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Moody's Talks - Inside Economics

Episode 29
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October 22, 2021

Beige Book and Betting on Oil Prices

Mark, Ryan, and Cris welcome Gaurav Ganguly, a Senior Director of Economic Research at Moody's Analytics and Chris Lafakis, a Director of Economic Research. They discuss global energy markets, the effect on the economy and where energy prices are headed.

Full episode transcript found here

Mark Zandi:                      Welcome to Inside Economics, I'm Mark Zandi, the chief economist of Moody's Analytics. And I am joined by a group of my colleagues. Of course, Ryan, Ryan Sweet, director of real-time economics. Hi, Ryan, how are you?

Ryan Sweet:                      Hanging in there, Mark? How are you?

Mark Zandi:                      I'm okay. Not too bad. This week went by pretty quickly. And we've got Cris deRitis, the deputy chief economist. Cris, how are you?

Cris deRitis:                       Doing well, Mark.

Mark Zandi:                      Yeah. And you're still in the office, Cris. Last time I saw you, you were there. You're 24/7 in that office now?

Cris deRitis:                       No, no, I'm hybrid. I'm hybrid.

Mark Zandi:                      You're hybrid? Okay. Very good. And-

Cris deRitis:                       And I was in New York yesterday.

Mark Zandi:                      Oh, how did it look in New York?

Cris deRitis:                       New York was quieter. But it was great. It was my first economic outlook live presentation since the pandemic, it was good to be back.

Mark Zandi:                      Oh, who did you present to?

Cris deRitis:                       I went to see a... Let's say, mid range bank? No official [crosstalk 00:01:13].

Mark Zandi:                      No names. No names.

Cris deRitis:                       I don't know if we should, right? Okay. They were very gracious because I was a little bit rusty. But-

Mark Zandi:                      Oh, I can't imagine that.

Cris deRitis:                       Yeah. Live presentation is different.

Mark Zandi:                      I told you I went to Miami for a real estate conference and spoke and I felt energizing. I really enjoyed it. Can't wait to do more of that. And we're joined by two other colleagues. We've got Chris Lafakis. Chris, how are you? Chris is all-thing climate change. And of course, a lot of expertise in the energy industry, which is where we're going to head in the big topic today, energy prices. Chris, good to see you.

Chris Lafakis:                    Oh, good to see you. Happy to be here. Thanks for inviting me. And let's have some fun.

Mark Zandi:                      Absolutely. That's what we do here at the Inside Economics. And Gaurav Ganguly, Gaurav is a recent new person to Moody's Analytics, of course I've known Gaurav for probably a decade, right Gaurav?

Gaurav Ganguly:             Yeah, I'd say it's more than a decade, Mark.

Mark Zandi:                      Is it? Oh, geez, really?

Gaurav Ganguly:             I recon, I was trying to figure this out the other day and I got lost in time, was it 10 years or 12 years.

Mark Zandi:                      We're really very happy to have Gaurav with us. Gaurav is a fantastic economist headquartered in London, also an expert in climate change, as well. And we've asked Gaurav to join us to talk about energy markets in Europe, which obviously a lot going on there. So good to have you. Hey Gaurav, maybe you can tell us a little bit about yourself, just to introduce you. I think everyone knows the rest of us, but maybe just a little bit about your background.

Gaurav Ganguly:             Sure thing, Mark. So first of all, thanks for inviting me on the show. It's great to be here and great to have everybody else in here as well. And I'm the newbie, I joined Moody's Analytics three weeks ago. So new kid on the block, based in London, as Mark said. He's actually told you everything you need to know about me, I think. No, just kidding. So I have been working in financial services for the past 15 years across a number of different institutions ranging from credit insurance, investment banking to universal banking. My last job was actually at HSBC, some of you may have heard of that. At the group level, I was responsible for an economics research and analytics unit and we looked at emerging macro risks arrayed across the group so that's from Europe, to Asia, to Latin America, and trying to work out what those risks might mean for the group's financial stability from a capital perspective and also how these should translate into scenarios for calculating loan loss impairments.

Gaurav Ganguly:             So that's been a lot of what I've been doing, it's been pretty broad so looking at economic risk, geopolitical risk, climate risk, sometimes even operational risks whatever it takes from a bank's perspective I guess. So yeah, that's been my background for the last several years. I did a PhD somewhere back in the midst of time and economics and before that [crosstalk 00:04:25].

Mark Zandi:                      He has an Oxford PhD. An Oxford PhD.

Gaurav Ganguly:             For my sense, and even before that Mark, I actually trained as a chartered accountant. I was telling somebody that the other day that I actually started out life as an accountant and obtained an ECA qualification in London. So yeah, jack of all trades, master of none, really happy to be on here today.

Mark Zandi:                      Well, it's fantastic to have you. Hey, Cris deRitis, you have a PhD from Johns Hopkins, right?

Cris deRitis:                       Yeah. That's right.

Mark Zandi:                      Johns Hopkins. And those Oxford PhDs, they're pretty good to have I'd say, what do you think?

Cris deRitis:                       That's what I hear. That's what I hear.

Gaurav Ganguly:             That's what I hear. To be honest, Cris, I've never actually worked out whether they mean that much than any other PhD. But that's what I hear.

Mark Zandi:                      That's very good. Well, we are going to talk about what's top of mind, or at least, there's seems like there's a lot of things is top of mind these days. But the higher energy prices, oil prices have moved up quite significantly, everyone's paying a lot more for gasoline. I know you are in the UK, we are here in the US, and natural gas markets, coal markets, a lot to talk about there. And so we'll come back to that. But before we get to the big topic, let's talk about the statistics, the economic statistics. And of course, we play a bit of a game to make this a little easier to digest.

Mark Zandi:                      And we each call out a statistic and the rest of us try to figure out what that statistic is. And hopefully, again, I've said this, I think numerous times but I'll say it again, just to remind everybody, the best statistic is one that's not so easy that it's a slam dunk, we'll get it quickly, but not too hard that we can never figure it out. And also a bonus if it is some broader point about what's going on in the economy or the prospects for the economy. Okay. And I traditionally start with Ryan. So Ryan, I'm going to start with you.

Ryan Sweet:                      All right, so I picked one that is top of mind, probably more important on everyone else's mind besides energy, and it's minus 7.2% month over month.

Mark Zandi:                      Minus 7.2%, this is statistic that came out this week?

Ryan Sweet:                      Yes, yes. I stay true to that tradition.

Mark Zandi:                      Yeah. People know that I break that rule every once in a while. I'm guilty of that. Minus 7.2%-

Ryan Sweet:                      And to be fair to Gaurav, it's an US indicator.

Mark Zandi:                      It's a US indicator?

Ryan Sweet:                      Yep.

Mark Zandi:                      Did you calculate that change in statistical results stated statistics?

Ryan Sweet:                      Stated. It's reported.

Mark Zandi:                      It's reported as minus 7.2% [crosstalk 00:07:24].

Ryan Sweet:                      Another hint is, this was one of the big surprises of the week. So this factors into an overall number which came in a lot weaker.

Mark Zandi:                      Was this industrial production?

Ryan Sweet:                      Very good. Getting closer. You're getting-

Mark Zandi:                      Decline in vehicle production?

Ryan Sweet:                      Very good. [crosstalk 00:07:46]

Mark Zandi:                      Oh, wait, wait for it. Wait for it.

Ryan Sweet:                      All right. Let's go with one of this.

Mark Zandi:                      My wife, I'm going to talk about my wife. She keeps telling me, threatening that she's going to get me a bell.

Ryan Sweet:                      I got you a bell.

Mark Zandi:                      Did you really? Can I see it?

Ryan Sweet:                      I got you and Chris bells? Yep, cowbells.

Mark Zandi:                      Where are they? You're going to send it to us or-

Ryan Sweet:                      They are right over here.

Mark Zandi:                      Oh, really?

Ryan Sweet:                      Yeah, they are in the Amazon box. Yeah, I'll pull them out.

Mark Zandi:                      Okay, okay, pull them out. We got to take a look at it. So okay, so this is industrial production. So this is a measure of output and it declined, well, I'll let you explain it and tell us why you think this is an important statistic. Go ahead.

