices, they're, I mean-

I think they're up almost 10% since three months ago, again, when investors started discount Trump victory. They're up, I believe they've doubled since the pandemic hit. In the five years since the pandemic hit, I think they've literally doubled in value. You got crypto that's gone skyward, gold prices have gone skyward, single family housing values have gone skyward.

I guess the counterweight to those things would be mortgage rates. They remain high, right? Fixed mortgage rates are close to 7%, which has really put a pall over the housing market, existing home sales, or that pandemic shut down lows. Yes. Yeah. Housing leverage is low, right? Yeah. Housing leverage is low.

I guess the other thing would be underwriting standards, bank underwriting. They're no longer tightening, but they did tighten in the wake of last year's banking crisis, right? That would be a tighter, all else being equal, tighter financial conditions. And the value of the dollar is stronger, right? I mean, it's pushed up since it became clear Trump was going to, or investors started to discount a Trump win in tariffs. So-

The financial conditions aren't all blowing in one direction here. There's a lot of headwinds and tailwinds. But Chris, you would say net, net, net, appropriately weighted across all these different things, financial conditions are easing. I think so. Yeah. It feels frothy, like I said. What do you think, Matt? It's hard to argue with those asset prices being as high as they are, even if credit demand and lending standards are still tight. Yeah. So I'm with Chris.

Yeah, I think the key is stock prices, right? Because that goes to wealth, net worth, and that goes to the wealth effects. And I think that's one of the driving forces behind consumer spending. The high income, high net worth households are willing to lower their saving rate and increase their spending, and that's powering economic growth. So it feels like

That's probably the single most important measure of financial conditions. And it has a higher weight than the other ones. And that would suggest that the financial conditions are easing. So Matt, what does that imply for all else equal for monetary policy in 2025?

Pause. What? The lending state. I mean, the Fed can control credit demand. They can control lending. I took you down the primrose path and you blew me off. And I knew you were expecting it. Yeah, I think there's only so much I can do. I think Matt really wants to pause on monetary policy. He definitely does. Yeah. What do you think, Chris? Except for inflation, right? He wants the cuts there. Yeah, he wants the cuts. What about you, Chris?

I actually think they should hike it. Yeah. That criteria alone, right? Right. It seems way too frothy to me. I'd say it argues for a hike bordering on pause. I mean, because there are, again, some cross currents here, but I'd say hike. Okay. So what are we? Inflation cut, inflation expectations and growth, the economy pause, right?

financial conditions hike hike okay here's the last thing to consider economic policy under president trump right which obviously a boatload of uncertainty but it uh it feels like we're getting tariffs of consequence and it feels like we're going to get some deportation of immigrants of consequence uh in in those are the two key policies that will hit in 2025 there's other policies

fiscal policy on tax and spending, but that probably won't matter until 2026. But in 2025, those are the two key policies. And both those policies, I think, and you'll correct me if I'm wrong, but both those policies mean higher inflation and diminished growth, diminished growth. So what do they mean for monetary policy, the conduct of monetary policy in 2025? If you're the Fed, and of course, I'm not arguing the Fed at this

today needs to, because they're going to wait, they're going to have to wait and see, which also suggests something about policy next year, but they've monetary policy next year. But given what we know or what we think we know, what does that imply for monetary policy next year? Matt?

It has to be a cut if you think these things are inflationary. I put the most weight- A cut? A cut? I'm sorry. I'm sorry. A hike. I'm sorry. Oh, geez. That would have been funny. Yeah. Yeah. A hike. A hike. Okay. A hike. I put the most weight on the labor market constraints and what that could do to prices through wage growth, through services. I think of the other ones as a kind of wash. Tariffs are going to destroy demand. I think the upper pressure there is less so than the labor market, but a hike. Okay.

A hike. Okay. What do you think, Chris? Well, clearly beating the witness. So one to two hikes. Yeah. Oh, no, no. I think it means a pause, actually. You think it's a pause? Yeah, because it's a negative supply shock. Tariffs and deportations are negative supply shock. It hits the supply side of the economy like a hike in oil prices. And that means higher inflation, diminished growth. So what do you respond to? The higher inflation or the diminished growth?

