Rules of Thumb
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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marissa DiDantelli and Chris Dries. Hi, guys. Hi, Mark. Hi, Mark. How are things? It feels like we just talked.

We did. We just recorded on Tuesday, right? Just a couple of days ago. Oh, that's right. We had a conversation with Cliff Rossi from the University of Maryland. That was a good conversation. I thought so. Yeah. Talked about the housing finance system, homeowners insurance, private credit, pretty wide ranging conversation. He was good. He was really good. Lots of risks out there.

Yeah, well, I'm sorry, Marissa, I'm in your neck of the woods and I didn't knock on your door. I apologize. That's okay. California is a very large state. So you're still far enough away that I'm not offended. It's like if I'm in Philly, you'd be in Pittsburgh. That's how far it is. That's right. Yeah. Oh, further, further. Oh, is that right? Yeah, it would be like if you were in Boston and I was in, I don't know, New York. Oh, okay. Yeah.

All right, because you're in Orange County. You're down in Orange County. Yeah, you're about four hours away from me. Okay. Yeah. Okay, I don't feel that bad then. No, you shouldn't. Okay. I'll let you know if you should. Okay. And this is Thursday afternoon, so this is a little atypical. We try to record on Friday, and the reason, I guess I'm going to be on a plane coming back from the West Coast, so we had to record. It's late in the afternoon, so a lot of news. I guess...

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

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

Well, so a court, a federal court that rules on trade matters declared the tariffs that President Trump had enacted under the International Emergency Economic Powers Act as being illegal.

So that isn't all the tariffs. That's a subset of the tariffs. It's mostly the tariffs that were announced on Liberation Day, many of which have been paused, right? The retaliatory tariffs got a 90-day pause. It includes the 30% tariffs against China. It includes the tariffs put on Mexico and Canada. So it includes all these kind of broad-based, country-level levies.

The tariffs that are specific to products like the tariffs on steel and aluminum and automobiles can stay in place. The court ruled it's just the stuff that was ruled where he invoked this Emergency Economics Powers Act. So a court ruled on that.

I don't even I'm losing track of time. Was that yesterday or today? But then they appealed the Trump administration, appealed it immediately. And the appeals court just ruled, I think, a few hours ago that

they will stay that original decision. So we're back to where we are. We were two days ago, essentially. And I should say the court that struck it down initially yesterday had given the Trump administration 10 days to kind of stop the tariffs, right? They gave them a 10-day window to make all the administrative changes they needed to put this into place.

So they had some leeway anyway before the injunction would go into place. But now we're back to where we started with this stay by an appeals court. And this ultimately feels like it's going to go through the court system up to the Supreme Court, I guess, right? It seems like that's the way a lot of these rulings are going. This is an unfair question, but do we have any sense of timing here? I mean, does this play out over a

Days, weeks, months? Do we get any sense of that at all? Have you heard any reporting on that? I didn't read how long this stay is in place for. I don't know if it was reported. I'm not sure. I know the original injunction was they were giving the administration 10 days to kind of like get it together and obey the law. I don't know how long this stay is in place for. Yeah, I guess I'm trying to get a sense of how long this...

Drama will continue. The whole thing? Oh. Well, on the IEPA, the I-E-E-P-A parts of the tariffs. Right. I mean- I don't know. Don't know. I don't know how long that takes. Chris, have you read anything about that? Do you know anything? The quote I saw was temporarily stayed until further notice while the court considers the motions papers. So-

Right. That's it. Yeah. Well, originally before this state came through, the Trump administration had indicated that they were going to go directly to the Supreme Court to appeal it. But now that they got the state, it seems like that's no longer- Now they go through the process. Yeah. Right. Okay. So this could be, I don't think this is days, it could be weeks, may even be months before the Supreme Court takes this up and rules and-

Figures out. We figured this out. It seems like it's at least weeks. Yeah. At least weeks. So I guess- Wasn't there another court case though that like toy manufacturers in, I want to say Illinois, there was another case that- Is making its way through. That had ruled that the tariffs also were-

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

Okay. All right. I don't want to confuse the issue, but it seems like there are other cases pending here that could also have an impact. Well, I think the effective tariff rate, which is just take all the tariff revenue that would be generated divided by the value of the imports that are being tariffed.

If all these things remain in place and are actually implemented, because President Trump has also put an effective stay on the tariffs, right, until early July, the reciprocal tariffs. Right. The ones that are affected by the IEPA ruling. But if they actually go into effect, I think the effective tariff rate is still 14, 15 percent. Right.

For context, at the start of the year, it was two and a quarter percent, something like that. So these are, you know, if they actually go through with all this, it will be a lot higher. The so-called sectoral tariffs, those are the tariffs on steel, aluminum, auto, etc.