Ryan Sweet:                      So it fell for the second consecutive month. So this counts essentially could be amount of production for motor vehicle parts. And as everyone's aware, global supply chain issues, semiconductor shortage is all weighing very heavily on industrial production for cars, vehicles. New car inventory is near record lows, and that's driving prices higher, and the supply chain issues are limiting the supply response. So we're not going to get an immediate relief on the price front because manufacturers can't ramp up production in response to higher prices, because things are all bottleneck throughout the supply chain.

Mark Zandi:                      Right. And this decline in industrial production was a bit of a surprise. And it did contribute to another marking down of our tracking estimate for third quarter GDP. And where do we stand on that now? What do we think third quarter GDP is going to... And by the way, we get that statistic next week, which...

Ryan Sweet:                      We do?

Mark Zandi:                      Yeah, we get that next week, a big statistic. What do you think... What are we tracking now?

Ryan Sweet:                      1.4% at an annualized rate, so we're below the consensus. So we partner with CNBC and we've been doing this for years now, Mark. When we started, and we survey economists that have all these tracking models. And the median estimate among them is 2.3%. So we're a little bit below what the consensus is.

Mark Zandi:                      Although I know we're quite... We're one of the more accurate, I think tracking estimates and I think the Atlanta Fed has its own GDP now, I think they call it?

Ryan Sweet:                      They do.

Mark Zandi:                      And that's even lower. Right? What is that?

Ryan Sweet:                      I think that's well below one, last time I checked.

Mark Zandi:                      Yeah, that was a trick question. I know the answer, is 0.5, 0.5. Yeah. And that's also quite accurate I believe [crosstalk 00:10:28].

Ryan Sweet:                      Pretty good, too.

Mark Zandi:                      So feels like it's going to come in around one. Okay. Let me ask you this question. What probability do you put on the possibility that GDP is actually negative in the third quarter?

Ryan Sweet:                      A third. And the reason why is that all the growth is going to be in inventories. And it's really hard to pin the advance estimate of inventory, build or decline, just inventories are really volatile. We get one more, or two more important pieces into our high frequency GDP model. Next week, we get durable goods orders, and then we get the advanced number on the goods deficit and inventory. So after we see that, we'll have a really good feel of what GDP is going to be. But I mean, it's possible it could fall. But again, I mean, there's a lot of chatter. I don't know, you and Chris, I got a lot of questions about whether or not we're descending to a recession.

Mark Zandi:                      I've seen that.

Ryan Sweet:                      And I mean, that's a little premature. I mean, even if GDP fall-

Mark Zandi:                      Premature? I don't think it's the word. It's just wrong.

Ryan Sweet:                      I was trying to be polite.

Mark Zandi:                      No, no, no, no. I don't know. That's my feeling. I mean, I think actually, this fellow, David Blanchflower, Gaurav, you might know him. I think he was in the BoE. Wasn't he?

Gaurav Ganguly:             He was in the BoE's monetary policy committee a while ago.

Mark Zandi:                      Yeah. And he's a bit of... At least my points of contact with him, he's a bit of an iconoclast, he's out there a little bit on issues. Was he that way at the BoE? Do you recall?

Gaurav Ganguly:             Yeah, I think so. Yes.

Mark Zandi:                      Yeah. Interesting, fellow. Obviously, very brave, thoughtful fellow, but he's out there a bit. And he wrote a paper, I think, with the University of Chicago professors saying high probability of recession, or we already are in recession. And I think they're focused on the consumer sentiment indices, which have fallen sharply because of Delta.

Ryan Sweet:                      There's another flaw right there. You don't put too much stock in consumer confidence. It's all Delta driven. The drop in confidence.

Mark Zandi:                      Yeah.

Cris deRitis:                       All you have to do is look at the yield curve, right? Ryan? That's-

Ryan Sweet:                      Oh, my god, no, we're not going down this rabbit hole.

Mark Zandi:                      Which is pretty wide. [crosstalk 00:12:41] It's very wide, yeah.

Gaurav Ganguly:             But while we're talking about Blanchflower and Europe, it's a similar sort of thing in this side of the water. I mean, again, consumer confidence for quite a lot recently in the UK, it fell about four points. But I completely agree, you can't put that much store by consumer confidence itself. That's so much driven by as you said, Ryan, by Delta. It's also driven in the UK, for instance, by people's views around supply shortages and what it's doing to their disposable incomes right now. But this is quite a fickle sentiment, right? I think I'd put more store by the fact that PMIs are starting to decline in Europe. There's still an expansionary territory, but what we're looking at in terms of declines in industrial production, more and more, manufacturers coming out and then stating that they actually suffering from shortages of raw materials or simply raising prices. So there's a similar view here, when we start thinking about third quarter output, there's a non- tangible risks that it could be negative.

Mark Zandi:                      PMI, by the way, listeners, another measure of industrial activity. It's just a survey based. PMI stands for purchasing managers index. So there's a survey of purchasing managers and based on that, they construct an index and that's still very, very high. But Gaurav is making the point... I think you're making the point that it's starting to come in a little bit and might reflect some weakness in the economy. Yeah, the way I think about consumer sentiment as a indicator of potential recession, is that a very sharp decline in sentiment for two, three, four months, is a necessary condition for recession, but it's far from sufficient. I mean, that's not by itself going to get you there. In fact, I was asked by a journalist about the Blanchflower piece, and my immediate gut reaction was, well, that's really wrong.

Mark Zandi:                      I said something to the fact that less than 1% probability, we're going into recession, and that's of course, the quote that got into the paper. I think Blanchflower saw that and took a little bit of umbrage and tweeted something in the journal, said did I have any comment on the Blanchflower comment and I said, no. I'm not going to do that. I'm not going to respond. Oh, it was a tweet, Blanchflower tweeted this out and said, are you going to respond on Twitter and I said, no. By the way, good advertisement, good time to advertise. I am now active on Twitter, @markzandi and I am the Mark Zandi. So feel free to follow me. I know Ryan's following me very carefully. Right, Ryan?

Ryan Sweet:                      Sure. Sure. I'm not on Twitter. I'm not a big social media person.

Mark Zandi:                      Yeah. What about you Chris Lafakis? I mean, you know what? It's getting hard to say Chris Lafakis, I'm saying Chris L and Cris D. Is that okay? Can we do it that way? So, Chris L, are you on Twitter?

Chris Lafakis:                    Yeah, I'm on Twitter.

Mark Zandi:                      Are you following me?

Chris Lafakis:                    I didn't know you were on Twitter, Mark. I mean...

Mark Zandi:                      Come on, man. I need followers. Let's go.

Chris Lafakis:                    I'm going to find you. I'm going to sign up right after this.

Mark Zandi:                      Okay, very good.

Chris Lafakis:                    But yeah, I mean, well, I agree with you guys about recession. But at the same time, don't want to understate the tremendous stress that the production side of the economy is under right now. And it's evident in the IP data. And just to give you an anecdote there, I was-

Mark Zandi:                      No acronyms on Inside Economics.

Chris Lafakis:                    Oh, I'm sorry. Okay-

Mark Zandi:                      If you've got an acronym, you got to define the acronym. IP, this is industrial production.

Chris Lafakis:                    Yeah. So real life example. So recently, me and my wife, and I don't even know if this is appropriate for Inside Economics, because it's my first time, but I will say it anywhere. Okay, we were shopping for a car, and we showed up at the Toyota dealership, and there were no cars for us to drive, right? To speak to this point of no inventory and eventually, we found a car at the VESA dealership that we bought, and they gave us no discount off of the MSRP price, right? Because there's again, no inventory. And I saw that Toyota announced in September, it would cut production globally by 40%. And it's not just the semiconductors, I was reading the other day about a shortage of magnesium production that is used to make aluminum alloys in China because of the power and energy crisis in China, which I'm sure we'll get into later. But if you just look across the board, the supply side of the economy is under tremendous... I haven't seen it like this before. I've been in professional economics for 15-

Mark Zandi:                      No, no, no. This is highly disruptive, the supply chain no doubt and related to the Delta, I think my sense is that the Delta variant did serious damage to not only the US, but to the entire global economy, the supply chain... Particularly in Asia, and particularly Southeast Asia, where the supply chains begin. And so clearly, the slower growth we're observing, and maybe the stalling out, like China, basically didn't grow in the third quarter, right? I mean, and so clearly Delta has done a lot of damage. But that's a long, long step to recession, which is a sustained, a persistent, broad-based decline in economic activity. I think we're a long way from that. But I mean-

Ryan Sweet:                      One quick point. One quick point. Even though we have all this supply chain issues, industrial production is really close to where it was pre pandemic. So even though we have all these hurdles, I mean, the supply response has been pretty solid.