Well, I don't know. I think it's the inflation now, right? Yeah, maybe at least initially. Yeah, given the mandate from the election. Yeah, given the mandate. Okay. All right. I'm going to say pause bordering on a hike, but I don't say that with great confidence. So I'm not going to argue with you too much about that. Okay. All right. So we add it all up. Pause. It's a pause, right? Isn't it a pause?

I mean, pause means no change in monetary, but no change in interest rates in 2025. That should be the forecast, right? This is what I was saying when we first started the conversation. I'm wondering whether we should make another change in the forecast. Of course, we have some time until we have to do the forecast again. Thank goodness. We have to think about this, but that's what it feels like, right? It does. Although a lot comes down to timing, right? In terms of the economic policy piece of it.

Right. Yeah, it sounds like they're coming, but when, where, how? Right. It could be second half of 25. It could be into 26 before you get the full... But here, we have to put pen to paper. We've got to do a forecast, meaning we've got to actually produce...

numbers, you know, to put in our databases, but with our models, next month, when we sit for 2025. So when we sit down next month and determine what the underlying assumptions are behind the forecast, monetary policy is going to be one of those assumptions. So we have to say, okay,

Are we going to change this again? We went from four rate cuts in 2025 before the election to two rate cuts now. Does that mean next month when we sit down and do the forecast, we're going to have zero rate cuts in 2025? I don't know. It feels like a big move. That's a big move. That is big. Yeah. Especially on the financial conditions. Those could change in an instance, right? You could get the effect of a hike essentially. Yeah.

from there. So I don't know that you'd want to go all the way, but yeah, if you want to remove one hike or one cut, sorry. Yeah. I wouldn't dispute. You wouldn't argue. Yeah. Okay. All right. Well, it feels like we're like with the market, right? We're taking away cuts in general from where we were, but a high dispersion around- Absolutely. That, I mean, not a lot of confidence around that forecast at this point.

Yeah. Yeah. Yeah. All right. Okay. Good. Good. Hey guys, you want to, I think we're already getting pretty far into the conversation. You want to end by playing the game? You guys ready for the stats game? We haven't played that in a while. We haven't. We skipped, I think. I think we skipped last week. Without Marissa, you know, it's not much fun. Yeah. It's not the same thing. Cause I like beating her, you know, don't tell her I said that by the way.

yeah there's always an asterisk on these uh yeah well why don't we why don't we end the podcast by playing the game sure um okay unless you guys something else you want to talk about no chris no no no we can talk about next year's uh holiday party but yeah oh yeah no i yeah if you got any thoughts send them my way yeah um okay matt what's your number

Oh, I should say to the listener, I'm kind of not taking this for granted, but the stats game is we put forward a statistic. The rest of the group tries to figure that out with clues, deductive reasoning, questioning. The best stat is one that's not so easy. We get it right away, not so hard that we never get it. And if it's related to the topic at hand, then all the better. With that as a description, Matt, what's your stat? I'm going to be considerate of everyone's time. Yeah. 8.7.

I should know that. It feels like I should know that number, 8.7. Oh, I know what it is. The increase in egg prices in the month. No, it's very close though. But no, it's not a percentage change. It's not a percentage change? It's a change. And you said I'm close. Just numerically you were, but not. Oh, because I think egg prices were up 8.7%. I'm pretty sure that I'm going, why would I know that number? Can you check that out if I'm right?

You can have it if you're right. I'm going to take it if I'm right. If that's 8.7, I'm probably way off. 8.2. Oh, 8.2. Okay. 8.2. Okay. That's kind of quasi-impressive, isn't it? Yeah. Yeah. Yeah. Kind of quasi-impressive. I knew it was- It's not a growth rate. It's just a change. It's a change. Yeah.

A level change? I mean, just a difference? A difference. A difference. A difference. And is it related to consumer prices? No. Is it related to inflation generally? Very indirectly. Oh, 8.7. Is it another economic statistic that came out this week? Yes. Government statistic? Not a government statistic. Not a government statistic. Oh, goodness. Should we know this?