That's included in that 14 to 15 percent, but it does not include potential sectoral tariffs on pharmaceutical and semiconductor, which it feels like that's coming. Those sectoral tariffs are done under different trade law, and there's a process that the administration has to go through to establish the legal foundation for those tariffs. And that's coming probably later this year.

So feel, you know, in our baseline assumptions about the economy, we're kind of sort of assuming the 14, 15 percent is what prevails here through much of this year into next and ultimately starts to come down mid next year with the USMCA deal. That's the free trade deal with Canada and Mexico. So given all the things that have happened here and going on, does that change?

Does that assumption change? I mean, do our baseline assumptions change, Chris, or what's your instinct? My instinct is no. There's so much uncertainty and volatility here around the announcements. I also read a very interesting article about just the complexities of actually assessing

tariffs. And the example given in the article was about importing men's shirts. And if it's a polyester shirt, it has one tariff. If it's a cotton shirt, it has a different, much lower tariff. And it's very difficult to catch all that and ensure that the proper tariffs are being assessed. So there could certainly be some of the steering that goes on as well. So

When all is said and done, the tariff rate might be a bit lower because of that type of behavior and all this other noise, but I don't think we're at a point here where we can definitively change that tariff rate assessment with a lot of confidence. All right. Marissa, do you agree with that? Yeah, I think there's still a ton of uncertainty around tariff.

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

i mean do i just wait it out i mean i or what i mean

Right. Why would you now be incented to negotiate something that has just been declared illegal by a court, right? Right. But then immediately paused or potentially overruled. So why would you negotiate anything? I mean, unless you're, you know, it seems like the leverage here to force negotiation has just been impaired to a significant degree. I think, right, if I'm

You would agree with that? Yeah, I mean, and that's actually the argument that the Justice Department used in appealing this decision, that it just undercuts the administration's attempts at extracting concessions, whatever, from other countries. That it's not just an international trade issue, it's a diplomacy and international relations issue.

Yeah. Although at this point, it's done. I just don't see how you could put that genie back in the bottle, right? I mean, other countries are – I know the injunction has been stayed and the terrorists are still in train, but if I were in another country, who knows? I mean, why would I come to any arrangement whatsoever? I'm not –

Unless there's more threats, I don't know. Yeah, unless you want to negotiate on a specific product, right? If you're Germany and you want to negotiate on car imports or something like that, I could see that. But beyond that, I don't see why you would. It does feel like we're getting pretty close to the day when these tariffs are going to start showing up in terms of prices for things. I mean, I think...

Things got delayed by the fact that there was so much forward front-loading of the imports. I mean, importers brought in so much product under the previous tariffs, the low tariffs, or no tariffs. And those products are going to start running out, and they're going to be replaced by products who now have to pay the tariff. And it feels like that we're now going to start to see some price increases. Does that sound right, Chris? Yeah, I agree.

I don't see another. I mean, there's still a question of how long businesses may choose to eat the tariff, right? They may extend it, right? But it really depends on the industry, the product, right? Some margins are razor thin. There's just no room to eat the tariff if you're an import. Other industries may have a little bit more leverage. But yeah, I think we'll see price increases. It's a question of degree and which products perhaps. Right.

I've got a personal story. So I'm doing some work on that home and got a quote from this salesperson for this company doing the work. And they were saying, here's the price. On June the 1st, I don't know what day that is, maybe it's Sunday, we are raising our prices 25% because we are paying tariffs of 25%.

Now, I don't know if that's a sales tactic. I didn't get that impression. I think he was being honest. But that's pretty interesting, isn't it? 25% increase. I mean, that's a pretty big deal. Because a lot of stuff that goes into homes is tariffed from different parts of the world. So it just feels like we're right on that cusp of seeing some pretty significant increases in prices.

And not to be cynical, but I'm sure a lot of companies will use this as an excuse to raise prices, whether or not they're actually being impacted by tariffs, right? Look around and say, everybody else is doing this. Everyone else is talking about tariffs. So...

I might as well try to get a price increase in here if I can. Right. Well, there's some public misperception around that too, right? That people believe, oh, well, the U.S. steel manufacturers, well, they're not subject to the tariff, so they won't raise prices. But that's not how it works, right? You compete and everybody raises prices, right? Right. That's the whole point. Yeah.

They just raise it one percentage point below the competitor who's paying the tariff. Yeah. They capture that benefit in the form of a higher price. Yeah. It's a better question of who's capturing the benefit on a product by product basis. Right. Well, our rule of thumb is that for every percentage point increase in the effective tariff rate, so if we go from, say, two and a quarter to 14, 15, that's an increase of what?