Mark Zandi:                      The demand has been so strong [crosstalk 00:18:27] That's the other point to make. Hey, but this is a good time for me to give you my statistic. Usually I go last, but because this is a bit of a hint of the conversation we just had, because my statistic is a little... I thought it was going to be hard, but now it's going to be easier because of those hints. So let me say. 37 times. 28 times, 23.

Ryan Sweet:                      Yeah, I counted that. The number of references in the Beige Book to supply chain disruptions.

Mark Zandi:                      Oh, you were the one who came up with that? Oh, I didn't know that. You're the one who did the counting. Oh, okay. That was, too easy.

Ryan Sweet:                      That's control fine. I mean, it was pretty, we can make it sound like [crosstalk 00:19:07].

Mark Zandi:                      Wait, wait, wait. For the listener listening... I guess it turned out to be too easy. But I thought I was being pretty clever. That 37 times is the number of times a supply chain bottleneck or some variation of that theme was in the Beige Book that the Federal Reserve produces. So for each FOMC meeting, each meeting of the operating market committee of the Fed, they put together a Beige Book, which is a compilation of anecdotes and other information about the different fed district banks around the country. It gives you a good regional sense. And we follow that very carefully and actually construct an index to try to give people a sense of how the language in the Beige Book translates into what it means for the economy.

Mark Zandi:                      And by that index, we're still at a very... The Beige Book is still pretty upbeat and optimistic although it's down from where it was, but the thing that stood out was all of these references pretty much everywhere across the country to supply chain bottlenecks to your point, Chris, that Chris L, that's very key. Since you did the analysis on that report. Anything else in the Beige Book that struck you? There's one other thing that I found pretty cool. That was regionally pretty big differences, at least in terms of our index measuring the strength. One, the strongest, anyone I guess, what is the, in terms of the Beige Book, which Federal Reserve district, I think how many are there? There's 12, I think. Which district is the strongest? And there's actually two districts that are I think, equally are strong.

Chris Lafakis:                    The Dallas.

Mark Zandi:                      Yeah, Are you're looking it up, Chris? I can see you.

Chris Lafakis:                    No, I'm not. No, I'm not looking it up.

Mark Zandi:                      Yes, you are. He's looking it up.

Chris Lafakis:                    I'm not so good economist. I mean, I just came up with Dallas, and that was it. I mean, do you want me to guess the other one?

Mark Zandi:                      It looked like he was looking at the screen, no? Okay. All right, I falsely accused you.

Chris Lafakis:                    Do you want me to guess the other one?

Mark Zandi:                      Yeah, go ahead.

Chris Lafakis:                    All right, I'm going to guess Richmond.

Mark Zandi:                      I think it is Richmond, but I forget actually. So I [crosstalk 00:21:25]. I think it's Richmond. I think it is Richmond. Guess what's the weak... Not guess, but I'm sure someone knows. Chris L probably knows this, too. Chris L, you answer this question? What is the weakest district according to the Fed Beige Book?

Chris Lafakis:                    That's actually a little bit tougher for me, but I'll guess Boston.

Mark Zandi:                      Oh, jeez, Louise. He's right. He's right. You're looking. You're looking. Okay.

Ryan Sweet:                      Yeah, it's only because the Red Sox are down three, two. ALCS, the only reason Boston [crosstalk 00:21:59].

Mark Zandi:                      I don't want to talk about it, Ryan. I don't want to talk about it.

Chris Lafakis:                    I haven't looked at like the Beige Book in like five, six years, by the way.

Ryan Sweet:                      It's actually really informative. I play very close. There's no numbers in it for the most part. It's all anecdotes, but it's really informative. I mean, one thing that stood out was they were talking about look at labor supply issues and what they're attributing to, childcare issues, which we've talked about a lot on the podcast, not a lot of references to UI benefits. But one thing that could emerge now is this vaccine mandate, whether or not that's going to be another labor supply issue.

Mark Zandi:                      Yeah. Yeah. What about... You mentioned child tax credit. You mentioned that, right?

Ryan Sweet:                      Childcare issues. Yep.

Mark Zandi:                      Child issues. Yeah. Okay, well, that was my statistic. So who wants to go next? Chris L, you want to go? Since you're on such a roll, do you have... Well, actually, I'm presumptuous. I'm assuming you have one, you don't necessarily need to have one. Do you have a statistic you want to use or not?

Chris Lafakis:                    Actually no, I didn't know what to prepare for the second-

Mark Zandi:                      No worries. No worries. No worries at all. Gaurav, do you have a statistic you want to use?

Gaurav Ganguly:             Yeah, I could come up with one. So I'll use a non-US statistic just to make it clear. I think I'll go for the number 3.4. Well, that's actually a percentage 3.4%.

Mark Zandi:                      3.4%.

Gaurav Ganguly:             And it's a non-US number.

Mark Zandi:                      Is it a UK number? [crosstalk 00:23:35]

Gaurav Ganguly:             Sorry, what's that?

Ryan Sweet:                      UK CPI?

Gaurav Ganguly:             No, it's not UK CPI but you're close. You're very close.

Mark Zandi:                      Okay. All right. Wait, don't tell us. It's definitely a UK series, you didn't want to tell us because [crosstalk 00:23:46].

Gaurav Ganguly:             No, no, I didn't say it was the UK series I just said you were close. So it could be a UK series, it could be CPI series.

Mark Zandi:                      EU CPI. EU CPI. [crosstalk 00:23:55]

Gaurav Ganguly:             Clue it's still Eurozone CPI, exactly. It's a September number. And the significance of that is of course, that the European Central Bank has a price stability mandate of 2%. And for several months now, monthly reads of Eurozone inflation have been coming in above 2%. And the latest reads at 3.4%. And actually quite a lot of that has been driven by energy price increases. So of that 3.4%, roughly 1.7% represents energy price increases. So this brings us back to what we're talking about here that energy price increases and not just being felt in the US, they're actually being felt in many parts of the world. The UK has a particular problem with energy price increases and we can come on to that later. But it's also being felt in the euro zone and it's being felt for a while.

Gaurav Ganguly:             Doesn't look like this is going to go away anytime soon. I don't think it's going to be several months before these kinds of price effects weigh in, the ECB still remains quite confident in its view that inflation is hump shaped. So it's picked up now. It's going to carry on this upward trend for a few months yet before it starts to come down. In the UK, it's a bit different, they're much more concerned about the system's inflation. But I know we're going to talk about some of these things later. So I don't want to turn and jump in right now.

Mark Zandi:                      Gaurav, do you know offhand what the current inflation rate is in the UK [crosstalk 00:25:19].

Gaurav Ganguly:             It's much past 4%. Well, it's expected to... I take that back, it's expected to nudge plus 4%. It actually dipped in September and came in at 3.1. But that was a temporary thing. But it's expected to nudge past 4% by the end of this year, and actually the chief economist of the Bank of England, Huw Pill who seems to be very boggish about inflation, his view is that it could easily go past 5% in the early part of next year, which makes setting monetary policy quite a challenge in the UK. And he in particular, he's been talking about the November rate possibly being very much a live decision where bank will be forced into raising rates.

Mark Zandi:                      This November?

Gaurav Ganguly:             This November, as early as this November. Exactly. So that's a big change. That's a step change in the UK. If you think back to the start of the pandemic, back to March last year, everybody's scrambling around to put rates down to the zero bound or in case of the euro area not do anything with rates because they haven't done anything with rates for about 12 years. But at least in the UK, and other advanced economies, but independent central banks trying to rush back down to the zero bound and then thinking when will we ever get out of this? The UK now looks like it might be the first out of the box now. And in lifting rates. They're not saying that they're going to do this because of the energy price squeeze.