Chris should know this. He had to endure a rant from me on Tuesday about this. I cornered him. At the holiday party? Prior to that, at the office. Oh, NFIB? That's right. It was the increase in the NFIB. Oh, that's right. That's right. Right. Yeah. So- You want to explain? All the surveys, as you mentioned about the University of Michigan, a lot to not like about them. NFIB, Small Business Optimism Index, is probably the most

politically compromised but it's uh 8.7 percentage point in point increase in the index from november i'm sorry from october to that's a diffusion index isn't it isn't it it is oh yeah so it's a difference between positives less negative responses isn't it and then they normalize it to 100. those were all the help normalizes it right yeah so that's the largest ever monthly positive movement in the survey's history so bogus just

Which is OK. You know, there's small business owners, lighter touch regulation, lower taxes. There's things that they should like about the election result. But even backward looking index indicators were unusually positive from September to October. So just feeling great in ways that they hadn't. So, yeah, the compare this month's revenue to the previous month's revenue, the increase there is the largest since when vaccines began.

available in 2021 and people could start doing stuff again. Not a whole lot of material changes in the economy over the past month outside of the election, but yeah, very interesting. We're economists professionally and we think about this stuff. I think it's changing. It just feels like it's just kind of sentiment. There's no real economic content in that. I mean, sentiment matters. I'm not saying that, but- I don't know that it does. I mean, if it does-

It's changed how it matters. And I don't think, I don't pretend to fully understand it yet, but it's something that I've been, I've doubted the sincerity of these surveys for a while. And this is a very glaring example of why we shouldn't take them as serious, at least in the same context as they were being taken seriously. This would be a good point to highlight our survey that we conduct on the Economy, Economic View website every week.

And that shows sentiment as the election had no impact as far as I can tell on the results. We do this every week and I can't see any meaningful impact of the election. But the thing that's most telling is it's steadily improved throughout the year. And now it's, I'd say,

you know, unambiguously strong. I think businesses are feeling good about the economic environment. And the one part of the survey I spend the most attention on is the percent of positive responses to the broad question about present conditions. So we ask, how's your business doing today?

positive, negative, or neutral. And this is the percent that respond positively. And when that falls below 20% percentage points, that's typically consistent with kind of recessionary. We're sitting at almost 50% at this point, and that's consistent with a very healthy economy. And that's steadily improved throughout the year. So

I actually put a lot of weight on that particular survey. I find it relatively useful. In terms of turning points in the economy, it feels like it's very, very useful. But the NFIB survey, that just feels like a beauty contest to me. Yeah. Yeah. Okay. All right, Chris, you got one?

Sure. So just on that note though, I guess listeners should go to economy.com and sign up to take the survey. Yeah, absolutely. Please do. We welcome your participation on the survey. Make it a stronger survey for sure. Absolutely. Economy.com. Economy.com. All right. I got two numbers for you. 3.8% and negative 0.4%. Related to inflation? Yes. Okay.

So percentage changes in some particular components of the CPI? Yeah. Yeah? Yes, yes. Yes. Okay. Okay. Are they month over month comparison? Is one a monthly comparison and the other the same component annually? They are both year over year. Both year over year. And they're related? Yes. 3.8 minus 0.4. Are they on the good side of the economy?

Oh, they capture all the prices. Oh, really? Okay. What do you think, Matt? I was going to say hotel prices for 3.8 year-over-year growth, but that's not. I think broader. You got to think more broadly here. Broadly, yeah. Yeah. Oh, I think super core versus goods. No. No, not really. No? Is the minus 0.4 goods prices? No. It's a group of prices. Yeah. A group of prices. Yeah.

Core Goods X Vehicles? Oh, boy. Jeez. That's a good one. No, this is one of those ones that we're going to kick ourselves for not getting, I'm sure. It came out the same day as the BLS reported it, but it was actually released by the Atlanta Fed. Oh, is this the Atlanta Fed? So wages? No. No.