12, 13 percentage points. For every percentage point increase, that raises inflation or prices by 10 basis points. And that's on the consumer expenditure deflator. That's the inflation measure the Fed uses for its target, the 2% target. And so if you do the arithmetic and the rule of thumb holds, then the inflation rate, which is now 2.5%, roughly speaking, so it's

above the Fed's target, above the Fed's target, but 2.5%, will now go to somewhere between 3.5% and 4% by this time next year. That feels consequential to me. That feels consequential. If that holds, right? Yeah, absolutely. Okay. Okay. So I guess buckle up. I guess those are the words. Buckle up. Buckle in. Buckle in. Buckle up. Yep. That's what's coming. Drop in. I don't know. Yeah, right.

Right, right. Oh, the one other question before we move on, I'm so perplexed by the stock market. You know, the stock market, you know, obviously has been going up and down and all around. And it really hasn't gone anywhere now for, I don't know, six months or so since this all began, this drama around the trade and tariffs began. But it's not, you know, it's

Just below, it's high. It's all-time high. What do you make of that? What do you think about that, Marissa? What do you think? It drives me nuts. I mean, it just is so reactive to whatever the headline is, it seems, right? It's up one day on good news. It buys it all back the next day on bad news. It just...

Yeah, I don't know that there's anything. I don't know how much of it is actually fundamental. It just seems like it's so much of these gyrations are driven by headlines. Not that anything is necessarily fundamentally changing, right? And all of this is mostly expectation, as we've seen, which is what a stock price is. It's expected earnings of a company, but...

Yeah, it kind of drives me crazy. I'm looking at it all the time, which is also why I'm being driven crazy because I'm doing it to myself. But yeah, I don't- You do that? You look at the stock market all the time? Yes. I didn't used to do that, but I do it now. What does that mean all the time? Like multiple times a day you're going- Yes, multiple times a day. Yeah. Oh, interesting. Yeah. You got a lot of your wealth tied up in the stock market there, Marissa? Is it personal?

Yeah. That makes sense. That makes sense. What do you think? What do you make of the stock market, Chris? It seems like it's totally discounting any change. Tariffs don't matter at all. So yeah, we're not going to get the 145%, but still 30% tariff on China is still a really big deal. And to say there's no effect on corporate earnings is

I don't know. It just, it seems to me, my take to rationalize it is it's kind of a

A TINA trade, there is no alternative trade that people have this idea that, "Oh, I don't want to hold bonds, treasury bonds because there's risk there, I hear. I'm worried about potential issues in that market. I'm worried about crypto. I don't want to go into that. Gold seems overpriced. Oh yeah, I'll just stick with stocks." Yeah, what would I do with my cash? What would I do with my money? Right. Yeah. And it seemed to work out to buy on the dips, right?

The tariff looks like it's going off the rails, stock prices decline, then there's a pullback on the tariffs and the stock market goes back up. So if you've watched that a couple of times and you begin to think, okay, that's what's going to happen here. That's what's going to happen. And the AI trade seems to- Still be playing out. Yeah, pretty robust. So NVIDIA stock earnings were good. So maybe it's long-term investors who are looking through all this and saying-

Or, you know, when things perplex me like this, they tend to kind of write themselves. Right, right. You know, so I keep thinking this isn't over. It feels like the stock market, and I'm not providing investment advice to anybody, don't get me wrong, but just feels like the market is highly vulnerable here. So anyway. Okay, well, I guess the other thing

The thing that really is playing out here that's really important to the economy is the so-called, I guess it's not so-called, I guess we'll just call it the reconciliation legislation in Congress. That's the big, beautiful bill, as President Trump would call it. And it's big. There's a lot of moving parts there and on taxes and on spending.

And how are you thinking about that, Chris? What kind of impact that's going to have on the economy? Well, first I'm trying to game out what the final bill will look like, how the Senate is going to modify it, and what the ultimate bill will look like. My guess is still it's going to be pretty close to what it is. There might be some changes around the edges, but still large deficits, significant increase in debt.

I guess the good short-term news is debt ceiling issue is taken off the table. So that's a positive. But yeah, I think they're long-term. Because the debt ceiling is going to be, the increase in the treasury debt limit is going to be part of the reconciliation package. Yes. Therefore, if the package passes through, then the debt limit will be increased and that's a problem down the road somewhere. That's right. So at least for today, for next few years.

a few years, I guess. We'd avoid that particular issue, which certainly has caused a lot of angst every few months, it seems like. So that's the short-term positive. But the longer-term negative, of course, is the very large size of the deficit, right? And that's certainly going to have impacts on interest rates and that's going to have a negative impact on the economy overall. Right, right. Any perspective on this, Marisa, on the reconciliation package? What's your perspective?