Gaurav Ganguly:             If they do, do this, then well, at least in the words of Huw Pill, it's because of the underlying forces in the economy that suggests that the economy no longer needs to be at the zero bound, which I guess then in plain speak translates into saying that activity has come back up. So this speaks to Ryan's earlier point. And Ryan said that industrial production is pretty much back to pre-pandemic levels. Well, that's true of various economies, industrial production, consumer demand, especially on the consumption side. It's all looking healthy, it's all back to pre-pandemic levels or close to being back to pre-pandemic levels.

Mark Zandi:                      I guess the other thing about the UK and EU is the labor market is much closer to full employment than, say the US right? Because of the labor market schemes that were put into place, you never saw the high unemployment, or at least the unemployment we saw here in the US where we didn't have those kinds of support to the labor market.

Gaurav Ganguly:             That's true. And in fact, in the UK, in particular, we've been wrong footed over the course of the last 18 months in terms of thinking about potential rise in unemployment. I remember when the pandemic struck, I think there was just massive panic amongst all economic observers, even markets where we thought, well, you probably have a further scheme that would underwrite part of the labor market, panic still continued and thinking about the issue because it wasn't clear how many people might just drop out of the labor force all together, [inaudible 00:28:14] not get furloughed. And so I think forecast in 2020, were quite negative initially, even the Bank of England was getting very negative forecasts for unemployment rate to the end of the year, because they were saying they just didn't have a handle unemployment situation.

Gaurav Ganguly:             But over the course of '21, it's become really obvious that all these schemes have completely underwritten labor markets. So we've seen very, very little rise in unemployment rates across a number of European countries. And when you look at the UK, then it's clear now that there's a lot of tightness in the labor market. Just a month ago, we got the statistic of 1.1 million if I can throw another statistic out there. That's job vacancies. With 1.1 million vacancies coming out with pandemic when 1 million people are still actually, we're just about to roll off a government support scheme on furlough. So that was quite a statistic. In Europe, I think [crosstalk 00:29:10].

Mark Zandi:                      Go ahead. Go ahead.

Gaurav Ganguly:             No, no, you go ahead. Go ahead.

Mark Zandi:                      [crosstalk 00:29:16] Fair enough. Go ahead. Go ahead, Gaurav. Sorry.

Gaurav Ganguly:             I was just going to say that in Europe, what that means is that, as you come out of all these employment support schemes, you don't necessarily go back to tight labor market conditions, because some of these countries have got long standing issues with labor force. And Spain's got very high youth unemployment. France has reasonably high unemployment rate, the huge issue with skills mismatches and so on. Italy has its own issues with the labor market. So we get back, unwind the situation and we start going back to the pre-pandemic structural issues.

Mark Zandi:                      Yeah. Since you're showing off, I was going to show off too. You said 1.1 million job vacancies in the UK, 10.4 million open job positions in the US. So not quite a record high but pretty close. But let's move on. Cris D, what's your statistic for the week?

Cris deRitis:                       I've got one for the big topic, but I'll save that one. In terms of this week, what happened? I'm going to go with 1.041 million there we go.

Mark Zandi:                      Million, all right. You know this, Ryan?

Ryan Sweet:                      Yes, I'll let you have it.

Mark Zandi:                      1.041-

Ryan Sweet:                      Think about Cris, what's Cris-

Mark Zandi:                      Oh, this is housing-

Ryan Sweet:                      Where he goes, housing.

Mark Zandi:                      1.041 is that the single family stats?

Cris deRitis:                       Permits.

Mark Zandi:                      Oh, permits. Single family permits, that's right. Okay.

Cris deRitis:                       I have to make it a little bit difficult, right?

Mark Zandi:                      Yeah. Yeah. Got to mix it up a little bit.

Ryan Sweet:                      And make it for last week.

Mark Zandi:                      Yeah. So tell us about the housing [crosstalk 00:30:48] Yeah, tell us about the housing situation.

Cris deRitis:                       The stats report overall it was weaker than expected, then consensus certainly down from the month before as well. So since March, things have been trending downward, chalking up largely due to the supply chain issues that seems to be again the reported reason why the numbers continued to be weak. And that doesn't look as though it's going to clear up anytime soon. And I'm concerned that okay, so what, we don't build the houses now but we'll build them later. I'm concerned we're not going to get the burst in building later on. The other thing in the report, it was particularly weak in the multifamily sector, but that tends to be volatile. So don't read too much into that but certainly that was clearly dragging down the overall numbers.

Mark Zandi:                      Right. I mean, the one thing. Oh, go ahead, Ryan.

Ryan Sweet:                      The only thing I was going to add to Cris, I agree everything Cris, but with this numbers for September and this captured Hurricane Ida. So anytime you have heard of, permits are actually more effective than stats.

Cris deRitis:                       Fair enough.

Mark Zandi:                      Yeah, right. One thing about the stats I find a little odd or interesting is the multifamily stats, they go up and down every month obviously, lumpy because these could be big projects is that they're cutting through the volatility pretty high, around 500,000 multifamily units per annum, which by almost all historical standards is a pretty high level of-

Cris deRitis:                       At the higher end. Yeah. So clearly there's still lots of demand and affordability issues I think they're still pushing in the direction of more higher density.

Mark Zandi:                      And I guess what rents accelerate... Vacancy rates are still low, particularly for affordable rental lower rent points and cap rates, which reflect the prices, investors are willing to pay for multi-family property are very low, meaning investors can't get enough of the multifamily properties. So that's a signal to build, right? So feels like we're going to get more building here, more construction. But to your point, you might be just constrained by the ability to get stuff to build with. Yeah. Right. Okay. Okay. Hey, one statistic, or one indicator that we've been following that seems to signal hey, no problem with the economy. In fact, maybe the economy's going to pick up here and in that would be more consistent with my view. And I'm curious how you think about this, Ryan?

Mark Zandi:                      Is it 10-year treasury yield? 10-year-treasury yield has really moved up quite a bit, it was as low as 1.2, maybe 1.25 not long ago, four, six, eight, weeks ago. I think when Delta was at its peak, having its peak impact on the infections in the economy, it's now one, seven are pretty close to 1.7. That's a pretty significant move. What's your interpretation of that? I'm really curious. And you do this nice decomposition of the 10-year-yield so we can get a sense of what's driving it. What's your take on that?

Ryan Sweet:                      So the way we do is we decompose the 10-year into three main components, long term inflation expectations, so its market base, what investors think inflation is going to be five, 10 years down the road. Also, the expected path of the real Fed funds rate, so market expectations for the path of monetary policy, and then the term premium, which is the extra compensation investors need to hold long term treasuries versus short term. So when you decompose it, all three components have edged higher recently, the biggest move is an inflation expectations. And segwaying into our big topic, it's energy prices. So there's a very strong correlation and causal relationship between global energy prices or oil prices, and market based inflation expectations. So investors basically say, higher oil prices today mean higher inflation down the road. And that's what's really driving the 10-year-up recently. And then, on the other hand-

Mark Zandi:                      Causal. Causal. What do you mean, causal? You mean changes in the oil, or global oil prices?

Ryan Sweet:                      Cause changes in inflation expectations. So we don't want fall into that trap like correlation doesn't... Correlation means causation. That doesn't apply every time. But in this instance, it does apply.

Mark Zandi:                      I find it so bizarre. I mean, oil prices go up and down and all around, in weeks, months, and this is 10 years [crosstalk 00:35:35].

Ryan Sweet:                      For years I've been trying to figure this out. Yeah.

Mark Zandi:                      It's a mystery.

Ryan Sweet:                      Same thing with consumers, though. They see higher oil prices, gas, and [crosstalk 00:35:44].

Mark Zandi:                      That I understand. That I get. Most people forecast with a short term ruler, they take what happened today, what happened yesterday, and they draw a line, and that's the forecast for the future. I can see most people doing that. That's the way they forecast but not for an investor. I find that bizarre, really, it's interesting. So the 50 basis point rise in the 10 year yield, how much of that is inflation expectations?

Ryan Sweet:                      A little bit less than half.

Mark Zandi:                      How much is the term premium?

Ryan Sweet:                      A quarter. And the other ones, half.

Mark Zandi:                      Okay. So if you look at futures?

Ryan Sweet:                      Markets are now pricing in two, 25 basis point rate hikes next year, which is a big shift from just a few months ago, where they were thinking early 2023, like us, now they're thinking the Feds going to move in 2021.

Mark Zandi:                      Consider that Gaurav was saying about the BoE pulling things forward here too. So it feels like all the central banks or at least expectations are forming that they're going to tighten sooner than was the case just a few months ago or a month.