And then if there's a wage tracker, okay. Is that something to do with like inflation, sticky prices or- Sticky prices. Yeah, sticky prices. That's right. Which one is sticky? The 3.8. Yep. And the minus 0.4 are the non-sticky prices. Yeah, the flexible prices. The flexible prices. So it goes right into what- What we were saying. What we were saying earlier.

What's interesting is the sticky price index from the Atlanta Fed, it's certainly high, right? It's not where it needs to be, but it has been persistently coming down by about a 10th of a percentage point every month. So if you continue that trend, it takes you into September, October of next year. Continue along this path here. Okay. And that kind of feels like the path

in our forecast. That's how long it's going to take. Yeah. Yeah. Things will continue to improve here, but slow going. Right. I haven't looked at that index carefully. If you look at sticky prices, what are the key sticky prices? I'm sure it's housing, owner's equivalent rent, medical care. It's what we mentioned. What we mentioned. Okay. Yeah. Insurance. Insurance. Medical services. Those prices don't tend to...

change that. The actual definition is based on, they look at the frequency of price changes across these different goods and prices that typically change within four months are classified as flexible. Those that change after four months or a longer horizon are sticky. But it's consistent with what we mentioned. They just group all the prices into these two sets of- Two buckets.

of goods and services. Yeah, I'm going to start paying closer attention to that. Atlanta Fed does some really good work. They put out some cool indices. I'll take a closer look. Okay, you ready for mine? What's your number? Yeah. 266 basis points. That's 2.66%. It's a financial measure. It goes to financial conditions. Is it the yield spread? Yeah. Yield spread. What yield spread?

Bond yield threat. Bond yield threat. Okay. But in the corporate bond market, it would be the high yield- High yield versus- Treasury. Or treasury. Okay. So you take the interest rate on high yield corporate debt, subtract the 10-year treasury. Well, I might be simplifying here, but roughly speaking, the 10-year treasury yield, now that I think about it, it might be option adjusted or something. There's some complexity to it, but roughly speaking-

266 basis points. We have data back 30 years. This is high yield corporate debt is below investment grade debt. This is the debt of lower quality companies or companies that have a higher risk of not being able to pay back on that debt in a timely way. And so interest rates are obviously higher and they're more sensitive.

to investor expectations with regard to what's going on in the economy, what that means for corporate cash flow, and whether businesses are going to be able to pay back the interest in debt that they owe. In that 30-year period for which we have data, there's only one other time when the spread, the difference was thinner than it is today. You want to guess when?

No. Give up? Give up. Right before the GFC, the great financial crisis. Briefly, it got, I think, got as low as 246 basis points. The average over that 30-year period, abstracting from the financial crisis, 500 basis points, five percentage points. So talk about

financial, easy financial conditions. That's a very good example of that. Investors are very, very optimistic about how things are going to go here. And all else being equal, we'd argue for the Fed to certainly not ease interest rates. It may even start to raise interest rates. Okay. All right. Well, very good. Before we call this a podcast, any parting words, Chris, Matt, anything?

I guess a question based on that, have you changed your recession probability? We haven't talked about that. Well, I'm still at about 20% for calendar year 2025. So a little bit elevated. I mean, I think through the kind of a unconditional probability of recession of about 15% over the coming year, a little bit elevated, 20%. What do you think?

yeah i think it was around 25 30 and yeah still there still stick with that and stick with that yeah matt any views on probability of recession i haven't asked people that in a long time yeah it's about where i am too although your bond spread theory wouldn't that support cuts next year if there's an imminent financial crisis coming

Well, first things first, Matt. Sure. First things first. Right. Yes, it would. Yeah. It's fall of 2007 again. Yeah. Right. Okay. All right. Well, I think we'll call this a podcast. Will Marissa be back with us next week? Chris, do you know? I believe so. Yeah. Okay.

our wayward host. She'll be back, back here next week, hopefully. And I think we'll probably have a guest next week too. But with that, I think I'm going to call it a podcast. Thank you for listening in dear listener. We'll, we'll talk to you next week. Take care now.