I too am not sure what the final outcome of this will be, but whatever it is, I'm sure we'll have an expanded deficit and a higher debt to GDP ratio when we look out five, 10 years from now. So it's not helping, right? It's not helping this long-term problem that we have. And I think eventually there's going to have to be some kind of reckoning here. Can't go on forever. Yeah.

You know, much of the package is simply extending the tax cuts for individuals that were set to expire at the end of this year. They were lowered with the TCGA, the Tax Cut Jobs Act, back in 2017, and they expire at the end of – was it 2017? Yeah, I think it was 2017. Yeah, they expire at the end of the year. And so if you just simply extend them, that really has no –

macroeconomic consequence, right? Because everyone's tax rates just remain the same.

And then there's a bunch of other tax cuts and some for businesses, some more individual tax cuts. There's a tax cut for tips and overtime. I believe there's an increase in the standard deduction for people over the age of 65 because the president had promised a reduction in Social Security taxes. And this is kind of a way of helping that group grow.

Pardon me? Salt. Yeah. Right. The salt cap, the state and local tax deduction cap is being increased. I saw those sums go up. Just kidding. It's terrible. There's a homeowner in California. Yeah, absolutely. There's some spending increases on defense and homeland security, but there's a lot of other spending cuts that, you know, it cuts to Medicaid, non-defense discretionary. The bill also gets rid of

the tax credits for clean energy that were part of Biden's Inflation Reduction Act to address climate risk.

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

increases in debt. So based on our work, if you do the calculation, and this assumes interest rates remain relatively low and the economy remains recession-free, continues to grow around 2%, 2.5% per annum on GDP, real GDP, that the deficits are 6% to 7% of GDP deficits. And the primary deficit, that excludes interest payments,

is about three, a little over 3%, which is just really disconcerting because in a full employment economy, you should be at zero or even positive. But here we are at minus three. And this does nothing to address that. Therefore, the nation's debt to GDP ratio goes from just under 100%, I think it's 97 or 98, something like that, to 130% 10 years from now. Just soak that in for a second. We go

And by the way, as a point of historical context, if you go back before the financial crisis, I think the debt-to-GP ratio was 35%, 40%. So because of the financial crisis, because of the pandemic, because of tax cuts and everything else, we've gone from 35, 40 to 100, and we're going to 130. That, to me, has macroeconomic consequence, right? And that comes in the form of interest rates. And here's another good rule of thumb here.

I'm giving, maybe that's the name of the podcast, Rules of Thumb. I don't think we've used that before, but every percentage point increase in debt to GDP, I can see Chris's face. He doesn't like that title. He's not on board with that title, but- That's good. It matches with Marissa's thumb. Oh yeah, right. Yeah.

Yeah, rules of thumb. Yeah. Can you do that some more? Some rules of thumb? Yeah, there you go. Well done. Not around the debt to GDP, I think, right? Yeah. Well, this is from CBO and it's very consistent with our own modeling. Every percentage point increase in debt to GDP raises 10-year treasury yields by two basis points. So if we go do the arithmetic, we go from 100 to 130.

That's 30 percentage point increase multiplied by two. That's 60 basis point increase. That's a 0.6 percentage point increase. So let's say the 10-year treasury yield is 4.5%. All else equal, we're going to 5.1% over the course of the 10 years. Of course, the world...

doesn't work in a smooth non-linear way it's not going to be a you know a little bit of an increase every year you know some point we could see interest rates you know move up and that that is that i think i view that as a you know a very at least a corrosive on the economy and you know potentially if the bond market were to react violently which at some point it could

given all the other things that are weighing on the bond market, you know, we could see, you know, interest rates spike. And I view that as a very significant risk to the economic outlook. Not our baseline, but very significant risk. Anything that, does that all make sense? Did that add up? Yeah. At least we're not Japan. Yeah. I guess. Yeah. Yeah. We're heading in that direction perhaps. That's one way of looking at it. But, you know, obviously it leaves us in a pretty vulnerable spot. Okay. Yeah.

Anything else to add on that? Chris, Marissa, on the fiscal situation? No? Okay. Everyone wants to be Italian. That's all I'll say. I know. No birth rates, high debt-to-GDP ratios. Yeah. Going down the same path. Yeah. Just look at it and that's what you can see. Yeah. Low growths.

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

I don't know what the context is. I know what you're going to say, too. In hindsight, in 2008, should Congress have not have passed TARP? Should we have let the banks fail? You know why they're asking that? Aaron Klein from Brookings was on and he was talking about TARP.

Don't you think that was it? No, this came in before he was on. Oh, really? Yeah. Yeah. This one's been sitting in the hopper for a little bit. Maybe Aaron sent that in in anticipation. He could. He could be using a nom de plume here. Yeah. All right. Yeah. So the question is, should they have done TARP, the bailout? Yeah. Yeah. Chris, what do you think? She knows what I'm going to say, but- Of course.