Ryan Sweet:                      It was interesting when the governor of the bureau, I think it was one of the governor's made those hawkish comments, you saw an immediate response in Fed Funds futures, they just replied, this is what the Feds going to be doing next. Which I think pals much more patient than the BoE.

Mark Zandi:                      Hey, I wanted to bring up, 10-year-treasury yield is one of those indicators we follow on a consistent basis. One of the others is UI claims. Hey, Cris, they stayed low again this week.

Cris deRitis:                       They did. They went lower to 290,000. Right?

Mark Zandi:                      That defies Ryan's expectations. Right? Ryan thought it was last week's decline below 300k was temporary. Are you still sticking to that, Ryan? You still think it seasonal or is this something more fundamental going on here? Meaning unemployment insurance claims are declining, which is a good sign for the economy?

Ryan Sweet:                      No, I think it's a good sign. I think last week's improvement, which is overstated in the next couple of weeks, don't move up.

Mark Zandi:                      Don't move up. Okay. It feels like we're around 300k now? [crosstalk 00:37:48]

Ryan Sweet:                      I was at 294 the forecast.

Cris deRitis:                       Lots of slack. Okay. You see?

Mark Zandi:                      Now, correct me if I'm wrong, Chris. But this is for the survey week. This number we just got the 294 is for the survey week. And that's well below initial claims for unemployment insurance a month ago during the survey week for the BLS employment report. That's right. So that would suggest-

Ryan Sweet:                      ... high of the pandemic.

Cris deRitis:                       We might be getting a pretty good jobs number. I would be the inference for the month of October.

Mark Zandi:                      That's right. That's what I expect. I don't know Ryan, what's your call?

Ryan Sweet:                      Early. [crosstalk 00:38:32] It's too early. I mean, Chris, what's your number? What's your got?

Mark Zandi:                      600,000.

Ryan Sweet:                      Mark?

Mark Zandi:                      All right. I think it's going to be a big number. I think it'd be 750. What do you think, Ryan?

Ryan Sweet:                      I think you guys are close. Mark's a little optimistic. But that's true to nature. I mean, it's going to be [crosstalk 00:38:58] I mean, we still get a few more inputs in our models. But next week we're going to recession.

Mark Zandi:                      Okay, I'm going to end this conversation around statistics because we got to move on. This took a lot longer than I expected, with this question, going back to that question around recession. What is the probability US economy's entering into a recession right now? Very quickly, what your sense of it is? Cris D?

Cris deRitis:                       Right now?

Mark Zandi:                      Yeah. It's headed into recession, it's on the verge of recession. Yeah.

Cris deRitis:                       It's certainly less than 10%.

Mark Zandi:                      10%. Ryan?

Ryan Sweet:                      2%. That's our probability recession model. It's 2%.

Mark Zandi:                      Oh, Chris L, do you have a view? Don't need to.

Chris Lafakis:                    Yeah, I was also going to say 2%.

Mark Zandi:                      2% and Gaurav, do you have a view?

Gaurav Ganguly:             I would intuitively go with Ryan on the US economy. It's got to be closer to 2%. It's not below. Because oh, yeah, well, it's a safe bet then.

Mark Zandi:                      All right, we're all on the same page.

Ryan Sweet:                      Mark, what's your answer?

Mark Zandi:                      It's less than 10. I'm on the record, I said less than 1%. I said that. I mean, I blurted that out without any thought at all. But it feels right to me, I feel very [crosstalk 00:40:12].

Ryan Sweet:                      We can point to our probability recession model. It's 2%. So your-

Mark Zandi:                      It's 2%? Yeah.

Ryan Sweet:                      It's 2%.

Mark Zandi:                      There you go. I should have done that. I didn't think about that. Okay, let's move on to energy markets. And to lay the table, Chris L, can you give us a sense of energy prices, oil, natural gas, coal, whatever you think is important. And I know, the price increases across the entire globe but it varies a lot by where you are in the globe, maybe can give us a sense of that just to lay the table here.

Chris Lafakis:                    Sure. Well, energy prices are surging everywhere. I would say that Europe is in the midst of a crisis. I don't think it's too much of a stretch to use that word with respect to energy prices in Europe. Even in the US, natural gas prices have doubled since the start of the year, and the US has one of the most plentiful reserves of natural gas in the entire world that is full of robust private sector that has historically invested extremely aggressively in bringing hydrocarbon production to bear. And the natural gas price increases have been more substantial in Europe, they've been present in Asia as well. So you're seeing global natural gas prices increase quite rapidly.

Mark Zandi:                      Hey, Chris, give us some numbers. What are some numbers? I mean, I know oil, West Texas intermediate is sitting at 83, 84 bucks, Brent's at 85, 86 bucks. Back in the teeth of the pandemic it was almost zero, one point the future is negative as I recall, so okay that gives you context and that's global. Oil prices are a global market and so that gives you a sense of that. Natural gas in the United States we were at three buck per million BTU, we're now at five, six bucks per million BTU. What about Asia? Where are we in Asia on natural gas?

Chris Lafakis:                    So the price to import liquefied natural gas in Japan for September delivery is 1,387 per million BTU.

Mark Zandi:                      Great. And what was it before all this? How low was it?

Chris Lafakis:                    In January, it was nine. Right? So you're talking about 50% price increase. And obviously you have a level, you have a base effect there, right? Because you have a higher base price for liquefied natural gas. Japan doesn't have a lot of its own hydrocarbon production. So it has to import so much of energy from other countries and exporting gas is an extremely costly process, because you have to actually turn it into a liquid by super cooling it and then putting it on a tanker and then having that tanker reach a regasification plant. And then it gets regasified and used. And so the transportation cost is very costly. Process is very costly. And that explains the high base price for gas. And so the percentage increase is going to be not as substantial because of that. But still, I mean, these LNG prices are tied to oil prices, right? And so when oil prices rise, gas prices rise, and the phenomenon is across the board. I would say there's multiple reasons why it's almost-

Mark Zandi:                      We'll get into that. We'll get into that. But in terms of the prices, Gaurav, can you give us a sense of prices in Europe? I think they're going up [inaudible 00:43:56] much I think Chris said a crisis, would you characterize it as a crisis?

Gaurav Ganguly:             Yeah, I would characterize as crisis. And that crisis has several dimensions. So I'll just move away from numbers for a minute to talk about the story if I'm being. In the UK, the UK doesn't depend that much in Russian gas, for instance, whereas in Europe, in mainland Europe, there's a lot of dependence on Russian gas. So there's a slightly different story that if you look at continental Europe, and this big dependence on Russian gas that is causing a concern for the coming winters. And last winter was pretty good. And gas supplies were depleted in continental Europe, then we had economies opening up. And we had massive demand around the world. And we had gas shortages. And we started seeing a big increase in gas prices. And now that we're looking at upcoming winter, the question really is can Europe actually fill up with strategic gas reserves in time for the winter or not.

Gaurav Ganguly:             And the answer doesn't [inaudible 00:44:58] February delivery in Europe. And why is Russia not playing ball? Why is Russia not pumping out more gas? And I guess a couple of reasons behind that, one of them is probably quite strategic. So Russia is holding back it seems on filling up gas into Europe. It's fulfilling all its contracts, by the way. So that's really important to bear in mind. There's economics of gas from clearly here that has to play out. It is fulfilling all its contracts. The question is why isn't it doing any more, and that seems to become a bit more political because of the second pipeline, the Nord Stream two pipeline. There's a pipeline that runs through the Ukraine that's awaiting approval from the European Union, that Ukraine is opposed to having this pipeline run through it. And it doesn't want this pipeline to be given approval. And Russia seems to be playing some game where, it's using this particular pipeline as part of its discussions with Europe for putting up more gas.

Gaurav Ganguly:             And it's apparently started filling up this particular pipeline with gas, almost waiting for Europe to say yes, we're going to open the tax and supply Europe with gas. But yesterday for instance, there was an auction that took place for near term delivery of gas, and gas firm didn't agree to supply more gas. So the current pipelines into Europe carrying, well short of the capacity and I think prices went up to give some idea of short term changes in gas markets, prices went up 18% of the back of that news. So that's Europe and the UK you've got other issues including supply. UK is really bad in supply and really bad in storage. So in the UK several years ago, they decided to cut back on storage facilities, so I think the UK has got about five days excess storage at most, simply because they scaled back and they shutdown some of the strategics that buy strategic storage facilities.