They should have gone big the first time as well. The two rounds in order to get it across the finish line were problematic. It's easy to look back with the benefit of hindsight, but we were staring into the abyss there. Yeah.

I mean, I think that was a slam dunk success. I mean, obviously getting it passed was not graceful. Right. To Chris's point, Congress voted it down initially and that created complete chaos. Stock prices were cratering, the economy was evaporating, and that forced Congress to pass it, I think one week later, the $700 billion bill. And, you know, I'm not even sure...

When you're in that kind of a situation when things are falling apart like that, it's not even a – there's nothing theoretical about it. You can't just say, oh, I don't think we should do that. Moral hazard, blah, blah, blah. That's just not happening. So we're going to go down that path. But should we go down that path?

We don't know what the counterfactual would have been, but I feel pretty confident it would have been pretty ugly. It would have cost us a lot more than $700 billion. That's for sure.

lost economic activity and all the hit to the fiscal situation that would have happened because of the deeper recession that we suffered. So from a cost-benefit analysis, pretty clearly, I think we needed to do that. And as Aaron pointed out, that money was paid back, right? That was what I was going to say. Certainly, there was three parts to that bailout. That TARP money went first to

the banking system and they fully paid that back right and then some uh there was you know interest on that the other was the auto industry I I don't know if we lost money on the auto industry bailout I'm not sure maybe a little bit because that was that was dealerships and everything else

And then the other was homeowners. That was, at the end of the day, pretty small though. And I think ultimately the government did just fine. So if you add it all up, I think taxpayers got paid back with interest. I don't think they lost any money. So now you could say the downside was moral hazard, that if you get bailed out, it makes it more likely people are going to do dumb stuff in the future and need another bailout. But

But that doesn't resonate with me either. I think there was a fair amount of pain, financial pain that people felt. And a lot of regulation that came about in the wake of that that forced banks to go through painful exercises and hold more cash on their balance sheets, right? Yeah. I don't think there was any moral hazard that came out of that experience. So yeah, that was a slam dunk.

success and critical to helping us navigate through. It wasn't a graceful recovery, but it would have been really much worse if not for that. So we're in agreement. I don't know. Have you read anyone taking the other side of that? I guess you'll find somebody, but I've not really heard anyone say that that was a bad idea. Yeah. Yeah.

okay probably somebody there you know somebody their folks are against deposit insurance and right it's the same right as her argument okay that was a good one any another question yeah here's one that dovetails on this chris's very esoteric stat from a couple podcasts ago where it was like

25% of 75-year-olds don't have money to afford daily home health care. Remember that statistic? Right, I do remember that. It stuck. I like it. And it stuck with Kyle, our listener here. So...

He wants to know, let's see, if you looked at that statistic in relation to homeowners by age group by metro area or cities around the country, you know, would you see differences, regional differences for where you might have an overabundance of housing because people

you know, aging boomers have to leave their house and maybe it goes to the kids and the kids sell it or probably sell it, right? Probably not move into it, but sell it. And then are there places in the country where it's a younger age profile and you're not going to have as much of this phenomenon happening? Hmm.

Yeah. So that statistic came from a paper. It was publicized on the JCHS, the Joint Center for Housing Studies out of Harvard. So first I direct folks to that. I don't remember the author's name unfortunately, but you can Google it and you'll find it. That study really considered more the income demographic. So it did a nice breakout showing what that percentage would look like

for folks in different buckets of the area meeting income. And clearly you see the progression that you might expect. Folks with wealthier, they can afford that type of daily health care. Folks at the bottom on their own certainly cannot. Renters disproportionately impacted versus homeowners. So there were a number of demographic cuts. I don't recall a regional cut there, but it certainly makes sense. We have cost of living differences across the country

So, yes, I think it'd be pretty clear that you would see some of those differences. And that might drive some future migration patterns as well. Yeah, and actually, I think this person's asking about how that might drive home building in different places across the country where you might have more of a scarcity of homes on the market. And in other markets, you might have an abundance of old homes on the market. Yeah, I think in the case of Florida, just...

One example, I think you are seeing at least anecdotes. I don't know that it's enough to really substantiate a broader trend, but there are certainly plenty of reports of folks who have been living in Florida, retirees living in Florida for a very long period of time. And now because of higher insurance and property tax, right, they are cashing out. They're moving to cheaper locations because of the cost of living.

So I clearly think that that's going to continue to be a trend, and you'll see that in certainly some of these states with the higher costs of housing. Well, I'm glad listeners are listening. That's a good one. Yeah. It's an important trend. Watch out for it. Yeah, there's actually another related question that goes to this boomers passing on their homes issue.