Gaurav Ganguly:             And then you've got the problem that you've actually had gas operators go bust in the UK, a lot of small gas energy suppliers have gone bust. And that's creating a problem with actually taking on customers and creating a lot of uncertainty for customers and creating potential issues around energy security in coming months. The UK actually needs a lot of gas in coming months because about 85% of households rely on gas for home heating, in addition to the fact that gas is actually, I think it's used for about 1/3 of electricity generation. So it's going to be a lot of demand for gas and not a lot of supply, storage issues. And then household utilities, households facing pretty large bills that caps on the price of gas in the UK. And people are now coming off those gaps, because these are one year contracts. And as they come off this gaps, they go on to standard variable contracts.

Gaurav Ganguly:             And as soon as they go into standard variable contract, they're now being slammed with a huge increase in the price of gas, which has been more than five fold in the last few months. So yeah, I think that's right. It is a crisis.

Mark Zandi:                      Oh, so those are... Just to make it clear to the listener, in terms of oil, it's a global market. So the price of oil doesn't vary very much across the globe, the price is what the price is. What you've been focused on Gaurav is the natural gas market, the market for gas, that is very much a regional market, although to some degree that can be broken down by liquefied natural gas. US produces a lot of natural gas that you can ship through LNG to a place like Japan or Europe. But that's limited, there's a limited amount of capacity to do that. So natural gas prices vary considerably around the world. In the United States, they're low as Chris L pointed out, we have got a lot of natural gas here in the US. And so that keeps prices low. In Europe, not so much, you rely on Russia. And because of the dynamics you've just discussed, that's causing prices to go skyward.

Mark Zandi:                      The other two other things on price before we dig even deeper into the reasons for all this, and this to you Chris L, one thing I'm a little confused by, if you look at oil, it's say 83 bucks, WTI, 85 bucks, Brent. That's well below the peaks we saw back, like in '08, I believe the all time high in 2008 with the all time high of what, 140 bucks, maybe? 150 bucks on WTI, something like that. Gasoline prices here in the United States feel really high compared to $80 oil, we're at three bucks, 35, three buck 50 for a gallon of regular unleaded and even back in '08 at the peak. I think we're 425 or something. So what gives? Why are gasoline... First of all, do I have this right? Is something weird going on? And if so, what's going on? Why are gasoline prices so high here?

Chris Lafakis:                    So the gasoline price is comprised of four components. One is the price of crude oil. The second is the retail markup. The third is the tax component. And the fourth is the crack spread. And so this is the amount that refineries charge for their services, for the refining and the distribution of the crude oil which is the raw product, they refine it. They create diesel, kerosene, jet fuel, distillates, residual fuel, gasoline, and then the gasoline is transported to the retailer and then it's sold. Yeah, there hasn't been a federal increase in the gasoline tax for I want to say, like 30 years since the Clinton years.

Mark Zandi:                      Yeah, early '90s.

Chris Lafakis:                    I mean, there are some states that have increased, in fact, we live in one, Pennsylvania, which over the last 10 years or so has instituted an increase in taxes, but it's really the crack spread. And this goes back to the supply issues, right? The supply chain, and I said it before, but I'll say it again, the supply side of the economy is under tremendous stress right now. And it's hard to hire qualified workers to source materials and parts and labor is expensive. And as a result, there is a broad bleeding into the overall price level. From the challenges in the supply chain I just mentioned, I didn't get a discount off of MSRP on that new Nissan. So it's creeping into inflation and-

Mark Zandi:                      So you're saying that the refiners can't ramp up production of refined product because they're facing material labor shortages?

Chris Lafakis:                    Well, that's part of it, but they're also the aftermath of the hurricanes that happened in the United States.

Mark Zandi:                      Hurricane Ida did have an impact on this.

Chris Lafakis:                    Yes. Yes. And the maintenance operations and that goes to the broader reason for the increase in oil price. A lot of US oil production was shut down from the hurricanes as well. And it impacted refineries and a lot of these are located for the listeners on the Gulf Coast. And that's a major refining hub for the United States. So when a hurricane comes through, and it does damage and it shuts in production, and it forces refineries to go offline for a little while. That's a loss in product production, and it shows up in inventories and it drives up prices.

Mark Zandi:                      Got it. Hey, the other price that's up a lot is coal prices. And this too is more regional, it's not a global price because coal markets are more regional like natural gas markets. In some parts of the world, particularly I think, in China, correct me if I'm wrong, but I think in China, they've really gone skyward. And part of the problem was one of the things is going on there is because coal prices are so high that's causing some electric utilities to divert to natural gas, which is contributing to the increase in natural gas prices. Do I have that dynamic, right? And what's going on with coal prices?

Chris Lafakis:                    So that's just a power shortage, right? There's a power shortage in China. And they don't really want to use coal, but they don't really have too many options right now. You mentioned that the Chinese economy didn't grow substantially in the third quarter, and they're very focused on top line economic growth. And so if it means importing coal to supply power, then they will do so and this by the way, this shortage of Chinese electricity is coming at the same time when Chinese authorities crackdown on Bitcoin mining, and China used to be the largest Bitcoin miner in the world. And that takes electricity. And now the US is. And despite that, they're still importing coal just to meet the power demands of the Chinese economy. So that Chinese demand has really put upward pressure on coal prices.

Mark Zandi:                      Hey, Gaurav,, do you know in Europe, is I mean coal is still a source fuel for a lot of electric production in parts of Europe. Are coal prices up as well?

Gaurav Ganguly:             It's a negligible part of the electricity mix. And if you look across European countries and-

Mark Zandi:                      I guess it's mostly Eastern Europe like-

Gaurav Ganguly:             Yes, exactly. Eastern Europe has a much bigger problem with coal than it must be the need for coal.

Mark Zandi:                      Yeah, oil, natural gas, coal, everything is up, some parts of the world more than others, given what's going on. What fundamentally is driving this? I'm sure there's many reasons, we've already talked about a few. But what do you think is the fundamental reasons for what's going on here? Why are energy prices up? And this is either you Chris L or Gaurav, whomever wants to take that question?

Gaurav Ganguly:             Well, I'll take that first because... Sorry, Chris L, I think that first because I've kind of given an answer to that, from the European perspective, that there are reasonable stories behind the shortage. One point because I was talking about China pushing into gas, but not having enough coal and having to rely on gas, etc. Interesting statistic for the UK, an interesting story for the UK is that in the month of August, we saw the lowest wind speed since 1961. Right? Now, some people say that that's actually because of climate change, because of the rate at which Arctic ice cap's melting, it's actually playing around with wind speeds, and it resulted in low wind speeds across Europe in August, now the UK generates almost a third of its electricity from renewables, and when wind speeds fell, it had to rely more on gas which pushed up pressure, which-

Mark Zandi:                      We can't win. We just can't win.

Gaurav Ganguly:             ... pushed gas prices. And then, if you get to, that's just one story of course. I think the biggest biggest story was actually around the global shortage, or the global increase in gas prices and the pressure of gas. In Europe, it's very much this regional story of what's happening with Russia, and Russia's abilities/willingness to supply more gas in coming months.

Mark Zandi:                      Got it, got it. And Chris L, broadly speaking, what's driving this surge in energy prices around the globe? I mean, abstracting from the kind of idiosyncratic, things that are creating issues in different parts of the world, broadly, what's going on here?

Chris Lafakis:                    Under investment and supply chain bottlenecks.

Mark Zandi:                      Not demand?

Chris Lafakis:                    Well, demand is recovering, right? Demand is recovering at a good pace. We're coming off of delta. But there has... Demand always rises. And the problem has been that supply has not kept up with that pace of demand increase. And-

Mark Zandi:                      Okay, I'm going to push back on that. Let's look at the oil market. Demand for oil is 100 million barrels a day, almost on the nose, which makes it really easy to remember. That's what it was pre-pandemic. And that's what it is today. But it's sharply fell during the pandemic. And it's sharply recovered coming, as the global economy has recovered here since the beginning of the year or back up a million barrels a day. But the supply side of the market is not, it hasn't gotten back done... It was producing 100 million barrels a day, price of oil was 50,60 bucks a barrel pre pandemic, what's going on? And you're saying that's because of the supply chain bottlenecks. I mean, that's what's going on, that they can't ramp it up. They can't get the production up to meet the demand.