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

the supply, does it, Chris? We do factor it. It's part of the supply. In our models, we don't really distinguish between how the house got there or who has it. So yeah, it's kind of factored in indirectly.

i i would say so yeah there's been a lot of you know the same household it's just who's in the household is changing right right but i mean i guess but but but then it becomes freed up for someone else do you know what i mean oh i see so the the boomer gives it to the kid and that kid doesn't put it on the market right i don't think that affects the overall shortage though i mean this affects who owns the home right so just

The home remains in the family as opposed to going to someone else. But in terms of what it means for the shortage of homes, I don't think it means anything. It might affect the mix of rental versus owner housing. That could be a concern if you think that wealthier households with homes just have built dynasties and they pass it on to their children and those homes only get rented out and you lock out potential people. I'm creating a

pretty contrived story here but you know you could think of something along those lines but no in terms of the overhaul housing style a home's a home it's available either to be lived in rented or it remains vacant but why why would that uh why would that property owner decide to just keep it vacant right that lock out other folks for no reason right right a lot of uh credence so

Sure, it's just changing hands, you're saying. It's just changing hands. I think what this other statistic related to that lack of savings for healthcare, that could certainly have an impact though. We've been talking about this great wealth transfer. If in fact you have older retirees who are house rich but cash poor and they start to borrow against their housing or downsize to a significant degree, that certainly could impact some of the dynamics out there. Maybe

maybe some potential heirs won't actually receive as much as they thought they might be receiving, right? If indeed the person lives longer and they need to tap into that wealth and it doesn't get transferred to their heirs directly. Right. Okay, you want to do another? Sure. Do you think we'll ever see the Fed go to the zero lower bound again? Absolutely. Yeah. I mean, I think...

In the typical recession since, I want to say World War II, but I don't think that's right. Let's say in the last, since 1960, the average decline in the federal funds rate target in a recession is 500 basis points, five percentage points. So, you know, right now the funds rate target's sitting, it's pretty high, higher than, you know, what most estimates of equilibrium are. Ours, it's higher, it's certainly higher than ours.

it's four and a quarter to four and a half. So if we got into a recession and it was typical on average, then they're going to hit the lower zero bound in the current cycle. I mean, our estimate of equilibrium, when I say equilibrium, that rate at which monetary policy is neither supporting or restraining economic growth

is probably somewhere closer to 3%. That's kind of sort of where we have the funds rate going over the course of the next couple of years. So if you're sitting at 3% and you get hit with the typical recession, yeah, we're at the zero lower bound. That's one argument for why you might want to set the inflation target higher, right? You set the inflation target at, right now it's two. So if you set it at three,

you know you maybe have more room to maneuver when you get into the recession into a recession you don't hit the zero lower less likely you'll hit the zero lower bound but you know with the two percent target and two percent real two percent real growth you're four percent nominal growth

just feels like there's, you know, in a lot of recessions, you're going to hit that zero lower bound, you know, going forward. So yeah, I think that that's very likely. And in particular, I left part of the question, part of the context for the question is, do you think the Fed is going to be reluctant to lower rates that low now, given what we've seen with the lock-in effect on mortgages, what it did to the housing market? Oh. Do you think they'll be concerned about

I mean, again, it kind of goes back to TARP. When you're in the middle of something like that and things are going off the rails, you do what you need to do to get through that period and you don't worry too much about what's on the other side and the adjustments that one creates.

So maybe it would be in the Fed officials, the back of their minds when they think about that. But I think a push comes to shove. They're still focused on unemployment and inflation. And those things would predominate and they would continue to push rates lower if they need to, to support the economy. So no, I don't think so. The one question I do have, and maybe I'll pose it to you guys.

that I wonder about. Suppose the, you know, let's go back to the bond market and let's, because of the large deficits in debt and all the other things that are going on that, you know, feel like they might push yields up. Suppose we see bond yields rise to a very significant degree.

We go from 4.5% 10-year yield to 5% to 5.5%. It feels like we're getting into what happened to the UK under Liz Truss. You may remember that episode. The Bank of England stepped in and bought bonds, right? Would the Fed do the same thing here? Would they actually step in and buy long-term bonds to keep long-term interest rates from rising further? Do you have a view, Chris, on that one? Yeah.