Chris Lafakis:                    Well, if you're talking about oil, the problem is there's a cartel that doesn't want to boost output. Right? They withheld production. They cut it tremendously 12 million barrels per day. I've never seen anything like it. And they are withholding some of that production. And like the rest of the world, the market have under invested chronically and I really can't understand it, I was reading the other day in the Financial Times the CEO of Pioneer, which is a US oil producer, talking about how his shareholders wanted him to return capital in the form of dividend payment, and they were going to punish him if he plowed money into expanding US oil production and gas production. At the same time, I'm looking at the breakeven price of oil production. And it's way lower than the current oil prices we have.

Chris Lafakis:                    And so I think right now the market is sending a strong signal for producers to ramp up production and make money. And I don't see a dramatic increase in the active rotary rigs looking for natural gas. And it's rising for oil, but not at a very strong pace. And so, for whatever reason, whether it's a lack of willpower on the part of oil producers, or there are some technical problems, they physically can't get the workers or they can't lease the equipment, or whatever it might be. Or some other reason there's a lot of pressure on the supply side of the economy across industries, not just energy, or housing, or automobiles or what have you. It's not happening, right? Production from the market is not happening. OPEC is not boosting production.

Chris Lafakis:                    And then you get these hurricanes. And then you get by the way, this surge in gas prices that is prompting, switching, now if you're in Europe, you're going to use oil to generate electricity instead of gas because it's cheaper because the gas price went up several times. So it's a combination of factors that have driven the increase in oil prices.

Mark Zandi:                      Okay, so this is the way I would characterize it, let's use the oil market as our benchmark because this dynamic is playing out in all the energy markets. And of course, there's a lot of other things going on, as you've just described. But what happened was the pandemic hit, demand gets crushed, we go from 100 million barrels a day down to what was the low in terms of global demand? Was it 85 million?

Chris Lafakis:                    Yeah, yeah, it's about 85 million.

Mark Zandi:                      About 85 million barrels a day. Supply falls too, I mean, the supplier say, hey, I can't sell oil. Prices are going to zero in the teeth of the pandemic. So they drop production all the way down. OPEC slashes production, everybody slashes production. Fast forward to early this year, vaccines, economy reopens, everyone starts to travel, demand goes right back up. We're now back up to close to 100 million barrels a day like we were pre pandemic, but the producers they're starting to ramp things up but it's been very, very slow to do that. And they're saying okay, what are the reasons for that? One of the reasons is supply side bottlenecks, I can't find workers, I can't find the materials I need. Another reason I've under invested for some time particularly in the coal industry obviously, because of the issues around carbonization and climate and that's an industry that doesn't have much of a future so no one's been investing in that.

Mark Zandi:                      And then here's the third reason you throw forward is, well maybe something's going on in these markets where the industry players are saying, I'm going to try and arrange as disciplined as I can, even though I can make a boatload of money by producing more at this price, I'm not going to do that because I'm going to enjoy these higher prices for longer so it's just taking some time for them to respond to the higher prices and ramp up production. But it sounds like you think that's a matter of time. Is that a good way of characterizing it? The way I just put it forward?

Chris Lafakis:                    It is. I would just do a slight correction. So we're forecasting like 98/99-

Mark Zandi:                      Beware, correcting me it's like [crosstalk 01:02:10].

Chris Lafakis:                    Okay, I'm with you. What is a million or two barrels per day amongst friends? That's the only thing I would say, but like yeah, I mean, yeah, but you're broadly spot on. It's that I do think it is a matter of time. I do think that the market through the price is sending a strong signal to producers right now. I expect them to respond by investing more in oil and gas production. President Biden is not going to stop you from drilling I promise. That's cooked up. And with respect to pipeline being the source of all evil, that's not the case either. Right? The problem is we need more investment from US oil and gas firms. And I think they can make money unless their input costs have just escalated so astronomically that the break-even price is over $70 per barrel.

Chris Lafakis:                    And even then, they're still making money. So I expect the supply to come back, and also OPEC, I mean, you have to expect them at some point, to loosen the grip on some of these production cuts and supply the market and return to their pre-pandemic levels, which they're not at right now.

Mark Zandi:                      Got it. Okay. So I want to do two more things in this conversation. The first is a question around, well, what is the impact of these higher prices on the economy? How big a deal is it? I know, it varies a lot where you are in the world. And I want to talk about that. And then I'm going to end, you guys, I want you to think about this while we're discussing this is, where are we headed? And we'll use oil as our benchmark? What do you think oil prices are going to be a year from now? So let's go first to the question of what's the impact? Gaurav, I suspect that this is a big deal in Europe, because Europe consumes a lot of energy but doesn't produce very much. Do I have that right?

Gaurav Ganguly:             You have that spot on, Mark. It is a big deal in Europe. And it's a big deal going into winter. And part of how this plays out will depend on how cold winter is and when the winter snap, actually. So the longer we have... The longer and the milder winter is, the more time Europe has to fill up with strategic reserves, which makes us less of a problem as in when a cold snap occurs. And if that cold snap occurs sooner and lasts for a long time, then I think Europe is facing a fairly difficult situation in winter. And I guess that spills over into social discontentment as much as it does into economic costs. You've got the issue of rising energy prices, I gave you some numbers at the start of this that there's 3.4% September headline number for inflation in the Eurozone, of which 1.7 percentage points is actually energy prices.

Gaurav Ganguly:             And it's been that way for a while. So in the five years before the pandemic energy prices barely contributed anything to inflation in the euro area. It actually detracted from inflation during the pandemic, because it fell so sharply and now it's just skyrocketing. So if this continues over winter, this is a big deal in terms of disposable income and the pension consumers. But it's also a big deal in terms of, I guess social factors.

Mark Zandi:                      Yeah, makes sense. I want-

Gaurav Ganguly:             Sorry, I just say, switch over to the UK is probably even worse. And that's because of Brexit concerns that's causing supply shortages of all kinds. It's not just because local demands happen, people can't get stuff done on time. It's also because the whole economic institutional setup of the UK has changed. And they're really struggling to deal with that right now. So in the UK, I guess you've got a bunch of confounding factors, which will add to the problem, which takes us beyond this particular topic. But just to point that out.

Mark Zandi:                      Yeah, just to connect the dots back to something you said about BoE, Bank of England monetary policy. I think the thinking here in the US would be, yes, inflation is higher, higher energy prices are adding to that. And yes, that's a negative supply shock, particularly in the UK, because you don't produce as much oil or the EU more specifically. So you get weaker growth, more inflation. And as a central bank, you have to make a decision, what do I do with that? Do I respond to the higher inflation? Or do I respond to the weaker growth? In the US, the answer would be well, depends on inflation expectations. If inflation expectations remain stable, I respond to the weaker growth, and I keep my foot on the accelerator, I don't raise rates. But if it's right in adding the inflation expectations in a meaningful way after you adjust for all the measurement issues that Ryan was talking about, then I will start to tighten monetary policy quicker. So which is exactly the kind of frame the way people think about in the UK? Where does that lead us in terms of BoE policy?

Gaurav Ganguly:             So I think people do think of it in that frame but I'd add to that, that you've got to start thinking about... You've got to size supply in the UK, post Brexit, what is the actual productive potential of the economy? Certainly not what we used to think it was back in 2016, before the Brexit vote. Now that this has happened, and we're coming out of it and starting to size the actual optimal level of output in this economy and working out that perhaps it's considerably lower perhaps than we thought it was, then that gives us another view of what's equilibrium level of output. What's the natural level of full employment output in this economy and that has to come into play in the Bank of England's considerations? I think.

Mark Zandi:                      So if you were sitting in the BoE, would you advocate raising rates in November, given everything that you know so far? You're sitting on [crosstalk 01:08:03].