That's a tough one. It's a tough one. It also depends on who the next chair of the Fed is. Yeah, that's a good point. Talked about that in the past as well. I think they might though. I think it's a pretty good chance they would. Yeah, I guess if it's an impeding kind of a well-functioning financial system, if you have funding issues, liquidity issues,

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

You know, that's really debatable. You know, should I step in? I mean, I guess if it starts hurting the economy, then you're back to that. I was going to say, well, what are the real economic – if those higher rates trigger recession, then they have –

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

Right. Right. And then get into that spiral. You see an emerging economy. Yeah. Yeah. So, I mean, it's kind of like what the bank of Japan has done. Yeah. They've essentially monetized the debt of that country. Yeah. Of course they never had an inflation problem. Cause the population is declining and,

you know, depressing demand. But it's interesting because it kind of, it sort of somewhat straddles that line of fiscal policy and politics with the Fed, right? Yeah. Yeah. Okay. Well, okay. Let's do one more question, then we'll move on to the game, and then we'll call it a podcast. Thumbs up podcast. They're the rules of thumb podcast. Here's one. Okay. And this is probably unfair because you might want to think about this. It's a hypothetical question.

What's one statistic that you wish BLS made that they don't already, preferably something that could plausibly they could pause plausibly produce if they had the resources. But feel free to let your imagination run wild if you think I've heard this one before. No.

No. Did I ask it before? I don't know. It's like three years old, two years old. Oh, okay. I think I have actually heard this one before. I'm not sure what I said the last time you asked it. I think we've been asked in general, not specifically for the BLS. Not the BLS, yeah. Which economic statistic would you like? So this is specific to the labor market. What would we want to know?

I guess it could be prices or anything the BLS collects. Right. Marcy, well, you're a former BLS official. What do you say? What was on your wish list when you were at BLS that you wish you had but you didn't have? Anything?

i mean they're they produce so much that's wonderful it would i guess my wish would be if you could get things at a higher frequency right without as much of a lag and at a higher frequency like it would be really cool to see consumer spending patterns at a higher frequency um i'd like a lot more data on the income distribution you know cut the data across yeah or wealth

Because it's very, very difficult to know what's going on at different parts of the distribution, high income, middle income, low income. And I think that's so important to understanding dynamics in the economy, but also politically, because the folks that are under a lower income are under such financial stress. I think that goes into our kind of fracture politics. Really important to understand that a little bit better. Yeah.

I'd love to have that data. The other thing is the response rates are pretty low. To your earlier point, it might be let's spend the resources trying to get better quality data, right? Because there's got to be alarm bells going off about the decline in the response rate for a lot of these survey-based statistics. I think that would be important. Yeah, that was my answer. That was your answer? I'm sorry. Higher quality, right? I think they measure the right things, but...

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

And the frequency. I agree. I agree with the frequency. Yeah. I think that already would be a huge benefit. I go for weekly and jobs numbers. That would be nice. Yeah. Yeah. Or spending. I like this. Yeah. Right. Yeah. Okay. All right. Well, that's good. Okay. Um, why don't we play the stats game? Speaking of statistics. Speaking of statistics. And then we'll call it a, we'll call it a podcast. Um,

The stat game, we each put forward a stat. The rest of the group tries to figure that out with clues and deductive reasoning and

And what else? Clues, deductive reasoning, and questions. And wild guesses. We learned the term wag in the last podcast. Wild ass guesses. Yeah, there you go. The best one is one that's not so easy. We get it quickly. One that's not so hard. We never get it. And if it's apropos to the topic at hand, and we're all over the map here, so I think everything's fair game. That would be the best statistic. Marissa, you want to go first? Yeah, I do. Okay.

God, I have a few. Okay, I'm going to give you two numbers related. So same category, just two different groups answering this question. 20...

Is this the University of Michigan survey? No. 26% and 13%. It's not the conference board survey. It is the conference board survey. Okay. And the two groups, 26 and 14? 13. 13. Is it across...

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

track track okay homes autos uh can you ask a vacation question like uh no no uh go ahead put yourself put you out of your misery yeah so 26 of households where household income is over 125 000 said that they made

purchases in advance of the tariffs. And only 13% of households with income under $50,000 said they did the same thing in the past few weeks. Oh, that's a great statistic. Yeah.

Yeah, isn't that interesting? So double. Double. Yeah. Double, which I think goes to the ability to do that, right? And maybe how informed you are about what's coming as well. But that's a pretty high share of people that are saying that they actually change their purchasing behavior because of the expectation of tariffs. Right.

Well, what does that auger for future spending? Because presumably you bought forward, you were going to buy at some point, you just bought it sooner rather than later to get ahead of the tariff increases, pricing increases. So that's got to have an impact, you would think, on future sales. Mm-hmm.

That's a really good one. So that was a special question that the conference board asked. It was. It was a special question this past survey. By the way, because I'm traveling, I hadn't looked at that. That survey jumped, right? It did. It jumped back. It came back in May.

Anything notable there in terms of the bounce back? Was it across? I mean, it basically bounced back to where it was back in February. So like it undid and this is mostly in the expectations index, right? Not the present conditions. It basically erased the last couple months of that nosedive that it had taken because of the tariffs. Oh, interesting. Yeah, interesting. Yeah.