Gaurav Ganguly:             I'm probably more dovish person, so I'll probably advocate holding off, raising rates in November, it's really difficult call to raise rates in November because in the one side, one hand you've got the whole supply side problem. And you really wonder to what extent raising rates is going to solve a supply side problem. And then you've got these additional issues with okay, the actually the productive potential of the economy might have come down, and you've got to worry about inflation expectations. And the fact that you've got a 2% target, but you're facing the prospect of 5% inflation is a very difficult call. But I'd probably be more cautious and a bit more dovish, and hold off and not raise rates in November.

Mark Zandi:                      Well, I think it's nuts to raise rates in November. I think, it's way too premature to do that. [crosstalk 01:08:50]

Ryan Sweet:                      Remember the ECB coming out of recession?

Mark Zandi:                      Yeah, I do remember the ECB.

Ryan Sweet:                      Yeah, they jumped at the first chance to raise rates and that was a big mistake and it seems like [crosstalk 01:08:57].

Mark Zandi:                      It was like 2011 I think, right?

Gaurav Ganguly:             And if you go back beyond before that, the Bank of Japan did the same thing, right? Jumped to the first chance to raise rates and look where they've been ever since.

Mark Zandi:                      Huge error. Hey, Chris. Okay, so how big a deal is it here in the US that these higher energy prices? We now produce pretty much as much as we consume, I think, roughly speaking. So in theory, not big deals, is that kind of way you think about it?

Chris Lafakis:                    Well, I mean, it's going to hurt consumers, if you look at what they spent in Q4, versus what they're going to spend in Q4 this year, last year relative to this year, they're going to spend about $120 billion more annualized in the fourth quarter, compared to a year ago. And what's the math on that, as a percentage of GDP?

Mark Zandi:                      It's another half a percent [crosstalk 01:09:50].

Chris Lafakis:                    Okay. So you won't show up that kind of stress because Q of GDP week report sequentially. And so if you look at compared to Q3 of 2021, instead of Q4 of 2020, the increase isn't going to be too substantial. But I mean, this acts as a tax cut. I mean, as a tax increase, it's taking money away that would be spent otherwise on other goods and services. And it's inflationary, right? And it reduces the value of real economic activity. And so, I mean, it's probably going to be closer to 10 or 20 basis points on GDP growth. But I mean, it's substantial. I don't know. And I'd love to hear Ryan's thoughts on it. What the Federal Reserve's view on this. If they believe in [crosstalk 01:10:45].

Mark Zandi:                      Wait a second. Wait a second. You did half the story, though. Yes, it hurts consumers. But it helps producers. So what's the net of all that? I mean [crosstalk 01:10:58] They're ramping up production. As you say, they're going to ramp up production.

Chris Lafakis:                    Yeah, I expect them to. But what are they doing? They're paying dividends. I mean, and what's the spending rate versus the savings rate for those people that are getting dividends? It's probably like 15% savings and consumers generally have 5% savings rate, so on that, it's a negative.

Mark Zandi:                      Okay, but it's probably a small negative, right? Don't you think, Chris? I mean-

Chris Lafakis:                    It's gotten smaller. I mean, the US has been through the Shale Revolution, come pretty close to being that energy neutral but it's lost market share in the pandemic, for sure.

Mark Zandi:                      Okay, go ahead. Ask your question to Ryan. I'm curious what he says.

Chris Lafakis:                    Yeah. I mean, Ryan, I got a question from a reporter at the Houston Chronicle this week, and she says, well, is the Fed going to move faster because of increases in energy prices? So are they thinking transitory for everything else?

Ryan Sweet:                      I mean, it creates a little bit of a communication issue because I mean, the feds been beating the drum that all the inflation that we've seen recently is transitory. Now we have higher oil prices, which will boost headline inflation, but also bleed into core through which excludes food and energy prices, the volatile components of consumer prices, via higher transportation costs, but the feds learned their lesson from the past and that fluctuations in oil prices either rising or falling are temporary and that this isn't going to cause them to raise rates sooner.

Chris Lafakis:                    Okay. [crosstalk 01:12:33] That's what I said as well. So I feel a little better about my response.

Ryan Sweet:                      Oil prices, the impact of rising oil prices will be a positive on Q4 GDP. Because the increase in production will more than offset. And I also think I'm more optimistic that the hit of consumption will be smaller because we have a lot of [crosstalk 01:12:57]. So this shock is not going to be like it was in '08. So I think it's going to be a net positive. Not a lot, but positive.

Chris Lafakis:                    And how do we figure out the answer to this-

Mark Zandi:                      I think you two have to take it outside is what I think.

Chris Lafakis:                    Yeah. Yeah. But I will say Ryan watches-

Mark Zandi:                      Bye-bye Chris, I'm on Ryan with this one baby. I'm with Ryan on this one.

Chris Lafakis:                    Okay. Well, Ryan, knows the nip is better than I do. So I don't want to put up too much of a fight.

Mark Zandi:                      Okay, we're going to end this it this way, as I said, I want to know and I know Gaurav, this is a stretch for you because you got to put these things in dollars. We're forcing you into dollar terms. But oil is sitting at let's use Brent, 85 bucks a barrel. What is Brent going to be on October 22, 2022? And I'm going to go with Cris D first, because always my mistake is to go with everyone else then go to him last and he finds the middle point of [crosstalk 01:13:59]. No, I'm not doing it. I'm not falling for that again. Cris is going first.

Ryan Sweet:                      Cris is in the historical average right now.

Mark Zandi:                      What he's doing is looking at the future's market, is what he's doing.

Cris deRitis:                       Just crypto. Just looking at Bitcoin. 75.

Mark Zandi:                      $75. 85 now $75 a year from now. Okay, Ryan.

Ryan Sweet:                      I was going to go 75 but since Cris, I'll go 70. I'm going to go a little lower. 70.

Mark Zandi:                      70 bucks a barrel. Okay, all right, Gaurav, where are you? And you can say, hey, I don't want to play this game.

Gaurav Ganguly:             No, no, I want to do this. I'm going do this. I'm even going to do it in dollars, that's fine. But I was actually going to go... Well, first of all, I was going to say lower. I'm going to say that because I'm going to agree with Chris Lafakis that actually production is going to ramp up over the next 12 months. OPEC's going to get, their pockets are going to fit out and then they're going to have some rumblings and then they will increase capacity. And I think the global oil market will just start getting better supplied at some point. So I'm going to go lower, how much lower? Well, I was tempted to take 10 bucks off, but that's been done twice now. So I'm probably going to have to say somewhere between 75 and 80.

Mark Zandi:                      See how he does that, he's very crafty. He's very crafty.

Gaurav Ganguly:             I just put a range on that, just a little bit. And you can take the midpoint of that range, too. 77 will be fine.

Mark Zandi:                      All right. All right. Gaurav is on record for 77.5. 77.5. Gaurav is 77.5, Cris's is 75, Ryan you said 70.

Ryan Sweet:                      70.

Mark Zandi:                      Okay.

Cris deRitis:                       I think we've got some anchoring bias going on here.

Mark Zandi:                      I think we do too, Chris L, what do you think the price is going to be?

Chris Lafakis:                    Well the number in my mind before Cris went and started us off was 75.

Mark Zandi:                      Was it 100? Oh, 75. It is anchoring bias, that's what it is.

Chris Lafakis:                    No, but before he said anything I had this number in my head, I don't know, maybe for final I'll go 76.

Mark Zandi:                      No, no. Everyone knows on Inside Economics. There's no I don't know on Inside Economics. I know the price is going to be. Chris L.

Chris Lafakis:                    75.

Mark Zandi:                      Well, okay. You know what, guys? I'm going to blow you out of the water, 60 bucks a barrel because you know why? That's the equilibrium price for oil. That's where it should be in the long run. And I think it takes about a year, maybe a little longer than that. Maybe spring of 2023, but I think 60 bucks barrel. Ben, who's our producer, who's listening into all this, you write all this down. We're going to come back on December 22, 2022. And we're going to find out who won that bet, this hasn't been a bet. But we're going to see who was right. Okay, we're going call this a podcast. This was a great conversation. We covered a lot of ground. Hopefully you found it informative. I do want to remind folks go to economy.com, hit Inside Economics, the button and tell us what you want us to chat about.

Mark Zandi:                      We pay a lot of attention to that. We also would like you to rate us on these podcast. We value that and would appreciate you to go up to Spotify or Apple or wherever you get your podcasts and give us a rating, I really would appreciate that. So with that, we'll call it a podcast. Take care, everyone.