So it's still below where it was in February, but it went from 85.7 to 98 over the month. And in February, it was right at 100. Right. Yeah, that's my favorite leading indicator of recession. And I was looking, remember in April when it was down, it was down 19.3 points. Every time it's fallen more than 20, we've gotten a recession six months later. So we kind of just got...

under the nose there, and now it's bounced right back up. So it would suggest that recession risks are receding, consistent with our own assessment of the recession risk. Oh, that's interesting. Okay. Chris, what's yours? 36.2. 36.2. Is it a percent? No, it is a ratio. Oh, it's a ratio. Is it labor market related? No. Housing? No. Trade? No. Okay.

Oh, it's not housing related. No, not housing. It's a ratio. 0.2. Oh, is it fiscal related? No. Oh, goodness gracious. It is financial market related. Oh, is it a PE ratio? It is. Which one is? Is it a price-earning ratio?

Yes. It can't be S&P 500, right? It is an S&P 500 price earning ratio, but- For some group. Oh, I know, for the tech guys. No. No? For one company?

No, it's the Shiller. No, it's S&P 500. For that technology? It's the Shiller price-earnings ratio. Oh, really? Yeah, the long-term cyclically adjusted PE ratio. Is that high? Really? It's that high. Wow. Can you explain what that is? Yeah.

Yeah, so I think most people know price-to-earnings ratio in general for stocks or for the market as a whole. What this sickly adjusted price-to-earnings ratio does is look at the average inflation-adjusted earnings over a 10-year period. So it's trying to smooth out some of that volatility and give us a sense of the truly underlying price-to-earnings ratio.

And that 36.2 is high. What's notable is that it's kind of like your confidence board number. It's right back to where it was, right? The P-E ratio went down, the CAPE ratio went down during the tariff situation, and then it's right back up where it was previously, as though nothing ever happened. And that's elevated historically, right? Going back to, I don't know, the 1800s, median is around 16%.

So it's high from that standpoint. But even in recent history, 36 is high relative. We were kind of trending around 30 for a number of years here. So it speaks to kind of that valuation of the stock market. And like you, Mark, I'm very nervous that there's some complacency going on here. We know tariffs are still around. They're just not as high as originally thought, but still they're going to have some impact. And that's bound to reduce earnings.

Yeah. The other thing is interest rates. I mean, it's one thing when rates are low and you have a high PE. Here you have a high PE with rates are high and threatening to go higher. I mean, the 10-year yield is four and a half. I don't know what the corporate bond yield is, 7%. That's not like stratospheric, but that's not low by historical standards. So another reason to be just a bit nervous.

Okay, I got one, 45%. Your odds of recession. That is my odds of recession, yeah. Ding, ding, ding. Ding, ding, ding. Yeah, yeah. That's not what you were thinking of though. That's not the number.

I think it's good enough because it's also the probability of recession implied by our new recession indicator. Have I talked about this? I can't recall. We talked about it last time. On the podcast? Yeah, Random Forest model. Oh, I did? I talked about it? I'm so proud of it. Because it matches what you say the probability of recession is? Absolutely. Not only today, but historically going back...

It got everything right by Zandi's interpretation of history. We're still doing a lot of experimentation with it, though, trying to really understand what's going on and how it's working. But yeah, 45%. Have any of your odds changed on recession? Marissa, has your odds changed? You're at 40, I believe, aren't you? No, I'm at 45. You're at 45? Okay. Chris, you're at 44.

Let's say 45. That's what I said last time. All three of us are at 45? Yeah, which makes me nervous. That's a really bad thing. Is your arrow pointing up or down? Oh, that's a good one. I'd say my arrow is still pointing up, meaning higher probability. What are you, Marissa? I think mine's pointing down. Pointing down? Yeah. Yeah.

All right. And Chris? Mine's pointing sideways. I knew you were going to say that. I was going to say that, but I said, no, I'm not going to do that. That's chickening out. That's chickening out. Sideways to slightly down, though. To slightly down. Lower probability. Lower. Lower probability. Okay. Yeah. Well, all the recent events this week, I guess it just adds up to nothing. A lot of drama, sturm und drang, up and down all around, but at the end of the day, doesn't change your odds of recession. Yeah.

Not materially. Not materially. Okay. Right. Okay. I don't know. This was a little shorter, I think. It was not that much shorter, but a little shorter than the typical podcast. We'll keep it that way. I'm traveling. I'm going to be on a plane tomorrow coming back home. I'm looking forward to that. Any last words before we call it a podcast? Marissa, anything? No? No.

Okay. Keep the questions coming. Keep the questions coming. We enjoy them. Because we're blowing through them. Yep. Okay. With that, dear listener, we're going to call this a podcast. Talk to you next week.